This is a must read FT article for everyone who wishes to become a great general manager in the post-depression era....
In the wake of the deepening economic crisis, many commentators are warning of the demise of corporate sustainability, the practice of balancing profit with the social and environmental impact of doing business. Companies obsessed with their own short-term survival, they suggest, cannot possibly support long-term, “feel-good” initiatives to protect the environment or invest in community development.
We see things differently. The downturn will produce more integrated, strategic and value-creating sustainability efforts in many companies. While traditional corporate responsibility and philanthropic initiatives may suffer, core elements of the sustainability agenda will survive or even thrive in a re-ordered economy.
One aspect of sustainability that is alive and kicking, perhaps more so because of the economic crisis, is concern with corporate governance. Public perception and trust of large corporations have been seriously damaged. The downturn will keep pressure on companies and executives to rebuild that trust and they must show a renewed commitment to do business in ways that go far beyond adherence to legal requirements, incorporating decision-making and reporting procedures that respect all stakeholders. Companies that fail to show such commitment will find themselves at risk when the economic conditions improve.
Concern with corporate governance is a fairly recent addition to a broader array of sustainability issues. Companies have been balancing economic, social and environmental objectives for much longer. In the 1970s, the earliest corporate sustainability efforts were developed to respond to new regulations in the US and Europe, and focused primarily on regulatory compliance and risk management. Environmental and social departments were designed as buffers, managing legal and regulatory obligations so the rest of the organisation could focus on making a profit. Many of the more successful companies have developed philanthropic programmes that direct a portion of corporate profits towards worthy causes, often through a corporate foundation created to support projects in communities where the company operates.
But this philanthropic approach is bound to suffer in the current downturn. For example, the three big US automakers have historically subsidised a broad array of social and economic initiatives, especially in the Detroit area. However, in the light of the automakers’ dismal economic prospects, local charities and non-profits expect corporate contributions to drop as much as 30 per cent in 2009.
As companies have built sustainability capabilities and systems, generally under the broad title of “eco-efficiency”, it has become clear that sustainability management can contribute substantially to the bottom line by driving more efficient use of resources and reducing waste. For example, 3M’s “3P” programme, which started in 1975 to identify specific efficiency projects, has led to about $1bn in cumulative savings.
In the current business environment, however, there are obvious reasons why companies might want to reduce their levels of investment in eco-efficiency. First, the economic crisis has dampened demand for many resources and, thus, reduced the costs of energy, raw materials and other natural resources. This has made the business case for investing in energy efficiency more difficult to make. Second, eco-efficiency efforts vary widely in the amount of upfront capital required. While most companies have significant opportunities to reduce resource use through better operational practices, opportunities that are more significant typically require greater investment. For cash-strapped companies, it may become difficult to justify immediate outlays in anticipation of savings in the long term.
So, the outlook for eco-efficiency is decidedly mixed, continuing in most companies, but focusing on lower-key and lower-cost measures.
Consumers, retailers and supply chains
Consumers continue to demand green products, and in some cases demand is growing. According to a study by the Fresh Ideas Group, a public relations firm, consumers in 2009 will be more conscious of product impacts but also more value-conscious. The best positioned products will produce immediate savings, such as efficient lighting, or yield multiple benefits, such as local food that is perceived to be both greener and healthier. Big-ticket items, such as hybrid cars, or products with hefty premiums for an environmental benefit, such as organic bedsheets, may be more difficult to shift off shelves.
Retailers with strong and growing sustainability ambitions should flourish. Perhaps the most visible example is Wal-Mart, the world’s biggest retailer, which has announced several goals in the past few years, including zero waste, 100 per cent renewable energy use, “sustainable products” and, most recently, new standards for the environmental and social performance of its suppliers. For the supplier, this could be a burden but it could also be seen as an opportunity.
Tesco, the UK retailer, has also raised the bar for its suppliers, most notably requiring certain products to provide labelling information about the product’s carbon footprint.
Big retailers such as Wal-Mart and Tesco play important roles in educating consumers about the importance of sustainability and providing more affordable options in the marketplace. While we are still early in this process, there are encouraging signs that the retailer sustainability effect is real and is here to stay.
Sustainability as strategy
Changing economic and regulatory environments will lead more companies to adopt corporate strategies that include sustainability as a core issue. In their simplest form, such strategies will focus on helping a company’s customers to cope with their own sustainability issues.
General Electric’s Ecomagination programme is a good example. By developing and marketing products ranging from compact fluorescent light bulbs for homeowners to more efficient gas turbines for power-generating utilities, GE profits by providing ways for its customers to reduce their own operational costs.
The current economic crisis adds tension – customers with less cash to spend may reduce demand for such products. However, this appears to be primarily a financing issue. The companies that succeed may well be those that can help their customers finance purchases so the timing of cash outlays and operational savings are brought closer together.
Establishing sustainability as a core element of strategy is a much deeper problem. Companies will have to broaden their understanding of the system within which they operate, which includes a broad range of impinging factors, trends, forces and interactions. Developing this understanding will involve more than a conventional economic analysis.
In The Necessary Revolution: How Individuals and Organisations Are Working Together to Create a Sustainable World, Peter Senge of the Sloan School of Management, MIT reveals that companies will need a deep systems-based understanding of how the global economy, environment, society and geopolitics interact and affect the organisation. His work predates the current economic crisis, but it only strengthens his argument. Retailers and manufacturers must consider the possibility of severe upstream disruptions in supply and distributions chains, and at the same time grasp how economic and political conditions across the world will affect them. Add in volatility in energy and natural resources markets and potential disruptions in resource supply, and the importance of large-scale system-based comprehension becomes crucial for companies to succeed or, in some cases, simply survive.
Companies that are able to adapt will see that problems previously considered to be outside their sphere of influence actually fall within their purview. A good example is how Coca-Cola has dealt with water sustainability challenges. As water resources have become increasingly stressed and scarce in many parts of the world, Coca-Cola has begun to experience more conflicts with communities and other water users, most notably in India. Beginning in 2002, the company launched a thorough evaluation of its water use and associated risks, and developed a water sustainability programme that goes well beyond the traditional narrow focus on legal compliance and efficiency alone. As this work has evolved, Coca-Cola has increased its involvement in community efforts to ensure access to clean drinking water, watershed protection projects, especially in water-stressed regions, and efforts to mobilise the international community to anticipate and deal with ever more severe water crises worldwide. Coca-Cola’s approach is not philanthropic, but rather based on a realistic assessment of what is required to continue to operate a beverage company in an increasingly water-stressed world.
Ultimately, sustainability in the 21st century will require companies to “go deep, go wide, go local”.
“Going deep” means institutionalising sustainability into the company’s DNA to the extent that it becomes part and parcel of strategy. “Going wide” implies a full understanding of how sustainability impinges on every aspect of the organisation’s value chain. Finally, “going local” paradoxically goes hand-in-hand with globalisation, forcing companies to examine their global operations in order to identify and ameliorate specific local issues that affect the company’s operations, customers, competitive position, brand image, political standing or any aspect of its ability to do business.
Adopting a phrase from John Ehrenfeld’s Sustainability by Design, we see sustainability as flourishing within limits. Companies that are able to grasp the system within which they operate and the limits and requirements the system imposes will be the ones to flourish in the future business environment.