How to use sustainability as a competitive advantage
In this article you will learn why sustainability can be a competitive advantage and how to achieve this. This article is based on the most important takeaways from a study the Harvard Business Review published in 2009. It is called ‘Why sustainability is now the key driver of innovation’. It may not be the most recent article, but ever since it was published it has been cited by thousands. The researchers followed businesses on their road to sustainability. They hoped to help businesses that want to become sustainable with their map of the road towards sustainability and its different stages. Fast forward to today and it has become clear that this road is very different for every business and not all sustainable businesses go through each of the stages, nor in the same order. Nonetheless, there is still a lot that businesses can learn today from the described stages. We extracted the valuable and useful information for you and turned it into the following article.
The current economic system has placed enormous pressure on the planet while catering to the basic needs of not even half the people on it. The coming decades that number will increase together with the exponentially growing world population. Traditional approaches to business will collapse and businesses will have to develop innovative solutions. Smart businesses will recognise the following simple truth sooner than the rest: Sustainability = Innovation = Competitive advantage.
There are different reasons why not all businesses today choose to work in the most environment-friendly way. Here are a few examples:
- They believe it will only cost money without bringing short term economic benefits.
- They believe becoming sustainable gives them a disadvantage against competitors in developing countries that don’t operate in a sustainable way.
- They believe that the fact that suppliers can’t provide green inputs or transparency will pose a problem.
- They worry that sustainable manufacturing will demand new equipment and processes.
- They believe that consumers will not pay more for environment-friendly products.
In other words, they see becoming sustainable as a costly social responsibility instead of a worthy business objective. Businesses behave as though they have to choose between the largely social benefits of developing sustainable products or processes and the financial costs of doing so. But that is simply not true.
The study by Nidumolu, Prahalad and Rangaswami has shown that sustainability is a driver of organisational and technological innovations that yield both bottom-line and top-line returns. Their research showed that by becoming environment-friendly, organisations actually lowered costs because they reduced the inputs needed. Moreover, the innovative process of becoming more sustainable created extra revenues due to products or services that were perceived as better by consumers. Finally, sustainable businesses also increased their revenues because the process of becoming more sustainable led to innovation with which they created new businesses.
Smart businesses now treat sustainability as innovation’s new frontier and innovation is crucial for progress. Sustainability is already starting to transform markets, which means that businesses are forced to change the way they think. By making sustainability an important business objective today, early movers will have developed the biggest competitive advantage for the long run. However, it is important to note that choosing to become a sustainable business, is not always the choosing for the easy way. Sustainable businesses face different challenges at each of the stages addressed by this study. Note that every business is different, this means that not all businesses go through these stages nor in the same order. Nonetheless, learning about the stages identified by this study can be valuable to any business.
Stage 1 Viewing compliance as opportunity
For some existing businesses, the first steps towards sustainability are forced by the law. Besides governmental regulations, businesses are pressured by voluntary codes that arise from non-governmental agencies and industry groups. For most businesses, it is appealing to comply with the lowest environmental standards that require minimal effort. However, it is smarter to adjust to the strictest regulations as early as possible. As a first mover, you will gain competitive advantage through innovation. First movers have more time to experiment with new materials, technologies and processes. This is important since regulations concerning sustainability are increasingly arising all over the world. These regulations not only concern greenhouse gas emissions and chemical use. But also think of regulations around resource use, production safety, recyclability, waste management and social responsibility. First movers that are prepared for these regulations might even determine a gap in the market before anyone else does. In that way, businesses that are on top of environmental regulations spot business opportunities first. Moreover, first movers can turn regulators into allies by taking initiative. In that way, some businesses help shape environmental regulations and can use this to their advantage.
Stage 2 Making value chains sustainable
After businesses have learned to stay ahead of the law, they often become more proactive about sustainability. The next step is making value chains sustainable, for which each link in the value chain needs to be analysed. In this step, businesses often learn to link sustainability initiatives to business results. By increasing energy efficiency and waste reduction for instance, creating a sustainable value chain leads to monetary value as well. Thus, when businesses create a sustainable value chain they experience how environmental and social value can be in balance with economic value.
- Supply chains
Assessment tools like carbon footprint analysis and life-cycle assessment help companies identify where their negative environmental impacts come from. Life-cycle assessment (LCA), also called cradle-to-grave is particularly useful. LCA is a method to determine the total environmental impacts of a product its whole life cycle, from the resource extraction to the waste management. Moreover, LCA looks at multiple different environmental impacts at the same time, think of impact on climate change, air pollution, biodiversity, ocean acidification, ozon depletion and so on. Thus, LCA determines provides a holistic method that determines where environmental impacts take place and where improvements can be made.
Operational innovations are essential to create a more sustainable supply chain. These operational innovations increase the supply chain efficiency. Increased supply chain efficiency reduces the amount of inputs needed while decreasing the amount of emissions or waste that is generated as well. Thus, increased efficiency reduces economic costs while also reducing environmental and social costs.
Another step businesses in the study took towards sustainability was to encourage employees to work from home. This leads to less travel time, less energy use and less costs. Other advantages that were observed when people telecommute up to three days a week were increased productivity (10 – 20%) and increased job satisfaction. Examples of improvements that can be made at the workplace itself are, using refurbished electronics, environment-friendly food and beverages, a paperless policy, second-hand furniture and other aware choices.
Some businesses can achieve waste reduction by letting people return their products to reuse or recycle them. These businesses try to recapture value by reusing returned products and thus reducing waste. Returned products often still work or can be disassembled into parts that can be reused. This turns a cost factor into something profitable while showing that the business is reducing waste and thus preventing environmental impacts. Some companies even created a value-recovery team and thus increased the reuse of product (parts) which led to reduced costs.
Stage 3 Designing sustainable products and services
Businesses that reached this stage became aware that a sizeable number of consumers are interested in sustainable alternatives. They realised that by developing a sustainable product or service and marketing it in the right way, they could gain competitive advantage. A lot of businesses that were followed by this study performed carbon footprint analysis or life cycle assessments (LCA) to determine how they did the most harm to the environment. They were often surprised to find out which products or actions had the biggest negative environmental impact. These assessments helped them decide where to make changes that make the best improvements. Subsequently, they could share the improvements they made with the world and use this as a valuable part of their marketing strategy.
Businesses in this stage showed three things that are needed to create sustainable products and services
1. Understand consumer concerns
2. Determine environmental impacts (e.g. through performing assessments or teaming up with other (non-profit) organisations
3. Combine this knowledge with marketing skills
Stage 4: Developing new business models
According to this study most executives assume that designing a sustainable business model just means rethinking the value proposition. Meanwhile, the most successful sustainable business models also include an increased focus on efficiency, new ways of capturing revenues, delivering services collaboratively with other companies and so on. Developing a new business model requires exploring alternatives to current ways of meeting consumers’ needs. Businesses have to question existing models and need an entrepreneurial mindset to develop new ways of doing business. That is where startups have the advantage of being able to come up with completely new ways of functioning easier. After developing a sustainable business model, this experience will lead businesses to the final stage of sustainable innovation, where the impact of a new product or process extends beyond a single market.
Stage 5: Creating next-practice platforms
Next practices change existing paradigms. To develop innovations that lead to next practices, executives must question the implicit assumptions behind current practices. This is exactly what led to today’s industrial and services economy. Somebody once asked: Can we create a carriage that moves without horses pulling it? Can we fly like birds? Can we dive like whales? By questioning the status quo, people and companies have changed it. In the same way, we must ask questions about contemporary problems: Can we develop waterless detergents? Can we breed rice that grows without water? Can biodegradable packaging help seed the earth with plants and trees? Sustainability can lead to interesting next practice platforms that solve contemporary problems using the knowledge and technology that we have access to today.
Not every business will walk through every stage or will be able to use every part of a stage, for every business is different. Nonetheless, we think that each business can get inspired by the different stages that were addressed in this article. More articles on sustainability, sustainable business models, and what you can do today, will follow. Subscribe below to stay up-to-date.
Based on: Nidumolu, R., Prahalad, C. K., & Rangaswami, M. R. (2009). Why sustainability is now the key driver of innovation. Harvard business review, 87(9), 56-64