Chapter OneWhy Every Business Needs an Eco-Strategy
CEO Jack Welch of General Electric (GE) seemingly could do no wrong in the 1990s. Named Fortune magazine's "Manager of the Century" in 1999, he presided over a company whose market value grew from $14 billion to over $400 billion in 20 years. While Welch pushed the company to manage environmental issues more rigorously, he didn't make everyone's Christmas card list. Critics saw GE as an environmental bad actor based on Welch's endless battles with the Environmental Protection Agency over whether and how to clean up the dioxin and other pollutants GE factories had dumped in the Hudson and Housatonic rivers decades earlier.
Welch's take-no-prisoners approach to the EPA left the company in a difficult strategic position. Regulators watched the company like hawks. Political leaders shied away from being seen as too friendly with the company. The GE human resources group began to notice that top recruits turned them down, citing doubts about the company's core values. Pitched legal battles cost the company tens of millions of dollars.
When Jeff Immelt took over as CEO of GE in 2001, he reversed course, working to make GE a world leader on corporate environmental matters. Today, many corporate sustainability experts cite GE's environmental management system as a model. The company's "digital cockpit" of performance metrics—scalable from a particular production line in a single factory to the entire company—wins praise for being top of the line. GE executives no longer see the environment as a burden with regulations to follow, costs to manage, and risks to mitigate. Indeed, they see environmental issues as opportunities for competitive advantage and marketplace success. As Immelt likes to say: "Green is green."
Jeff Immelt knows what he is talking about. Under his leadership, GE's "ecomagination" line of products and services has blossomed. With high-efficiency jet engines and locomotives, wind turbines, water purification technologies, solar power systems, and other clean energy equipment, GE has become a world-leading "environmental solutions" provider. Immelt's push to meet the government, business-to-business, and consumer demand for "green" does not mean that he is secretly a member of the Sierra Club or otherwise an "environmentalist." No, his logic is pure business. Immelt sees the high-growth, high-margin ecomagination line as fundamental to GE's future ability to deliver value to its shareholders. And while parts of the company have struggled in recent years, GE now earns over $20 billion per year from its ecomagination products and services with better than 20 percent annual growth in these lines of business.
You don't have to be a corporate giant to uncover the competitive differentiation that derives from bringing sustainability into strategy—what Dan Esty and Andrew Winston dubbed "Eco-Advantage" in Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage. Smaller companies can also benefit from going green. Take Curtis Packaging Corporation, a 165-year-old Connecticut-based company with 188 employees that produces folding cardboard cartons for products such as cosmetics, pharmaceuticals, gourmet foods, and golf balls. In 2003, CEO Don Droppo decided to put sustainability at the heart of the company's business strategy. Rebranding itself as "luxuriously responsible," the company switched to renewable energy, reduced waste and emissions, and incorporated eco-friendly materials into its products. By 2007, annual sales had doubled to $47 million. The Curtis management team attributes the gains to improved product quality and environmental goodwill, which secured customer loyalty and brought in new business partners.
The GE and Curtis Packaging stories are part of a much bigger drama playing out across the country and the world. Interest in environmental protection and sustainability is growing. In fact, sustainability has emerged as a business megatrend that promises to shift the foundations of competition in every industry in every marketplace. This Green Wave presents significant challenges for companies but also offers real opportunities for those who learn to ride it.
So let's be clear, you don't have to be an environmentalist to find this book valuable. The Green to Gold Business Playbook will be especially useful to those who are skeptical about the push to address climate change, perhaps see environmental fears as exaggerated, and don't share the enthusiasm for all things green. Our goal is not to get you to join Greenpeace. Rather, it is to position you to be a winner in a world where environmental factors shape competition and determine marketplace success.
How to Create Eco-Advantage
GE and Curtis Packaging didn't stumble into profits with their environmental efforts. They systematically pursued Eco-Advantage and the four strategic values identified in Green to Gold. Specifically, they looked to:
1. Identify and reduce environmental and regulatory risks, not only within their own operations but across their entire value chains, thereby reducing liabilities, avoiding costs, and increasing speed to market.
2. Cut operational costs and improve efficiency by reducing environmental expenses, including scrap, waste, disposal fees, regulatory paperwork, and energy spending.
3. Grow their revenues by designing and marketing environmentally superior products that meet their customers' needs for energy efficiency, improved resource productivity, and reduced pollution.
4. Create intangible value for their businesses by enhancing their brands, connecting with customers on an emotional level through environmental stewardship, raising workforce productivity, and attracting and retaining the best employees.
Let's examine each of these core elements of Eco-Advantage in a bit more detail.
For many companies, the most immediate environmental challenges involve how to manage pollution and waste. For those who handle oil, heavy metals, or toxic chemicals, even a little mistake can lead to big problems in the form of costly accidents, legal liabilities, product recalls, regulatory violations, and government penalties. Inadequate risk management can lead to more than just higher costs. It can bring an abrupt end to an executive's career. Just ask Tony Hayward, ex-CEO of BP, who lost his job over the 2010 Gulf of Mexico oil spill.
Every business faces some eco-risks as a part of broader enterprise risks. Properly managed, this exposure need not present any real threat to the business. But if mismanaged or missed altogether, eco-risks can take a business down. Robert Eckert, the CEO of Mattel knows this reality all too well. In 2007, one of Mattel's suppliers in China was found to have painted its toys with lead paint in violation of U.S. law. The uproar that followed became a PR disaster for Mattel and a model of what happens when eco-risks are mismanaged.
The fact that the supplier had violated Mattel's explicit procurement guidelines offered no protection from the media and public onslaught. The company's reputation for quality, built up over generations, took a terrible battering. At the end of the day, Mattel had to recall over 21 million items—including Barbie dolls, Polly Pockets, and Fisher Price infant toys—at the cost of hundreds of millions of dollars. The CEO faced a congressional inquiry, Mattel stock fell over 20 percent in three months, and the company ended up paying a $2.3 million fine.
If the Mattel story were unusual, we would not put so much stress on sound eco-risk management. But it is not. In recent years, stories of eco-risk management gone awry have become a staple of the media diet. Contaminated peanut butter, milk, chocolate, dog food, toothpaste, bottled water, eggs, chicken, spinach, and cough syrup have all hit the headlines. So in the chapters that follow, we'll show you how to look at your business through an environmental lens so as to reduce risk exposure and liability—which translate into cost. We'll walk through a number of strategies for digging out eco-risks, particularly in extended supply chains. This focus is especially important for big companies with consumer-facing brands who suffer the consequences and reputational loss if their suppliers misbehave. Simply put, we live in a world of "extended producer responsibility," meaning that companies can expect to be held accountable for anything that goes wrong anywhere in their value chain—from the extraction of raw materials to the end-of-life disposal of their products by their customers (or even their customers' customers).
The risks that need to be managed come in all sorts of shapes and sizes. Spills of toxic materials in the workplace, liability for improper disposal of hazardous waste, and exposure related to a product that later turns out to be environmentally harmful—they all need to be carefully managed. But less obvious risks also need to be addressed: Could regulatory changes disadvantage your company's products or service relative to the competition? Is the burden of paperwork related to chemicals in your production process adding costs that your competition does not bear? Will growing scarcity of a critical natural resource used as an input to one of your products make it much more costly to produce? Or limit the markets in which you can operate? Could shifting consumer tastes translate into reduced demand for your products? Or even expose you to activist boycotts?
Effective environmental risk management spots the full spectrum of possible threats to the business and maps out what sorts of liabilities might emerge. The best risk management systems look at scenarios and probabilities related to potential threats. And they explore exposure not just within the company's own operations but also upstream (across the supply chain) and downstream (involving a customer's use of the product).
For many businesses, cutting costs is an ongoing imperative. Adding a sustainability focus to your corporate strategy can bring to light numerous ways to cut waste and inefficiency. Indeed, we've seen endless examples of companies that have achieved substantial cost reductions through "eco-efficiency." The biggest savings often come from better energy management. A well-designed eco-efficiency initiative explores ways to encourage energy conservation across all activities. Water consumption as well as production processes in which waste and scrap might be eliminated should also be viewed through the efficiency lens.
Eco-efficiency depends on being structured (which is to say, data driven) in the search for waste. Firms that utilize the tools we offer in the chapters that follow, such as the AUDIO assessment (an issue spotting framework introduced in Green to Gold and discussed in Chapter 5), have cut their energy bills by 10 to 20 percent or more. The cost savings are available to big and small firms alike. For example, Town Sports, a New York-based company that manages fitness centers such as New York Sports Club, generated so much savings with a six-month eco-efficiency initiative that the company decided to expand the program to other locations. The company anticipates a payback of two years on its energy conservation investments. Beyond efficiency gains, Town Sports obtained additional savings by working with World Energy, a Worcester, Massachusetts-based energy management company, to buy its electricity through competitive online auctions. Maersk, the Danish shipping giant, launched its eco-efficiency campaign when the company's top executives realized that even a 10 percent reduction in the enterprise's $6 billion per year energy bill would yield hundreds of millions of dollars in savings.
Other companies have focused their eco-efficiency efforts on reduced waste in production. Various "green manufacturing" tools have been developed to facilitate these operations-oriented initiatives. Diversified products giant 3M employs "Lean Six Sigma" (which others call "green Six Sigma") principles to reduce waste and improve efficiency. The company has achieved impressive results. By 2006, 55,000 employees had received Lean Six Sigma training, and 3M had reduced waste in operations by 30 percent over five years, 20 percent above its already ambitious target for efficiency gains.
Optimizing the use of fixed assets in general (and buildings in particular) represents an area where many companies can make substantial improvements, which delivers both environmental and business benefits. By carefully reviewing facilities utilization, you can often identify excess space that you can eliminate or redeploy for savings in both energy costs and operational expenses. Investments in physical plant retrofits and automation upgrades can lead to speedy and substantial savings for you as well, especially in an era of high energy costs.
With oil prices down from their 2008 high of $140/barrel, many companies are breathing a sigh of relief. But remember this: even at $70/barrel, energy prices are double where they were in the early 2000s. This means that almost every business in America (and every household for that matter) can save money by investing in energy efficiency.
In the past few decades, there has been a marked shift in how business leaders think about the environment. Previously, the relationship consisted of pitched battles over regulations, ongoing disputes, and endless grumbling. Today, smart businesses treat environmental issues not as a burden but as an opportunity to advance their position in the marketplace. In a world of ever-greater environmental consciousness, many companies find that building environmental attributes into their portfolio of products and services helps them win customers and drive revenues. Not every customer will pay for improved environmental performance, but a growing number will. According to a 2008 survey conducted by the Hartman Group, more than 75 percent of Americans consider environmental and social aspects in purchasing decisions and about a third are willing to pay more for those benefits.
Interest in greener products isn't limited to the United States or Europe. A 2009 survey found, for example, that 73 percent of Brazilian respondents planned to spend more on green products in the coming year, and that 38 percent of them would buy a green product even if the price were 30 percent higher than a comparable non-green product.
As Professor Mike Porter at Harvard Business School has definitively demonstrated, innovation is the key to sustained competitive strength. Porter has shown that a focus on environmental issues can spur innovation. By looking at their market offerings through the environmental and sustainability lens, companies may find ways to add value to their goods and services. Redesigning a product or service to solve a customer's pollution control and natural resource management challenges can pay off handsomely. Business leaders at the front edge of the Green Wave seek not only to introduce new products and services that cater to the sustainability needs of existing customers, they also look for "green value innovation" opportunities that will allow them to capture an entirely new customer base.
Game-changing innovation can also be used to shift customer preferences and develop untapped markets. After recognizing an undeveloped niche market for natural cleaning products, Clorox launched its Green Works product line in 2007. The company's timing couldn't have been better. The market for natural, reduced-chemical cleaning products doubled within the first year of Green Works' launch. Because Clorox had the right products in place to meet exploding demand, it now holds 42 percent of the $200 million natural cleaners market. Even better, Green Works appealed to consumers' demands for less-hazardous household cleaning products and effectively set a new standard in the industry.
As we have seen, innovative companies can modify existing products and services to reduce wastes and costs while meeting consumer demand for healthy, environmentally friendly offerings. Systemic innovation within a company can also be used to break free from old ways of thinking—allowing a company to reposition itself to enter new sectors and markets.