Sustainable Innovation Strategy

Creating Value in a World of Finite Resources

C. Sempels, J. Hoffmann

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137352613
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Examining the links between sustainable development, innovation strategy and the business model, this thought-provoking and timely book uses insightful case studies from mature and developing markets to demonstrate how sustainability needs to be at the core of every organization's strategy and innovation.

1
Tackling Sustainable Development at the Corporate Strategic Level to Create Value

Sustainable development is often presented, almost ritually, as a tremendous source of development, opportunity and value creation for companies. Titles of books, articles or conferences on the subject leave little room for doubt: sustainable development appears to be inseparable from innovation, corporate performance, or with the opening up of new, buoyant markets for a passionate cohort of consumers. Some do not hesitate to qualify it as a true goldmine; others associate it with a rich source of jobs for all skill levels. Based on these promises, it would not be unreasonable to expect that sustainable development would be naturally and rapidly integrated into companies.

In reality, however, this is rarely the case. Often, this line of argument fails to convince companies and their leaders. Skepticism prevails, especially among small- and medium-sized companies. Sustainable development tends to be perceived more as a constraint, or even a threat or a risk, pushed by regulations that are deemed to be developed too hastily. It may also be seen as a source of sometimes-considerable expenditure with only a dubious return. Those who do wish to engage in sustainable development generally feel unsupported or ill equipped, believing that they lack resources and expertise to tackle this multidimensional, complex field.

If we look at the scientific evidence supporting sustainable development, a number of studies have sought to understand the relationship between a company’s “sustainable performance” and its financial performance.¹ A large majority has identified a positive relationship between these constructs, suggesting that sustainability “pays.” Others, however, have highlighted an absence of relationship, and even, for a very small number, a negative relationship.

What conclusions can we draw from these contradictory results? Is it possible to analyze the relationship between the sustainable and the financial performance of a company without considering how sustainability is integrated in the company? Given the complexity of modeling both the financial and the sustainable performance of a company, would it not be more effective to study the conditions that foster a positive synergy between these two constructs? This is the question we will attempt to answer.

A company’s capacity to create and capture value is largely dependent on the quality of its strategy, its business model and its value propositions for its target markets. In the search for contributions to the process of value creation, how then can we separate sustainable development from strategy?

This chapter will briefly clarify what we mean by the notion of strategy – by describing its main pillars. It will then position sustainable development at the corporate level of strategy, showing why this is the most appropriate gateway for the successful integration of sustainable development in the pursuit of value creation. The impact of sustainable development on the pillars of strategy will then be analyzed, demonstrating that a manager can simply no longer afford to ignore consequences of sustainable development on the company without running the risk of threatening its competitiveness and possible survival.

WHAT IS STRATEGY?

Corporate strategy is a vast field of knowledge built around many schools and currents of thought. Describing these is neither the intention nor the goal of this book, but the interested reader can find many good sources to further his or her understanding.² It is commonly agreed, nevertheless, that strategy aims to enable a company to create value for customers and build a unique position on its market(s) taking into account a constantly changing environment. More specifically, corporate strategy involves (a) configuring the company’s scope of activities, (b) effectively and distinctively allocating its resources and skills in order to (c) be able to develop a sustainable competitive advantage, (d) allowing it to reach a higher level of performance than its competitors, and thereby (e) satisfy its stakeholders.³

Strategic decisions are thus based on four main pillars:

1. The definition of the long-term direction of the organization and its scope of activities

2. The organization of the processes of value creation, distribution and capture

3. The management and allocation of resources and competences within the company

4. The steering of necessary adaptations to a constantly changing environment

Companies in direct competition evolve in similar environments. Ford, Volkswagen and Renault are active on the worldwide car market facing a comparable competitive environment with all its legal, political, socio-economic and technological issues. The performance of these companies, however, differs because of their respective strategic capabilities. A company thus builds its competitive advantage, its competitiveness and its capacity to create value by constructing and developing its strategic capabilities, and its capacity to make strategic decisions more effective and more difficult to imitate by its competitors. Moreover, because the environment in its multiple components is constantly changing, the capacity of a company to perform above average in its sector is largely determined by its “ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments,” in other words, by being faster than its competitors.⁴

SUSTAINABLE DEVELOPMENT AND STRATEGY

Given the numerous challenges raised by sustainable development, we can conclude that strategy is indeed the appropriate corporate level for the integration of sustainable development into the business agenda. The reasons for this are listed here and developed in more detail later in this book:

• Strategic decisions hinge on four main pillars. Sustainable development impacts these four pillars, sometimes significantly. The following section describes these impacts, illustrated with many supporting examples. A failure to recognize the impact of sustainable development on the strategic pillars of the company can be seen as strategic myopia, with potentially detrimental consequences in the short, medium and long term.

• Climate challenges, scarcity of resources in terms of quantity and quality and the associated pressure on prices; loss of biodiversity; financial, economic and social crises; extreme poverty; impoverishment of the middle classes and the rise of unemployment in developed economies; ageing societies; public health issues; and so on are only some of the issues related to sustainable development. Potentially, they can have a considerable impact on a company’s competitiveness. Or, if they are properly understood, and if they encourage the company to innovate, they can be a rich source of differentiation and profitability.

• Through the definition of the company business model(s) (explained in Chapter 2) and the configuration of resources and competences, corporate strategy structures and creates the conditions for the successful implementation of the processes of value creation, distribution and capture. In short, and without minimizing the importance of other corporate functions, corporate strategy is primarily responsible for value creation and management. Therefore, how can sustainable development contribute to value creation if it is not closely linked to the function intrinsically in charge of the creation and the management of value?

• Sustainable development promotes the concept of responsibility and openness to stakeholders, both internal and external to the organization. While the ultimate goal of corporate strategy is to satisfy stakeholders, how can we exclude sustainable development from its scope?

As of 2012, a growing number of companies are becoming aware of this necessary connection between strategy and sustainable development. Veolia Environment is a global company providing a full range of service in the fields of water, waste management, energy and transportation. Its sustainable development division started four years ago with the hiring of Geneviève Férone and now has more than 30 full-time staff.⁵ IBM started to work on its Smarter Cities initiative five years ago and this now forms a central component of its strategy.⁶ And the Global Reporting Initiative provides an array of examples of how sustainable development is considered at a strategic level. Nevertheless, medium-sized companies, and even more so small businesses, are finding it more difficult to integrate sustainable development into their strategy.

IMPACT OF SUSTAINABLE DEVELOPMENT ON THE PILLARS OF STRATEGY

Sustainable development calls into question the conception and execution of strategy by impacting its pillars, in all contexts but at varying degrees.

Pillar 1: The definition of the long-term direction of the company and its scope of activities

Strategic choices are made at several levels. At the strategic business unit level, it is a question of defining and adopting a certain strategy to build and maintain competitive advantage. At the corporate level, it is a matter of formalizing the scope of activities, which markets to enter and the associated value propositions. These major decisions require long-term commitment from the company and affect the strategic positioning of the organization.

Sustainable development, in its multiple dimensions and challenges, is likely to impact these long-term strategic decisions. It may, for example, call into question a dominant design in a particular industry, generating strategic uncertainty over the future of the industry as a whole, as well as over the prevailing technological design. In the car industry, thermal engine propulsion has been the dominant design for several decades. Its environmental record, however, raises severe questions about its survival as a dominant design in the long run. And even if thermal engine propulsion continues to be the principal technology for years to come, all manufacturers are exploring alternatives, even though they have little idea at this stage what the next dominant design could be. Will the car propulsion of tomorrow be fueled by hybrid energies, electricity, compressed air, hydrogen, combustible battery or even water? Will it be solar? Will it be made of ultra-light composite materials?

Carmakers bet differently on the new dominant design for car propulsion

Private light vehicles represent 12 percent of the total European CO₂ emissions. Reducing these emissions is at the heart of Europe’s commitment to fight global warming.⁷ A European directive recommends that manufacturers will have to reach an average rate of 130 g/km of CO₂ emissions for new vehicles by 2015, and 95 g/km of CO₂ emissions by 2020 (for comparison, the European average was 160 g/km of CO₂ emissions in 2006).

To meet these targets, manufacturers have been investing massively in the development of technologies to reduce carbon emissions, while at the same time betting on alternative technological solutions. French constructor Renault, for example, is focusing on a 100 percent electric car; other European carmakers such as Audi and Peugeot are focusing more on hybrid diesel technologies.

The debate is particularly heated regarding electric vehicles because of the huge infrastructure changes their use will entail. Until early 2011, one variable that could be taken for granted was the reliance on (cheap) nuclear energy to power electric vehicles. And then came Fukushima. Japan announced its intention to shut down all its nuclear plants by 2042, a decision already made by Germany. And in countries like the US and France, existing plants will have to comply with new (and expensive) standards. All this casts a shadow on the future of 100 percent electric cars, and Toyota and Honda, pioneers in hybrid cars (electric-thermal propulsion,) could be reassured by their choice.

Local constraints also have a part to play. Electric cars in India would hardly be an option in the foreseeable future given the country’s poor electric infrastructure. Brazil has championed sugarcane ethanol as an alternative to petrol. Italian Fiat and German Volkswagen are two manufacturers with extensive experience in Brazil of developing flex engines alternating ethanol and petrol use.

In North America, the United States has championed shale gas extraction leading to what has been called a “gas bonanza”⁸ that will last for decades to come. This will certainly impact carmakers’ considerations, at least for the US market.

Who has made the best bet? Only the future will tell. But environmental regulations will just add uncertainty to an industry that is already facing turmoil and will give a clear competitive advantage to those manufacturers that have made the right choice.

The car industry is not the only sector to face such uncertainty; the energy sector is likewise in turmoil. The International Energy Agency “World Energy Outlook 2010”⁹ report describes a world of energy facing an unprecedented level of uncertainty, and one whose future will be largely determined by the response of governments to the twin challenge of climate change and energy safety. Areva, world leader in nuclear power technology, is repositioning itself as a champion of energy solutions with a low carbon footprint. It intends to be one of the three world leaders in the renewable energies sector by the end of 2012, by betting on wind energy, bioenergy, solar energy and hydrogen.¹⁰ The scope of the company is therefore evolving through organic growth and a policy of acquisitions. And one of the drivers of this evolution is, without doubt, sustainable development.

Many industrial sectors will see their strategies and dominant technologies challenged by sustainable development. While this would seem logical for high carbon-emitting sectors (like energy), the same goes for sectors requiring access to rare resources (rare earths, for example) like electronics. This is also true for pharmaceutical, cosmetics or chemical industries, where the erosion of the biodiversity and new regulations aimed at limiting the “privatization” of the common natural property are imminent. Countless other sectors can be listed.

In addition, sustainable development can generate a shift in the structure and competing dynamics of a large number of sectors. The dematerialization of media, presented by some as a promising path¹¹ for satisfying certain needs at a lower environmental cost, has already shaken up the music industry, and is now challenging the press and publishing industry. The balance of power is changing, with the appearance of actors who had previously played only a minor role, or who were not even present in the sector. Amazon is not just a simple distribution network of physical books and e-books, but it now offers self-publishing services,¹² giving each author the opportunity to self-edit while taking advantage of a worldwide distribution network. Apple has close to 70 percent market share in the United States in the sector of digital cultural goods, and 90 percent for digital music.¹³ This is impressive for a company that only entered the music industry in 2001. And the reconfiguration of the music industry is certainly not over.¹⁴ A failure by existing market players to understand these changes ...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures and Tables
• Acknowledgments
• Introduction
• 1 Tackling Sustainable Development at the Corporate Strategic Level to Create Value
• 2 The Business Model – A Powerful Tool to Drive a Strategic Shift
• 3 Eco-Efficiency and Eco-Design – A First Step toward Sustainable Performance
• 4 Circular Economy: Transforming a “Waste” into a Productive Resource
• 5 From Products to Use-Oriented Services
• 6 From Product-to Result-Based Integrated Solutions
• Conclusion
• Notes
• Index