Sustainable Growth:
On the Brink of a Major Transformation

by Gib Hedstrom and Michael Isenberg

Massive shifts are underway in how business relates to society. Not since the decade of the 1880s have we seen this kind of change. Indeed, Peter Drucker noted recently that, "We have been through two big transitions in the last 500 years in the West: one starting with Gutenburg and one starting with the steam engine ... and we're just at that point" (of another transition).
Kids in Forest Final
Five forces, hardwired to the future, are converging to paint a picture of considerable uncertainty, perhaps transformation. These forces will spur an unprecedented degree of innovation and define the successful businesses of the next 20 years.

* The "Big Squeeze" is on. Big companies (BP, Shell, DuPont, Unilever and others) are responding to global environmental issues (CO2, water scarcity, depleted fisheries, loss of forests and habitat, etc.) by investing billions of dollars to seize business value;

* Transparency Rules. Stakeholders have greater access to information; everything about your company can and will be known.

* The Rising Tide of Emotion. Before September 11, smart companies were seeing the emotion on display in Seattle, Davos, Washington DC., Prague, Melbourne, Nice, Quebec City, Barcelona, Gutenberg, and Genoa suggest the "old model" of multinational corporations will not cut it in the 21st century. September 11th changed everything. After the immediate response, the environmental and social dimension will only gain in importance.

* Servicing the Poor. We all know the story of the widening "rich-poor" gap and the rapidly escalating growth of the "bottom of the pyramid" (the 4.5 billion of the current 6 billion people on earth). What's new is that a few of the biggest companies are starting to pay attention to how their business can address the needs of the poor and position the companies for growth.

* About Face. For the past 30 years, industry leaders have thought of the environment with increasing respect; yet, at the end of the day, it was (and largely is) non-strategic. Environment has meant cost, compliance, risk management, avoiding a bad thing; it certainly has not meant business opportunity. This is changing.

These "Five Forces" accelerating change for today's business leaders are grounded in "economics 101" supply and demand. On the supply side, the global Big Squeeze is beginning to impose constraints on major industries like agriculture, fishing, energy, and pharmaceuticals. On the demand side, three broad forces (Transparency Rules, The Rising Tide of Emotion, Servicing the Poor) coalesce to accelerate that big squeeze. In response to these changes, we are seeing an About Face in how executives view environmental and social issues. What only a few years ago was viewed as non-strategic is now viewed as core to the future strategy.

Underlying all these forces is the Internet, with its massive power to "level the playing field" between rich and poor, and between big business and small non-governmental organizations (NGOs). The Internet revolution is creating a true global economy and a bias toward action, increasingly moving from "Ready. Aim. Fire" to "Ready. Fire! Aim."

Companies ignore these forces at their peril. A few dozen companies are responding quickly today and many more will soon be wondering how to catch up. Most of those paying heed are doing so to avoid risk ( a good reason); a small but growing number see huge opportunity. Both courses of action go beyond incremental talk about the "triple bottom line" of financial performance, environmental stewardship and social responsibility.

Force #1: The Big Squeeze
Modern society was founded on a very simple reality: nature is plenty and people are few. Over the past 120 years of the industrial revolution, society continued to rely on this basic assumption. The problem today is that the table has turned.

What's the big deal? During the past 40 years, global population has doubled. We add almost a billion people each decade, mostly poor people at the bottom of the economic pyramid. Facts and figure abound describing the demise of the planet, and most of us get lost in the details. Smart companies focus on the large, strategic threats to society and look for business opportunity.

* Air. A growing number of high profile companies see climate change as not only the #1 issue on the NGO agenda, but also as a source of competitive differentiation. Ford is just one of the latest to publicly state that "There is no doubt that sufficient evidence exists to move from argument to action... We expect to be judged on our progress and not on our promises."

* Oceans/ Fisheries. Unilever saw it coming years ago: with 70% of global fisheries in steep decline, the leaders in the fish business will need to innovate their way to future success. They anticipated consumer advantage achieving their stated goal of 100% fish and fish products from "sustainable fisheries" by 2005. Aquaculture, the fastest growing sector of the world food economy, is increasing by 11% a year.

* Fresh Water. Canada, with 30% of the world's fresh water, quietly passed a law in 1998 banning exports of this "clear gold". The long-range strategy document from Coke reportedly says "water will be the oil of the 21st century."

* Land (Agriculture). Bob Shapiro was driven by incredibly simple logic in his quest to transform Monsanto. The number of mouths to feed will grow by 3-4 billion people in the next 50 years; supply of land to grow food is essentially fixed; the quality of land is declining. Therefore, society needs to significantly increase the efficiency of food production and distribution just to maintain today's levels of daily food per person. Any company that can help find a solution to this dilemma will make a ton of money!

* Land (Old Growth Forests). The leadership of some of the large wood products buyers (eg. Home Depot; B&Q) see the change coming. With much of the original forests cut; pressures from a rapidly growing population on the rise, 50,000 NGOs connnected to monitor the health of the planet; and consumers able to decide at the check out counter whether to buy certified sustainable yield forest products, now is the time to act.

The challenge with the Big Squeeze is that it's so very hard to see locally, especially in many parts of North America where water is plenty, forests are full and the air is relatively clean. But raise our heads above the borders of North America and the picture changes radically.

Force #2: Transparency Rules
Nike is one of many companies responding to the fact that the Internet is rapidly democratizing information. Consumers have not had much of a voice; now they do. Companies are responding by increasing the transparency of their operations and engaging in partnerships with a wide array of stakeholders.

In response to worldwide concern and protests around sweatshops and working conditions, Nike CEO Philip Knight launched "Transparency 101" - a series of new initiatives to further improve working conditions worldwide and provide increased opportunities for people, that includes:
increasing the minimum age for footwear factory workers to 18; and adopting U.S. OSHA standards as the standard indoor air quality for all footwear factories.

Comprehensive, standardized, fully transparent "sustainability reporting" is becoming the threshold requirement for business. In just over four years, the Global Reporting Initiative (GRI) developed globally applicable guidelines for company reporting on the economic, social and environmental performance.

It was the GRI reporting process that prompted Ford's announcement to increase the fuel efficiency of its SUV fleet by 25% by 2005. Bill Ford states that "Transparency, stakeholder engagement and accountability with real performance measures and standards will be the regulatory tools of the 21st century and consumers will be the regulators." We can take a lesson from E-Bay, where vendors cannot afford to produce faulty products or engage in questionable practices.
Novo Nordisk, Shell, DuPont and others regularly hold sessions to understand the needs of their key stakeholders worldwide and use this information to develop strategies and plans.

Force #3: The Rising Tide of Emotion
Since September 11 the most profound message is emotion. As the Wall Street Journal reported shortly after that day, "From Morocco on the Atlantic ... To Pakistan on the Asian subcontinent... the Middle East constitutes a shatter zone of fragile societies, with a growing population of unemployed young males in cities where per capita water availability may drop by half in the next two decades."

The 40,000 who rallied against the WTO in Seattle kicked off 11 meetings around the world. A Business Week poll in 2001 found that while Americans believe globalization is good in principle:

* just 10% describe themselves as free traders, while 51% say they are fair traders
* some 74 - 80% say their priorities are to prevent unfair competition, environmental damage and job loss.

In cyberspace, consumers/ NGOs are taking on corporations in "David vs. Goliath" campaigns. Greenpeace launched a campaign called Cokespotlight.org highlighting Coke's use of HFCs to cool its drinks. They called on Coca-Cola to use only Greenfreeze technology at the 2000 Sydney Olympics, and to shift all its cooling systems to Greenfreeze in time for the 2004 Athens Olympics. The company announced it will phase out HFCs in refrigeration by the Athens games. It will expand its research into refrigeration alternatives and insist suppliers announce specific time schedules to use only HFC-free refrigeration in all new cold drink equipment by 2004.

Emotion also works in positive ways. Small companies like Tom's of Maine, Stonyfield Farm and Patagonia enjoy loyalty to their deep green entrepreneurial brands. These companies have strong commitments to environmental and social issues and make great products.

When American Express donated a penny to restore the Statue of Liberty every time a person charged a purchase, new cardholders grew by 45%, and card usage grew by 28%.

Force #4: Servicing the Poor
Leading companies are adopting very localized strategies that are opening new markets and securing their license to operate and grow.

* Coca-Cola is putting its extraordinary distribution network - which not only moves Coke into every corner of Africa, but gets the empties back for refills - to work for the greater good. It will use trucks to distribute condoms, test kits and AIDS literature to remote clinics.

* Hewlett Packard's World e-Inclusion initiative aims to sell its products to traditionally under-served markets throughout the developing world.

* Arvind Mills, an India-based company that is the world's fifth-largest denim manufacturer, created a new distribution system to sell blue jeans to some of the world's poorest citizens. The company introduced "Ruf and Tuf" jeans, a ready-to-make kit of jeans components (zipper, denim, rivets, patch) priced at about $6. Distributed through a network of 4000 tailors, many in rural villages, the jeans are now the largest selling jean in India.

Force #5: About Face
Procter and Gamble aims to sell $1 billion in products and services to combat issues of water and health in developing nations. Unilever anticipates that by 2010, half its sales will come from the developing world, up 32% from current sales. Toyota introduced the Prius, the hybrid electric car. BP aims to grow its solar business to $1 billion by 2007.


Action on the Brink
Transformation - the changing in composition or structure of the outward form, appearance, and/or character of a system -
Webster's Dictionary.

Are we on the brink of a major transformation? We think so. John Elkington's book, The Chrysalis Economy, says the transformation in the early decades of the 21st century will mark not just the end of the most unsustainable form of capitalism, but also the early evolution of radically different forms of wealth creation. Shell affirms this in their 1999 Sustainability Report by writing that they are going through a "messy transition" where they are navigating a shift from oil, coal and other high carbon energy sources to new energy sources such as renewables and hydrogen.

In our work with a dozen of the leading companies over the past year, our clients have confirmed our belief that the convergence of these five forces offers the potentially most significant set of major business opportunities facing industry in the next decade. So, what actions are they taking to reposition themselves?

Actions to Take Now
Companies we are working with are seeking concrete ways to minimize risk and position themselves for significant gain:

1. Portfolio Analysis. Conducting an analysis of existing and planned businesses, products and services:
* Conducting a "red zone analysis" to identify major emerging issues and threats;
* Putting corporate and business unit strategies through a high level sustainability diagnostic to assess how the strategies play out under different scenarios;
* Launching new products/ services that meet emerging needs that address environmental and social issues;
* Developing new business models for operating in the developing world (eg. joint ventures, local partners).

Examples:
- Proctor & Gamble concluded the major emerging threats to its business are water and health.
- DuPont analyzed its footprint - an important factor in the sale of Conoco.
- Conoco did the same and launched it's Cevolution business.
- Toyota developed the Prius to meet the needs of green consumers.


2. Brand / Image Transformation. Developing a socially responsible brand at the corporate and product level:
* Conducting a triple bottom line (TBL) audit of your brand to highlight risks and opportunities;
* Leveraging (or changing) core values to integrate TBL concerns;
* Forming NGO alliances to build or enhance image, product, service for mutual benefit.

Examples:
- Avon sponsors the Breast Cancer Crusade as part of their marketing to women.
- Patagonia, Stonyfield, Tom's of Maine develop "deep green" brands.

3. Supply Chain Management. Preventing supply chain disruptions and reducing costs of raw materials, energy, waste:
* Conducting an environmental footprint analysis that defines and evaluates the environmental impacts and benefits of products throughout the lifecycle;
* Launching targeted sustainability audits, incorporating TBL criteria;
* Building sustainable management systems that infuse TBL considerations throughout the value chain into core business processes.

Examples:
- Ford requires ISO 14001 certification from all suppliers and manufacturing facilities.
- Shell companies worldwide must write and sign letters covering performance in Business Integrity, Health, Safety & Environment, and Shell General Business Principles.


4. Stakeholder Engagement. Entering into dialogues and engagements with an increasing wider range of stakeholders to increase trust and understanding and gain access to new ideas about products, services, markets:
* Facilitated company/ NGO workshops, engaging in topics including site development, business planning, product development, materials sourcing, public reporting and workplace policies;
* Harnessing the power of stakeholder engagement to achieve business and societal goals. This includes strategies for entering challenging markets, resolving or heading off confrontations, and improving or preserving their reputation.

Examples:
- Shell has a formal community engagement process in 91 of the countries where it operates.

The ability of an enterprise to innovate and change in response to its external environment has always been critical to success. Sustainable development adds new dimensions to opportunities for increased profitability, growth and innovation. In our work with clients, in our research across industries, and in our collaboration with the NGO and financial communities, we find that companies that innovate consistently and effectively - in products and services and also in strategy and operations - win a premium in the marketplace.

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Gib Hedstrom is a member of the Management Group of PA Consulting Group, a UK-based technology and management consulting firm with over 4000 staff worldwide. Gib works with more than 500 staff operating in 50 countries doing sustainable development work.
Contact him: gib.hedstrom@pacconsulting.com

Michael Isenberg is a MBA candidate at University of Michigan where he is focusing on social responsibility, entrepreneurship and marketing. He was formerly a consultant at Arthur D. Little, Inc. Contact him: michaeli@umich.edu

FROM International Journal of Corporate Sustainability: Corporate Environmental Strategy, Vol. 9, No. 1, a SustainableBusiness.com Content Partner.



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