Week Four: Transforming Into the Sustainable Enterprise

Week Four: Transforming Into the Sustainable Enterprise

“Introduction … Tools and Techniques for Transformation … Company Case”
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Summaries

  • Week Four: Transforming Into the Sustainable Enterprise > Introduction > Improving Corporate Sustainability Performance
  • Week Four: Transforming Into the Sustainable Enterprise > Tools and Techniques for Transformation > Sustainability Challenges
  • Week Four: Transforming Into the Sustainable Enterprise > Tools and Techniques for Transformation > Green Supply Chain Management
  • Week Four: Transforming Into the Sustainable Enterprise > Tools and Techniques for Transformation > Managing Sustainability Risks
  • Week Four: Transforming Into the Sustainable Enterprise > Tools and Techniques for Transformation > Thought Leader Insights

Week Four: Transforming Into the Sustainable Enterprise > Introduction > Improving Corporate Sustainability Performance

  • As we noted then, sustainability approaches can influence a firm’s ability to create, capture, and manage value.
  • These improvements follow through with cost savings, revenue increases, or increase in other intangibles.
  • There could also be costs avoided due to better compliance, better risk mitigation, lower potential liabilities, and lower insurance cost.
  • On the other hand, revenues are advantages due to increased pricing power or increases in market share or the creation of new markets.
  • As margins improve, revenue grows, and reputational advantages increase.
  • Because the biggest gainers in the sustainability game are often new entrants who are able to enter in trends markets because of changed conditions.
  • This is because sustainability issues may erode existing basis of advantage and change the key success factors for the industry.
  • The hottest new entrants in the sector today are Tesla and BYD-a Chinese company.
  • In short, sustainability concerns may shift the basis of competitive advantage, and new and innovative companies may be in a better position to leverage on these emerging opportunities.
  • Many Indian companies too, are gradually discovering the advantages of this approach.
  • Build a unique value proposition by building its hotels in harmony with the environment.
  • Often this means building very little, or building eco-friendly structures, or not building at all, and completing the entire project at a fraction of the cost and the time.
  • The result? CGH’s properties are highly valued and bookings are closed several months in advance.
  • As the later agreements by the International Community brought forward the deadline for eliminating CFCs. In their quest to generate sustainable competitive advantages, many firms are also innovating on their products, services, and business models.
  • The U.S.-based company, Interface Carpets is an excellent example of one who has innovated in all three dimensions.
  • The results on the company’s bottom lines were no less than dramatic.
  • We will focus more on the tools and techniques used in the transformation process.
  • For now we will move on and explore a few more aspects related to how corporations may sustainably transform their operations.

Week Four: Transforming Into the Sustainable Enterprise > Tools and Techniques for Transformation > Sustainability Challenges

  • In this segment, we answer the interesting question: How should firms respond to sustainability challenges? But before that, we need to understand how firms have traditionally responded to such issues.
  • Many firms start with a low environmental sensitivity, what could be called a highly reactive stance, a combination of coping and containment approaches.
  • Coping refers to the ad hoc efforts made by a firm to manage all the demands for improving its sustainability performance.
  • Firms in this category meet the onset of regulations and public pressures, using a mix of denial, issue avoidance, or grudging acceptance.
  • Such strategies may be successful in the short term but eventually they lead to crisis causing loss of legal and moral legitimacy, loss of image and profits to the firms concerned.
  • At the other end are firms that adopt highly sensitive, or what could be called as proactive, stances.
  • There’s a conscious effort by such firms to anticipate and seek solutions to sustainability issues that are expected to arise in the short to medium term.
  • The underlying philosophy is that the firm is a trustee for the resources of future generations.
  • We plot the impact of business on society on one axis and the impact on business itself on the other.
  • Firms in the lower right corner box, situations where the outcomes for both society and business are negative are unsustainable, inefficient businesses.
  • Firms in the top right and bottom left corners, the blue and yellow boxes, are those that have a differential impact on society or on themselves.
  • This matrix draws upon the portfolio matrix developed by GE. An important difference between our matrix and the conventional portfolio matrix is that the conventional matrix uses the dimensions of market attractiveness and competitive possession, while we use market attractiveness and environmental attractiveness as the variables.
  • Market attractiveness in our framework is a combination of various factors related to the market, competitive intensity, firm competitiveness, technological, and economic aspects.
  • It indicates the prospects of the firm within the industry sector in which it operates.
  • It is determined by the nature of the impact generated by the business on the environment in the process of sourcing its raw materials, manufacturing, or the use and disposal of its products and services.
  • Other factors that determine environmental attractiveness include risk arising from the firm’s activities, the company’s environmental record, regulatory trends, and associated expectations from stakeholders.
  • In the nineties, the company decided to rework on its product portfolio and created a whole new set of products-bio-fertilizers, drip irrigation, seeds, and tissue culture related products.
  • In terms of future, the company visualized itself moving to the extreme left hand corner by creating products and services around waste management, solar energy, afforestation, and so on.
  • It’s clear from this example, how a firm may manage its transition from an unsustainable portfolio to a more sustainable position.
  • The relative importance of each of these factors also will vary depending on the business environment, the technology and strategy of the firm.
  • For a firm in a high risk, high visibility sector, such as hazardous chemicals, the evaluation of environmental attractiveness should give greater weight to the power of pressure groups, the potential for accidents, and the safety record of the industry and the firm.
  • The location of the SBU within the matrix will also be based on an evaluation of these factors, internally by the management and externally by experts, and other regulatory agencies.
  • In the next segment of this week, we will try and look at a few specific tools and techniques that are used at the firm level to improve the sustainability performance.

Week Four: Transforming Into the Sustainable Enterprise > Tools and Techniques for Transformation > Green Supply Chain Management

  • I’ll be giving you a brief introduction, in the early eighties, lot of people were talking about lean operations and at that point in time, people thought that there’s a trade-off between cost and quality.
  • This leads to basically lower batch size, less rework, and less inventory leading to hopefully a low cost and in the long run a higher quality.
  • Now, in the last decade or so, green operations similar debate has been rekindled.
  • The questions typically companies ask is “Can we have green operations without increasing cost?” So, there seems to be a trade-off between green and cost.
  • How does one have green operations at a lower cost? Typically there are two ways of achieving it: 1.
  • The question is this: Is green free? In other words, by investing in a green process, does it mean that you can do it without cost? The same issue was raised in 1980s when people used the term “quality is free.
  • Intel invested 59 million dollars from 2008-14 and they reduced the energy bill by 111 million dollars.
  • So the question is, “Is green free?” Green is not free, but it is very likely a positive NPV project investment.
  • How does green products help? Well, they consume less energy of fuel, they consume less raw material, or they consume raw material that are environmental friendly.
  • In summary, companies achieve green operations or green systems by essentially doing two things: a) they actually improved a process by which they manufacture the product, and b) they improved or designed a product by which it consumes less energy.

Week Four: Transforming Into the Sustainable Enterprise > Tools and Techniques for Transformation > Managing Sustainability Risks

  • What is the purpose of the sustainability initiative? Is the intent to manage or minimize costs and, thereby, gain a cost leadership advantage? Or are the expected benefits about differentiation and increased margins? At the functional and tactical levels, sustainability efforts involve managing environmental, social, or economic impacts across the supply chain; and in some cases, specific initiatives within the firm to improve operational efficiency or manage sustainability impacts.
  • Finally, at the tactical level are the short-term measures to deal with an immediate sustainability crisis or opportunity, especially those that impact reputation and product integrity.
  • I am sure you heard of Life Cycle Assessments, eco-design, industrial symbiosis and ecology, and circular economy, and such terms.
  • First we define a life cycle, that is, the stages of a product or service from the extraction of natural resources to the creation of intermediate products, to final product to final disposal.
  • Every output-emissions and wastes-at every stage from material extraction to manufacturing, to packaging, transportation, utilization, and disposal; we can estimate the impact of every material entering and exiting the system.
  • Knowing the potential resource usage and emission intensity of a product or service at all stages of its life cycle can be a fantastic decision support tool.
  • A third method, the cradle-to-cradle approach, popularly called as the closed-loop production system, measures impacts from the extraction to use and final disposal and even recycling of the waste.
  • We will come back and have a re-look at the cradle-to-cradle approach, and how it may be complimented with other approaches in a later segment this week.
  • A comparable methodology for evaluating social impacts examines the social impacts of products and services.
  • These can range from human rights, working conditions, health and safety, cultural heritage, and other socio-economic impacts.
  • Identifying social impacts and creating standardized measures can also be difficult.
  • Regardless, it is still an important decision support tool for firms looking to minimize the environmental and social costs of their products and processes.
  • P&G has used these techniques extensively to evaluate their product decisions.
  • Life Cycle Assessments attempt to assess environmental impact along the supply chain and across multiple categories including energy, emissions, or materials.
  • In other words, it is the measure of how much area of biologically productive land and water is required to produce all the resources consumed and to absorb all the waste generated, using prevailing technology.
  • At the operations level, it will include all products and materials consumed within the organization.
  • At the product level, it examines resources required to deliver a final product.
  • The carbon footprint measures the total carbon emissions emitted over the full life cycle of a product or service either directly or indirectly.
  • The Greenhouse Gas Protocol, also called the GHG Protocol, was developed by the World Resources Institute and the World Business Council on Sustainable Development, and sets global standards for how to measure, manage, and report on greenhouse gas emissions.
  • Given that freshwater is a very scarce resource and demand is growing rapidly, the water use intensity of products and services have also become very big areas of concern.
  • Water footprint measures the amount of water used to produce a product or service.
  • For a good insight into the water intensity of products, go to the water footprint organization’s webpage.
  • Nearly three-quarters of a product’s cost are determined at the design stage, so also its impacts.
  • One of the earliest companies to adopt this approach was Herman Miller Incorporated, who used the cradle to cradle principles in designing their products.
  • Nearly three-quarters of a product’s costs are determined at the design stage.
  • Eco-design is the approach to examine the overall impacts of a product or service at an early stage so that we are not locked into an unsustainable production or consumption system.
  • We can carry out eco-design for existing products and services, that’s more like a redesign by substituting materials or energy currently used with low impact materials and energy sources.
  • The attributes of a product or service that would be examined in such an approach would relate to may be toxicity, renewability, biodegradability, or recyclability.
  • The approach is to make the product and the production process cleaner, safer, and more eco-efficient without fundamentally changing form or function.
  • Companies routinely rework their packaging and product energy requirements to reduce potential impacts.
  • A second and a higher order approach would be to design new products and services, that is substitute old systems with new sustainable ones.
  • This calls for systematically evaluating every stage of the product’s life cycle and improving it’s eco- efficiency and eco-effectiveness.
  • By and large, this would imply creating new categories of products and services to replace existing ones.
  • This is not a more efficient car, but it’s a new category of products such as, an electric car or a hybrid like a Toyota Prius.
  • A third approach to improving performance is to go beyond products and services and take an industrial eco-system perspective.
  • Here, companies collaborate to utilize each other’s products and otherwise share resources.
  • At a more evolved level, this calls for managing the complex interplay between products, services, industrial systems, and consumers.
  • Design for Environment considers cradle to grave costs and benefits associated with the acquisition of materials, manufacture, use, and disposal of a product or service.
  • They argued that the key is not to make human industries and systems smaller as efficiency advocates propound, but to design them to get bigger and better in a way that replenishes, restores, and nourishes the rest of the world.
  • The key insight McDonough and Braungart had was to visualize nature and industry as complimentary metabolic systems each complementing the other with the biological nutrients feeding the biosphere and the technical nutrients feeding the technosphere as seen in this diagram.

Week Four: Transforming Into the Sustainable Enterprise > Tools and Techniques for Transformation > Thought Leader Insights

  • She is passionate about sustainability reporting and heads GRIs, that’s a Global Reporting Initiatives, efforts in promoting sustainability reporting across Asia.
  • My first question to you is, why is sustainability reporting important? Why do companies need to report at all? Dr. Aditi: The basic premise of sustainability reporting is building trust, and one of the ways to build trust is to actually become more transparent.
  • In order to demonstrate transparency, sustainability report and the reporting process becomes an important element and a tool.
  • What companies are actually doing is that through the process of sustainability reporting, they are able to measure, manage, change, and communicate sustainability performances and impacts.
  • From a sustainability perspective, what are the most important parameters a company should report on and what are the prevailing global standards? Dr. Aditi: From 1999, GRI had been the most popular, you know, sustainability reporting, you know, standard.
  • They can disclose information on their sustainability performance and impacts through that guidelines and standards.
  • In making these reports, what challenges or problems do companies normally face? Dr. Aditi: So, in the beginning, I think I would say for the last 15 odd years, organizations were really struggling with the idea of being transparent or not transparent.
  • I remember about, say, 10 years back, when I was interviewing many chief executives in India and South Asia, they would say that why do I need to disclose the information? I know what I am doing, what is best for my organization and the stakeholders.
  • You know the evolution of the stakeholders to demand and expect information across environment, economic, social, and governance issues have changed drastically.
  • Since 2015, our strategy has changed and we are now focusing on the reporting process and saying that report is the outcome of the reporting process.
  • One of the biggest challenge is actually the understanding and awareness not only at the managerial level but also at the top management level to see how sustainability report can just not become another publication in the organization, but it can be used as a tool both at the board level and at the working shop floor level to see how decisions can be taken in a more enabling manner, in a more credible manner to see the change, which is most desirable.
  • Prof: Do you fear that this kind of reporting could also become a source of risk for companies? Dr. Aditi: I think, yes, there could be.
  • What will happen is after sometime, the risk will come out, you know, it’s like a volcano, yeah! But, the trend that I see is that stakeholders’ demand and expectation is growing so much that technology will actually come and change the entire scenario of sustainability reporting.
  • What you are mentioning about, you know, risks-they could be either turned into opportunities by being proactive and using the measurement, management, and change process, or an organization who is laid back can say that, “Let me just be quiet for some time and see and wait for a big crisis to come.
  • Prof: Can you share with us some best practices that you observed in terms of sustainability reporting? Dr. Aditi: Actually, it’s been a very, very interesting journey for me to be with GRI and contributing to this whole movement of, you know, disclosure.
  • The word transparency itself was like a very, you know, difficult word and I would be always told that please don’t pick up this word on transparency, say what we have to measure, that we can do but transparency is a very big word and it is only at the top management that it can be dealt with.
  • Now I see that in Annual Reports, or in Business Responsibility Reports, which is by the SEBI, or sustainability reports, I see the word transparent is become very common.
  • I feel that, globally, I feel that Unilever is one of the very nice organization, which has taken sustainability reporting as one of the tool to actually showcase itself to contribute to sustainable development.
  • One of the best practice that I remember is that they have a sustainability, you know, council which they call as sustainable living, you know, planet, and that is where they are bringing stakeholders to give them advice on what should be their, you know, contribution to sustainable development.
  • There are many organizations including the Tata Steel, which has its 17th sustainability report, which is also a big effort because all these years, they never left, dropped out of this system and the, you know, the motivation to disclose information on sustainability for long.
  • Another best practice that I see is because of sustainability reporting, business organizations have gone through governance change, you know.
  • Prof: These days, there is a lot of discussion about the future of sustainability reporting.
  • What are the major trends that you see? How is this reporting initiative likely to evolve, especially with respect to what some refer to as an integrated reporting framework? Dr. Aditi: I think, you know, before I go to integrated reporting, two things I would like to mention here in the trends that-I think reporting is not going to be restricted only to one corporation.
  • It is more and more seen that supply chain reporting is becoming a very important element and that is why our generation fourth version of the guidelines has included parameters on supply chain across, you know, the disclosures.
  • It will be not limited to only the, you know, the black and white printed sustainability reports, it will be digitally available information, which is accessible by many stakeholders like consumers, you know.
  • The third thing I see is that reporting and also the very concept of XBRL, which is about tagging, which is been used by financial reports is now coming to sustainability reporting.
  • Someone said that there should be a complete integrated report, you know, “Complete Integrated Report” is that there is this, you know, expectation that companies will now look at how do they take a financial decision based on sustainability footprints and vice-versa.
  • This is going to be a long journey in the evolution of corporate reporting because in financial reporting, you have many standards but sustainability reporting is since 1999.
  • We have to become mature on the sustainability dimension to move into integrated reporting.
  • There are about, I think, more than 350 companies who are trying on their own to prepare integrated reports.
  • If you look at GRI database, there are many integrated reports but they are in various shapes and formats, you know.
  • We have to still come to a conclusion through all this explorations to see how integrated reporting can actually happen.
  • We wish you all the best in taking this your mission of getting sustainability reporting more prominent and transparent.

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