The Innovation Bottom Line

Section I: The Hallmarks of Sustainability-Driven Innovators

Business model innovation is the bottom line of Sustainability-Driven Innovator success. In stark contrast to managers who say sustainability is not adding to profits, those who say that it is are more than twice as likely to report that sustainability is driving business-model innovation. As Michael Bremans, Chairman of Ecover, a manufacturer of eco-friendly cleaning products, puts it: “Sustainability means that you are continuously looking at innovation and improvement. You shouldn’t think of it as a best or finished solution. It’s a process that requires constant attention and commitment.”

Business-model innovation looks beyond product, service or technology advances. This dimension of innovation explicitly addresses the fundamental choices a company makes about what it is offering to whom — its value proposition — and how it leverages its value chain, cost models and organization to deliver that value (see “A Framework for Analyzing Business Models”).2

A clear business case helps ensure that innovations deliver value. Overall, the percentage of respondents who say their companies have developed sustainability business cases has grown over the years. With Sustainability-Driven Innovators, the number is pronounced: 54% have developed a business case versus 38% overall. Developing a business case avoids what Paul Murphy, chief executive of Valid Nutrition, the social enterprise food production arm of VALID Group, cites as a dangerous pitfall. “Too many companies see sustainability as an insurance policy and just tick off the boxes,” he says. “They often spend significant amounts of money that, from a strategic and business development standpoint, leads to a dead end.”

To avoid that dead end, Sustainability-Driven Innovators see the opportunity differently than do companies that haven’t gleaned sustainability’s financial rewards. They don’t dwell on it as a cost issue. They focus on how their efforts can increase market share, boost energy efficiency and build competitive advantage. Sustainability-Driven Innovators bring a strong execution focus to their efforts. These companies are much more likely to place customers at the center and work closely with many stakeholders. They also drive sustainability objectives through skillful organizational change.

In the remainder of this report, we look at these specific hallmarks in detail.

Section II: The Crux of Sustainability-Driven Profit: Business-Model Innovation

To gain a deeper understanding of sustainability innovation, we presented survey respondents with the business model framework described above, which was developed by The Boston Consulting Group. (See “A Framework for Analyzing Business Models.”) Using this framework, we asked respondents how (if at all) they have changed their business model. We found that up to 59% of respondents whose companies changed three or four business model elements report profit from sustainability efforts.

In short, Sustainability-Driven Innovators pursue innovation aggressively across their business models — much more so than companies that don’t achieve profits from sustainability efforts.

The Potent Combination

A surprising combination of business model elements delivered the most potent results. They weren’t the game-changing products and businesses that one usually hears in the context of innovation. Sustainability-Driven Innovators often take a more straightforward route, combining target segments with value-chain innovations. Nearly 60% of organizations that pull these two levers and change one or two other business model elements are more likely to be Sustainability-Driven Innovators. (See “The Extent of Business Model Change.”) Pulling both allows companies to target new segments and/or better serve the segments where they currently compete. Value-chain innovations help companies realize innovations in these segments.

Kraft Foods is a perfect example. (In October 2012, Kraft Foods changed its name to Mondelez International.) Sustainable sourcing in its value chain is a key part of the company’s strategy, according to Chris McGrath, then vice president for sustainability. In addition to protecting the environment and helping farmworkers improve their livelihoods, models such as Rainforest Alliance, Fair Trade and UTZ Certified help boost crop yields and capacity — a critical need for a global food company dependent on reliable access to commodities. Last year alone, Kraft increased its sustainable sourcing of agricultural commodities by 36%. Currently, more than 15 of its brands carry the Fair Trade or Rainforest Alliance marks.

But value chain innovations do more for Kraft than help ensure reliable sources of commodities: they have opened up new consumer segments. Coffee is one of Kraft’s biggest success stories. This year, Kraft committed to 100% sustainable sourcing of the raw materials for its European coffee brands by 2015. “Our consumers and customers care about the benefits certification and verification deliver,” says McGrath. “It is good for business and brings our work full circle.” In the United Kingdom, the Rainforest Alliance Certified seal is generating double-digit revenue growth. In Sweden, Kraft’s sales of instant and espresso coffees with the seal have doubled with the “away from home” consumer segment.

More often than not, however, “greening” a product is not the key to building business in target segments. Kraft discovered this with its YES Pack commercial salad dressings. Through supply chain innovations, the company significantly reduced its packaging costs. The new plastic container requires 50% less energy to produce and uses 28% less primary packaging material than its predecessors. What opens doors to commercial segments, however, is the package design. The bigger, easier-to-use containers — which are also less expensive to produce — are extremely popular with restaurants, giving Kraft competitive advantage with lower costs.3

For Dell, packaging innovation was important to maintaining business in many of its target segments. “You might think packaging is a mundane topic,” said John Pflueger, Dell’s principal environmental strategist. “But it is a recurring pain point for many customers.” Dell’s clientele wants strong packaging to ensure their equipment will arrive undamaged, while Dell wants lighter packaging material to reduce its shipping costs. The company turned to its supply chain for an answer. It found a Chinese company that was experimenting with bamboo fibers as a substitute for paper used in cardboard packaging. Bamboo, which is native to China, is one of the fastest growing plants in the world and, as a result, a renewable resource.

The experiment ultimately proved successful. Because of its structural strength, 70% of Dell notebooks are now shipped in bamboo. The company was also careful to make sure that it was indeed using a sustainable resource; pandas, for example, eat bamboo. In collaboration with the Forest Stewardship Council, Dell ensures that the bamboo forests from which it is sourcing raw materials are not panda habitats.

To gain competitive advantage, Kimberly-Clark looks at the entire value chain of its products, cradle to grave. Its business customers are particularly keen on reducing waste in an environmentally positive way. In its professional business market, the company launched a program called “Reduce Today, Respect Tomorrow.” One of its offerings is a hand towel for public washrooms where users can dry their hands with only one towel. The product certainly has a potentially powerful “green” message. As Thomas Falk, Kimberly-Clark’s CEO and chair, points out, Kimberly-Clark has reduced the amount of fiber in its professional towels by up to 17% since 2005. The company has one of the most progressive fiber procurement policies in the tissue industry. It reduced its water use by 1.1 million cubic meters between 2010 and 2011 and regularly seeks to reduce its use of transport, storage and landfill.

But Kimberly-Clark doesn’t rely solely on the sustainability credentials of its products. The value to customers is the reduced cost of fewer towels. “Sustainability can create competitive advantage,” says Falk. “If we can make a towel that is good enough to dry hands with only one sheet and we can sell it at a competitive price, we create value for the customer and the environment.”

Doing Things Differently, Doing Different Things

Value chain and target segment innovations are by no means the exclusive source of sustainability profit and competitive advantage. Examples of successful sustainability-driven innovation fall along a rich spectrum — from doing things differently to doing entirely different things.

Incremental steps, for example, can significantly improve efficiency and reduce cost. U.K.-based supermarket retailer Sainsbury’s saved $2.4 million by improving water efficiency in its stores. The company fixed leaks, installed sensors on urinals and reduced toilet water capacity. In addition, rainwater harvesting, low-flush toilets and waterless urinals are installed in all of its new stores.

Nestlé developed a cost model innovation in a novel point in its value chain. The company realized how to use coffee grounds — a by-product of its manufacturing process — to help power its factories. Instead of treating coffee grounds as waste, Nestlé discovered that burning them can generate steam, which is used in many of its factories. Some 60% of the steam the company uses now comes from burning coffee grounds, significantly reducing Nestlé’s reliance on natural gas. In addition, in over 20 years, the company was able to divert 1.24 million tons of coffee grounds away from landfills.

At the other end of the spectrum, Interface, the world’s largest manufacturer of modular carpet, developed a powerful revenue model innovation through a service offering with some similarities to Zipcar’s. Its FLOR line offers a system of carpet squares that customers can combine and assemble to create rugs, runners or wall-to-wall designs. In 2003, it began to offer its carpet tiles as a service. Under this model, the company maintains the carpet for customers throughout its life — from installation to replacing tiles to recycling at the end of the carpet’s use.

Apparel manufacturer Patagonia used its sustainability message to bolster its value-proposition innovations with a provocative brand-building campaign. In 2011, it took out a full-page ad in The New York Times with the surprising headline: “Don’t Buy This Jacket.” Consumers were asked to sign a two-part pledge online. In signing the pledge, both consumers and Patagonia agreed to reduce consumption and waste by only buying items when needed, repairing items when they break and recycling products at the end of their useful life. If the company didn’t have credibility in sustainability, the ad could have backfired. The company did, however, and the campaign generated significant buzz. But it also achieved its most important aim: reinforcing Patagonia as a high-quality brand that offers durable, long-lasting products.

Making Sustainability Efforts Happen

Like any major business initiative and opportunity, sustainability-driven innovation requires adroit change management skills and innovative approaches to organizational governance, leadership and employee engagement.

Our research found that top management attention is central. Sixty-one percent of companies that have changed their business model and have sustainability as a permanent fixture on their management agenda say they have added profit from sustainability. (See “Top Management Agenda.”)

Former CEO of Campbell Soup Company Douglas Conant made sustainability a focus. He argues that a company’s CEO must make sustainability a priority to keep it from falling off the radar and becoming a risk. At Campbell, he advanced what he calls an “abundance mentality” — challenging people not only to create shareholder value but to do it in a way that simultaneously helps build a better world. This abundance mentality is not unique to Campbell. Leadership can unleash it by putting sustainability opportunities front and center. Conant did so personally, making a point of frequenting company discussions on sustainability. “As I did this, sustainability became part of people’s everyday conversation and thinking,” he says. “It became part of the fabric of doing your job.”

At telecommunications company Sprint, sustainability is a board-level agenda item. In 2012, the company made its sustainability efforts part of the formal board review process. At nominating and governance committee meetings, members review the company’s sustainability performance against its goals. Sustainability has become a core part of the company’s annual review.

Integrating Sustainability into the Company

Sustainability-Driven Innovators don’t treat sustainability as a stand-alone function detached from the business. They integrate the efforts into operations and planning. “We have sustainability in all of our operations,” says Hans Joehr, Nestlé’s corporate head of agriculture. “We don’t even have a sustainability officer. We believe that you can’t make good progress by using a ‘doctor’ prescribing to everyone what they should do.”

At Dell, sustainability is deeply integrated into the organization and the function reports to the chief marketing officer. Dell’s Pflueger points out that the marketing organization has a global purview that gives sustainability an equally broad outreach. Reporting to the marketing organization also ties the efforts to customers, analysts and opportunities to leverage sustainability for brand development. To build sustainability expertise across the organization, Dell uses a hub-and-spoke model. A small core team works with subject-matter experts across the company to collect data and generate insights about what customers are seeking.

Kimberly-Clark uses a bottom-up/top-down approach and matrix structure to drive its sustainability efforts. The company’s CEO meets with his leadership team and the head of sustainability to set five-year goals and a vision for efforts beyond. The planning work then cascades through the organization for vetting and input. “But then each line executive owns the goals,” Falk says. “We develop a quarterly scorecard so that my leadership team and every business unit leader can see where they stand. Sustainability goals are as important as any others on their lists.”

Scorecards, key performance indicators (KPIs) and other metrics are a mainstay of how many Sustainability-Driven Innovators make sure their efforts come to fruition and achieve the desired impact. Timberland, for example, is currently developing a new set of sustainability KPIs that will be tightly linked to financial performance. AT&T invested in back-end systems to collect the data needed to evaluate its efforts. At AT&T, facilities are graded A through F and the scorecard data is shared broadly throughout the organization. “Visibility into the data drives behavior,” says John Schulz, director of sustainability operations. “Managers want to do well among their peers, and progress on sustainability is linked to their annual performance reviews.”

Most Sustainability-Driven Innovators don’t tend to march to the beat of their own drummers. They are not married to one-size-fits-all or other prescribed approaches. Instead, they generate profit by changing the way they address their markets and operating models. Sustainability is a strategic mandate that Sustainability-Driven Innovators support through providing leadership from the top and by integrating sustainability into the organization.

Section III: The Business Case Effect

A clear business case is vital to generating profit from sustainability. It defines how a given innovation will add business value: companies that profit from sustainability are almost 200% more likely to develop sustainability business cases. The business case is often integral to the company’s overall strategy. “Making the sustainability strategy part of the global business planning process really turned things around for us,” says Peggy Ward, director of the enterprise sustainability strategy team at Kimberly-Clark. “We were able to demonstrate the competitive advantage that sustainability could provide.”

Retailer Marks & Spencer is a prime example of the business case in action. In 2007, the company announced its Plan A, which included 100 sustainability commitments over a five-year time frame. The company extended this in 2010 to 180 commitments to achieve by 2015 to become the world’s most sustainable major retailer. The plan has seven pillars that address customer involvement, climate change, waste, natural resources, becoming a fair partner, health and the company culture. The company’s achievements include becoming carbon neutral, giving customers the opportunity to give back by donating clothes, and integrating sustainability into its financial performance and reviews. The company reports that the plan has delivered $296 million in economic benefits.4

Often, successful business cases mesh with a company’s business culture. Former Campbell Soup CEO Conant, for example, argues that many food companies have a “reap what you sow” mentality. He points out that the industry is heavily represented on surveys of the most socially responsible U.S. companies. For Dell, sustainability bolsters the company’s focus on efficiencies. “Dell abhors waste,” says Dell’s Pflueger. “Any inefficiency — whether it’s excessive days of inventory or energy waste — is something the company will want to address. Our approach to sustainability fits the company culture.”

The Hard-Nosed Numbers

Business cases for sustainability often focus on the numbers. Sprint, for example, invests in making its phones very easy to take apart. That investment allows them to recycle waste and refurbish phones for more price-sensitive markets. Sprint CEO Dan Hesse also underscores that Sprint’s hurdle rates for sustainability projects aren’t necessarily as stringent as they are for other opportunities. Solar panels, for example, might have a longer payback period than other investments, but still make sense. “You always create a business case,” he says. “But you may need to use criteria with a longer time horizon. But as long as the return is positive, you can do it knowing it’s in shareholder interests.”

Intel also scrutinizes the numbers behind its sustainability activities, and its corporate finance unit has been charged with helping quantify the impact of sustainability efforts across the board. “Some of it is easy,” says Suzanne Fallender, director of CSR (corporate social responsibility) strategy and communications. “Since 2001, for example, we have invested more than $45 million in 1,500 projects. We can quantify what we have saved in energy — about $23 million in annual costs.”

Timberland leverages industry standards to tightly tie sustainability efforts to the bottom line. The company developed its own “nutrition label,” which it calls its Green Index. The index measures the climate impact, chemicals used and resources consumed by the manufacture of a footwear product. With the index, Timberland compares a product’s score to its profit margin. “I can find out if shoes with higher environmental impact are better or worse for margin,” says Betsy Blaisdell, senior manager of environmental stewardship. “They may be more expensive to produce, but generate better margins.”

Although Sustainability-Driven Innovators focus on the numbers, many try not to let them stand in the way of ideas that may be difficult to measure but, nonetheless, have an inherent strategic logic. Sprint’s Hesse points out that a number of sustainability activities build intangible value for the brand. The value of achieving high positions on global sustainability rankings, for example, is difficult to pin numbers to. However, he realizes that a teenager today will be a consumer tomorrow, possibly with high disposable income. Sustainability will be an important element of the brand to that generation. “It’s difficult to say how many subscribers those rankings will add,” he says. “You have to make some reasonable assumptions.”

Intel also makes general assumptions for some of its sustainability initiatives. Fallender points out that Intel is one of the largest purchasers of green power in the United States. The company knows it is currently paying a premium for renewable energy. But it also believes that spurring demand will help bring down renewable energy costs in the future. “Just because you can’t always measure and monetize a sustainability activity doesn’t mean you can’t see the strategic value it creates,” she says.

Section IV: Customer and Stakeholder Effects

For Sustainability-Driven Innovators, customers are at the center. These companies are 80% more likely to increase collaboration with customers as a result of sustainability than are companies that did not change their business model. They are also much more likely to collaborate with competitors, suppliers and across their own business units.

AT&T, for example, has consumer advisory panels that include both end users and businesses. The panels’ goal is to understand customer decision-making processes and then determine the best way to communicate the company’s sustainability values. Like many other companies, AT&T realizes that customers are moving targets and their competitors are also aiming at them. As Michael Bremans at Ecover puts it: “All your activities need to be centered on customer expectations. Even without legislation and regulation, consumers are looking for sustainable lifestyles and the demand is going to grow faster and faster.”

Governments and political organizations do play a key role, but not as a source of pressure. Sustainability-Driven Innovators pull them into the fold to build expertise and help solve sustainability related issues.5 “NGOs are an important resource,” says Bremans. “They are an excellent source of information about how the market might react to a particular innovation.”

Kimberly-Clark formed an outside advisory board five years ago to bring fresh thinking to its sustainability efforts. “We were really inwardly focused,” said Falk, the CEO. “We had been eating our own cooking for a long time and thought we had all the answers.” Today, the company has ongoing dialogues with Greenpeace, the World Wildlife Foundation and other NGOs. It is also working with suppliers to help them reduce waste and make progress with other sustainability goals.

Nestlé has brought together customers, advisors and competitors to develop what it calls “pre-competitive” practices. Ten years ago, for example, the company reached out to Danone and Unilever to help develop sustainable agriculture approaches. “We were like the oil and gas industry,” says Nestlé’s Joehr. “A lot of what we did was having a negative impact. Instead of each of us working on our own, we decided to work together to figure out principles, practices and procedures.”

Timberland’s Green Index spurred the creation of the Higg Index, an industrywide coalition to measure the environmental and social impact of apparel products. According to Blaisdell, suppliers were frequently saying they had “green” products, but there was no way to assess the claims or measure them against other products. The Green Index provides that baseline. To develop it, Timberland worked with academics and retail customers.6

Investors remain a challenging stakeholder group. There are investment firms that focus on sustainability, and a growing campus movement in the United States is urging their colleges to divest investments in companies that don’t meet environmental muster. Nonetheless, sustainability does not necessarily appeal to short-term investors. “They can have a big effect on share prices, because they trade regularly,” says Sprint CEO Dan Hesse. “Their time horizon is shorter than the payback period of most green investments.”

Section V: Hitting the Sustainability Bull’s-Eye

The trends are clear, and the stakes are high. Climate change, demographic shifts and population growth are increasing the sustainability demands placed on businesses. Our research has found that companies need not see these demands as a cost burden nor respond to them with tweaks to their businesses or “greenwashing.” Sustainability is both a business necessity and an opportunity, what PepsiCo’s Dan Bena calls the sustainability bull’s-eye. Even moderate changes to company business models can reap significant financial rewards.

Five Practices

Our study found that many companies are generating profits from sustainability. To do so, they are following these five practices:

1. Be prepared to change business models. Business-model innovation is a key indicator of whether a company will profit from its sustainability activities. Since business-model innovations can involve significant corporate change, organizations should address the need for and the speed of that change. Setting multiyear sustainability goals that matter needs consistent top management attention, especially if achieving the goals requires adding new capabilities and changing elements of the business model.

2. Lead from the top, and integrate the effort. Although the momentum for sustainability efforts is often bottom-up, Sustainability-Driven Innovators lead it from the top. Executives make sure goals are set and tied to strategy. Steering committees and other coordinating groups ensure that knowledge is shared and that good ideas move systematically from pilot to rollout. Sustainability should never be a stand-alone effort. It needs to be integrated into the business and its operations with clear accountabilities.

3. Measure and track sustainability goals and performance. As the adage says: “If you can’t measure it, you can’t manage it.” Sustainability-Driven Innovators use scorecards, KPIs and other integrated reporting tools that track performance against goals. These measures give a clear signal that top management takes the effort seriously. In many cases, sustainability results are a key element of performance reviews and compensation.

4. Understand how customers think about sustainability and what they are willing to pay for in connection with sustainable products or services. Customers aren’t always willing to pay more for a “green” product or service.7 It is important to determine whether they are. In North America, LEED certified buildings have been definitively shown to command price premiums in the real estate market. In some parts of the world, especially Europe, consumers will pay a premium for environmentally sound products. But this approach only scratches the surface of sustainability opportunities. As is the case with Dell and Kimberly-Clark, sustainability can help target and address a broad range of market and customer needs.

5. Collaborate with individuals, customers, businesses and groups beyond the boundaries of the organization. Many companies are forming outside advisory groups to help frame their sustainability agenda. This process is an opportunity to get closer to customers, who can be a useful resource for identifying appropriate members. NGOs have become much more constructive in their corporate engagements and can help your company identify credible, meaningful and feasible sustainability objectives that lack the appearance of “greenwashing.” Consider participating in or helping create an industry group to give your business an opportunity to shape what “doing good” means in your market.