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    Why Sustainability is Now the Key Driver of Innovation


    International Trade Forum - Issue 4/2009

    There's no alternative to sustainable development. Even so, many companies are convinced that the more environment-friendly they become, the more the effort will erode their competitiveness. They believe it will add to costs and will not deliver immediate financial benefits.

    Talk long enough to CEOs, particularly in the United States or Europe, and their concerns will pour out: making our operations sustainable and developing "green" products places us at a disadvantage vis-à-vis rivals in developing countries that don't face the same pressures. Suppliers can't provide green inputs or transparency; sustainable manufacturing will demand new equipment and processes; and customers will not pay more for eco-friendly products during a recession. That's why most executives treat the need to become sustainable as a corporate social responsibility, divorced from business objectives.

    Not surprisingly, the fight to save the planet has turned into a pitched battle between governments and companies, between companies and consumer activists, and sometimes between consumer activists and governments.

    Although both legislation and education are necessary, they may not be able to solve the problem quickly or completely. It resembles a three-legged race, in which you move forward with the two untied legs but the tied third leg holds you back. One solution, mooted by policy experts and environmental activists, is more and increasingly tougher regulation. They argue that voluntary action is unlikely to be enough. Another group suggests educating and organizing consumers so that they will force businesses to become  sustainable.

    Executives behave as though they have to choose between the largely social benefits of developing sustainable products or processes and the financial costs of doing so. But that's simply not true. We've been studying the sustainability initiatives of 30 large corporations for some time. Our research shows that sustainability is a mother lode of organizational bottom-line and top-line returns. Becoming environment-friendly lowers costs because companies end up reducing the inputs they use. In addition, the process generates additional revenues from better products or enables companies to create new businesses. In fact, because those are the goals of corporate innovation, we find that smart companies now treat sustainability as innovation's new frontier.

    Indeed, the quest for sustainability is already starting to transform the competitive landscape, which will force companies to change the way they think about products, technologies, processes and business models.

    The key to progress, particularly in times of economic crisis, is innovation. Just as some internet companies survived the bust in 2000 to challenge incumbents, so too will sustainable corporations emerge from today's recession to upset the status quo. By treating sustainability as a goal today, early movers will develop competencies that rivals will be hard-pressed to match. That competitive advantage will stand them in good stead, because sustainability will always be an integral part of development.

    It isn't going to be easy. Enterprises that have started the journey, our study shows, go through five distinct stages of change [see below]. They face different challenges at each stage and must develop new capabilities to tackle them. Mapping the road ahead will save companies time-and that could be critical, because the clock is ticking. 

    The five stages of change towards Sustainability:

    1. Viewing compliance as opportunity
    2. Making value chains sustainable
    3. Designing products and services to become eco-friendly
    4. Developing new business models
    5. Creating next-generation practice platforms that enable customers and suppliers to manage energy in radically different ways.

    Ram Nidumolu is the founder and CEO of InnovaStrat, a Santa Cruz-based firm that helps companies design and implement sustainability strategies and new business models. C.K. Prahalad is the Paul and Ruth McCracken Distinguished University Professor of Strategy at the University of Michigan's Ross School of Business and a member of the board of directors of the World Resources Institute. M.R. Rangaswami is the founder of the Corporate Eco Forum, a global organization of senior executives, and the cofounder of the Sand Hill Group, a San Francisco-based strategic management, investment, and advisory firm.

    © This excerpt is published with permission of Harvard Business Review. A full copy of the article is available atwww.harvardbusiness.org