Archive for the ‘Sustainability & Corporate Social Responsibility’ Category

5 sources of growth in 2013

North America is mired in a low growth funk driven by cautious consumer spending and frugal capital expenditures.  For 2013, many CEOs are bracing for zero or even negative revenue performance. Even frothy companies are adjusting to this ‘new normal’ by continuing to restrain R&D, sales & marketing and M&A activity.  Is this reaction a tad premature?  Have firms exhausted all avenues for growth?  Since 2008, we have helped a variety of dynamic companies drive topline growth an average of 27% by identifying market ‘white space’ and monetizing under-utilized assets.  Managers should explore these 5 areas to propel their 2013 business:

1.    Find under-serviced or ignored niches around your core offering

The fluid nature of many categories and consumers hide a number of market anomalies that could be exploited by nimble firms.  For example, the majority of markets can support different strategic positions including low cost, specialized and premium offerings.  Some categories, however, are missing one of these players offering opportunities for new and differentiated entrants.

Other companies will discover adjacent “white space” – an ignored market or compelling, unmet consumer need – where they could extend their strong brand franchises. P&G has done this successfully by launching Crest White Strips, extending their Oral Care line-up from toothpaste and brushes into the Whitening business; and by launching an array of Swiffer products to clean various surfaces in addition to their other cleaning line.  “Cutting costs is important, but you cannot shrink your way to growth.  You’ve got to reinvest the savings in distinctive value-added products and services that customers are happy to pay for.” said Tim Penner, retired President of P&G Canada.

2.    Increase revenue from current customers

Most firms inadvertently leave money on the table, often with their best customers. This occurs for a number of reasons including: over-zealous discounting; poor visibility into the customer’s potential value; low customer awareness of the vendor’s full offering or; ineffective cross-selling programs.    Fact is, opportunities exist in every customer relationship and company.  We designed a revenue maximization program for a software company that plugged billing leaks and better aligned pricing to value deliveredpainlessly producing an 18% revenue lift.  In another case, we helped a U.S. industrial goods manufacturer double their cross-selling rates by mining their customer data with advanced analytics and developing targeted sales and marketing initiatives.

3.    Turn platforms into new revenue generators

Following significant capacity, infrastructure and IT investments over the last decade, many firms now have robust but under-utilized operational platforms that can be leveraged into new revenue opportunities.  Amazon has successfully pursued this strategy.  Early on, they recognized the potential of their B2C e-commerce platform by launching a host of new B2B services including cloud computing, online storage and merchant e-commerce services.

4.    Maximize all distribution opportunities

Many marketing strategies have not kept pace with the buying habits of their customers, who increasingly are directing their purchases through a plethora of direct and indirect on & offline channels.   Filling these distribution gaps is an ideal way to build volume and outflank competitors.  For example, we helped a consumer products company drive a 18% increase in shipments by gaining ‘bricks and clicks’ shelf space in non-traditional retail and B2B channels.  Furthermore, firms can no longer ignore the revenue, margin and custom experience benefits of going direct to the consumer.

5.    Monetize intellectual property and process by-products

In some firms, healthy investments in R&D and strategic partnerships have spawned a significant amount of intellectual property.  Much of this IP may now be lying dormant due to lower commercialization investments or a shift in corporate strategy. Organizations should look to monetize inactive IP through outright sale or by licensing to non-competitive 3rd parties.  In addition, many companies like Cook Composites and Polymers have discovered that there is gold in the waste by-products of their manufacturing processes. Turning waste into new products can create new streams of high-margin revenues and improve sustainability performance.

In tough times, prudent companies will seek to maximize their revenue by better leveraging their existing customer base, resources and capabilities.  To realize this potential, managers will need to relook their entire business, including: enhancing their understanding of the market ecosystem, mining their consumer data and; looking for creative ways to serve customers in unique and compelling ways.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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Turning industrial waste into gold

The idea that waste from a manufacturing process can be reused or sold is fairly well established.  In agriculture, cast-off corn husks are being converted into animal feed, while discarded cow parts are turned into everything from leather to jet engine lubricant. Harvard Business School professor Deishin Lee has pushed the notion of waste management even further with her concept of “by-product synergy.” As outlined in the school’s Working Knowledge newsletter, BPS is about taking the waste stream from one industrial process and using it to make a new product. According to Lee’s research, a BPS strategy can: 1) boost profits by reducing waste disposal fees;   2) create new revenue streams by using the waste to develop new products;  2)  decrease the environmental impact of a process and;  3) improve operational efficiencies through increased manufacturing utilization. 

Virtually every manufacturer defaults to a disposal or sale strategy when dealing with waste.  BPS looks at waste more strategically by asking a simple question:   What is the maximum value that can be extracted from the by-products given existing inputs, processes and capabilities?   At its full potential, BPS leads to the development of new products, derived from the by-product waste, and delivered through the same production process.

To tie her conceptual thinking into a practical tool, Lee developed a scenario-based model that is driven off the relative value of the original waste-generating product, the cost of waste disposal, and the cost of raw materials:

Scenario 1 – Waste has low value and utility  

Since the by-product is of low value, a company should not commit too much time or capital to repurposing the waste.  To maximize profits, firms would seek to dispose of the waste through traditional means and look for easy and inexpensive opportunities to turn some of the waste into a new product.

Scenario 2 – Waste has significant value and utility

As the value of the waste increases, managers would explore how to “productize” it within the existing operational model.  In some cases, there may be a profit incentive to actually increase the production of the original product in order to generate more “waste.” Though profits of the legacy product might fall due to market saturation or reduced operational efficiencies, the incremental revenue and profits from the secondary product could more than compensate for the loss.

Lee uncovered this insight in her study of Cook Composites and Polymers Co., a manufacturer of gel coats for premium yachts. One of the by-products created in the manufacturing process was styrene, a chemical used to clean molds between batches.  Interestingly, the firm discovered  styrene can also be used to make coating for concrete. Through productizing the styrene waste stream, the company gained more options to optimize the joint production process, creating a win-win situation for both products.

The operational benefits of manufacturing multiple products in one line will not always be apparent. Competing product priorities could generate capacity and workflow challenges since BPS implies a proportional volume relationship between products.

Scenario 3 – Waste is more valuable than original product

The company may discover that the by-product is more profitable than the legacy product. In this case, a consumer goods producer might deal with the problem by sourcing virgin material to create more of the secondary product. Not only does the company reduce costs for the original product by cutting down on waste, but it also gains competitive advantage over other firms for the secondary product – who are limited to sourcing virgin material.

Environmental questions

While BPS can deliver new revenues and greater operational efficiencies, its environmental benefits are not always clear cut.  According to Lee, “As you create more value and demand for your by-product, and you increase the quantity of everything, then emissions might increase, depending on process characteristics. That could be the unfortunate part of being successful.”  Furthermore, it is hard to quantify the net effect of a joint manufacturing process on the environment, as BPS may change the nature of the environmental impact.  In essence, Lee asks “Is it better to have carbon emissions or toxic waste in a landfill?”

Manufacturers with hundreds of inputs and complex production processes could face a dizzying array of BPS options.  To choose wisely, managers should apply a market lens to focus on what current customers want and what the company is well-positioned to produce. Properly planned and managed, BPS can be the alchemy that turns industrial waste into gold.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Renewable energy’s moment of truth

After 30 years of booms and busts, the renewable energy industry is at a crossroads.  Between 2003 and 2008, the sector (which includes solar, wind, biomass and geothermal technologies) expanded rapidly, propelled by strong government support, high levels of private investment, technological innovation and high fossil fuel prices. However, since 2008 the RE industry has stumbled due to slower economic growth, power generation over capacity and declining competitiveness due to falling natural gas prices.   

Will the sector bounce back and grow to become a mature industry or will it fall victim to the classic boom-and-bust new technology cycle?  Two recent arguments highlight the current level of uncertainty surrounding the business. 

Booz & Co. argues that RE has finally evolved into a self-sustaining industry based on some key developments:

Geographic dispersal

RE sources are no longer confined to a few regions or markets. For perspective, 55% of the U.S.’s RE capacity in 2005 was located in just two regions (the western and southeastern regions).  Today, thanks to generous subsidies these two regions represent just 40% of a larger total capacity.  Dispersal is also occurring globally with each region now able to select the optimal mix of energy sources that suits their needs.

Technology diversity

RE is more diverse today than it was 20 years ago (when biomass was the only game in town) thanks to major advances in solar and wind technologies.  These advances have delivered major improvements in project usability, cost reduction and generation capacity.  As a result, most local areas now enjoy a variety of competitive RE alternatives; falling installation & operating costs and; a greater range of consumer and industrial applications.

Too big to fail

RE is now big business supporting a strong foundation of global and local players who have committed billions of dollars to new production capacity, distribution and R&D.  This investment is unlikely to evaporate in a market slowdown.  In most regions, a large ecosystem of critical support services has evolved including project installers, sub-contractors, and energy brokers.  This ecosystem can help accelerate RE’s share of the energy market beyond current single digit levels.

So RE has a bright future…or does it? A recent article in Foreign Affairs, “The Crisis in Clean Energy” contends that the industry is headed for a crash due to 3 fundamental challenges:

Weak economics

Most RE programs are not financially viable without generous government subsidies, regulations, and tax credits. This intervention has led to market distortions that do not reflect optimal investment allocation and market pricing. Capital has flooded into technologies and capacity that are subsidized and easy to build today but are unlikely to be innovative and large enough to compete against traditional energy sources in the long term.  In fact, over 85% of all RE investment has been plowed into technology that is not financially viable without subsidies.  Any declines in the price of traditional fuels – oil, natural gas and coal – will only worsen RE’s competitiveness and increase the reliance on subsidies.

Fading incentives

Given the existing economic and political climate, the RE sector can no longer rely on strong political and fiscal support.  Many governments are already pruning vital subsidies and tax credits.  Overall, these incentives provided 20% of all 2010 global RE investment.  Falling government support can not come at a worse time.  New industries typically depend on large and steady public/private investments to move from a start-up to a commercially-viable sector.  Moreover, the embryonic RE industry – utilities and multi-nationals notwithstanding – features hundreds of small firms who are highly vulnerable to changes in public policy and costs.

The bear is here

Equity markets are already foreshadowing problems. The WilderHill New Energy Global Innovation Index, which tracks the performance of 100 clean energy stocks worldwide, fell by 14% in 2010, underperforming the S&P 500 by more than 20%. As equity markets go, so does critical early stage technology and commercialization funding.  In fact, many North American venture capital firms have already scaled back or have canceled their RE investment arms.

Perhaps both arguments are right.  If the RE industry can weather short term economic storms and kick the subsidy habit, then it may be able to fully leverage a foundation of global industry players, capacity and expertise. The next 12 months will be interesting.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Consumer behavior in 2011: back to the future

Few people would be surprised to see that American consumers have changed their spending habits as a result of the current recession. Determining whether these changes herald a ‘new normal’ was the goal of a recent study by the consultancy, Booz & Co.  The firm spent the past two years collecting data on how the recession has impacted the practices and values of American consumers.  To gain a historical perspective, the researchers also utilized Young & Rubicam’s BrandAAsset Valuator (BAV), an ongoing 20 year survey on consumer behavior.

Booz’s study found that the recession has merely accelerated changes in consumer beliefs that were occurring over the 2005-2009 period (per the BAV survey). These changes represent a significant shift back to historical purchase drivers and lifestyle values.  Traditional purchase drivers put more emphasis on humane product and corporate attributes such as “kindness & empathy” (+391%), “socially responsible” (+63%) and “high quality” (+124%).  This swing has come at the expense of other brand values like “exclusivity” (-60%), “sensuous” (-30%) and “daring” (-20%).  Although the data is U.S.-centric, Booz believes it is applicable to all markets, including Canada.

Overall, the study found that firms scoring in the top 20th percentile in the BAV survey on the humane values identified above enjoyed almost three times higher product usage and brand preference than their peers who scored lower against these values.  Companies that do not adjust to this ‘new normal’ may face a future characterized by falling product demand, declining pricing levels and a loss of competitiveness versus their more attuned and agile rivals.   

Booz distilled their findings into 4 guiding principles:

1.  Frugality is fashionable

According to the data, more than 65% of U.S. respondents now prefer a simpler lifestyle with fewer possessions and less emphasis on displays of wealth.  Significantly, the figure rises to 77% for millennials (those born between 1980 and 1995). Not surprisingly, these attitudinal shifts are driven by record levels of household debt and a slowing economy that prevents consumer spending from growing faster than personal income. Moreover, the transition from spending to savings – savings levels are now approaching 5% of income versus 1% in 2005 – also suggest that a new era of parsimony is here. 

Consistent with their emphasis on frugality is people’s desire to be more self-reliant in order to attain a greater sense of control, empowerment and status. Brands such as Weight Watchers, Craftsman and LeapFrog that stress “educational,”  “helpful”  and “durable” attributes scored more than 200% better than their competition on BAV measures such as likelihood to refer to friends, ability to charge premium prices and propensity to repurchase.  To cope with this new milieu, marketers must improve their positioning and value proposition if they are going to maintain competitiveness in the mass market.    

2.  Transparency creates trust

The combination of economic and environmental bad news plus the rise of social media has fostered a large class of jaded consumers.   The study showed that consumer confidence and trust in a firm’s product claims, environmental footprint and social impact across every industry has fallen by nearly 50% over the past 2 years.  Increased consumer cynicism has driven a stake through many brands reducing their differentiation, image and value perception.  One important way  to restoring trust is for organizations to increase their transparency in areas like strategy, core values, supply chain and environmental footprint. 

3.  Change is ubiquitous

Consumers are changing in far-reaching ways.  According to the research, 55% of all Americans are part of a movement towards a simpler, more purpose-driven lifestyle.  As an example, 88% of respondents reported they now purchase less expensive brands than they used to.  Furthermore, 78% of consumers indicated they are happier with a more back-to-basics lifestyle.     Interestingly, not one demographic, socio-economic group or region was unaffected by this attitudinal and spending shift. Whether the firm is Hermès or H&M, they need to stay relevant by relentlessly delivering quality products and service at a fair price.

4.  Companies must care

In today’s marketplace values matter and consumers are speaking with their wallets.  The study found that 71% of U.S.consumers are now aligning their spending with their core values such as community, honesty, self-reliance and adaptability. Moreover, almost 66% of people said that they avoided companies whose values contradicted their own.  Managers must look for opportunities to align their business model to these values, whether through robust Corporate Social Responsibility programs, new products or services or via ethical business practices.      

Despite these early signs of change, more research is needed over the next couple of years to determine if these attitudinal changes have led to a permanent shift in spending and behavior.  Not surprisingly, many companies are not waiting for these results to change their approach.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

The critical role of IT in driving sustainability

In previous columns, I have written about how companies such as Nike, Walmart and SAP are using sustainability strategies like Product Life Cycle Analysis, green product development and the reframing of environmental standards to deliver on their sustainability goals. Now, we turn our attention to the important but often overlooked role of Information Technologies (IT) in supporting green business strategies.  In the past, many companies have been reluctant to consider IT for a host of reasons including the presence of significant legacy assets; the mission-critical nature of many IT systems and; the lack of a strong consumer impetus. 

IT systems and their accompanying data centers are a major source of carbon emissions, toxic waste as well as being a major consumer of energy. According to a study by A.T. Kearney, a consultancy, corporate IT departments creates as much as 1 million tons of obsolete electronic equipment each year and produces 600 million tons of carbon dioxide (CO2) emissions worldwide per year. For perspective, these emissions are equivalent to the annual CO2 output from almost 320 million small cars. As well, some data centers are so big that they consume as much energy and water as a small city.

With Internet-based services growing at healthy double-digits per year, IT’s environmental impact will continue to increase rapidly unless management does something to rein it in.  If most organizations are going to meet their aggressive sustainability goals, they will have to take a hard look at their IT operations. 

Where should they start looking?

Powering down

Energy usage is a key area to tackle first. According to the Interactive Data Group, a typical IT department in 1996 spent 17 cents of every dollar to power and cool a new server. A decade later, the rate jumped to 48 cents per dollar.  The firm predicts that number will grow to over 70 cents by 2012.

When considering ways to reduce power consumption, an obvious place to look is the data center.  A number of steps can be taken here including monitoring and improving HVAC efficiency; switching to more efficient blade server and virtualization architectures and; choosing cooler climates to build new data centers.

The front office is another fertile source of energy savings.  Every firm can benefit from quick wins such as installing power measurement and management software and introducing policies that require PC users to shift to low-power or shut-off state when not using their machines.  When Bendigo Bank in Australia mandated employees turn off unused desktop computers, monitors and printers that used to run constantly, they saved more than $300,000 a year in electricity.

Buy greener

Better purchasing governance is an important tool to reduce a firm’s environmental impact.  For example, managers could stipulate that new equipment purchases must bring the highest energy efficiency ratings as well come from companies that feature prominently in sustainability indexes and standards. Moreover, buyers might also look for products manufactured from recyclable materials and that generate minimum amounts of hazardous waste and carbon emissions.  Finally, in order to reduce the purchase of unnecessary assets, policies should be enacted that prevent buyers from over-buying equipment just because someone wants the latest technology.  One way to ensure this happens is by extending the life cycle of IT equipment.

Improve reporting

Some companies are using IT to improve sustainability reporting across the entire value chain.  Dow Chemical’s IT group, for example, acts as a green watchdog, tracking emissions, performance and vendor activity.   Dow is using this data to calculate a net environmental balance across a product’s entire life cycle to help them better understand how materials are consumed in manufacturing. These insights can identify environmental and cost savings throughout their operations as well as their vendor inputs.  Finally, improved tracking and reporting will enable companies to better meet customer sustainability programs like Wal Mart’s Sustainability Index as well as provide key environmental data to consumers.

Greening IT will be crucial to helping many organizations achieve their aggressive sustainability targets. Managers can ill afford to ignore this under-developed area.  

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Making sustainability live in your organization

Most executives I speak with acknowledge sustainability’s strategic imperative. A few of them have understood the transformational impact of sustainability and have moved boldly to realign their operations and cultures in order to reap significant business value. This value creation includes tangible outcomes such as improved brand image and supply chain efficiencies as well as intangible benefits like enhanced employee morale and greater appeal to new recruits.   While the majority of organizations have similar ambitious goals, many are unclear how to turn intent into results.

Recently, MIT’s Sloan Management Review looked at how companies were responding to the emergence of sustainability as a mainstream business driver. The study found that most organizations fall into one of two groups: a select group of embracers and the masses of cautious adopters.  Embracers such as GE, Unilever, Walmart, P&G and SAP recognized early that they can leverage sustainability strategically to outflank competition, drive brand differentiation and revitalize supply chains. To bring this vision into action, the embracers quickly integrated sustainability strategies and practices into the core of their business and organizational models. The results have been impressive:  enhanced corporate reputations, significant supply chain savings, higher product margins and a lower environmental footprint .  

On the other hand, the cautious adopters have been more reactive and timid.  They see sustainability as important but within the context of efficiency gains and risk management.  In their planning, sustainability is pursued as a series of tactical initiatives executed within their current organizational model.  In most cases, results have been modest with little appreciable change in competitive position.  Not surprisingly, cautious adopters will be challenged to overtake the embracers as long as they continue to treat sustainability in such an incremental fashion.

Interestingly, capital spending was not a barrier to action.  Despite recent economic and political uncertainty, 60% of surveyed firms reported increasing their 2010 sustainability investments.  What then is holding back most companies?

To drive sustainability, executives need to change the way they do business.  The implementation strategies of embracers offer a number of lessons, including: 

Move early even if there is incomplete information

Brian Walker, CEO of sustainability-leader Herman Miller furniture believes that many sustainability decisions “can’t be reduced simply to a formula or financial return…it requires a bit of instinct, a gut feeling of where you want to go.” In most industries, there are sufficient best practices and case studies to help firms move forward with plans that improve sustainability competitiveness.

Balance a long term vision with concrete short term wins

While long term success favours the ambitious, the reality in most organizations is that short term project wins are needed to generate operational experience and catalyze change.  One IT CEO I worked with refused to implement a large scale sustainability initiative until the firm had garnered sufficient learnings from a couple of pilot programs. 

Integrate sustainability into the organizational structure and operations

Sustainability must be woven into the fabric of the organization and not siloed within a specific department.  For example, GE and Nike translated their bold sustainability mandate directly into their operating units, practices and cultures.  Santiago Gowland, Unilever’s VP of Brand and Corporate Responsibility, says that his company views sustainability as a key business growth lever, treated at the same level as HR, Marketing and Supply Chain Management. For Unilever, sustainability is a new way of doing business.

Leverage top down and bottom up commitment

While getting a strong mandate from the Executive Team and Board is crucial, much of the early effort and ideas must come from the lower ranks.  One firm I worked with gained environmental leadership in their industry mainly through the efforts of a highly motivated, cross functional volunteer committee of low and middle level employees.

Make sustainability integral to key product, service and supply chain decisions

Inputting sustainability criteria into decision making and operational analysis is essential for developing a business case and gaining external compliance.  Companies like SAP and Walmart have driven sustainability savings and compliance using tools like Product Life Cycle Analysis, which look for opportunities to reduce environmental impact while generating significant cost savings.

Successfully deploying sustainability strategies requires more than lip service.  As well as putting their money where their mouths are, practical executives will seek to embed sustainability practices and beliefs within their companies.

For more information on services and work, please visit the Quanta Consulting Inc. web site.

Is it time for professional boards?

Existing approaches to corporate governance are being questioned as a result of recent developments.  The 2008 financial meltdown plus some famous corporate implosions over the past decade – WorldCom, Tyco and Enron to name three – has focused government and academic attention on how shareholders and the public are being safeguarded.  Secondly, senior management is being challenged by growing business complexity arising from increasing globalization, the impact of new technologies and growing consumer activism.     

The Sarbanes-Oxley Act was supposed to improve governance by bringing greater financial transparency and management & director accountability to public corporations.  Despite its promise, SOX by itself was insufficient to prevent the financial crisis and loss of public confidence.  In reality, all of the troubled Banks were more than compliant with SOX’s stringent regulations.  Clearly, regulatory compliance is not a substitute for prudent financial, strategic and risk management.

One way to improve corporate governance is by professionalizing the Board of Directors, says Robert Pozen in a recent article published in the Harvard Business Review. Pozen,  a senior financial services insider and Harvard Business School lecturer, believes that governance failures arise from a lack of director expertise as well as the behavioural dynamics that influence their actions.

Pozen asserts that many Boards suffer from three basic weaknesses:

  1. Lack of expertise – Many Boards are populated with independent and “generalist” directors who do not possess the necessary skills and industry experience to effectively execute their role.  This skills gap can be especially problematic for Boards in complex, risk-laden sectors like energy, financial services and pharmaceuticals.
  2. Lack of time – Many Board members do not devote enough time to deal with the complex demands of their organizations. According to Pozen, a typical Board member in Financial Services might put in only 200 hours of part-time effort per year spread across Board meetings, telephone calls and prep time.  Moreover, generalist directors, especially those engaged in other pursuits, are often challenged to maintain the required knowledge of the business and industry.
  3. Lack of manageability – With an average size of 10-20 members, many Boards are too big and unwieldy to be effective decision making and oversight bodies. Within groups of this size, individuals often engage in what psychologists call “social loafing”: Members resist taking personal responsibility for the group’s actions and rely on others to take the lead. Furthermore, large groups are challenged with consensus building and open communication, both vital requirements for effective Board governance. In general, the more members there are, the harder it is to reach agreement.  As a result, fewer decisive actions are taken.

To address these challenges, Pozen recommends that Boards become “professionalized” through the following changes:

Reduce the size of the Board

Effective deliberation and decision making can be achieved by making Boards smaller or by creating a more focused sub-group within a larger Board, tasked with specific oversight or strategic responsibility. 

Research on group dynamics suggests that a team of six or seven individuals is the ideal size for effective decision making.  Smaller groups enable all members to take personal responsibility for the group’s actions.  Additionally, small groups can often reach a consensus in a reasonably short time.

Require higher levels of expertise

Boards could be required periodically to undergo an external talent assessment to identify key skills gaps and develop plans to fill them.  Firms have a number of options to augment Board expertise including recruiting more senior industry experts (versus Generalists) as independent directors or periodically educating existing directors on key facets of the Company or industry.  Part of this effort could involve a new director “boot camp” so that additions are quickly brought up to speed on key business and industry issues.

Demand greater time commitment

Directors should be required to invest more time than they currently do understanding the business, meeting key stakeholders and executing their responsibilities. For example, companies could stipulate that independent directors, who are now allowed to serve on the boards of four or five public companies, should be restricted to just two.

The above recommendations could go a long way in creating a dedicated and expert class of professional directors who would strengthen the current governance model and help rebuild the public’s confidence.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Catching Up in Sustainability

These days, virtually every company is being impacted by consumer, stakeholder and regulatory demands for green strategies and programs.  For a variety of reasons, most firms have adopted a “follower” sustainability strategy as opposed to that of a pacesetter.  A poignant article from the Harvard Business Review highlights the challenges of being a sustainability follower and suggests some strategies to catch up.

Enterprises face considerable financial, marketing and operational dangers when competition or external advocacy groups have defined what sustainability means for their products, company and industry.  Although green product definitions and standards will vary across industry, companies not engaged in shaping the rules risk being assessed against standards that they can’t easily satisfy. Worse, the firm may be out-flanked by a shrewd competitor that has strategically positioned itself as the sustainability gold standard.

Shaping the sustainability landscape is no mean feat.  There are a plethora of advocacy groups, regulations & standards (current and under debate) and consumer needs that need to be understood and evaluated.  For example, the coffee industry features more than a dozen standards and hundreds of individual criteria, affecting everything from pesticide use to workers’ housing to bird friendliness.  Each of the various standards has a constituency working to define the benchmarks for “sustainable coffee.”  Some are backed by nonprofits such as the Audubon Society and TransFair, others by companies such as Starbucks and Nestlé.

Fortunately, firms that lag in sustainability progress can still leapfrog competition by repositioning themselves as influential or even leading players in the green-standards battle.  There are 4 possible strategies to do this:

1.Adopt existing standards

Companies should pursue this strategy if their industry or major customers have well-established standards and their sustainability capabilities are modest.  Importantly, a determined catch-up effort can still enable firms to best competition and become a credible participant in future sustainability debates. As an example,  The Fishin’ Company became the largest sustainable seafood supplier to Wal Mart by outperforming its competition in meeting Wal Mart’s strict product sustainability standards.

2.Influence existing standards

Green advocacy groups often compete to see their own standards widely adopted.  To do this, they need to find corporate partners to champion and commercialize their standards.  This fact gives companies an important but limited window in which to influence the standards to their commercial benefit without compromising sustainability considerations. For example, Chiquita Banana was successful in helping define new standards that not only satisfied the Rainforest Alliance’s goals but also led to a 27% increase in farm productivity and a 12% reduction in costs.

3. Define new standards

Some industries do not yet have established standards or a green consensus.  Ambitious firms may be able to impose their sustainability standards – which happen to be a strong fit with their business model – on the sector in conjunction with external stakeholders.  To pull this off, these companies should possess significant industry clout, a credible brand image and strong internal capabilities.  Starbucks and Nestlé have successfully pursued this strategy in the coffee business. 

4. Break away from existing standards 

A few firms may consider going alone to create new sustainability standards when the existing standards do not play to its strengths, are inconsistent with its strategy, or actively undermine its competitiveness.  Apple is a case in point.  With its revolutionary iPad, Apple out-greened the greens by emphasizing a new and relevant sustainability dimension — power conservation — on which it can excel. The market-beating iPad is considered so energy-efficient that one T. Rowe Price analyst compared its battery life to “black magic.” A strategy like Apple’s will work only if the proposed new standards are measurable, relevant to customers, and demonstrably superior to the existing criteria.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Green companies outperform in times of volatility

It is conventional wisdom that sustainability and corporate social responsibility (S&CSR) programs can improve an organization’s image, morale and recruitment efforts, not to mention make a positive environmental impact.  Yet, many executives remain skeptical that these initiatives can deliver tangible business benefits and are the best use of scare capital and management attention.  Not surprisingly, many firms view the current recession as a time to batten down the hatches and not pursue unnecessary investments.   

This view can now be challenged by hard data. New research from AT Kearney, a consultancy, suggests that executives should think twice about cancelling or deferring sustainability initiatives during recessionary times.  The study showed that companies that are committed to launching and maintaining S&CSR initiatives will outperform their peers in financial returns.

In the second half of 2008, AT Kearney looked at 99 US public companies spanning 18 industries to understand how S&CSR-focused companies fared against sustainability-specific market indices.  Sustainability-based practices were defined as tangible programs that were geared toward protecting the environment, promoting social well-being and driving business results. 

The study’s results were instructive:

Sustainability-focused firms out performed in almost every sector.  Sixteen out of 18 industries awarded better returns to S&CSR-focused companies.  The 2 industries that underperformed were Construction & Materials and Personal & Household goods.

The performance differential was significant.  The difference in shareholder value between companies after 6 months was 15% or an average of $650 million. The industries with the highest 6 month stock price differential were Media, Automobiles & Parts (each 133 vs index), Financial Services (125 vs index) and Industrial Goods & Services (123 vs index)

Why did some companies do better than others?  For one thing, the market could be rewarding a longer term, more comprehensive and genuine commitment to S&CSR and risk management versus more ad hoc efforts.  In particular, sustainability driven innovation, supply chain optimization and green product development will yield higher returns in a firm that treats S&CSR as a strategic priority with proper funding and focus.  In addition, better financial results could be attributed to stringent governance, risk management and compliance efforts needed to fully deploy and manage S&CSR programs.

There are important implications for the poorly performing companies. Half measures with sustainability programs may be a waste of money and effort.  Laggard companies should consider one of three strategic options: 

  1. redouble their S&CSR investment and focus to catch up to leading competitors;
  2. look for market or supply chain ‘white space’ where they can leapfrog competition;
  3. abandon all sustainability efforts (except what is government-mandated) and direct their capital elsewhere.

For existing high performers, staying the course can be very rewarding.  Firms should consider increasing their sustainability focus if they deem it to be a major driver of competitiveness and market differentiation.

Despite some clear findings, managers should treat these results cautiously. The second half of 2008 was an atypical period in the public markets.  Likely many of the findings would be different during a more stable economic period.

For more information on our work and services, please visit the Quanta Consulting Inc. web site.

Making a business case for sustainability: SAP best practice

Many executives struggle with launching sustainability programs.  Their challenges are many, one of the biggest being how do you craft a business case for making sustainability a key business priority?  This is an important question as a weak business case will not support the resources and focus needed to deliver the maximum business and environmental impact.  Overall, I recommend evaluating and implementing sustainability programs the same way you evaluate any other business initiative – by strategic congruence, customer need and ROI.  My approach to developing a business case balances elements of strategic fit and financial analysis with stakeholder alignment and organizational transformation.  This recipe has been proven successful in many green companies, including SAP.  This global leader in business management software has garnered impressive results to date with their sustainability program.

In a recent interview with MIT’s Sloan Management Review, Peter Graf the Chief Sustainability Officer for SAP, discussed how he crafted his sustainability business case. Some of his and my recommendations include:

  1. Review the financial risk of not meeting current customer environmental requirements.  Simply put, if you don’t comply with customer needs they will find another vendor that will. Although financial risk may be the biggest catalyst for action, you do not need a compliance requirement to make the business case work.
  2. Drill deep for cost savings in the areas of resource productivity and organizational efficiency.  Potential savings can be identified using proven analytical techniques such as Product Lifecycle Analysis. For perspective, SAP’s sustainability strategy delivered 90 million euros of direct savings to the company during the first year of its program. That traced to a 7% reduction in energy consumption, 25% reduction in paper and printing, and a 30% reduction in airline travel.
  3. Consider how sustainability can drive new revenues through new sales as well as higher price premiums.  With a public and sincere commitment to leading in green business, it is possible for companies to differentiate their offering and brand. To achieve this, firms need to conduct extensive customer research to understand their customer’s sustainability needs.  Additionally, executives need to internalize and communicate a strong vision that sustainability will be a fundamental part of their business 3-5 years out. Finally, achieving environmental leadership can provide your firm with a platform to shape governmental policy and standards for your industry, to your competitive advantage.
  4. Use sustainability as a means of re-energizing your employees and improving your talent acquisition.  Sustainability can be a passionate issue for many people, with the ability to improve morale and catalyze productivity improvements.  As well, possessing an exemplary sustainability pedigree could improve a firm’s ability to attract and retain highly-skilled and motivated talent.
  5. Make sustainability a part of your company’s fabric.  For sustainability strategies to be truly successful, piecemeal implementation will not work. Based on SAP’s example, sustainability must become a corporate priority as well as embedded within your value system and tactical decision-making criteria. Measurement tools such as the Balanced Scorecard or the One Report should be used to ensure internal compliance and stakeholder alignment.

Graf’s noted that his biggest challenge in the business case process was assembling and analyzing the numbers.  A financial analysis necessitates building a comprehensive data baseline to understand the firm’s current state.  For example, organizations must execute an environmental audit around their energy consumption, carbon footprint etc.  Sustainability leaders need to understand the metrics around their current state and then make assumptions around key questions like the cost of energy, anticipated regulations etc. This multi-functional exercise is time-consuming and difficult in large companies because they often lack the expertise and resources to undertake it internally. Moreover, this analysis needs input from the supply chain and marketing partners who may not be able or willing to generate the necessary data.

Creating a business case is fundamental to any corporate initiative.  With sustainability, do your homework.

 For more information on our services and work please visit the Quanta Consulting Inc web site.