How Sustainability is Reinventing the Business Model
Do you remember when business was not only uncomplicated, but, dare I say, easy? You found customers with unmet needs, created a solution to those needs, and sold the product or service at a profit. Then you rinsed, washed, and repeated your way to financial success. Essentially you created a business model – identify customers, create a solution customers want, source the needed materials to put the solution together, and get it to your customers – that mapped out a path to growth.
But hyper competition, changing consumer demographics and related demands, and hard economic times, among other roadblocks, have complicated your path to growth. So you altered your business model. Perhaps you expanded globally. Or moved manufacturing overseas to lower costs. Or entered politically unstable markets to gain access to rare yet vital components and materials, such as conflict minerals.
Business cannot escape the clutches of Newton’s third Law of Motion: to every action there is always opposed an equal reaction. As business yet again changed its business model to conquer the challenges of competition et al, new challenges emerged. The whole of these challenges, including climate change, natural resource shortages, social inequity and injustice, is referred to as ‘sustainability’.
There is a group of trailblazing companies that is rewriting conventional business thinking to overcome the challenge of sustainability. These companies view sustainability not as altruism, not as ‘do less bad’, but as an arrow in their competitive strategy quivers. They are marrying profitability with sustainability by seeking partnerships with strange bedfellows, financing from unique sources, and ideas from the crowd. In short these trailblazers are reinventing their business models.
Companies used to set goals they were capable of achieving on their own. Be number one or number two. Go global. Dominate the book sales market. To achieve these goals, companies have entered new markets, invested heavily in developing countries, and adapted to the realities of the Internet. As long as they applied their core capabilities correctly and swiftly, they controlled their own growth trajectory.
Not anymore. Consider Unilever. When Paul Polman, Unilever’s CEO, announced the company’s Sustainable Living Plan, he committed Unilever to a new business model. The Sustainable Living Plan aims to double Unilever’s revenue while halving its environmental footprint. Inherent in the Plan are two changes to conventional business thinking. The first is the explicit marriage of sustainability – in this case, environmental sustainability – with profitability. The second is perhaps less obvious, but no less critical. It is impossible for Unilever to achieve its goal through its actions alone. Growth while shrinking is analogous with doubling one’s consumption of ice cream while losing half one’s body weight. The math simply doesn’t make sense without an additional variable.
Unilever will need to collaborate with its suppliers, consumers, potentially even its rivals, to achieve its public commitments. This explicit reliance on the resources and know-how of non-affiliated organizations is a grand departure from conventional business strategy. Time will tell how Unilever and its Sustainable Living Plan alters the rules of competition, but it clearly has started down this path toward interconnected relationships throughout its business model.
Trailblazers think not only bigger, but also broader when setting their paths for growth. After all, the inefficiencies in our global system of commerce and activity – for example the cost to the US economy of obesity is roughly $170 billion per year – are sapping consumers’ ability to buy, buy, buy. And urban infrastructure is now in such an inefficient state as to rob companies of the ability to generate sufficient returns on their capital, and perhaps more importantly, withholding natural resources necessary to satisfy the demands of the growing global population. Our pursuit of growth has led to the creation and acceptance of an inefficient economy, one that leaks prosperity seemingly at every turn.
GE has reset its business model in response to this urban infrastructure challenge. It’s not a secret that the potential ‘Smart Grid’ could yield billions in free cash flow for companies like GE. Yet oo one company, not even one as substantial as GE, can bring the Smart Grid to life alone. In particular, two roadblocks to the birth of the Smart Grid stand out: the need for capital and best of breed technological thinking.
GE launched the ‘GE Ecomagination Challenge’ in 2010 to find ways to tackle these two roadblocks. The idea was to create a pool of capital to identify, invest in, and develop the best technological thinking to bring the Smart Grid to life. First GE partnered with four prominent venture capital firms to develop a $200 million fund. Then it launched a website to gather ideas from society, incorporated aspects of social media, and installed a committee to decide which ideas to fund. Between July and September 2010, nearly 4,000 ideas were submitted; collectively these ideas garnered over 70,000 comments from nearly 70,000 registered users. Every idea was publicly available to both review and support. Jeff Immelt publicly announced the winners of the Ecomagination Challenge later that year. The Ecomagination Challenge was deemed a success and a second round of the Challenge was subsequently initiated in 2011.
The evidence for the need to reinvent business models is all around us, waiting to be discovered. Often the evidence resides at the intersection of environmental and social inefficiencies, frequently found in developing countries. Consider the plight of shipping vessels that reach the end of their useful life. Typically these vessels make their way to the beaches of developing countries, where they are stripped for parts. The process results in the harvesting of some re-useable components…all too often at an incomprehensible environmental and social price.
Grieg Shipping Group is out to reinvent how ship breaking occurs. The company launched Grieg Green, a for-profit ship breaking company, to provide environmentally and socially conscious ship breaking services to clients, including competitors. The business case to launch Grieg Green was informed by pure economics. That is, the steel used to manufacture shipping vessels typically lasts for 50 or more years. Yet the vessels themselves, comprised of an inordinate number of other alloys and components, typically last for 15 to 20 years.
Grieg Green plans to raise the level of the ship breaking sector’s professionalism and efficiency, in large part to harvest the materials to be sold on the commodities market in order to make a new batch of shipping vessels. To succeed at its goal, Grieg Green will need to earn the trust of regulators, suppliers, local community activists, financiers, and even the competition. Grieg Green is at the vanguard of re-writing the rules of collaboration and competition.
Sustainability is the catalyst that is leading trailblazing companies to reinvent their business models. Unilever, GE, and Grieg Shipping Group are reinventing their business models to achieve growth by solving our world’s environmental, social, and economic development issues. They are challenging convention…and their own institutional memory in the process. And they are setting their companies, their stakeholders, and even their entire industries squarely on a new path towards prosperity. Sustainability is the catalyst and we as shareholders and stakeholders alike will be the ultimate beneficiaries.
 The efforts of trailblazing companies such as the three discussed in this article are the subject of my next book, The Collaboration Economy, to be published by early 2013.
Eric Lowitt is an independent consultant who helps companies grow, innovate, and become more agile and competitive by embracing sustainability. His first book, The Future of Value, releases through Jossey-Bass/Wiley in September, 2011. Eric can be reached at email@example.com
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