Companies Are Integrating New Goals into Their Strategy Processes
Sustainability has been on the corporate radar for several years now. But how much progress have companies really made? Holger Rubel, a senior partner and managing director in the Frankfurt office of The Boston Consulting Group and the new director of the firm’s sustainability topic area, recently shared his thoughts on the current state of corporate efforts for improving environmental and social impact.
Where do you see sustainability on today’s business agenda?
Over the years, many companies have come to accept the need to preserve vital natural and human resources for the long term. BCG’s annual sustainability survey, which we conduct with MIT Sloan Management Review, indicates that many companies understand that they need to adopt sustainability as a goal in order to remain competitive.
At the same time, the gains in practice that we saw earlier have stalled. That’s not necessarily such a bad thing. Companies are now struggling to go beyond the talk to really make it happen. Earlier sustainability initiatives tended to be flashy, poorly thought-through programs that accomplished little besides public relations. Now, sustainability is becoming a normal strategic issue, which means that companies are treating it in the same hard-nosed way they treat other issues. It’s a healthy development. Still, only about a third of the survey respondents have completed a business case for sustainability, and resource efficiency is the biggest area of interest.
Why are companies struggling?
They’re working to overcome the bias that many managers developed in those earlier years—that sustainability is expensive and offers little real payback for the company. But they’re also facing a decision-making and an organizational challenge. Making a business case turns out to be much more work than they had expected, both in getting the numbers and in matching up against competing priorities. Sustainability issues typically play out in the medium to long term, and companies have a built-in tendency to focus on immediate pressures. That’s true even for many resource-intensive companies that have the most to gain from sustainability.
Adding to the complexity is the fact that most of these initiatives require going beyond the organization. Many sustainability problems can be addressed only in collaboration with suppliers, customers, and other stakeholders.
Nevertheless, we are still hearing a lot about sustainability programs.
Companies are trying out various activities and making a point of publicizing them, but there’s been little real innovation. As Harvard Business School Professor Robert Eccles has pointed out, a mix of one-off programs can’t be sustained over time unless the programs come out of a systematic approach rooted in the organization. Some consumer-goods companies, for example, have discovered that even if they make some nice improvements in a few areas, they’re still open to harsh criticism because of unresolved problems in their supply chains.
Most of the interesting work is now in resource management, an area with enormous potential. The planet faces limited supplies of many critical resources—from phosphates to zinc. Most of the projects involve low-hanging fruit, easy corrections that require little investment and make sense even without sustainability concerns. But some companies are broadly rethinking their value chain or business model. Carrying through with this rethinking is going to take major innovation, which depends on extended organizational commitments. So it’s going to take time. Compliance and cost reduction may dominate sustainability activities now, but as companies build their capabilities, those concerns will be dwarfed by opportunities to create value.
We’re focusing on resource management because it’s the sustainability issue that comes closest to conventional strategic imperatives. It’s highly measurable and offers proof of concept: people can see a real payback for the company regardless of how it helps the planet. Yet it touches on most of the key sustainability issues because resource extraction affects environmental and social issues. So it’s a great entry point for companies unsure of how to proceed.
Please give an example.
We’ve worked with an electronics company that requires rare-earth metals to manufacture its products. The cost of these metals has gone up, partly because of an explosion in demand but also because mining companies and the governments of their countries have tried to exploit the situation.
The company treated this as a strategic problem in multiple ways. First, it subjected the supply situation to conventional risk-management tools. That led to efforts to partner with suppliers in order to ensure a steady flow, which, in one case, involved investing directly in a mine. In going over the list of potential partners, the company made a point of excluding mines that met the business criteria but had poor track records related to pollution or labor practices. Meanwhile, the R&D division integrated these concerns into product development, and the result is that future products will require a good deal less of these metals. More generally, the company has hardwired the issue into the organization by adding it to managers’ performance metrics.
As these practices settle in, the organization will start to realize how sustainability can make sense and actually work on the ground—not just to lower costs and risk but also to provide an edge over less aggressive competitors. Resource management can be a model for other, less tangible issues.
What are the key questions managers should ask about their companies as they try to make progress in this area?
Managing resources efficiently means going after four separate goals. Start with conventional lean thinking: How can we set targets and KPIs to boost efficiency in our current operation? This applies to every kind of major resource—from energy to minerals to water.
But then look out into the value chain: How can we help suppliers and customers use resources better? And how can we capture some of the gains from these efforts?
Next, build on these efforts to reconsider the business model: How can we innovate in the big choices for our business? Products or markets that seemed marginal may now be attractive once we integrate the full costs of resources, while some of our mainstay activities risk becoming competitive albatrosses.
Finally, step back and soberly assess what’s needed organizationally to make this happen: What are the structures and governance we need to support the effort, and what incentives should we put in place?
All of this is hard work, and it won’t win you any accolades in the short term. But it’s essential for gaining a competitive edge—not to mention making real progress for the planet.