UK: The Journey Towards Business Sustainability

Last Updated: 23 December 2011

Today's enlightened businesses are keen to go "green". But what does it take to become a sustainable business? This article covers the science on climate change; what sustainability means to businesses; the importance – and the challenge – of contingency planning for climate change; and how to transition successfully to a sustainable business model.

"Marketing Myopia"

Fifty years ago, Theodore Levitt published a seminal article in the Harvard Business Review. Entitled "Marketing Myopia", it challenged the business paradigm of the day by asking readers to think of industry as a customer-satisfying process, not a goods-producing process. "An industry", said Levitt, "begins with the customer and his needs, not with a patent, a raw material, or a selling skill."

Those who grasped Levitt's concept and made the customer king could create organisations capable of capitalising on growth opportunities, while those who focused merely on operational efficiency or the power of a patent would eventually find that their customers would wander off as others tempted them with newer, better ways to have their needs filled.

The key was to view the business organisation not as an entity that produced a good or service that needed to be sold to recalcitrant customers, but rather as one that sought to do the things that would make customers want to do business with it. This would make the objective of business be not merely to survive, but to "survive gallantly, to feel the surging impulse of commercial mastery; not just to experience the sweet smell of success, but to have the visceral feel of entrepreneurial greatness".

No wonder CEOs across the world were soon asking themselves the key question: "What business am I in?"

Environmental impact: a new challenge for business

Today, the world is facing a new challenge to the business paradigm. It is now clear that the way we conduct business throughout the world is having an adverse effect on the natural environment, and that the scale of that impact is not only growing but is on course to threaten the basis of industrial civilisation as we know it.

Despite the impression you may get from the media, the science on climate change is actually quite straightforward and is long-standing.

  • The so-called "greenhouse effect", where it was recognised that the composition of the Earth's atmosphere caused it to retain some of the heat from the sun's energy, goes back to 1824.
  • The role of carbon dioxide in absorbing infra-red radiation (i.e. heat) was identified in 1859.
  • The first prediction that man's activities could alter the composition of the atmosphere (and hence the climate) was made in 1896 – albeit by a scientist who thought it would a good thing, as it would prevent the world from going back to an ice age.
  • The first claim that warming was under way and evident was made in the 1930s.
  • The first regular measurements of the levels of concentration of carbon dioxide in the atmosphere started in the 1950s; they have steadily risen every year since.

The political debate that has surrounded the science on climate change has focused on how big a problem global warming is going to be, and the timescale for its effects to be felt. These have been more difficult questions to answer, because the product of burning fossil fuels contains "greenhouse gases" that cause warming, but it also contains particle pollution that has a cooling effect. Which effect would prevail was the subject of controversy among scientists for a while.

Examining the science on climate change

In an attempt to resolve these and related issues, in 1988 the world's governments founded the Intergovernmental Panel on Climate Change (IPCC), to examine the science and inform the policy debate.

The panel has made four reports on climate change over the course of its history. The third of these, published in 2001, stated that global warming, unprecedented since the end of last ice age, is "very likely", with possible severe surprises. This effectively ended the climate change debate among all but a few scientists.

The most recent climate change report, in 2007, warned that serious effects of warming have become evident and that the cost of reducing emissions would be far less than the damage they will cause. Exactly what the damages will be, when they will be felt and by whom, is still a topic of active debate. But continuing on the current course will lead to two results:

  • By 2020, the impact of increased storms and droughts will be keenly felt.
  • By 2050, half of the world's arable land could be lost to rising sea levels.

Despite the strength of the scientific evidence on climate change, the political will to act has not yet materialised. International politics have got bogged down in the relative responsibilities of economies that currently produce a lot of greenhouse gases to cut their output and those of economies that are growing to avoid adding to the global total stock.

Enlightened businesses are going green

Politics, however, is not business. There are now a growing number of enlightened businesses that are recognising that customers will be increasingly unwilling to buy from those who treat the environment as a dumping ground and have no concern for tomorrow.

Faced with the choice between a business that myopically focuses only on today and a green business that is working to reduce its current impact and helping to create a future world that has a safe and healthy climate, that enjoys clean air, water, soil and power, an increasing number will go for the latter. The visionary business leader of today is taking the proactive stance to look at the sustainability of their business model.

What exactly is business sustainability?

Sustainability has a variety of interpretations. But within the sphere of economic activity it can be thought of as one customer's use of a good or service not adversely impinging on a future customer's ability to enjoy that same good or service.

The way the world currently conducts and accounts for its economic activity is, quite simply, not structured to encourage that way of thinking. The production of goods and services is costed in the same way, regardless of whether the good is a primary one (i.e. a product of the Earth) or a secondary one (i.e. a product of man), and no distinction is made between the cost of using a primary good that is non-renewable (e.g. a mineral resource) versus a renewable one (e.g. a plant).

Ludicrous assumption

Economics is supposed to answer the question of how best humans can maximise scarce resource. However, the way we account for our economic activity makes the ludicrous assumption not only that the planet's resources and services are unlimited, but that there is no cost attached to their use. In the words of Henry Ford, "Although one may calculate what a cost is ... no one knows what a cost ought to be."

The root of this problem lies partly in how humans have generally viewed their relationship with the rest of the planet (dominion) and partly to history.

The basic tenets of accountancy were laid down with the invention of double-entry bookkeeping in 15th century Italy, while the basics of economic theory came from the 18th century Enlightenment thinkers. To both groups the world would have appeared – and indeed was – an enormous and bountiful place. To think of the Earth's resources and services as having a practical limit would have seemed foolish. But, as any decent business manager knows, size matters.

The human population rocketed during the 20th century, ending up at around 6.6 billion people – a level four times higher than at the start. Although the rate of increase has slowed, the next 20 years are expected to see about half that number again added to total population.

Questioning the economic framework

As society is now essentially a global one, there are fundamental questions that need to be addressed about the nature of the framework within which we operate our economies.

Business has long been used to the idea that it is necessary to have a depreciation charge, to put aside cash so that when a capital item needs replacing there is money to do it. If natural resources and services are considered as natural capital, one solution would be for business to pay for the depreciation on that natural capital.

If business was obliged to spend that charge on restoration projects of its choice (e.g. restocking oceans, protecting biodiversity, taking carbon out of the atmosphere), this would by-pass government administration (but not verification) and so would, in fact, stimulate economic activity by expanding those things that were considered within its bounds.

It would also put us onto a rapid course of making things better and encourage the needed creativity that has, so far, ensured that our species has thrived.

Although there are several organisations working to reform the basis of accountancy, day-to-day business has to work with the world as it finds it, rather than as it would like it to be: profitability is still the requisite condition for business continuation.

With that in mind, there follows an outline framework for how a business can maximise its sustainability and minimise its exposure to the likely impacts of a changing climate over the next few years.

Contingency planning for climate change

One of the consistent predictions of the effects of global warming and the climatic changes it will provoke is an increase in the frequency and violence of extreme weather events.

The floods experienced in Queensland, Australia, in January 2011 had been previously experienced in 1974 and, before that, in the mid 19th century, despite flood prevention measurements taken during the intervening periods. In 2011, Australian mining companies had to announce that they wouldn't be able to meet contracts for coal – Australia's biggest export – while farmers were counting crop losses that could push up world food prices.

The overall cost to Australia's A$1.3 trillion economy may have amounted to as much as A$13 billion, or 1% of gross domestic product.

After such an event, some businesses will be able to clean up and recover but many will not. The difference will be between those that have effective contingency plans in place and those that do not.

The challenge of contingency planning

The big management challenge about contingency plans is the human trait that recognises disaster as a possibility but discounts the likelihood that it will strike any particular individual contemplating it. The emergency services get over this by periodically putting their plans into practice, and business could learn from that.

Amazingly, few businesses manage to hold a successful fire drill – far less test out their ability to recoup their computer backups, know where they would find alternative accommodation should their facilities become unworkable, or have any idea of the vulnerability of their key suppliers to natural disasters.

Contingency planning might seem like a costly and boring use of resource, but it could have an enormous impact on your likelihood of surviving catastrophe.

Towards a sustainable business model 

Levitt told his readers: "Building an effective customer-oriented company involves more than good intentions or promotional tricks; it involves profound matters of human organisation and leadership."

In the same way, a sustainable business model is not creeping incrementalism – tweaks here and a spot of product innovation there. Transitioning to a sustainable business model requires wholesale transformation of how a business does business.

Sustainable business models can exist in an unsustainable world. It is the model for the business, not the overall economy. However, they are not created overnight. Be prepared for a journey towards sustainability, but make sure that you generate a clear road map. The goal is transformational change, not incremental tinkering, but your map may need a number of "wedges" where many smaller actions are needed to generate the overall impact.

The "quick wins"

Carbon emissions = energy = cost.

It has become evident over the past few years that there has already been a paradigm shift in energy prices and that the prospect for the next few years is for energy (and probably all other raw material) costs to continue to rise.

Efficiency levels in virtually all businesses are surprisingly low, whether it is:

  • through careless use of resource
  • through lack of information about where savings could be made, or
  • simply because the overall system inefficiency masks the potential for improvement.

It may surprise you that even in a transport company, until recently fuel consumption wasn't even on the management radar – despite the fact that it accounted for 5% to 7% of costs. Driving styles can impact fuel consumption by as much as 20%, so a programme that seeks to get all drivers to coax the same mileage as the best practice could be looking at an amazing cost reduction of 1.0 to 1.4 percentage points.

This money could either go to the bottom line for improved profitability, or be reinvested in other energy-saving programmes such as replacing old boilers, improving building insulation, or even on-site generation of electricity.

The long game

At present, our industrial system operates what is essentially a "take-make-waste" economic system. We take resources from the earth, use them to power our economy and convert them to goods and services for our use. We then dump massive amounts of often toxic waste – including carbon emissions – back into the same resource base on which we rely for our sustenance, without considering the negative consequences for the overall system.

This "take-make-waste" system made sense when it emerged at the dawn of the industrial revolution, because resources were plentiful and there were few people. However, it is increasingly recognised as not being fit for purpose today – and certainly not tomorrow.

It is increasingly recognised that we need to move to a "borrow-use-replenish" economic model. In this system, economic activity seeks to mimic the "closed-loop" systems of nature, where the waste from one process (or animal) is food for another.

In this way, raw materials would still be extracted from the Earth and converted into energy, goods and services for human use. The big difference is that the by-products of this system would be either returned to the economy for future use or returned back to nature as nutrients for further use.

Importantly, the goal of economic activity becomes to do it without degrading the structure and functions of the climate or natural environment. The big attraction of this way of thinking is that it represents a logical step that incorporates social and ecological well-being into our core assumptions and beliefs about what is normal behaviour.

It is already in use with great success – and not necessarily in the obvious industries (a carpet company in the US is a leading exponent of the model) – and is beginning to attract much attention in several countries.

Four keys to business sustainability

You may not even know today what it is you will need to grow your business in the future, but if you are keen for your company to avoid what Levitt called "suicidal product provincialism", sustainability should be your key concern. The four keys to likely success are as follows.

1. Integrate sustainability thinking into the DNA of the business

Incorporating sustainability performance into cash bonus schemes, or embarking on full-blown change management programmes – both approaches will bring sustainability into the heart of the business. This will shift perceptions of business sustainability from being just "another thing to do".

Fundamentally, this integration means redefining your organisation's view of what internal success looks like. Reward and recognise your staff for making sustainability a success.

2. Recognise the need to change the value proposition

"Value" is owned by the customer, not the producer. In our current consumption-driven society, value is often associated with volume, but that is looking at the process through the wrong end of the lens. There is nothing to prevent customers from deciding to equate quality with being about where and how something was made (ethics), how it can be used (efficiency) and what happens when we've finished with it (recyclability).

3. Start to shift your product portfolio

Either through choice editing (taking the sustainability villains off the shelves) or actively promoting the more sustainable choice (healthier, greener), start to ensure that the product portfolio begins to reflect your sustainability policy aspirations.

4. Innovate, innovate, innovate – everywhere

From product design to service delivery, to internal and external communication, to business strategy planning, innovation is the key to delivering the holy grail of a sustainable business model. You need to include everyone in your business and it will take forever. But that, really, is the point.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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