January 22, 2009
News & Opinion: Excerpt from Green to Gold (now in paperback)
by Daniel C. Esty and Andrew S. Winston, authors of Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage
An Eco-Advantage Mindset, supported by the right tracking tools, a focus on redesign, and a culture of environmental stewardship, is the foundation for turning green to gold. But the real action lies in the strategies that create value, the Green-to-Gold Plays.
Like any other business strategy, our Green-to-Gold Plays aim to reduce the downsides a business faces (cost and risk) or increase the upsides (revenue and intangible value). Unlike many others, though, these plays don't sacrifice responsibility in the pursuit of profit -- or profit in the pursuit of responsibility. Our WaveRider companies offer proof every day that doing good and doing well can be symbiotic.
We've mapped the eight Green-to-Gold Plays drawn from our study of WaveRiders onto the two-by-two strategy framework we outlined earlier. Not surprisingly, most green business efforts to date have focused on the lower left box. Cost reduction is extremely low risk, easy to sell internally, and often pays back quickly. It can yield competitive advantage. But our research suggests that, by focusing solely on the cost side, many companies are missing chances to generate broader Eco-Advantage. Most companies have not yet executed all of the plays -- they're leaving money on the table.
Cutting pollution and waste makes good business sense. Even highly efficient companies have been shocked to discover savings they had previously overlooked. Over three decades, 3M continues to find new ways to pare costs through its 3P program, Pollution Prevention Pays. Many changes can be very simple. STMicroelectronics, for example, put in larger air-conditioner ducts, which allowed its air-circulating fan to run more slowly. The fan now uses 85 percent less energy. In just one year, with $40 million invested in changes like these, the company saved $173 million.
Sometimes the search for eco-efficiency can leapfrog past reduction to outright elimination of a process or resource. Rohner Textil once produced its dyed, woven fibers in the same manner as everyone else in the industry. To make the fibers strong enough to weave, it would coat the yarn with chemicals, which had to be washed off later, creating wastewater problems. While searching for a way to reduce chemical use, Rohner realized that humidity makes the fiber stronger. So the company now skips the chemical coating and simply doesn't dry the yarn quite as much, leaving moisture in the fiber. Rohner cut out one step, shortened another, eliminated the chemicals, reduced energy use, and cut costs. A pretty good day at the eco-efficiency office.
Rohner's efficiency improvements have driven per worker productivity up 300 percent over the past 20 years. During a vicious downturn in its industry, Rohner, unlike many other companies, remained profitable.
2. Eco-Expense Reduction
Efforts to lower direct environmental costs such as landfill fees or regulatory paperwork can also return big dividends. DuPont has saved billions on pollution control, and that's only the measurable cost of waste. In one case, the company cut rejects from the Lycra production line from 25 percent of volume to less than 10 percent. That focus on reducing waste saved material, lowered landfill costs, and freed up $140 million in saleable product. It also meant the company could delay building another plant, saving many millions more in capital expense. The ripples from cutting waste and eco-expense can overflow and save money in many ways.
3. Value Chain Eco-Efficiency
Companies that look broadly for environmental gains and use tools like Life Cycle Assessment often find ways to reduce costs throughout their value chains. The play here is to try and capture that value, which can be a difficult task. In Chapter 4, we talked about one area in which companies are quite effective -- distribution. IKEA and others stuff their trucks through smart package and product design, and save money.
4. Eco-Risk Control
With the rise of transparency, the risks to a business and its brand can come from anywhere. A substantial amount of goodwill is tied to corporate reputation. If a distant supplier dumps waste in a river or employs children, the major customer, with an international brand, may well be the one to pay the price.
WaveRiders identify potential risks and act on them as early as possible. When McDonald's pushes back on its supply chain to lower antibiotic use in chickens, or asks for documentation that ensures that cattle do not have mad cow disease, it's lowering the risk of contaminating its brand. Intel spends millions to ship its hazardous waste from some developing countries to the United States so it can be disposed of properly. Why? Intel doesn't trust the waste-handling system in some countries where it operates. And company officials know they'll be blamed if something goes wrong.
WaveRiders get ahead of regulations before they get tighter. BP began its Clean Cities program and sold cleaner-burning, lower-sulfur fuels in part to get out in front of more stringent air quality laws. "The driver was that sulfur regulations would come," BP's Chris Mottershead told us. "Rather than deliver on a regulated schedule, we decided to go early and try for a market benefit."
Anticipating regulations can put a company in a position to meet requirements at a lower cost than its competitors. Some companies have even obtained a competitive edge by lobbying for tighter controls. Remember, it's often the relative regulatory burden that matters.
Redesigning processes and products to cut waste and pollution is a big part of Eco-Advantage. Keep in mind, too, that a great deal of potential gain might lie outside the factory gates or your own facilities' doors. Helping customers reduce their environmental problems can strengthen customer loyalty and attract new sales. Reducing a product's energy use or toxicity also can add to customer value. Like Johnson Controls, which sells entire energy management systems, companies that find ways to lower customer burden can profit.
6. Eco-Sales and Marketing
Marketing the green qualities of products can drive sales. When Wausau Paper launched a new brand extension of "away from home" products -- paper towels, toilet paper, and the like -- it first certified the product line with Green Seal, an NGO specializing in environmental product labels. The company then rebranded the product EcoSoft Green Seal, putting the certification right in the name. In an industry growing only 2 to 3 percent per year, Wausau's sales in this market leapt 44 percent in the first two years.
In fact, Wausau took an unusual route by focusing its marketing pitch squarely on the environmental message. Products that scream "green" to the exclusion of other qualities often die on the shelves. As Shell learned with its Pura gasoline, a product often needs to stand on other attributes first before selling the environmental story. Green, we've found, is often best used as the "third button."
7. Eco-Defined New Market Space
Environmental Vision can create new market space and value innovation. Toyota set out to redefine the twenty-first-century car and has come pretty close. Many customers now seek a hybrid, not a midsized car, and they'll pay a substantial premium or wait months for a Prius in particular. For these consumers, there is no substitute.
Looking for environmentally defined market space can seem to lead companies far afield. Take John Deere's recent foray into renewable energy. The tractor maker started up a business unit to help farmers harvest wind energy. Deere will offer financial backing and consulting. This may seem an odd fit, but we see it as an interesting play. A company known for providing farmers with the tools they need is offering to help them survive and find new revenue streams. That's value innovation!
8. Intangible Value
Most companies are worth more than their hard assets, and in some cases much more. Brand value -- or corporate reputation, more generally -- can be worth many billions of dollars. Any threat to that value has to be taken seriously. From BP to GE to Wal-Mart, a growing number of companies have launched campaigns to build a green element into their brand.
Copyright (c) 2009 Daniel C. Esty and Andrew S. Winston
Daniel C. Esty, co-author of Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, is the Hillhouse Professor at Yale University and Director of the Center for Business and the Environment at Yale (www.yale.edu/CBEY). Author and editor of nine books and dozens of articles, Dan is one of the world's leading corporate environmental strategy experts with twenty years of experience working with companies of all sizes and across many industries worldwide. He served as senior official at the U.S. Environmental Protection Agency in the early 1990s and is presently Chairman of Esty Environmental Partners (www.EstyEP.com).
Andrew S. Winston, co-author of Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, advises some of the world's leading companies on how to profit from environmental thinking. He is also a highly respected and dynamic speaker, exploring the business benefits of going green with audiences around the world. Andrew's earlier career included corporate strategy at Boston Consulting Group and management positions in marketing and business development at Time Warner and MTV. See www.andrewwinston.com for more information.