Sustainability StrategiesWhen does it pay to be green?

Renato Orsato

Presented by:

Jako Volschenk

Date: 23-04-07

Background to book

• Renato Orsato (Orssatto)– INSEAD– Peer-reviewed articles in California

Management Review, Journal of Industrial Ecology, among others

• Sustainability from a mostly environmental perspective

Chapters

Part I: Fundamentals1. When does it pay to be green?2. What are sustainability strategies?

Part II: Competitive environmentalism3. Eco-efficiency4. Beyond compliance leadership5. Eco-branding6. Environmental cost leadership

Part III: Beyond competition7. Sustainable value Innovation8. Sustainability strategies and beyond

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PART I: FUNDAMENTALS

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Chapter 1: When does it pay to be green?

• Green as – Commitment– Core competence

• Non-competitive strategies– Co-opetition on aspects that companies do not differentiate on– Non-exclusive profit = not only private profit = Public profit

• Competitive strategies– Zero sum game = your gain is someone else’s loss– Involves choice

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Environment

PublicBenefits

Sustainability business models

The Win-Win Scopeof Sustainability

Strategies

Business as usual

BusinessPrivate Profits

E

B

Orsato, R. 2009. Sustainability strategies: When does it pay to be green?. Palgrave Macmillan: Houndmills, United Kingdom.

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Environment

PublicBenefits

Sustainability business models

BusinessPrivate Profits

E

B

Zone ENon-rivalStrategies

Zone BCompetitiveStrategies

Business as usual

Orsato, R. 2009. Sustainability strategies: When does it pay to be green?. Palgrave Macmillan: Houndmills, United Kingdom.

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Competitive Environmental Strategies

Sustainable Value InnovationStrategy

Existing Markets New Market Spaces

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Orsato, R. 2009. Sustainability strategies: When does it pay to be green?. Palgrave Macmillan: Houndmills, United Kingdom.

Chapter 2: What are sustainability strategies?

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Chapter 2: What are sustainability strategies?

• It is not operational effectiveness, i.e. reducing costs or risk• It involves a choice of position for a product or service (Porter)

or choice in what you do (RBV).• Some of the chapter spent on linking Position based & RBV

• Competitive Environmental Strategies– Not a stage model– Choice model (Typology)– Non-exclusive– Recognition that titles may be loaded in meaning

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STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental Cost

Leadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond Compliance

Leadership

Com

petit

ive

Adv

anta

ge

Competitive Focus

Organizational Processes Products and Services

Lower costs

Differentiation

Orsato, R. 2009. Sustainability strategies: When does it pay to be green?. Palgrave Macmillan: Houndmills, United Kingdom.

Competitive Environmental Strategies

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Value for Customers

STRATEGY 5Sustainable

Value Innovation

Economic Costs

Contribution to Society

Environmental Impacts

Orsato, R. 2009. Sustainability strategies: When does it pay to be green?. Palgrave Macmillan: Houndmills, United Kingdom.

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PART II: COMPETITIVE ENVIRONMENTALISM STRATEGY 1

Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

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Chapter 3: Eco-efficiency

• So is eco-efficiency different to resource productivity ? 1. Lean thinking can lead to breakthrough innovations & radical

improvements.2. Industrial symbiosis (SI)3. Emission reductions could become an additional revenue stream.

STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

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Lean thinking

“To hell with your competitors; compete against perfection by identifying all activities that are muda (waste) and eliminating them” (Hawkin, Lovins & Lovins in Orsato p. 62)

STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

Traditionally sold as animal feed

Can be used to grow mushrooms

Spent grain from breweries

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Industrial symbiosis• Manufacturing processes = parts of bigger system of production and

consumption (Industrial Ecology)• Waste becomes raw material – as you reduce waste, costs reduce

STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

US-based Eco-Industrial Parks (EIPs) (p 52)

SUCCESS FAILUREKalundborg Eco Park, Denmark (p 51)Guitang Group, China

LESSONSLiability for other’s waste in US

Political, financial, operational, behavioural barriersMBAs taught to focus on core competence

Natural alliances (bottom-up)better thanTop down public programs

Result of organic collaboration rather than

planned infrastructure

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Making strategy 1 pay

• Lean manufacturing– Industrial markets (B2B)– High processing costs– High levels of waste/by-products

• Industrial symbiosis– Agriculture

• Emission reduction– Energy intensive STRATEGY 1

Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

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Chapter 4: Beyond Compliance Leadership

• In some industries (such as resource intensive)– Reputation = licence to operate– Reputational risk very big = biggest driver of Environmental

initiatives– Have to assure stakeholders that the company does more

than what’s required.• The Stuart Oil Shale Project & Greenpeace = poor stakeholder dialogue• Shell in the North Sea & Greenpeace

– What the company says about itself carries no weight.

STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

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Voluntary Environmental Initiatives (or VEIs)

• Green clubs (VEIs) provide a way to reduce risk– Reputation insurance (p. 74)– Not much evidence that CERES, GRI or Global compact

provide reputational advantages

STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

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Process certification

• Process carries more credibility• In 1990s ISO & Environmental Management Systems brought

hope of competitive advantage (CA)• BUT

– ISO 9000 = quality indicates a private benefit to consumer– ISO 14000 = environmental protection is a public benefit

• For B2B this can carry weight, but unlikely in in B2C– Would you choose a hotel based in ISO 14000?

• Yet – Industry leaders can create CA by lobbying for stricter regulations– GM and Ford announced in 1990 that paint suppliers should be ISO 14000 certified

STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

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Negative Positive

Reputation

Beyond Compliance Leadership

VEIs - Green Clubs

Beyond Compliance

Non-Compliancelaggard

LeaderAverage

Consumer engagementConsumer boycotts

Stakeholder criticism, negotiation and dialogue Stakeholder opposition and confrontation

ReflexiveReactive and Defensive

Building Positive ReputationAvoiding Negative Reputation

Sustainability leader in the industryBeyond Compliance

ToFrom

Orsato, R. 2009. Sustainability strategies: When does it pay to be green?. Palgrave Macmillan: Houndmills, United Kingdom.

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Making strategy 2 pay

• In conclusion– These companies can invest in Eco-efficiency but because of

reputational risks, beyond compliance should be the focus

• VEI– Effective in managing risk– Reputation of club impacts credibility– Joining early reduces costs for companies while putting pressure on

others

• STAKEHOLDER DIALOGUE/ENGAGEMENT A MAJOR REQUIREMENT

STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

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Chapter 5: Eco-Branding

• What is different for differentiation on environmental attributes?– Normally a brand appeals mostly to private benefits– Not only private benefits embedded in eco product– Also public benefits such as biodiversity, water recycling, CO2- reduction– Consumer needs to be informed about issues.– Consumer must believe the benefit is worth paying for and is real

STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

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Labelling

• One way to present information is through eco-labels– Eco-labels facilitate consumer choice– But is the consumer willing to pay?

• Product labels– Type I: Multi-party agreement on criteria and 3rd party certification– Type II: Packaging, etc. (Provided by manufacturer) – Type III: Measureable data - Life Cycle Analysis

• Seems to be more effective to avoid disadvantages than generating CA

STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

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8Type I Type II Type III

From Eco-labelling to Eco-branding

• Coop Sverige – Ӓnglamark– Products perform as well as products in categories– Difficult to imitate

STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

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Making strategy 3 pay

• Can create CA when1. Uncontroversial information about environmental performance is available2. The differentiation is difficult to imitate3. Customers are willing to pay for costs of ecological differentiation4. Ideally, private and public benefit should converge

• B2C shows potential– B2B less potential as B more rational (less emotional)

Orsato seems sceptical of affluence leading to eco-behaviour, instead stating that it seems to lead to higher material intensity…but “we cannot deny the potential”.

STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

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Chapter 6: Environmental Cost Leadership

• Most difficult of strategies– Not only lowest cost, but also lowest environmental impact

• Ecolean packaging/ pouches– 25% cheaper than competitors– No FDA approval required– When incinerated it reduces acidity of fumes– Yet the company does not market this – consumer won’t pay.

• Other instances– IKEA’s flat packaging reduces transport cost and emissions– Biofuels

STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

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Servicising

• Convert functional product to service– Water heating instead of geyser– Xerox photocopiers

• Decouples economic growth from consumption– Throw away society

• Barriers– Culture shock to let others work in your processes– Not easy to identify economic gains– If core competence is manufacturing – won’t be keen– Consumers have ingrained perceptions

• Servicising ignores emotional attachments such as status

STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

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Making strategy 4 pay

• B2B– Compete on price

• Commodities– Fuel (bio-fuel)

STRATEGY 1Eco-Efficiency

STRATEGY 4Environmental

CostLeadership

STRATEGY 3Eco-Branding

STRATEGY 2Beyond

Compliance Leadership

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PART III: BEYOND COMPETITION

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8Value for Customers

STRATEGY 5Sustainable

Value Innovation

Economic Costs

Contribution to Society

Environmental Impacts

Chapter 7: Sustainable Value Innovation (SVI)

Car industry as example•Red Ocean

– Breakeven for models at 100k to 150k units p.a.– Plant capacity needs to run at 65% to be viable– Operating margin typically 3.5%

•Polluting industry– 80% of a car’s emissions is during its use– 2.4 of every 100 litres is used to transport the driver (p 158)

•Car industry aims to overcome pollution in 3 ways1. Smaller cars2. Cleaner fuels3. Alternative powertrains

•None of these provide CA

Value for Customers

STRATEGY 5Sustainable

Value Innovation

Economic Costs

Contribution to Society

Environmental Impacts

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SVI in car industry• Station cars Liselec

– 50 cars in 7 stations– Individual public transport

• Stations avoid cost of parking areas• Electricity utilities sees EV as future consumers• Regulators supports less traffic

• Better place– PPP with Israel govt to provide transport in “transportation islands”– Similar to mobile phone contract

• Low cost of car• Subscription to service provider = battery replacement, maintenance, etc.

• Car sharing (Mobility & Zipcar)– 80 000 members & 2000 cars – Book vehicle on internet for round-trip use – (2hrs/taxi < CSO< 2 days/ rental)– Lower cost plus access to multiple types of vehicles– 30% of members delayed buying a new car or sold car

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8Marginal, but exponential growth

Orsato, R. 2009. Sustainability strategies: When does it pay to be green?. Palgrave Macmillan: Houndmills, United Kingdom.

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Smaller car Alternative drivetrain

Chapter 8: Sustainability Strategies and Beyond

• Being green requires some specialisation = choice• Being green can align with stakeholder expectations• When it pays is > Whether it pays• Sustainability strategy needs to align to corporate strategy

– Wall Mart

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In conclusion: About the book

• Anecdotal– Book by its own admission does not provide a clear

explanation of the answer to the central question.– But a VERY strong conceptual framework

• Multiple South African cases can extend the context of Orsato

• A very significant contribution to management of green issues– Does a lot to show how it relates to Position based

and RBV.