Contemporary Strategy in a Changing World

The Capgemini Consulting CEO Study 2008Mastering the Triple Bottom Line

Capgemini Consulting strategic thinking series

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Contents

About the Capgemini 2008 CEO study 3

Introduction 4

Key insights 5

Sustainability has become a top priority for CEOs 7

Sustainability represents unprecedented market opportunities across most industries 8

Environmental and social performance emerge as a major source of competitive advantage 11

Mastering the Triple Bottom Line requires a strategically founded execution 13

Sustainability leaders have the potential to change the rules of the game 18

Mastering the Triple Bottom Line – the way we see it 22

Capgemini Consulting – A trusted sustainability advisor when results matter 23

About the Capgemini 2008 CEO study

To assess the condition of the Norwegian business climate on selected topics of strategic interest, Capgemini Consult-ing interview Norwegian CEOs on an annual basis. Last year’s study covered strategic planning and innovation. This year we focus on how businesses relate to the increasing demands to deliver performance on environmental and social issues, as well as the traditional financial bottom line.

We have adopted the term Triple Bottom Line (TBL) to label the challenges companies are facing in order to deliver results across three dimensions; financial, environmental and social performance. The term Triple Bottom Line was first coined by John Elkington (1994) and is spun out of the sustainability debate introduced by the Brundtland Commision (1987). Environmental performance includes issues like impact on climate change, waste management, recycling and choice of materials while the social dimension covers issues like business ethics, child labour, poverty, health and workplace conditions. We see sustainabil-ity as referring to how enterprises balance the realisation of business objectives, whilst taking responsibility and protecting society at large (also referred to as Corporate Social Respon-sibility). The study investigates the positive impacts sustainability can have on businesses profitability. Mastering the Triple Bottom Line requires identification of strategic opportuni-

ties arising through a sustainability focus, and integrating sustainability related opportunities with the companies business strategy.

CEOs and top executives of 55 large and medium sized Norwegian firms have partici-pated in one of the largest selections of in depth interviews that have been conducted on sustainability in a strategic business perspec-tive in Norway. Out of the 55 companies, 44 are headquartered in Norway. The companies vary widely in size. The sectors included in the study are:

• Manufacturing • Financial services • Retail• Distribution• Oil and Gas services• Energy• Property• IT/Telecom

The interviewed CEOs contributed to our study with insights based upon their knowl-edge and experience. Special thanks are di-rected to representatives from KLP, SN Power and Wilh. Wilhelmsen Group, who contrib-uted in the identification of key findings. The Centre for Corporate Responsibility at the Norwegian School of Management BI has been a valuable partner throughout the study.

We are proud to present a comprehensive and multifaceted report reflecting CEO’s views on challenges and opportunities related to the complex matter of “Mastering the Triple Bottom Line”.

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4

Introduction

Businesses’ key objectives are naturally centred on creating shareholder value. Not until sustainability-related media scandals jeopardised the value of mega-stocks like Nike, H&M and BP, did we see a rapid build-up of sustainability programs to manage reputation and risks related to environmental and social performance. Today, the environ-mental threat has become more real to a great amount of people, and the tolerance of unethical behaviour, like corruption, has been drastically reduced. Governments and global organisations are increasingly initiat-ing rules and regulations to raise the business standards on both environmental and social performance. These changes in business con-text put pressure on executives to reconsider their strategic options and their response to complex market dynamics where social and environmental performance matters.

Lately, considerable attention from con-sultancies, media and academia has been given to the risks related to sustainability. Less focus has been given to the potential strategic opportunities that emerge from this new business context. In our study, we look

at how the increasing focus on sustainability can change the rules of the game, and on the business opportunities that arise from it. We argue that the ability to balance the Triple Bottom Line affects overall competitiveness, long term growth prospects and profitability.

There are generally two ways businesses can respond to the increasing sustainabil-ity focus: defensive – with a main focus on reducing risk and protecting reputation, or offensive – searching for opportunities to dif-ferentiate offerings or outperform competitors on environmental and social performance. In some industries, we clearly see that the of-fensive approach is a key element in reaching and/or maintaining industry leadership.

We believe the ability to master the Triple Bottom Line will characterise leading en-terprises across most industry sectors in the near future. Capgemini’s CEO study 2008 examines how Norwegian companies view the challenges and opportunities related to sustainability, and how mastering the Triple Bottom Line can prove to be a strategic differentiator.

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Key insights

Analysing the data from our study has lead to five key insights on mastering the Triple Bottom Line.

KEY INSIGHT 1 – SuSTaINabILITY HaS bECOmE a TOp prIOrITY fOr CEOS. Significant shifts in customer demands, newly passed or anticipated rules and regulations, and an increase in media attention has been instrumental in the recent dramatic increase in the demands CEOs face to deliver Triple Bottom Line results.

KEY INSIGHT 2 – SuSTaINabILITY rEprESENTS uNprECEdENTEd buSINESS OppOr-TuNITIES. Close to 85 percent of the participating CEOs state that sustainability creates new market opportunities to a medium or higher extent. Furthermore, most CEOs believe that sus-tainability will have a major impact on their business in the near future. There is a strong perception among CEOs that sustainability creates business opportunities across most sectors. KEY INSIGHT 3 – ENvIrONmENTaL aNd SOCIaL pErfOrmaNCE EmErGE aS a majOr SOurCE Of COmpETITIvE advaNTaGE. The CEOs believe social and environmental per-formance can be leveraged to create competitive advantages across most sectors. Positive effects on brand, risk management and access to talent are the most promising strategic levers. Hence, social and environmental initiatives can enhance your company’s competitiveness.

KEY INSIGHT 4 – maSTErING THE TrIpLE bOTTOm LINE rEquIrES THOrOuGH aNd STraTEGICaLLY fOuNdEd ExECuTION. In mastering the Triple Bottom Line, formulating the sustainability strategy is the necessary first step to create clear direction. In order to incor-porate the strategy into day-to-day management decisions at all levels, and towards all stake-holders, it requires a governance structure that supports the sustainability strategy, a broad mo-bilisation in the organisation and an organisation that successfully communicates the strategy towards all stakeholders.

KEY INSIGHT 5 – SuSTaINabILITY LEadErS HavE THE pOTENTIaL TO CHaNGE THE ruLES Of THE GamE. Differences in demands and opportunities create particular strategic playgrounds for different industries. The attractiveness of sustainability leadership varies, but offer promising benefits across all sectors. The ability to select the right issues, integrating social and environmental ambitions into your game plan and turning your key capabilities into sus-tainable practices, have emerged as crucial elements of reaching and/or maintaining industry leadership.

On the following pages we will explore each of the key findings in more depth.

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– CEO, Distribution sector

Sustainability is paramount – failure to address these issues will put you out of business

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Winning and retaining stakeholder’s trust has become a key issue for business executives, and addressing sustainability issues a necessity to succeed for most businesses. 70 percent of the CEOs in our study consid-ered the demands to deliver on the environmental and social, in addition to the financial, dimension to have in-creased significantly. Only 15 percent of CEOs claim that they experience increased demands to a small extent.

Sustainability has become a top priority for CEOs

To which extent do you experience increasing demands to deliver results on environmental, ethical and other social conditions in addi-tion to financial results?

50 %

45 %

40 %

35 %

30 %

25 %

20 %

15 %

10 %

5 %

0 % Very small Small Medium Large Very large

The study shows that there has been a 70 percent increase in the number of CEOs having sustainability issues frequently on the agenda in board meetings the last two years compared to the last five years. This confirms that sustainability has become a top priority for CEO’s, and as a result, busi-nesses need to generate increased insight, strategic thinking and new capabilities related to a new business climate.

To which extent do you experience increasing demands to deliver results on environmental, ethical and other social conditions in addi-tion to financial results (per sector)?

Oil & Gas Services

Energy

Property

Manufacturing

Distribution

Retail

FSI

Telcom & IT

Total average

1 2 3 4 5 Very small Small Medium Large Very large

Across industries, CEOs point out ethical dilemmas that arise when conducting busi-ness, especially in certain developing coun-tries. Attention in developed countries are high on corruption, and the US Anti-corrup-tion Act, put into effect in 1999, represents a significant threat to companies violating the principles outlined. However, when dealing with emerging markets there is a notion among Norwegian executives that compa-nies based outside Europe and US tend to be more aggressive and inclined to offer ethical compromises. Most of the Norwegian CEOs with international operations in developing countries claim they offer working standards above the general level in the countries they operate.

What are the key drivers for shifting busi-nesses approach to sustainability?

45 %40 %35 %30 %25 %20 %15 %10 %5 %0 %

Brandin

g

Cost s

aving

s

Risk m

anag

emen

t

Media

& NGO

Custo

mer de

mands

Compli

ance

Employe

es

Percentage of CEOs

Looking forward, almost all CEOs inter-viewed believe that sustainability will have a significant impact on their business within the next 10 to 20 years. Governing bodies, employees, customers, new technologies, media and Non Governmental Organisa-tions (NGOs) are among the driving forces mentioned when assessing the sources of increased demand.

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To which extent may an increased focus on sustainability create new market opportuni-ties in your sector?

35 %

30 %

25 %

20 %

15 %

10 %

5 %

0 %

Very small Small Medium Large Very large

* 7 percent answered ”do not know”

By mapping initiatives discussed with CEOs in the study, market opportunities can be divided into five broad and distinct categories. (Figure 2.1.) Exploration and utilisation of scarce resources, need for cleaner technologies, the raise of the LOHAS (Lifestyle of Health and Sustainability) segment, enabling the unprivi-leged and exploring sustainability options.

While the degree of market opportunities varies widely across the covered sectors, even the lowest scoring industries believe there are moderate levels of opportunities. How closely the environmental and/or social dimension of sustainability is related to the core of the companies’ products and/or services have a large influence on the extent to which the CEOs perceive that market opportunities arise from a focus on sustainability. Whole industries, e.g. renewable energy and clean-tech, are developed around sustainability driven markets. Until the financial crisis shook the capital markets, investors where flooding these industries with capital. All CEOs in the energy sector state that there are more than moderate market opportunities related to sustainability, and 64 percent of them give market opportunities the high-est possible score. Financial services have a different opportunity space, and in average CEOs consider there to be moderate market opportunities related to sustainability.

Sustainability represents unprecedented market opportunities across most industries

Norwegian CEOs seem well aware that the rules of the game are about to change in most industries. The graph below illustrates that approximately 85 percent of the CEOs believe a sustainability focus can create market opportunities for their business to a medium or high degree. furthermore, more than 65 percent of the CEO’s believe that focus on sus-tainability will create major market opportunities and that it will have a considerable impact on their business .

1Exploration and utilisation of scarce resources

CEOs in the Energy sector focused on market opportunities arising from exploring sources of renewable energy, increasing productivity and sus-tainable use of natural resources like minerals, water, rain forest and food; opportunities that can lead to both cost savings and revenue increases.

2Need for cleaner technologies

Many CEOs mentioned market opportunities related to adaption to a low-carbon economy. Especially the CEOs in the Property, Manufac-turing and IT / Telecom sectors saw large market potential in cleaner technology solutions within production, buildings, logistics, infrastruc-ture, recycling and transport. Conversion to environmental materials and packaging were also mentioned.

3The raise of the LOHaS segment

CEOs in the Retail sector acknowledged the growth of consumers that are willing to act responsible by selecting sustainable products or services – the Lifestyle of Health and Sustainability (LOHAS) segment. A range of green-, eco-, health- and fairtrade- products represent growth markets.

4Enabling the unprivileged

Some of the global companies in the study also focused on the oppor-tunities that arise from poverty and its implications. Levelling out dif-ferences between developing and industrialised countries represents an untapped potential for attracting talent and targeting future consumers.

5Exploring sustainability leadership options

Across sectors we found CEOs acknowledging how increasing demand from customers, employees and regulators create opportunities to capi-talise on sustainability leadership. Sources of competitive advantage based on environmental and social performance has the potential to be leveraged into higher market share and premiums.

Fig. 2.1.

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To which extent may an increased focus on sustainability create new market opportuni-ties in your sector?

Energy

Property

Telcom & IT

Retail

Distribution

Oil & Gas Services

Manufacturing

FSI

Total average

1 2 3 4 5 Very small Small Medium Large Very large

Sustainability issues are consid-ered in buying decisions

The rationale for competitive advantage based on sustainability is largely arising from choices among buyers – both businesses (B2B) and consumers (B2C). Consumers’ and businesses willingness to pay a sustainability premium on goods and services has been limited, but is growing. In recent years, the emergence of the LOHAS segment indicates a shift in focus with significant impact on con-sumer behaviour. In the US, different sources indicate that 15–20 percent of the US popula-tion can be categorised as LOHAS which are actively searching for sustainable products and services. This trend is confirmed in a recent (2008) Capgemini study of consumers in the US, UK, Netherlands and France. The study shows that more than 80 percent of the consumers consider issues like energy/water usage, sustainable manufacturing features and waste reduction and management as impor-tant or extremely important.

Willingness to pay a higher price for products that support sustainability requirements (% who answered ”yes, a premium /yes, small price difference”) 1)

Fair trade issues

Sustainable manu-facturing features

Organic food

Environmentally friendly packaging

Energy/water usage

Waste reduction/management

Yes, a premium Yes, a small price difference

0 % 20 % 40 % 60 % 80 %

24 % 61 %

21 % 63 %

20 % 64 %

15 % 64 %

14 % 62 %

14 % 62 %

Although consumers rate sustainability issues as highly important, the majority of consumers are only willing to pay a small sustainability premium, and the price elasticity does not match the ranking of importance. However, the LOHAS-segment is growing in both US and Europe, and increas-ingly strong presence will eventually lead to a large segment of conscious buyers. These changing preferences is also reflected in the B2B segment, where we see an increase in sustainability as an important buying and/or decision criteria. As an example, compa-nies that have experienced negative incidents related to sustainability face challenges related to their participation in public tender processes and/or struggle to acquire attractive joint venture partners. Other CEOs state that sustainability performance has proved to be an important aspect of the strategy in win-ning large tendering processes.

unprecedented opportunities existEarly movers in the enterprise world will

respond to the sustainability challenge and introduce innovative products and services. Based on unprecedented market opportunities, we believe new winners will emerge as sus-tainability leaders in a number of industries. Innovation is a key part of the process – by introducing environmental and social per-formance as two new dimensions to the busi-ness, the opportunity space is expanded. The experience of General Electric, a pioneering innovator dating back to Edison’s first com-mercial light bulb, illustrates how sustainabil-ity can represent promising growth initiatives. GE launched their “Ecoimagination” initiative tapping into sustainability market opportuni-ties in 2005. By 2007, revenue from 60 new portfolio products reached $14 billion and orders and commitments have increased to $70 billion. Despite current economical tur-moil, GE’s revenue from the “Ecoimagination” initiative rose 21% to $17 billion in 2008. The amount is expected to increase to $25 billion in 2009. GE chairman and CEO Jeff Immelt put it this way: “Ecoimagination is one of the most successful cross-company business initiatives in recent history”.

Sustainability can be the oil-adventure of the Norwegian generation to come – CEO, Energy sector

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All new products must use less material, have less weight and be more recyclable

– CEO, Oil & Gas Services sector

Ecoimagination is one of the most successful cross-company business initiatives in recent history – Chairman & CEO, General Electric, Jeff Immelt

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Environmental and social performance emerge as a major source of competitive advantage

from a strategic point of view, business executives should always explore ways to develop competitive advantages. Competitive advantages, based on superior resources and capabilities, enable companies to harvest more than average returns from their business.

We have identified eight strategic param-eters (figure 3.1.) where social and environ-mental performance can be developed into competitive advantages: increasing innovation, positive brand effect, differentiation, reduced use of resources, reduced risk of bad publicity and probability of unwanted incidents, secure market access and access to talent. All the interviewed CEO’s considered one or more of the listed strategic parameters to represent a major source of competitive advantage.

In which way can social, ethical and en-vironmental initiatives also enhance your company’s competitiveness?

Positive effect on brand

Reduce the risk of bad publicity

Access to talent

Secure market access

Differentiate from competitors

Creating innovation

Reduce probability of unwanted events

Reduce the use of resources 1 2 3 4 5 Very small Small Medium Large Very large

Positive brand effects, reduced risk of negative publicity and access to talent stand out as the most important parameters of competitive advantage created through sustainability initiatives. Positive effect on the company’s brand is an important factor for the majority of CEOs across different sectors and companies in the study. Reduced risk for bad publicity is even more evident as a competitive advantage among the CEOs of the larger corporations. Unfortunately, fear for bad publicity can be a major barrier for an offensive sustainability game plan. The importance of sustainability to get access to young talent is widely recognised among most CEOs in the study.

While the CEOs overwhelmingly see a potential for increasing competitive strength through sustainability, 65 percent of them also see situations where focus on sustain-ability could reduce their competitiveness.

The CEOs’ main concern is that comprehen-sive initiatives on sustainability may lead to increased costs which in turn may reduce competitiveness. Challenges regarding access to certain foreign markets are also a major concern for many of the CEOs.

developing competitive advantages through sustainability is potentially rewarding

Selecting the right environmental and so-cial issues, where company resources can be effectively utilised to enhance sustainability performance, requires careful consideration of strategic options and potential for developing competitive advantage. Too often compa-nies are caught on the defence with reactive sustainability actions. We believe companies should consider a more offensive approach and identify a few strategic sustainability initiatives where current capabilities can be leveraged to solve environmental and social problems while tapping into some of the ben-efits offered by the eight strategic parameters mentioned.

Sustainability is the single biggest opportunity in the 21st century and will be the next source of competitive advantage

– CEO, Wal Mart, H. Lee Scott

1Increasing innovation

New performance dimensions create new competitive space.

2positive brand effects

Positive attention on environmental and social issues are valued both in the B2B and B2C market.

3differentiated offerings

Environmental and social performance can be used to differentiate products or services.

4reduced use of resources

The company’s cost base can be reduced by introducing environmental solutions.

5reduce the risk of bad publicity

Negative attention on social or environmental issues can damage a company’s core business.

6reduce the probability of unwanted incidents

Damaging incidents can be reduced by raising the HSE standards.

7Secure market access

To earn a licence to operate the company must comply to rules and regulations.

8 access to talent Environmental and social performance increasingly attract talent.

Fig. 3.1.

Sustainability is particularly important to attract talent

– CEO, Energy company

12

CSR can be much more than just a con-straint or charitable deed. Approached stra-tegically, it generates opportunity, innovation and competitive advantage for corporations – while solving pressing social problems

– M. Porter & R. Kramer Harvard Business Review 2007

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Based on findings from our study, we have identified four key success factors for sustain-ability execution, as illustrated in figure 4.1.

Success factor 1: Clear direction

Developing a mission statement, establish-ing codes of conduct for employees, actions to support local environment and good citizen-ship – these are all examples given by CEOs on initiatives to increase their sustainability performance. Although this study clearly indicates that opportunities exist to leverage social and environmental performance to enhance competitiveness, it is challenging to identify the right issues to address. The most mature companies in terms of sustainability are also the most humble ones on this issue, acknowledging the complexity of addressing environmental and social issues while deliv-ering a robust financial performance. 2)

The study confirms that best practice companies develop a coherent sustainability strategy that incorporates company values, commitments and goals. Incorporating issues with significant social and environmental impacts in strategy formulation is key to bring balance to the Triple Bottom Line, as illustrated in Figure 4.2. Selecting the right sustainability issues without a clear direction and at the same time taking advantage of the strategic sustainability opportunities that arises, is difficult, at best.

Just above 20 percent of described envi-ronmental or social actions by the CEOs in this study fall into Porters and Kramer’s (2006) definition of strategic CSR: environ-mental and social issues affected by business activities, and environmental and social issues affecting the drivers of competitiveness. Examples on strategic sustainability actions from the study are: focus on growth in renew-able energy for a company within the Energy sector; increasing the use of electric cars for a company in transport-intensive businesses; lowering energy usage in buildings within

Mastering the Triple Bottom Line requires a strategically founded execution

In the previous sections, we have seen that opportunities exist for companies in most sectors when it comes to position-ing themselves on sustainability. While developing the right sustainability strategy, formulation is the necessary first step. This study confirms however that incorporating the strategy into day-to-day management decisions at all levels, and towards all stakeholders, is perhaps the greatest challenge.

1 Clear directionSustainability is yet not an area included in the business strategy process for most Norwegian companies. To achieve sustainability leadership, clear direction and well thought priorities are necessary.

2

Governance reflecting sustainability ambitions

Only a minority of the companies measure the sustainability ele-ments with the strongest strategic impact. In order for the governance system to function as a vehicle for operationalisation, the sustain-ability strategy should be reflected in the selection of measurement parameters and in the detailing of roles and responsibilities. Progress should be evaluated according to the sustainability ambitions towards different stakeholders.

3 broad mobilisation

For companies with international operations, anchoring the sustainability strategy within the entire organisation and in the relations with external stakeholders is perhaps the greatest execution challenge. The answer is not necessarily uniform performance across operations, but finding the right balance between local adoption and uniform standards.

4Targeted communication

While internal communication on sustainability is widespread, most CEOs are more reluctant when it comes to communication towards external stakeholders. Even though external communication can generate risk, an offensive communication approach tailored to the different external stakeholders is necessary in order to take advantage of potential competitive advantages related to brand-building.

Fig. 4.1.

Economic responsibility

Environmental responsibility Social responsibility

Value creation Profitability

Efficiency Corruption and bribery

Quality goods Job creation

Marketing standards Innovations

Competitiveness Supply chain

Responsible accounting Pricing

Eco-efficiency

Genetically modified products

Energy use Water use

Waste control Product stewardship

Use of forest Climate change

Emissions

Recycling & product take back

Corporate governance

Use of human resources

Workplace issues Philantropy

Human rights Community development

Culture Equal opportunities

Minorities Diversity

Fig. 4.2.

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the Property sector; and responsible mortgage lending in the Finance sector.

Success factor 2: Governance re-flecting sustainability ambitions

Structures and systems that encourage em-ployees to pursue and measure Triple Bottom Line performance are instrumental in im-proving the overall effects of social and envi-ronmental actions. Additionally, this lays the foundation for holding employees accountable for their contribution to the sustainability goals. While 58 percent of the CEOs say they have ways of measuring social and environ-mental performance, these are mainly related to environmental costs aspects. Examples are energy usage and emissions. A minority of the firms measure the sustainability elements with the strongest strategic impact. While 64 percent of the CEOs state that sustainability is reported to the CEO in one way or another, very few companies have clearly defined environmental or social measures, such as KPIs. This indicates that most companies lack structures for tracking sustainability-related actions that may be of great strategic impor-tance to their business performance.

Success factor 3: broad mobilisation

To succeed operationally, the sustainability priorities must be part of the employees core values, of the established routines and the action guidelines for “how we do things here”. Implementing sustainability guidelines be-comes particularly challenging for companies with international operations, where the cor-porate cultures tend to be more complex. To maintain corporate sustainability standards while succeeding in the local market is an-other major challenge mentioned by several CEOs, especially among those operating in emerging economies. Executing sustainabil-ity standards is equally challenging related to sub-level suppliers, both in foreign and domestic markets. Nevertheless, to apply the

company’s standards related to sustainability towards suppliers is seen as important by the CEOs facing this issue.

Both towards own employees and sub-level suppliers, the challenge lies in identifying the right balance between uniformed corporate and locally adopted standards, and in suc-ceeding with embedding the chosen practice level into the cultural awareness and mobilis-ing the executers.

Success factor 4: Communication towards stakeholders

The majority of the participating CEOs communicate environmental and social initiatives to all stakeholders, but to a vary-ing degree. Communication towards inter-nal stakeholders is especially strong, as 85 percent of the CEOs state that they actively communicate sustainability to their internal stakeholders. Internal communication on the sustainability strategy lays the foundation for trustworthy external communication. As much as 78 percent of the CEOs communi-cate their sustainability efforts to customers, mainly through the quarterly and annual reports and the company homepage.

Communication on sustainability towards society and media varies to a great extent. While some companies send out press releases on important initiatives and actions, others state that they do not want to market their sustainability actions. Overall, CEOs express a reluctance to open external communica-tion regarding sustainability performance due to fear of attracting negative attention by the press. Research somewhat supports CEOs reluctance, as the companies most ac-tive within CSR are also the most criticised, whereas companies doing the least are the least criticised (Vallentin: 2003).3) A Danish survey has even found the public to be rather sceptical towards conspicuous corporate com-munication regarding sustainability issues (M. Morsing et al: 2008).4) At the same time

as the risk in communicating sustainability strategy towards the media and the general public is substantial, these stakeholders are also increasing their demands for a corporate sustainability strategy.4) The solution could be indirect communication, communicating to external stakeholders through third party “ex-perts” (e.g. in industry collaboration forums) or also through employees instead of in a top management fashion.

Do you communicate your efforts and results of sustainability initiatives to the following stakeholders?

100 %90 %80 %70 %60 %50 %40 %30 %20 %10 %0 %

Investor Society/Media Customers Internally/Employees

Percentage of CEOs

There’s a lot of incompetence and naivety out there, global expansion to low-cost countries cannot be performed with Norwegian standards on all aspects

– CEO, Manufacturing company

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Case: unilever uK works strategically to embed sustainability into the ”culture of the organisation”unilever uK, a global consumer goods business, is building a culture emphasising sustainability through encouraging a sustainability mindset from the moment an employee enters the organisation Three ”lessons” from Unilever are:1) Corporate culture and values influence internal business processes to a large degree2) Corporate ethics is about allowing people to use their own personal values to guide them in their work3) Continuity and consistency of communication are vital to reinforcing commitment to sustainability

Sustainability is one out of five goals I have to report on

– CEO, Distribution firm

In order to avoid negative press coverage we don’t communicate our sustainability efforts actively towards external stakeholders

– CEO, Financial services

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We have identified a limited number of the participating companies who truly stand out with their ability to maximize the benefits for themselves and society by taking a strong position on sustainability. The firms stand out with specific initiatives on sustainability as well as their ambitions on the matter, and subjective rankings of own performance. By comparing the average performers to the more mature players, the four key success factors for executing sustainability are confirmed.

The mature players clearly outperform the more average players on several key areas:• Engaging senior executives in sustainability

issues• Considerably higher frequency of sustain-

ability related topics in board meetings over the last two years

• Placing the overall responsibility for sus-tainability at corporate level, and cascading responsibility for execution to all manage-ment levels

• Creating an engagement for sustainability performance throughout the entire organi-sation

• Communicating more towards all stake-holders, and being far more proactive in external communication

• Realising the complexity in implementing sustainability guidelines both internally and towards suppliers

We argue that performance above standard on these parameters are important levers in building a position as a sustainability leader.

On the matter of successfully balancing execution with ambition in sustainability strategies, one CEO pinpointed it well: “it might be necessary to aim lower in the first few years in order to ensure that the entire organisation is committed, rather than to try to reach for the stars straight away”.

To which extent do you succeed in implement-ing your guidelines in your organisation and towards your suppliers?

5,0

4,5

4,0

3,5

3,0

2,5

2,0

1,5

1,0

Succeess in implementation of own guidelines in organisation

Success in implementing guide lines towards suppliers

Mature Average

5 = Very large extent 1 = Very small extent

best practice companies acknowledge the challenge in executing sustainability

Case: adidas as a high-performer in sustainability world-wideadidas is according to the Dow Jones Sustainability Index, one of the high performers on sustainability in their industry world wide. They have a supplier strategy that is based on a long-term vision of self-governance in the supply chain where suppliers take ownership of their compliance programme. This is done through a set of different tools. Standards and guidelines have been developed and have been in use, with minor updates, for the last ten years. They have a dedicated team of auditors who monitor and verify that the suppliers are following the standards, and give each supplier a rating based on those criteria. Those results are again incorporated in the overall supplier rating that informs their decision of which suppliers to use.

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The way CEOs view the impact of sustain-ability issues on their business context can be summarised in two categories: the extent to which they experience an increase in sustain-ability demands, and the degree they experi-ence an increase in sustainability driven mar-ket opportunities. While the opportunities and challenges businesses are facing related to sustainability differ, CEOs across industry sectors experience increasing demands and expect new market opportunities to arise (illustrated in Figure 5.1). Further more, as many as 75 percent of CEOs state that they have evaluated their existing product portfolio based on sustainability issues.

We believe that industries facing increasing demands related to sustainability, and that have a high exposure to sustainability driven market opportunities, have a strong potential for strategic differentiation. Based on the sector characteristics across these two dimensions, we have identified four distinct strategic play-grounds related to sustainability. We argue that within most sectors there will always be niche markets where sustainability has a strong impact, and even game changing potential.

Going further, and looking at sustainability leadership as a business strategy, the four strategic playgrounds give rise to two distinct types of sustainability leadership: 1) Market driven leadership, and 2) Compliance driven leadership. The first type refers to the poten-tial for developing new products and achiev-ing market differentiation, and the second to the potential of outperforming competitors by driving the development of sustainability practices within regulated industries. See figure 5.2 for illustration.

Sustainability leaders have the potential to change the rules of the game

Case: vattenfall pursues sustainability leadership within the energy sectorvattenfall produces, distributes and sells energy and energy related products to several million customers in the Nordic countries and

northern Europe. 11th of January 2007, Vattenfall launched an initiative to Combat Climate Change (3C). The 3C initiative consists of

business leaders demanding integration of climate issues in trade and markets. At present, 55 leading companies, including major global

companies like GE, BP and Siemens, have joined the initiative. This ambitious group of companies has defined a roadmap to combat

climate change, which includes recommendations on political priorities to the world’s politicians, in order to reduce emissions. CEO Lars

Josefsson has a strong commitment to develop Vattenfall into a sustainability leader within their sector. This include ambitious environ-

mental targets to reduce CO2 emissions, and he declares that the company’s mission is to reach carbon neutrality by 2050. A mission

which according to Josefsson means Vattenfall will be way ahead of its competitors, and the requirements set by regulators and society.

Sustainability driven market Opportunities

Compliance driven leadership

Strategic playground Sustainability leadership

Sustainability driven market Opportunities

Compliance driven leadership

Very Low Limited Moderate High Very High

Potential for game changing strategies

Enhance value chain performance and increase standards to put competition on defence

Attractive positions for sustainability leadership

Protect reputation and increase standards to put competition on defence

Moderate High Very High

Very

Low

Li

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d M

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ate

Hig

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igh

M

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Incr

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Oil & Gas Services

Oil & Gas Services

Oil & Gas Services

manu-facturing

manu-facturing

manu-facturing

property

distribution retail

property

property

distribution distributionretail

retail

IT/Telecom

IT/Telecom

IT/Telecom

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financial Services

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EnergyEnergy

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Fig. 5.1.

Fig. 5.2.

financial Services

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Category 1: potential for game changing strategies

In industries where the market oppor-tunities and the demands to deliver social and environmental performance are high, sustainability becomes strongly linked to the business core, and hence a key strategic parameter. In the Energy sector, issues on en-ergy production, energy efficiency and clean energy are critical and given a strong focus. Within a limited time span we believe the leading companies within the Energy sector will have the ability to explore opportuni-ties and take risks to capitalise on innovation related to sustainability. Competitiveness will be further enhanced by the ability of inte-grating environmental and social ambitions into core operations. As an example, Vatten-fall has taken a clearly defined position on sustainability leadership, as part of an overall ambition of reaching industry leadership.

Category 2: attractive positions for sustainability leadership

In this category, the degree of sustainabil-ity driven opportunities is seen as high, and companies strongly experience increasing demands to include sustainability in strategy development. While sustainability may not be as directly related to the business core as in the first category, there are significant risks

related to underperformance. The potential upside of taking a clear sustainability posi-tion related to overall business and/or niche segments is significant. A combination of increasing regulations and changing customer preferences creates the opportunity to use sustainability for strategic differentiation. This is especially relevant in order to create a new competitive space and new market opportuni-ties, and to strengthen competitive advantage. Sectors included in this category are Property, Distribution and Retail.

In Property, the use of environmental friendly materials, energy efficient buildings and recycling are examples of issues where sustainability leaders could excel. Increased regulation of the industry may be appar-ent, as buildings alone represent 40 percent of CO2 emissions in Norway. Distribution companies’ key issues are related to both their infrastructure and their need for transporta-tion and logistics. Differentiation based on more energy efficient solutions and reducing carbon emissions represent possible strategic options for achieving and/or maintaining industry leadership. To retailers, the selection of consumer products, reduction of waste and of the use of energy, environmental packaging and new and innovative solutions for transport and logistics are all possible dif-ferentiation parameters.

Case: marks & Spencer’s plan a integrates key sustainability issues into every aspect of their businessmarks & Spencer is one of UK’s leading retailers, employing 75 000 people, and having more than 21 million people visiting their stores every week. M&S’s plan to grow into a world class retailer, includes an ‘eco plan’ for every aspect of the business to ensure sustainable growth. Plan A is a five year plan, consisting of 100 points to tackle environmental and social challenges. The ambitious plan is divided into five pillars, each with its own goals. By 2012, M&S aims to: 1) become carbon neutral, 2) send no waste to landfill, 3) extend sustainable sourcing, 4) help improve the lives of people in their supply chain and 5) help customers and employees live a healthier life.

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Category 3: Enhance value chain performance and increase stan-dards to put competition on defence

Sectors with moderate market opportunities and high demands to deliver environmental and social performance usually have strong regulatory regimes giving significant chal-lenges related to production, manufacturing and operating environment.

Companies in the Oil & Gas Service sector have faced strong regulations on HSE over time, and this has led HSE-issues to become incorporated into the daily operations. Being in an extremely carbon intensive industry, players have experienced increasing demands related to sustainability. The most likely scenario is that the demands will continue to increase, leading to a tightening of industry regulations. Thus, to ensure compliancy, leaders should strive to deliver beyond the imposed standards. Additionally, this sector offers attractive niche markets where sustain-ability represents new market opportunities. Examples are carbon capture and decommis-sioning of offshore installations, where win-ners capitalise on sustainability leadership.

Manufacturing is a diverse sector, but leading companies within this sector should investigate the entire value chain with re-spect to use of scarce resources, energy usage, recycling and carbon emissions. Companies with global operations also need to carefully address their impact on social, political and ethical performance in the countries where they have a presence.

Category 4: protect reputation and increase standards to put competi-tion on defence

In the category with the lowest score on sustainability demands and market opportu-nities, CEOs rate the increase in demands and opportunities resulting from sustainability as moderate. Thus, companies that fall into this category should also assess how sustainabil-ity could impact their competitive advantage. Typically, industries within this category are less raw material and energy intensive. Among the sectors analysed in this study, Fi-nancial Services and IT/Telecom are the only ones placed within this category.

Business ethics is as an area CEOs across all industries are looking into, but especially highlighted by CEOs in the Financial Services sector, as they are faced by ethical dilem-mas related to transparency and asymmetric knowledge of complex financial products. Early movers on sustainability within this sector are proactively using their investment placing power to influence companies to act upon sustainability issues. Other leading Fi-nancial Services companies have also created new products linked to sustainability, includ-ing renewable energy and clean-tech funds.

Vodafone, a leading European telecom pro-vider, estimates that 80 percent of its carbon footprint is associated with its network opera-tions. In this context, smarter and cleaner energy solutions can reduce both carbon footprint and spending. In addition, IT and Telecom companies can be key players in cre-ating more environmental friendly solutions

and interfaces like virtual meetings and video conferencing. The increasing globalisation of the industry also makes issues related to the societal dimension of sustainability essen-tial. In short, ignoring the environmental or social bottom line represents significant risks related to profit and company reputation, while mastering it create opportunities in new niche markets.

Case: Toyota has established a unique sustainability position within the automotive sectorToyota, headquartered in Japan, is the world’s largest auto-maker. They emerged as the sector sustainability leader as they responded to the concerns over automobile emissions by launching Prius, a hybrid electric/gasoline car, voted 2004 Car of the Year by the Motor Trend magazine. A saying is that; when California introduced regulations to promote hybrid cars, US manu-facturers hired myriads of lawyers to avoid the new regime, while Toyota hired engineers to take on the challenge and produce a quality car that fulfilled the requirements. Today, Toyota is recognised and awarded for their environmental commitment, while US manufacturers are struggling to survive through the present financial crisis.

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IT and Telecom companies must be conscious about sustainability issues because the sector represent parts of the solution – Executive, IT/Telecom sector

The rules of the game are chang-ing – managing sustainability is-sues emerge as a pre-requisite for success

The participating CEOs in our study expect the compliance level for environmental and social performance to increase, and thus affect their current balance between the fi-nancial, environmental and social parameters. The right combination of performance along the three dimensions will have to be assessed individually and as a part of the strategy process for every single company. As sustain-ability has emerged as a major buying criteria for both consumers and businesses, the at-tractiveness of sustainability leadership will increase, and in time offer superior returns for those who get it right.

There is no “one way” to achieve sustain-ability leadership. In order to balance all three dimensions, businesses must carefully consider risks and opportunities within their current business context and operating model. Companies will increasingly have to

investigate their strategic options and search for new potential sources of competitive advantage by carefully monitoring the cur-rent and expected development of customers buying behaviour, rules and regulations and competitor’s responses. Industry leadership can only be obtained by a limited number of companies. Nevertheless, business success for most companies will be influenced by the ability to manage the new game. By under investing in sustainability, companies run the risk of not being able to participate on the new strategic playground.

Mastering the Triple Bottom Line is about winning in a new competitive game. Failure to adapt will jeopardise the business perform-ance in the long term, while investing too much and too fast in sustainability related initiatives can ruin business performance in the short term (figure 5.3). The companies that excel in mastering the Triple Bottom Line, enabling strategic integration of sustain-ability issues with core capabilities, will also prevail in the market place.

Environmantal and Social Performance

NegativeReturns

Superior Returns

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Fig. 5.3.

1

Sustainabilityleadership

3

Overinvesting

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Successfuladaptor

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Non-compliant

Mastering the Triple Bottom Line

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Mastering the Triple Bottom Line – the way we see it

Based on insights from top executives in the Norwegian market we have argued that an offensive approach to sustainability will generate strategic opportunities across all the sectors represented in this study. There has been a change of business climate, also in the Norwegian context, generating new opportunities for companies evaluating their economic and social performance in order to assess how to balance their Triple Bottom Line. The findings from the interviews show that executing sustainability is far from easy.

When asked about the potential conflicts related to social and environmental perform-ance relative to financial performance, most CEOs are quick to pinpoint the distinction between short and long term considerations. As much as 71 percent of the interviewed CEOs see limited conflicts between sustain-ability and financial performance. However, short-term trade-offs will exist. The trade-offs may be modest for the most basic sustain-ability issues, as companies must ensure compliancy to earn a licence to operate and avoid practices putting the brand at risk. As companies increase their sustainability ambi-tion level, the trade-offs between the three dimensions of the Triple Bottom Line will increase, though. Addressing environmental and social issues often involves significant upfront investments, while the expected output is often uncertain and can be hard to quantify. An example is carbon neutrality, a valued environmental long term target. In most industries, reaching carbon neutral-ity requires significant investments in new

technologies and extensive trading of quotas. When detailing a carbon neutrality roadmap and setting explicit goals, executives face trade-offs between environmental and finan-cial performance measures.

The increased focus on sustainability among both CEOs and stakeholders implies that a new game has arisen, where the envi-ronmental and social dimensions of business create new opportunities. In the new game, companies must carefully adapt their busi-ness- and operating model to a new business climate where expectations to social and en-vironmental performance are fundamentally changed. Mastering the Triple Bottom Line is the key to success in the new game, and requires top executives capable of evaluating the trade-offs in a long term perspective and of taking advantage of the strategic opportu-nities in the new game.

Successful strategy implementation is de-manding both in terms of strategy formula-tion and governance. However, the premium for sustainability leaders is only expected to grow. While the interviews were carried out at a point in time where the Norwegian economy – as well as the rest of the world – was on the brink of a serious financial crisis, our continued dialogue with the interviewed CEOs suggests that the key findings are robust. The stakes are as high as ever, and by ignoring the environmental and social conse-quences, we believe CEOs are only postpon-ing the inevitable.

Sources:1) Capgemini 2007, “Future consumer – how shopper needs and behavior will impact tomorrow’s value chain”2) M. Porter and M. Kramer, 2006, “Strategy & Society – The Link Between Competitive Advantage and Corporate Social Responsibility”, Harvard Business Review3) S. Vallentin, 2003, ”Persionsinvesteringer, etik og offentlighed – en systemteoretisk analyse af offentlig meningsdannelse.” Copenhagen, Samfundslitteratur4) M. Morsing et al. 2008, ” The Catch 22 of communicating CSR: Findings from a Danish study,” Journal of Marketing Communications

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Capgemini Consulting– A trusted sustainability advisor

when results matter

Capgemini Consulting is a leading pro-vider of Management Consulting services in Norway and globally. We constantly strive to exceed our clients’ expectations by delivering realisable solutions and introducing lasting change. We assist some of Norway’s larg-est and most innovative organisations with making the right strategic decisions and im-plementing strategies for sustained improved performance. In Norway we offer a broad range of Management Consulting services within the areas of strategy, transformation and optimisation of support processes within finance and HR.

Capgemini Consulting’s sustainability practice helps assessing the right sustain-ability strategy for your business and enables your organisation for mastering the Triple Bottom Line.

ContactSteinar Simonsen, Head of Capgemini ConsultingPhone: +47 41 43 18 89mailto: steinar.simonsen@capgemini.com Bjørn Haas Brubakk, Vice President StrategyPhone: +47 41 43 18 83mailto: bjorn.brubakk@capgemini.com Anders Rygh, Head of Business Strategy and M&APhone: +47 95 11 81 33mailto: anders.rygh@capgemini.com Gard Nordby, Head of Corporate Strategy and GovernancePhone: +47 48 03 47 26mailto: gard.nordby@capgemini.com

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Capgemini, one of the world’s foremost providers of consulting, technology and outsourcing services, enables its clients to transform and perform through technologies. Capgemini provides its clients with insights and capabilities that boost their freedom to achieve superior results through a unique way of work-ing – the Collaborative Business Experience – and through a global delivery model called Rightshore®, which aims to offer the right resources in the right location at competitive cost. Present in 36 countries, Capgemini reported 2007 global revenues of EUR 8.7 billion and employs over 88,000 people worldwide. Capgemini Consulting is the Strategy and Management Consulting division of the Capgemini Group, employing 5,000 consultants worldwide. Leveraging its deep sectorial and business expertise,

Capgemini Consulting advises and supports organizations in transforming their business, from strategy through to execution, and delivers successful outcomes by working side by side with clients to identify the best solutions to critical business challenges.

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