While political players argue about it, businesses with a real commitment
to a future get going early in response to inevitable changes required for
by Sue Hall
ive years ago, during the celebrations of Earth Day
1990, I found myself repeatedly asking a simple question. Could companies
gain competitive advantage from becoming environmental leaders? There was
much noise and celebration surrounding corporations' contributions to the
environment. Lots of talk about pollution prevention, and the million dollar
savings that 3M had generated from its total quality environmental programs.
More intriguing, to my mind, were some of the companies which had begun
to mount more proactive, innovative initiatives. Wellman, for example, had
linked up with Pepsi and Coke bottlers to produce recycled PET plastic,
while Shaman Pharmaceuticals was researching potential new drugs by learning
from traditional indigenous healers.
Was the marketplace rewarding companies that had begun
to mount more proactive environmental initiatives? If so, we might be able
to more deeply harness the power of the marketplace to serve and support
So began five years of research and consulting designed
to explore this question. In every industry I have investigated to date,
I have found at least one company successfully "leading the change"
toward more sustainable practices to produce significant competitive advantage.
These companies have excelled beyond regulatory compliance, beyond the cost-saving
achievements of pollution prevention, to entirely redesign their products
and services to be more sustainable. Some have even changed their industries'
rules of the game, forcing their competitors to adopt similarly sustainable
These proactive companies were more successful because
they were willing to respond early to signals that the market was restructuring
in response to environmental challenges and were prepared to partner with,
rather than oppose, environmental stakeholders to co-create solutions to
tackle these issues. Having now researched dozens of industries and interviewed
as many companies to understand why such leadership has been rewarded competitively,
the following picture has emerged.
Market restructuring: a gateway to sustainability
What all of these leading companies recognized is that environmental forces
were beginning to restructure their marketplaces. These environmental forces
were causing whole product markets to go into serious decline, while creating
others to grow dramatically in their place. For example, as lead was phased
out of gasoline, sales of tetraethyl lead declined to virtually zero by
the early 1990s. By contrast, sales of MTBE, a safer antiknock replacement,
were rising dramatically. Sales of HCFCs had similarly expanded to replace
CFCs until they too declined in the face of further environmental opposition.
Across a broad array of markets downstream of the chemicals
industry - including pulp and paper, detergents, solvents, and gasoline
- the same trend could be seen. Chemicals like chlorine or phosphates that
were causing major environmental problems in downstream markets were suffering
serious decline. By contrast, chemicals that were helping to solve those
same problems were enjoying exceptionally rapid growth.
Similarly, in the oil industry, companies like Chevron were mounting serious
efforts to improve their environmental and social performance to gain a
share of the lucrative oil exploration market by becoming the operator-of-choice
in environmentally sensitive regions. Meanwhile, downstream, oil was losing
its share of the energy market to natural gas, which has much lower emissions
of SOx, NOx and CO2 per unit of energy.
These examples suggested that environmental concerns
were beginning to seriously restructure entire marketplaces, up and down
the value chain. Environmental challenges were becoming more than regulatory
issues for business. They were beginning to create profoundly market-based
challenges and opportunities.
A simple choice
I would argue that this market restructuring poses a rather stark choice
to companies. They can choose to deny this reality and continue with business
as usual, rather than innovating to create more sustainable products and
services. In this case, their businesses will continue to cause environmental
problems, fueling the market restructuring and ultimately creating a downward
competitive spiral for the company.
By contrast, a company can decide to learn from other
stakeholders - such as environmental groups, regulators and the media and
so forth - in order to create more sustainable products for its core businesses.
This decision further fuels the market restructuring, but this time to the
company's advantage. The creation of these green products in turn helps
to accelerate the pace of the environmental market restructuring, creating
new competitive rules of the game from which these leading companies are
uniquely well positioned to benefit.
The laggards' view
However, most companies do not recognize the potential of this environmental
market restructuring. When we surveyed the U.S. chemicals industry, we found
that managers saw only nine percent of their environmental challenges arising
in downstream markets, which were restructuring and creating major declines
and growth in their product sales. Similarly, less than eight percent of
environmental challenges were seen to be arising in upstream markets, where
companies like Chevron were seeking to gain market share by becoming the
environmental operator of choice.
Although most companies' policies (63 percent) focus
on compliance concerns, by contrast, their executives felt that 25 percent
of future opportunities lay in new business lines that environmental issues
were creating in downstream markets. A sea-change was in the air, which
some companies had begun to sense and capitalize upon.
The leaders' view
Leading companies have clearly gained competitive advantage by recognizing
and responding to this environmental market restructuring. Spanning over
a dozen industries, these companies have gained market share, increased
profit margins, or entirely changed the competitive rules of the game to
create incremental value for themselves - and for the environment - as a
result of their response to these environmental forces.
Take Henkel, for example, one of Europe's largest chemicals
and detergents companies. In the late 1970s, Henkel began to notice the
concerns rising in West Germany surrounding the potential impact of phosphates
in detergents on rivers and streams. At the time, Henkel manufactured 50
percent of the country's phosphates and sold 49 percent of its phosphate-based
Instead of attempting to downplay the
problem, Henkel decided to invest considerable R&D monies into finding
a substitute for phosphates. The company's success led to the surprising
and courageous decision to cannibalize both of its phosphates businesses
- up- and down-stream - and replace them with new products based upon their
newly patented substitute, zeolite.
Henkel was the first consumer products company to introduce
phosphate-free detergents in Europe, entirely replacing all their old product
lines. As a result, the company increased its market share from 16 percent
to 23 percent for its top brand in Germany, and strengthened its foothold
in the French market, gaining a six percent share for its new phosphate-free
brand. At the same time, Henkel, in conjunction with joint venture partner
Degussa, built a 70 percent market share of the European zeolite production
capacity, while its former phosphate production competitors were suffering
major overcapacity and hemorrhaging losses.
Gasoline, plastics, & pharmaceuticals
Similarly hopeful examples can be found in industries as improbable as oil
and gas. When Arco first noticed the likely shift towards lead-free gasoline,
it moved early into MTBE, ending up with the largest worldwide share of
this expanding market. More surprisingly still, Arco led its industry again
with a decision, in August 1991, to replace all of its leaded gasoline sales
in California with a new reformulated product, EC1. EC1 is a specially designed
substitute formulated to run on pre-1975 cars, which accounted for only
15 percent of gasoline sales but 30 percent of the California auto pollution
problem. Arco's market share rose dramatically from under 17 percent to
over 25 percent in just nine months.
Leaders can even be found in industries as notorious
as plastics. Wellman, for example, sustained a 40 percent growth rate and
21 percent return on equity over a period of six years when, almost a decade
ahead of other plastics companies, it took on the challenge of creating
the market for the recycled plastic, PET. Wellman teamed up with a set of
non-traditional allies, including Coke and Pepsi bottlers who were recovering
their used PET bottles from the bottle-bill states. This leadership helped
PET become one of the most heavily recycled plastics - which in turn enabled
PET to gain market share over rival resins, enhancing Wellman's sales still
As competitors began to invade Wellman's niche, it expanded its recycled
product range downstream into the fibers business, helping to catalyze yet
another high-value recycled materials market by selling these Coke and Pepsi
bottles to Patagonia to manufacture a new line of "recycled" fleecy
Other companies have begun to change the rules of the
game in their industries. Shaman was formed five years ago to develop pharmaceutical
drugs by learning from traditional indigenous healers which plants they
use to treat various diseases. When these plants are tested for effectiveness
in treating those diseases, half the plants test positive - a hit rate over
50 times that of most drug companies.
Two Shaman drugs, now in phase II testing, may complete
their FDA trials within seven to eight years of their initial plant screening,
compared to an average of 10 to 12 years for conventional drug companies.
Since the FDA grants patent protection - and thus exclusive "monopoly"
profits - to drug companies for up to 17 years after initial screening,
this could provide Shaman with up to four years' additional protected revenues
Shaman plans to share the profits from these potentially
billion-dollar drugs with the indigenous communities from whom it first
learned of such possibilities - offering an alternative revenue source to
oil and timber extraction for these vulnerable peoples.
Outstanding leadership can even be found in products as humble as baking
soda. It was members of two Canadian environmental groups who first knocked
on Bryan Thomlison's door at Arm & Hammer, the baking soda company,
to ask why the company was not educating consumers about baking soda's use
as an alternative, non-toxic cleaner. Thirty-six months later, baking soda
sales had risen 30 percent - in an industry in which sales had been stagnant
Thomlison began to deepen his relationships with other
environmental stakeholders - environmental groups, educators, the media,
regulators, and beyond. Further innovations followed. One of the founders
of Earth Day USA asked if baking soda had ever been used to clean printed
circuit boards, where traditional solvent cleaners were creating major CFC
and VOC problems. Thomlison put them in touch with the head of Research
and Development. Two weeks later a prototype product was developed, which
now forms the basis for a full line of patented industrial cleaners.
Arm & Hammer probably works more closely with environmental
stakeholders than any other U.S. company. Recently, we measured how much
incremental value this stakeholder approach has created for the company,
evaluating its contribution to new product development, revenues, and profit
margins. While 15 percent of company revenues are derived from the "green"
market, the company's stakeholder approach alone contributes an entirely
incremental five percent of revenues. These incremental sales are created
by the additional "green" consumers that this uniquely powerful
stakeholder approach attracts. Furthermore, Arm and Hammer has found that
its stake-holder strategy is twice as cost effective as traditional marketing
approaches, generating $10 for every $1 invested, compared to $4 for the
company's traditional marketing approach - yet another source of competitive
Why were these leaders successful?
What do leading companies do right?
Successful companies learn how to predict and lead their
markets as they restructure towards more sustainable products and services.
Like Henkel, with the specter of phosphates looming, or Wellman, operating
in the increasingly controversial plastics industry, these leaders recognize
that environmental concerns can and will reshape their markets in profound
Successful companies collaborate with environmental
stakeholders to envision new solutions to environmental problems. Then they
embed these solutions into their core businesses, fueling the restructuring
of the market in ways that powerfully benefit their bottom line.
Successful companies make a clear up-front commitment
to become a part of the solution. This commitment enables them to build
the trust required to foster strong learning and innovation across stakeholder
Successful companies explicitly invest in long-term, learning-oriented relationships
with stakeholders to co-create these growing businesses. They do not seek
to persuade or negotiate with stakeholders to defend poor business practices
- a fundamentally different process.
Companies have not traditionally recognized the value
of including environmentalists and indigenous people along with customers,
suppliers and investors in their core business decisions. However, creating
learning-oriented relationships with stakeholders can help a corporation
answer questions central to its future, including questions about market
restructuring and potentially profitable solutions to environmental challenges.
Such learning can help a corporation build competitively powerful and sustainable
The bottom line
Overall, the answer to the question, "Can it be profitable to conduct
business in sustainable ways?" is certainly "Yes." Companies
have gained competitive advantage by leveraging the environmental forces
that are already reshaping and restructuring their marketplaces to create
profitable business solutions to environmental challenges. This success
often depends upon the quality of learning and innovation that these companies
build into their relationships with environmental stakeholders. As a result
of these companies' leadership, whole markets have continued to restructure
towards more sustainable solutions.
By contrast, companies can choose to deny these new
realities - and fail to introduce sustainable innovations. However, their
businesses will continue to cause the environmental problems that fueled
the market restructuring and ultimately create a downward, uncompetitive
spiral. A profound lack of sustainability is certainly the hallmark of companies
whose industries now face "dinosaur extinction" status. Decommissioning
costs for the nuclear industry, for example, and even Superfund clean-up
costs for chemicals, place the long-term viability of both these industries
in doubt unless ways can be found to pass the bill on to taxpayers.
The new paradigm may not, in fact, leave companies with
much of a choice at all over the longer term. Interestingly, between 1979
and 1989, 47 percent of the "Fortune 500" organizations dropped
off the "top 500" list there because they were not adaptive enough.
As one commentator concluded: "In the next decade, change or die."
As the magnitude of the environmental challenges we face increases, sustainability
will also increase in its effectiveness as a competitive strategy. Businesses
may therefore find themselves saying over the next few decades: "Sustain
Sue Hall founded Strategic Environmental Associates in 1992 to assist
companies and other stakeholders in creating business-based solutions to
environmental problems. She is also Executive Director of the Institute
for Sustainable Technology (IST). The research in this article was done
while a research fellow at Harvard Business School in 1991. You can reach
Sue at IST, 4 Chenowith Road, Underwood WA 98651.
This article was reprinted with permission
from In Context, published quarterly by Context Institute, an independent,
non-profit, tax-exempt corporation dedicated to sustainability research
and education. Address: P.O. Box 11470, Bain-bridge Island, WA 98110. Phone:
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