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The
Natural Advantage of Nations (Vol. I): Business Opportunities,
Innovation and Governance in the 21st Century
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 This
book is about innovation, solutions, competitiveness
and profitability. It is also about building environmental
integrity and sustainability now and for future generations.
It draws a bold vision for the future and tells us
how to get there by building on the lessons of competitive
advantage theory and the latest in sustainability,
economics, innovation, business and governance theory
and practice. The authors incorporate innovative technical,
structural and social advances, and explore the role
that governance can play in both leading and underpinning
business and communities in the shift towards a sustainable
future. The result is nothing less than the most authoritative
and comprehensive guide to building the new ecologically
sustainable economy. (more...)
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Chapter
6 (Part 7) - Increasing Profitability and Minimizing
Risks (Porter's 5 Forces Model)
Given
what has been covered in the preceding sections,
it should come as no surprise that in a US study
covering a ‘large and representative’
sample of US companies (330 from S&P500) it
was found that adopting a more environmentally pro-active
approach reduces operating costs together with ‘a
significant and favourable impact on the firm’s
perceived riskiness to investors and accordingly
its cost of equity capital and value in the marketplace.’
The authors suggested this could increase a firm’s
stock price by as much as 5 per cent.[54]
The biggest driver for sustainability in business
will be its capacity for improving profit margins,
reducing risks and building key assets such as reputation,
attracting and retaining staff and access to capital.
Students of business strategy will recognize that
adopting a strategy of sustainable development will
help many firms constructively address the issues
and risks for business summarized in Porter’s
5 Forces Model. For those not familiar with the
5 Forces Model, it is regarded as one of the leading
guides and checklists for the main factors that
influence businesses profitability.
The 5 Forces Model focuses on addressing and minimizing
risks to business and strategically maximizing positive
outcomes (see Figure 6.3).
Due to space restrictions in this book we cannot
consider in detail all aspects of the 5 Forces Model
and how sustainable development strategies for business
help to address them. Instead, we will provide a
thumbnail sketch of some of the key issues under
the 5 themes.
Threats of new entrants
Unlike previous waves of innovation that affected
only specific sectors, innovation for sustainable
development will affect all industries, as industry
affects the communities and environment within which
it operates. Increasingly, threats from many overseas
firms are emerging because many national research
bodies are increasingly focusing on this challenge
of eco-innovation for a sustainable future. This
means, therefore, that all sectors will be threatened
by businesses, both small and large, that actively
commercialize new eco-innovation arising from partnerships
with these major research bodies, as well as from
internal commercial R&D. Numerous firms are
already responding profitably to threats from new
products and services. In response to the threat
from the fast growing renewable energy market, fossil
fuel companies, such as BP and Shell, have undergone
major changes in their mindsets and now see themselves
as energy providers. Aidan Murphy, Vice President
of Shell International, says the Kyoto Treaty has
prompted the British-Dutch oil company to shift
some of its focus from petroleum towards alternative
fuel sources. While the move has helped the company
make early strides towards achieving its goal of
surpassing treaty requirements and reducing emissions
to 10 per cent below 1990 levels, he says Shell
is being driven largely by the lure of profits.
We are now involved in major energy projects involving
wind and biomass, but I can assure you this has
nothing to do with altruism. We see this as a whole
new field in which to develop a thriving business
for many years to come. Capital is not the problem,
it’s the lack of ideas and imagination.’[55]
Shell’s position is indicative of an important
shift that has taken place in the mindset of multinationals
over the past two decades, which is evidence of
a more general shift in thinking amongst business
leaders.
Threat of substitute products or services
Firms and nations that ignore the sustainability
revolution will be left behind and expose themselves
in the long term to serious risks. In order to achieve
truly sustainable solutions to the challenges facing
our civilization, there is a need for radical technical
change to develop new goods or services which offer
improved environmental performance at lower prices.
New forms of service delivery are enabling companies
to achieve this whilst also building greater customer
loyalty and long-term competitive advantage. BP
realize they are no longer a fossil fuel company:
they are providing energy services. Ford understand
that they are not simply a car company, but rather
providers of mobility services. Dow Chemical doesn’t
just recycle toxic chemicals: it provides chemical
services. Likewise, mining companies are increasingly
diversifying into metal recycling, paper companies
into paper recycling and so on. Most industrial
processes have not been designed for sustainability.
Much supposed ‘green development’ is
so far from being that, that there is still significant
scope for innovation in order to achieve genuine
sustainable development. Increasing percentages
of national R&D budgets are being spent on this
eco-innovation and on technologies to better manage
the environment. This is generating a continual
flow of opportunities for firms to commercialize
these innovations. Combining the latest in competitive
advantage theory with the latest in eco-design,
eco-innovation and lean thinking will help firms
to target the higher end segment of the market where
they can
command higher returns for their products and services.
Bargaining power of buyers
Large multinationals are often significant purchasers
in their own right. Increased scrutiny of multinational
corporations has meant that many of them are committing
to sustainable development strategies. Over the
past five years, numerous large companies have gone
to great lengths to incorporate the language and
verbal commitments of sustainable development into
their operations. Increasingly, these multinationals
realize that a genuine commitment to sustainable
development in their own operations is not sufficient
as a significant part of their ecological footprint
is determined by what they buy from their suppliers.
In addition, multinationals are looking for ways
to ensure that their suppliers are not acting unethically
anywhere in the world and that the quality of product
from their suppliers is also guaranteed. This is
having a significant effect. Asian businesses are
moving to adopt ISO 14001 because transnational
corporations (TNCs) like IBM say they will favour
ISO 14001-certified suppliers. Companies that have
strong supply networks and are intent on implementing
and improving ISO 14000 and other standards are
already encouraging environmental efficiencies in
their suppliers. Ford, Nike and IBM are companies
which have demonstrated success in pressuring upstream
companies in this way.[56]
A further example is General Motors (GM), which
requires its supply chain to recognize issues of
‘continuous improvement, eco-efficiency, reducing
waste in material, energy and resource usage, design
for the environment, and recyclability.’[57]
The Warehouse Ltd, New Zealand’s largest mixed
retailer, has an annual turnover of NZ$1 billion.
In 1999 it declared a national corporate goal of
zero waste. To minimize the waste generated in stores,
the company’s buyers have been given a radical
packaging reduction target in their ‘terms
of trade’ document. This means that The Warehouse’s
buyers and suppliers have to work together to address
packaging issues.[58]
A further example is that of Nike when, about 5
years ago, it began addressing a serious discrepancy
between its goals and its practice. Created to encourage
health and vitality, Nike realized that it was making
products that included potentially harmful chemicals.
The company now markets an entire line of organic
clothing, made from cotton produced by small farmers
around the world, and are revamping their entire
chemical supply chain. Their goal is to mass-produce
non-toxic organic fibres for all their products.
This is creating new markets for organic cotton
farmers around the world. In Europe, supermarket
chains are increasingly purchasing organic produce
in response to increased demand from the public.
Despite these changes by progressive supermarkets
in many countries, including Australia, supermarket
chains have been slow to embrace organic agriculture.
One of the biggest obstacles to the mainstreaming
of organic agriculture has been building sufficient
scale in the industry in order to overcome supermarkets’
fears regarding the industry’s ability to
deliver on promised supply. The scale of an organic
industry in its infancy does not compare to the
equivalent in mainstream agriculture. Hence, buyers
have enormous power to make or break businesses
in industries that are still niche markets. Therefore,
companies that can find ways to break through these
barriers through their own value adding strategies,
can achieve real lasting competitive advantage.
An
example of this is organic agriculture, as highlighted
in a 15-year study by ANU agricultural systems researcher
David Dumaresq, who compared an existing organic
wheat farm which had been functioning for 40 years
with comparable conventional farms.[59]
‘While organic yields were lower than conventional
crops, costs per hectare were lower and returns
were much higher because of the premium for organic
produce. If we assume that the farms are run in
a similar way, organic wheat is substantially more
profitable than conventionally grown wheat’.
The organic farm in the study and the historic ‘Junee
Flour Mill’ built in 1934–1935 is currently
operated by Green Grove Organics, to target this
growing niche market. Dumaresq points out that ‘Wheat
farmers typically sell their wheat for AU$200/tonne.
Organic wheat farmers for AU$400 a tonne but by
value adding with their confectionary mill these
organic farmers are effectively earning AU$8000
a tonne for the organic wheat is sold now as part
of confectionary rather than straight wheat grain.
The first export of organic confectionary to the
USA was in 2003.’ Organic agriculture is established
worldwide. Many countries regulate locally based
organic production by government and non-government
certification. Scotland has a target of an organic
sector that makes up 20 per cent of its agriculture
sector. The industry’s peak international
body is IFOAM, the International Federation of Organic
Agriculture Movements, established some 25 years
ago, and now has 527 member organizations in 92
countries including five in Australia.
One
of the most interesting examples of buyers’
commitment to sustainability having the potential
to influence the rest of the supply chain comes
from the lean thinking work of Tesco, a large supermarket
in Europe. Working with Tesco, leading ‘lean
thinking’ experts like James Womack, from
the Japan Program at MIT, and Professor Daniel Jones,
the Head of the Lean Enterprise Research Centre
at the Cardiff Business School worked to reduce
waste throughout its operations. ‘Lean Thinking’
defines waste, according to its founder, Tauchi
Ohno, famous CEO of Toyota, as ‘any human
work that uses resources but creates no value.’
The six types of waste can be defined as:
1
Defects (in products).
2 Overproduction of goods not needed.
3 Inventories of goods awaiting further processing
or consumption.
4 Unnecessary processing.
5 Unnecessary movement, transport (of people and
goods).
6 Waiting (for process equipment to finish its
work or on an upstream activity).
With
Womack and Jones’s team from the Lean Enterprise
Institute, Tesco was achieving great progress in
making its own operations lean, having dramatically
reduced the instances of not stocking a requested
product, whilst reducing its inventories by half.
Tesco realized, however, that to further reduce
its waste it would need to work with its suppliers
to help them become more responsive to fluctuations
in supply and demand. Womack and Jones claim that
85 per cent of the costs to Tesco are outside its
control. Hence, Tesco became very interested in
understanding ways to help its suppliers become
lean. Womack and Jones considered a particular Tesco
product, a generic cola can, as a case study to
illustrate this style of thinking. A detailed analysis
of the value stream (supply chain) for the cola
can (see Figure 6.4) showed that there were four
main chains:
1 from the aluminium bauxite mine to the can maker;
2 from the corn field through a process to the plant;
3 from turning beet into sugar, storing it; and
finally
4 wood from the fir forest to create cardboard packaging.
Source:
Womack and Jones (1996, p42)
Figure 6.4 Confluence of cola
value streams
By
far the biggest source of waste was the process
of mining and refining the aluminium: from bauxite
ore in Australia to the can maker took over 200
days. This process was the main reason why 319 days
elapsed from the start of the process at the bauxite
mine to the placing of the can on the Tesco shelf.
In addition, their research showed that the can,
and the aluminium it is made of, are picked up and
put down 30 times. Further, the aluminium and cans
are moved through 14 different storage lots and
warehouses. This left the two eminent industrial
economists with no choice but to state the obvious:
‘Currently, only 16 per cent of aluminium
cans in the UK are recycled… If the percentage
of cans recycled moved towards 100 per cent, interesting
possibilities would emerge for the whole value stream.
Mini-smelters with integrated mini-rolling mills
might be located near the can makers in England,
eliminating in a flash most of the time, storage,
and distances involved today in the steps taken
by most cola can makers.’ They argue further
that: ‘the slow acceptance of recycling is
surely due in part to the failure to analyse costs
in the whole system rather than just for the recycling
step in isolation’.[60]
Hence, this work is showing the real benefits to
the economy of increasing recycling, helping to
make the economy a more closed-loop economy. The
Lean Thinking concept arose from the opportunity
to reduce costs by reducing waste. Its success also
produced environmental benefits. Professor Jones
now sees the next logical step for lean thinking
as the application of its lessons to environmental
challenges. Their work is important because it is
showing that significant labour productivity as
well as resource productivity gains can be made
simultaneously through this strategy. In addition,
reducing global inventories in the long term will
allow multinational significant capital savings
due to requiting less storage and handling of materials
and supplies globally. Their work is important in
that they have shown there are significant economic
gains obtainable, through lean production, that
will offset the short-term costs of adopting new
environmentally motivated technologies and continue
to supply savings into the future. Professor Jones
is currently engaged in a ten-year project to investigate
how businesses can best minimize their impact on
the environment.[61]
He is working with a range of people and bodies,
their aim being, as he says: ‘Not to dream
about high tech solutions. But to find the next
steps, the win–win opportunities that we can
take together. To think about how we can design
our supply chains for the future and to think about
efficient consumer response for the next ten years.’[62]
Power of suppliers
The main development that is making industry wake
up and take notice of sustainable processes, is
the range of products that can be produced, with
no increase in cost, and that can actually save
you money whilst being better for the environment.
The combination of product differentiation and same
or less cost will give any firm in any industry
competitive advantage. How can traditional paint
companies expect to compete with suppliers of paint
that has very low to zero volatile organic compounds
(VOCs), that has amazing durability, and is cost-competitive
with conventional products, such as Oikos in Europe
and Rockcote in Australia. Or the Easiwall, a straw-based
Australian wall panel that can save AU$15/m2 on
interior wall construction, is quick to erect, and
replaces timber studs and plasterboard together.
Or the Interface graphlarbacked (PVC-free) modular
carpet system that is now available in Australia
under a lease or rental scheme. Interface use a
proprietary low-VOC glue and, under the lease scheme,
will replace any worn tiles over the life of the
contract, ensuring a floor that looks 100 per cent
over its entire life. Indeed new products are emerging
almost every day. An Australian company has just
begun producing a 1.5W light emitting diode exit
light with a battery backup. A super-efficient light,
it has significant environmental benefits over conventional
exit lights, including dramatically reduced power
consumption, but at no increase in costs.
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References
54.
Feldman, S., Soyka, P. and Ameer, P. (1997) 'Does
Improving a Firm's Environmental Management System
and Environmental Performance Result in a Higher Stock
Price?', ICF Kaiser International, The Journal
of Investing, Winter, pp87-97. (Back)
55.
Drozdiak, W. (2000) 'Firms Become "Green" Advocates
Global Warming Talks Near End', Washington Post. (Back)
56.
Lovins, L. H. and Link, W. (2002) Insurmountable
Opportunities?: Steps and Barriers to Implementing
Sustainable Development, Comments to the UN Regional
Roundtable for Europe and North America, Vail, Colorado.
(Back)
57.
Ibid. (Back)
58.
NZBCSD ( New Zealand Business Council for Sustainable
Development) (2002) Industry Guide to Zero Waste,
NZBCSD, August. (Back)
59.
Dumaresq, D. and Greene, R. (2001) Soil Structure,
Fungi, Fauna & Phosphorus in Sustainable Cropping
Systems, Rural Industries Research and Development
Corporation (RIRDC). (Back)
60.
Womack, J. and Jones, D. (1996) Lean Thinking:
Banish Waste and Create Wealth in Your Corporation,
Touchstone & Design, New York. (Back)
61.
Jones, D. (2003) 'Supply Chains of the Future', presentation
to the Efficient Consumer Response (ECR) Conference,
Berlin, Germany. (Back)
62.
Ibid. (Back)
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