Why disruptive sustainability is the new leadership framework
<p>Has Harvard guru Michael Porter become sustainable business's newest hero?</p>
At the recent GreenBIz Forum 2013 in New York, there was an informative and energetic panel discussion, “The Power of Wall Street in Promoting Sustainability,” with Erika Karp, head of UBS Global Research and Matt Arnold, head of environmental affairs at JP Morgan Chase.
In trying to forge the link between sustainability and business drivers like revenue and ROI, Karp said “It’s not easy to prove this case … but they [Julie Hudson of UBS London and her team of ESG analysts] have figured out how to use traditional business analysis, Michael Porter of Harvard ‘Five Forces’ analysis, to talk about what [are] the most material issues, risks and opportunities, facing an industry and even facing a company … and when you have a framework, this is how you make things systematic.”
Using traditional business analysis to elucidate the bottom-line benefits of sustainability seems logical. After all, to show the relevance and applicability of sustainability to business metrics you need to speak the traditional language of business, and the keepers of that language are found in places like Harvard Business School and personified by people like Porter. Logical as that seems, is traditional business analysis really the correct approach? As corporate responsibility and ESG professionals plead their case for relevance using the language of business strategy, Porter, the chief architect of that language, is changing the vocabulary -- and even more broadly, he is building an entirely new framework.
Creating Shared Value
When Porter speaks today, he is unlikely to emphasize his Five Forces of competitive strategy (1. Bargaining power of suppliers, 2. Bargaining power of customers, 3. Threat of new entrants, 4. Threat of substitute products, and 5. Competitive rivalry within an industry). Instead, he is more likely to point out six ways the capital markets are undermining value creation. In a 2011 presentation Porter made at a UBS conference in New York, he listed these value destroyers as:
- Search for short-term “surprises” in earnings or revenue.
- Use of industrywide metrics that are misaligned with true economic value and drive strategic convergence.
- Encouraging companies to emulate currently “successful” peers.
- Strong pressure to grow faster than the industry.
- Bias in favor of “doing deals” (M&A).
- A narrow view of economic value creation that overlooks shared value.
Porter is attacking management’s short-term orientation, its blind use of metrics, its worship of growth, its groupthink and its narrow perspective.
This is not the typical message coming out of B-schools, and sounds a lot closer to ESG and CSR than Harvard. His criticism of the capital markets is part of larger framework for thinking about business strategy that Porter calls “Creating Shared Value” -- a crunchy name itself. It is hard to imagine that this is Michael Porter of Harvard Business School, once called the father of competitive strategy, sought after by the world’s biggest corporations and institutions for his insights into fierce global competition. He’s now talking about, of all things, sharing? What changed?
A lot changed: the collapse of the credit markets in 2008, the poor record of job creation and middle-class income growth in the last decade, the expanding concentration of wealth, the lack of U.S. leadership on global issues like climate change and in new sectors like clean energy. And the never-ending federal budget morass. Just this month, a poll by HBS of nearly 7,000 alumni business leaders found those foreseeing a decline in U.S. competitiveness outnumbered by more than 2 to 1 those predicting an improvement.
In formulating the Creating Shared Value framework, Porter may have come to realize that the current state of U.S. competitiveness is due in part to business education over the past 30 years that encouraged the next generation of business leaders to take actions that solely benefited their own firms even while they collectively weakened America's business environment. Porter goes so far as to say that the benefits of the capitalist system are not being seen by greater society. It’s not that profit is inconsistent with society’s needs, but rather it is seen as coming at the expense of society rather than to its benefit. If the 20th century model for capitalism was “What’s good for business is good for society,” Porter sees the 21st-century model as the converse: “What’s good for society is good for business.”
Again, this sounds a bit too much like CSR- and ESG-speak, with the argument for doing good evolving into doing well by doing good. Yet sustainability is moving on from doing good and doing well to a third phase, doing differently, and while UBS’s ESG team may want to talk about doing well using the traditional language of business, it is strategists and gurus like Porter who are recalibrating their theories and ideas for doing differently. And Porter is not alone.
Another Harvard professor, Clayton Christensen, is also pushing back against the business-as-usual mindset of “measure what you manage and manage what you measure,” which has also infiltrated the CSR and ESG vernacular. Christensen has said “[T]he way they designed the world, data is only about the past. And when we teach people that they should be data-driven and fact-based and analytical as they look into the future, in many ways we condemn them to take action when the game is over.” Christensen is the author of "The Innovator’s Dilemma," a book that became an innovation bible in Silicon Valley in the late 1990s and influenced many business leaders, including Apple’s Steve Jobs and Intel’s Andy Grove, helping them handle disruption within their industries. (One might ask why it is that when Harvard Business School talks about disruption it makes the cover of Forbes, but when sustainability professionals talk about resilience -- the ying to disruption’s yang — it’s lucky to make it into the corporate CSR report.
Next page: Extrapolation ≠ prediction
There are other leading business thinkers past and present, including Peter Senge, H. Thomas Johnson, Francis Gouillard, W. Edwards Deming and others who in their own way have shown the power of sustainability as an organizing principle for business. Sustainability is strongly influencing the analysis in a number of business sectors -- many leading food and beverage and consumer products companies are working closely with NGOs like WWF, EDF, Rainforest Action and other groups that bring a deep understanding of sustainability and decades of experience. These engagements require a new way of thinking for business -- that measuring what you manage and managing what you measure frankly is not enough. Extrapolation ought not be confused with prediction. To address the problems facing business in the 21st century will require entirely new thinking.
Fortunately, new thinking is still a transformational force in business. As JP Morgan's Arnold, the other speaker on that Wall Street panel at the GreenBiz Forum, pointed out, some companies as they think about sustainability are looking beyond responsibility and opportunity and seeing disruption. This disruptive threat is pushing them forward and yielding transformational change. He gave the example of Novelis, which is looking for ways to make aluminum cans without mining bauxite. CEO Phil Martens has pledged that by 2020 the cans Novelis sells will be manufactured with 80 percent of the aluminum coming from recycled cans. They call it the EverCan. “[T]hey are disrupting not just their company, but their entire industry,” Arnold said. “And their sustainability strategy … is their business strategy.”
The new mantra of sustainability is becoming “disrupt or be disrupted,” and there are many examples of disruptive sustainability emerging in today’s economy.
When a house can be heated and cooled to the same level of comfort using only 5 percent of the energy of a conventional home of comparable size -- that’s disruptive sustainability.
When a high performance zero-emissions automobile can be driven from New York to Boston, with a half-hour pit stop for refueling -- and the fuel is free -- that’s disruptive sustainability.
When the relationship between a utility and its customers is fundamentally redefined by changing roles -- customer as generator and seller of clean energy and utility as buyer and distributor -- that’s disruptive sustainability.
When a company that uses garbage as the source for making 300 million pounds a year of high-grade plastics that satisfy the most exacting customer requirements -- that’s disruptive sustainability.
When a small home-cleaning supplies startup can capture ever-growing market share from industry giants because its products don’t leave a thin film of toxins on kitchen and bathroom surfaces and actually clean them better -- that’s disruptive sustainability.
When new financing models take the capital and operating expenses out of the cost of clean energy and provide electricity at competitive rates that are fixed for 10 years -- that’s disruptive sustainability.
When a 100 percent recyclable industrial carpet, designed using a rainforest floor as inspiration, becomes the best-selling product in the company’s history and redefines an industry -- that’s disruptive sustainability.
When a major real estate developer announces the construction of the largest net-zero-energy commercial building in the United States, and finds it fully leased two years before it even opens -- that’s disruptive sustainability.
When a five-year-old hospitality company helps property owners increase their asset utilization through sharing and renting among peers, and brings in hundreds of millions of dollars in annual revenues without building, owning, leasing or managing a single property -- that’s disruptive sustainability.
And when Michael Porter replaces his Five Forces framework with Creating Shared Value -- maybe that, too, is disruptive sustainability.
In the final analysis, management is prediction. Data can inform, but it alone cannot predict. As Christensen once observed, ”The only way you can look into the future -- there’s no data -- so you have to have a good theory. We don’t think about it but every time we take an action it is predicated upon a theory. And so by teaching managers to look through the lens of the theory into the future, you can actually see the future very clearly. I think that’s what the theory of disruption has done.”
My advice to CSR or ESG professionals: Don’t look to a 30-year-old framework from Harvard Business School to show relevance; formulate a good theory -- a compelling, credible, disruptive theory -- and make your case based on that.
Image by Tatiana Popova via Shutterstock