Strategic Management and Sustainability #4
Sustainability and how it can be beneficial for businesses
Good morning dear readers,
in todays’ newsletter we will talk about how sustainability is not only an important mission to save the environment, but also how businesses can be sustainable and gain competitive advantage and other benefits from it.
You will find valuable insights on topics such as:
Sustainable production and strategies to implement it & examples
Sustainable sourcing for cost reduction
Green manufacturing
Sustainable branding
Sustainable resources and company’s image
In addition to this, we included some interesting resources for those of you who are interested in further information about businesses & sustainability.
We hope you enjoy this week’s issue. Feel free to contact us if you have any questions!
Ricky Dietl, Maria Giulia Armentano, Eva Gajate, Julia Kuzovkova
Students at University of Carlos III de Madrid
Today's newsletter is 1843 words, a 6-minute read.
Sustainable Production and Strategies to Achieve It
Switching to sustainable production is not only needed to save the planet, but it can be less expensive and more efficient for any business. Initial investments may be more expensive, because of the need for more costly materials and methods, but they will lead to vaster savings and attract more customers. It’s important to focus on increasing the efficiency of the production chain and not on reducing the costs for single segments of it.
In 2010 the Boston Consulting Group and the World Economic Forum conducted a research to find the companies with the most effective sustainable practices in the developing world. They identified the companies with the best sustainability practices: highly effective, innovative, and scalable. These companies are located across Latin America, Africa, the Middle East, Asia, and the South Pacific and they have followed one of three main strategies:
The first strategy consists of focusing on the long run and investing in more expensive methods that will eventually lead to lower costs and higher yields.
The second strategy is starting with small changes that generate substantial cost savings and then reinvesting the money saved to afford advanced technologies that make production even more efficient.
The third and last strategy is to spread sustainability efforts to the operations of customers and suppliers, meanwhile defying new business models that are difficult to be copied by competitors.
In the western world, companies tend to implement costly solutions to lessen their environmental impact. Unlike them, many companies in emerging markets start small.
Examples:
Florida Ice & Farm is Costa Rica’s largest beverage bottler, they started their sustainability journey by repairing water leaks in their production equipment.
The Manila Water Company in the Philippines took a similar path and initially focused on leaks too or illegal taps of its pipes. From 1997 to 2010, the company managed to recover an amount of water equal to the supply from a medium-sized dam that would have cost an estimated $750 million to build.
As low-cost moves save a business a larger amount of money, the business can reinvest it to fund purchases of expensive technologies and R&D initiatives that many western companies may have had from the beginning.
Some companies in emerging markets have obtained very large gains by extending their sustainability strengths to the operations of their customers, increasing their buying power and making interdependencies that are hard to emulate.
Jain Irrigation systems, in India, began as a supplier of irrigation systems for small farms. Irrigation systems are becoming crucial in India, farmers have traditionally relied on rainwater, but as the climate is changing and rain is lessening, their plantations are suffering, and farmers are going bankrupt. The issue was that most farmers needed financing to purchase Jain Irrigation’s systems and banks were reluctant to lend money to villagers that often didn’t even know how to write. The company decided to help them apply for governmental subsidies and it agreed to buy some of the crops their customers were growing using their systems and then reselling the produce. By customizing its business to local needs, Jain irrigation was able to outperform its competitors.
Natura, a natural-cosmetics company in Brazil has gained competitive advantage by working with rural communities, local governments, and NGOs to find ways to sustainably extract raw materials. After creating them, the company then teaches its innovative methods to suppliers. Thanks to its research partnerships, Natura can compete against large competitors who made larger investments in R&D.
Reducing Costs with Sustainable Sourcing
Running costs for buildings can account for up to 85% of total lifecycle costs of a company. However, energy-efficient resources can lower the costs of sourcing and manufacturing. While an energy-efficient building is more expensive to build, the resulting lower operating costs will generate a faster and higher return.
Reducing waste is another way to drastically reduce costs, this can be done in various ways: by shipping products efficiently, reducing sample runs and in-production waste, reducing air shipping in favor of less polluting ocean shipping and making use of full container loads (FCL) instead of less than container loads (LCL).
More and more customers are interested in sustainability and willing to pay more to purchase from sustainable companies. Sustainable sourcing and procurement can consequently also lead to marketing advantage through value creation. Companies have a competitive advantage over their opponents who aren’t using sustainable supply chain management.
It is crucial that businesses start to look over the bottom line and follow a stakeholder-centric approach. They must operate focusing on environmental, social and corporate governance (ESG) metrics.
Over than 50 per cent of global asset owners are actively implementing or reviewing ESG aspects in their investment strategy, according to a 2018 global survey by FTSE Russell, an index provider.
Bank of America Merrill Lynch discovered in 2018 that companies with a superior ESG track record outperformed their peers in terms of three-year returns, were more likely to become high-quality equities, had fewer big price drops, and were less vulnerable to bankruptcy.
Forward-thinking investors seek for actual evidence in a company's annual reports to ensure that the business is focused on material ESG issues. Companies focused on reducing emission or that implement internal carbon pricing are better prepared for a regulatory future where carbon is priced.
Green Manufacturing
Green manufacturing is a practice that focuses on reducing pollution and using less energy and less materials (preferably renewable and sustainable) in the manufacturing process. Waste reduction, including physical waste and emissions, occurs at all steps of the process. Moreover, sustainable materials are cultivated and harvested with methods not harmful to the environment and reproduce naturally and rapidly.
Green manufacturing may seem like a costly procedure, but here are some examples how companies can achieve cost reduction by implementing green practices:
Simplified packaging is less wasteful than elaborate packaging and creates sustainable cost savings;
Harmful waste products such as emissions and toxic byproducts are eliminated so that fines and penalties are also reduced;
Using non-toxic chemicals reduces the amount of water needed for production and waste disposal;
Recycling water offers additional cost savings by reducing the amount of fresh ground water needed and can be used to meet various needs from cleaning equipment to watering the lawn.
Energy efficient lighting is another way to reduce spending, and these lights last longer and require less electricity to operate. Solar panels are another way to reduce energy costs.
Sustainable Branding and Why It Matters
A sustainable brand is one that has successfully integrated environmental, economic and social issues into its business operations.
More than 90% of CEOs nowadays consider sustainability to be fundamental for success and a lot of companies are putting more and more attention toward their sustainability strategies. Here are some examples:
Developing sustainable products and services
Creating positions like Chief Sustainability Officer
Publishing sustainability reports
In addition to this, 88% of business school students consider environmental and social issues to be priorities in business.
Furthermore, more and more first-time entrepreneurs are building their companies around environmental protection. This has led to the rise of promising startups that focus on durable, eco-friendly and recycled products.
One thing can be said without a doubt: there is a huge rise of environmentally and socially conscious companies.
On the other side of the spectrum, modern consumers are ready for sustainable brands. They are becoming more risk-averse when it comes to spending their money and also spend more carefully than previous generations. However, when they do spend, there are some emerging patterns that favor sustainable brands. These consumers prefer to spend their money on brands that preach pro-social messages, apply sustainable manufacturing practices and exercise ethical business standards. Companies should be cautious to have proper messaging. If they do not show their customers what the brand is really doing, consumers will end up buying from their competitors. It is essential to pay special attention to what firms send out in press releases and on social media, as well as the general brand perception of the company, to ensure that the consumers know what you stand for.
Sustainable Resources and Company’s Image
Nowadays, it is of great importance that companies choose the right suppliers and manufacturers since they can carry some risk. For example, having a relationship with suppliers that support child-labour, bad working conditions or exploitation of workers can have a severe impact on the brand name.
Therefore, companies should invest in well established suppliers who can guarantee that such working conditions are not supported during the supply chain.
However, it is not always easy to ensure that the supplier that you have chosen is sticking to the regulations they claim, especially when your supplier is located in a different country.
Example:
Suggestions
🎙Podcast: The EY Sustainability Matters podcast on spotify or apple podcasts.
The EY Sustainability Matters podcast explores sustainability as a business issue. Hosted by EY’s Chris Hagler, the series offers insights on key business risks and opportunities, through an environmental, social, governance and sustainability lens.
📚Book: Corporate Sustainability in the 21st Century: Increasing the Resilience of Social-Ecological Systems
Corporate Sustainability in the 21st Century is an innovative new textbook which provides a fresh conceptual framework for understanding and engaging with sustainability, now and in the future - "Business In Nature." This book critically discusses key concepts and topics related to corporate sustainability, with a focus on corporate sustainability strategies and corporate value chains. Setting itself apart from existing books, it introduces ideas from global ecology and the natural sciences to provide readers with a new language for discussing business and sustainability.
🎥Video: Sustainable Business | Frank Wijen | TEDxErasmusUniversityRotterdam
Sustainability is a hot topic for businesses these days. But have companies been able to translate its theoretical principles into actual practices? By reviewing different interpretations and standards, as well as bad and good examples, Frank invites us to rethink business sustainability for the future based on 3 key principles.
Sources:
https://hbr.org/2013/03/making-sustainability-profitable
https://www.bomler.com/blog/how-sustainable-sourcing-can-reduce-cost
https://www.weforum.org/agenda/2020/01/sustainability-profitability-co-exist/
https://www.forbes.com/sites/theyec/2018/08/20/why-sustainable-branding-matters/?sh=481b7ece5b6e
https://investors-corner.bnpparibas-am.com/investing/sustainability-profitable/