By Dave Newman
Senior Strategist, Brightworks Sustainable Systems Group
Businesses with global value chains can find any of their three core responsibilities – meeting consumer demands and legal requirements while also making profitable products – suddenly disrupted by sustainability-related trends and impacts.
Companies often have difficulty understanding how these issues may affect their value chain of suppliers, operations, customers and consumers. And if the issues are understood, how will they influence corporate strategy and deployment of resources?
We at Brightworks use a systems thinking approach that looks beyond the problem at hand to include all the related possibilities. Systems thinking enables companies to design and implement strategies that reduce market uncertainties.
How Unsustainable Practices Create Risk
The risks and uncertainties inherent in emerging sustainability trends and impacts can be illustrated by several examples:
- Energy costs: A primary economic threat for most companies, and especially in extended value chains, is the unpredictable, volatile cost of energy, mostly tied to the cost of oil. Oil is the material basis of many products and provides the primary feedstock to transport goods from manufacturers to markets across the globe. So, what happens when the price of oil rises from $90 a barrel to $125…$150…$200? These price fluctuations put profitability at a high risk.
- Consumer expectation: Consumers and customers vote with their dollars every day when they purchase goods and services. Growing numbers of global consumers do care about their environment and want to purchase products from companies they believe are good corporate citizens.
- Pressure from business: Businesses are also dictating the demand for sustainable practices among their suppliers. Walmart, for instance, introduced a Sustainability Index in October 2009 to their largest suppliers. Their goals were to help create a more transparent supply chain, accelerate the adoption of best practices, drive product innovation and ultimately provide their customers with information they need to assess a product’s sustainability. If a supplier receives a failing score, it may at some point be dropped as a Walmart vendor. Other well-known companies, including Proctor & Gamble and Staples, have introduced sustainability scorecards, ratings and performance targets for their suppliers. Expect more businesses to introduce environmental programs targeted to their suppliers. Those suppliers ignorant or dismissive of this trend stand to lose business.
- Legal risks: In 2009, the State Council of China announced that China will commit to reduce its carbon intensity (defined as a reduction in CO2 per unit of gross domestic product) by 2020. It is highly likely that the carbon intensity goal will bring with it a similarly serious commitment and effort on the part of the Chinese government. For many businesses, the Chinese commitment provides certainty. That’s not the case in the U.S. The Environmental Protection Agency formally declared that carbon dioxide from the burning of fossil fuels poses a threat to human health in 2009. However, this “endangerment” finding has been challenged in federal court. No one in the U.S. can be certain EPA or Congress will establish any CO2 regulations.
Turning Risk Into Opportunity
With risks like these posing threats to manufacturers, no wonder leading companies are planning ahead instead of waiting to be disrupted.
Consider, for example, Nike’s goals for footwear manufacturing: zero waste, zero toxics and 100% closed loop systems by 2020. Waste from footwear production was substantial and often was incinerated or sent to landfills. In pursuit of its goals, the company sought to reduce post-manufacturing waste and responsibly manage its disposal. If Nike had viewed this as an issue-specific, isolated problem, it might have mitigated the risk by simply purchasing a different feedstock or attempting to recycle more. By viewing the solution as part of a connected system, Nike was able to achieve greater environmental and business results.
Post-production rubber from the creation of outsoles produced one of the largest waste streams. So the footwear sustainability team developed markets for post-production rubber. One buyer was Nike itself. Once the post-production rubber was ground up, it could be used as feedstock for rubber outsoles. Working with the footwear design team, Nike began to market “regrind” rubber in various models and use it for up to 5% of the rubber outsole.
The company then looked to develop markets in Asia and the U.S. for regrind rubber. One such market was artificial athletic fields that used reground, used tires. Nike successfully positioned its regrind rubber as superior. For example, it could be sorted by color, contained zero additional materials and did not mark footwear and field equipment.
Through the sustainable footwear team’s vision and action, Nike was able to meet corporate waste goals, responsibly manage factory waste and create income from royalties by licensing “Nike regrind” to artificial field developers.
A Lesson in Systems Thinking
Any enduring initiative within a business, including sustainability, requires a comprehensive approach. By focusing first on a set of goals to chart their course, and then viewing their goals and challenges as an interrelated system rather than an isolated problem, Nike reduced one of their manufacturing waste flows and transformed it into top line revenue growth.
All businesses run their own sustainability risks, especially if they sell to consumers or manufacture products. And like Nike, they have access to these corollary sustainability opportunities. Systems thinking helps businesses spot these opportunities and better position themselves to withstand the changing environment of regulation, consumer demand and energy volatility.