Reprinted from Forbes.com
In April 2009, Forbes hosted a panel discussion about sustainability and as part of our Business Visionary series. Strategy & Innovation editor Renee Hopkins recently re-convened the panel to explore the topic further. The participants include Andrew Shapiro, CEO of strategy consulting firm GreenOrder; Lewis Perkins, Sustainable Strategist for the Mohawk Group; and Mark Johnson, co-founder and chairman of Innosight.
Strategy & Innovation: I’m struck by the differences and similarities between existing companies like yours, Lewis, trying to move in the green direction, and companies like the ones you describe in your article, Mark, and the ones you work with, Andrew, that are trying to formulate new business models around sustainability, or clean-tech, or both. Let’s talk about the start-ups first. If you’re a “green” start-up right now, what’s the most critical issue or issues facing you?
Andrew Shapiro: I’m not sure you can reduce it to one thing. One of my heroes, Ben Cohen of Ben & Jerry’s, once said to me almost 10 years ago when I was starting GreenOrder, “if you want to run a socially responsible business, first make sure you have a business.” I think to some degree that’s true for clean-tech businesses as well. Just because it’s part of the current wave doesn’t mean that all the other rules and principles about sound thinking for a start-up don’t apply. And, we’ve got companies trying to make breakthroughs in technology as well as companies disrupting existing industries, for example in an area like transportation or green building, which are not maybe technology-dependent but require innovative business models. I would say it’s hard to reduce to a single piece of advice.
That said, anyone who’s going into a green business needs to really understand the policy landscape and must particularly be able to price the externalities that these businesses are trying to address–carbon being first and foremost, but also other environmental externalities that are not currently priced in the market. Many of these businesses are predicated on a level playing field, ultimately, and this means figuring out a way to appropriately price the negative externality that comes from energy production and other manufacturing that leads to pollution. Many people have started businesses only to see that the policy landscape isn’t changing as quickly as they had hoped. And that can really hang them up in terms of getting access to capital, getting commercialization, getting penetration in new markets.
That makes sense. Mark, do you want to weigh on this? If you’re a start-up in the green space, what would be the most critical issues? I’m guessing you’re going to say formulate a good business model.
Mark Johnson: Absolutely. A business model is certainly fundamental: If there’s a customer out there that has a job to be done and you can identify that job, there is the opportunity to make money through an effective business model–by creating a compelling customer value proposition to fulfill that job, devising an innovative profit formula to deliver it profitably, and marshalling the key resources and processes needed to fulfill it. Clearly there are companies out there already doing that, especially in solar. They also need to think about introducing those new models in the right markets. Some of these start-ups may have better opportunities in places where there’s no existing infrastructure. But companies need to figure out what will ultimately drive the widespread adoption of clean technologies if they are ever to move beyond niche markets. For that, their offerings will ultimately need to be part of the larger clean-tech infrastructure that, at least in the short term, will need to be nurtured not only in favorable foothold markets but also by favorable government policies.
Lewis, you work for an existing business, not a start-up. If sustainability is the direction the world’s going now, what’s the first thing an existing business would want to do to move in this direction?
Lewis Perkins: What I’m seeing as the biggest mistake for established companies is trying to reinvent the wheel. Now is a tremendous time for partnerships because budgets are limited, venture capital is limited and executive leadership is focusing more and more on immediate returns. Some companies can’t wait for several years for a return on their investment–they need to know that the dollars they invest this fiscal year are going get a return this year.
For example, at Mohawk we needed to develop a proprietary internal-tracking system for sustainability reporting, but instead of building it ourselves, we’re partnering with companies that can develop something for us more quickly. And the same thing is occurring with some of our sustainability programs–rather than launching our own initiatives to get involved in the green-building movement, we’re working with organizations like Global Green, the US Green Building Council, and the projects going on in Greensburg, Kan. This also goes along with the whole idea of “green” or sustainable innovation–rather than reinventing the wheel, look to see who’s doing it and doing it well out there, and form partnerships.
We’ve touched on some of the ways in which the current cultural change has begun to shape innovation efforts, new businesses, and so forth, which goes along with Innosight’s theory that constraints drive innovation by defining the box within which you need to innovate. The green mandates–sustainability, using clean energy, trying to keep as small a footprint as possible, environmentally–how are those things driving innovation?
Mark Johnson: In Innosight’s language, we’d say that these constraints have the effect of creating new jobs-to-be-done related to sustainability: “Make my environmental footprint smaller,” for instance, or “Let me run my business profitably using clean energy.” Innovative technologies will be developed and adopted to fulfill those jobs, but only through equally innovative new business models. Better Place, for example, in attempting to make the current electric vehicle technologies competitive, has devised a business model in which it sells miles driven, rather than cars, in much the same way that cell-phone companies sell minutes.
But right now the oil-based economy fulfills most of these jobs more conveniently and economically than current sustainable alternatives can, so the odds of people switching on a large scale for purely social reasons any time soon is, I fear, remote. If we want to effect the transition to sustainable technologies faster than the market will do on its own, these businesses will need government support–not only in the traditional form of underwriting basic and applied research but also, most likely, through tax incentives. This is going on in Denmark to spur demand for electric vehicles, for instance. The Danish government has instituted what some have called an “idiot tax”: you pay a 180% tax for gasoline vehicles and 0% for electric vehicles. Policy changes are critical because otherwise, the new technologies are likely to remain too expensive for the consumer in the short term.
What other forces are at work?
Andrew Shapiro: Besides policy, another related constraint dynamic we’re watching closely right now is transparency in the supply chain. For example, Walmart is encouraging and driving their supply chain to adopt best practices around energy management, carbon management, waste reduction and packaging, and other lean, green practices. We hear about it because Walmart’s supply chain is so vast and it touches so many industries and large enterprises that we work with, companies like GE and DuPont ( DD – news – people ). Companies are trying to make sense of where they need to be on the environmental sustainability curve–do they need to be a leader in this regard, can they be a fast follower, or can even can they be a slower follower, frankly, kind of ride the slipstream behind what others are doing in their industry. In some remarkable ways, large enterprises like Walmart, Tesco ( TESO – news – people ) and others can be as powerful as public officials and regulators in establishing policy and criteria that the supply chain and the rest of the business community needs to meet. Walmart can act a whole lot faster than the EPA, and their edicts and mandates can’t be challenged under provisions for being overbroad or burdensome. If you want to continue doing business with them, you’ll figure out a way to do it. That dynamic comes into stark relief as you think about the competing pressures that are driving management to focus on the market forces accelerating change, and resources are committed to staying ahead of the curve and anticipating what’s next. Also will there be areas where the supply chain community pushes back and says, “Wait a second, these directions may not make sense”?
Has demand for green products fallen off in the current economy, or is that holding steady?
Andrew Shapiro: I don’t have an empirical way to measure that, but I think there’s a strong argument to be made that big companies should continue to focus on environmental performance and energy use in the downturn. If they’re trying to be leaner, more efficient and more cost-effective, whether they’re creating new operating procedures or products to sell externally to customers, there’s a realignment there in that most things that are greener save money. At least, when you’re talking about energy management and natural resource management, companies should be saving money immediately or have a very near-term payback.
Companies can also benefit from a downturn, because they get a license to innovate, to reinvent. Progressive ( PGR – news – people ) business leaders can look at a product portfolio and identify products and services that may not be well-positioned for a move to a low-carbon economy. Companies could therefore phase out products, services, or divisions for which they think there will be less demand in the future, and focus more on those that are more efficient, less polluting, cleaner, which might be more in demand, if not this year, then in the next five to 10 years.
In terms of start-up companies, I see no turnback in the enthusiasm and interest among entrepreneurs and investors in funding clean technology or green businesses. That’s in part because of the changing policy landscape we’ve been talking about. There’s a very real awareness that even though oil prices fell off as much as they did, the ongoing trend is one of energy volatility and price and energy insecurity in terms of national or geopolitical forces, and that climate change is increasingly becoming an issue of top import globally. All these macro forces are very much still in play, and so we continue to see interest in new, environmentally sustainable product development, innovation, change, and pursuing opportunities that are going to translate into business success, even in this downturn and certainly as we come out of it.
Andrew, looking ahead over the next six months, do you see anything bubbling up that’s on your radar, any shift of emphasis?
Andrew Shapiro: Thinking by analogy, or thinking historically by comparison, consider the dot-com boom 10 years ago and the bust that followed. I was working in that space at that time. At the height of the boom there were some really frothy, hype-oriented, meaningless things going on. My favorite example was pets.com and the sock puppet in the Super Bowl ad. They went public and 260 days later were out of business. Then after the downturn we got “real” innovation, andGoogle and YouTube and Facebook and even companies like Amazon and eBay ( EBAY – news – people ) really took hold. There was a shift in how people began to use the Web as a real tool of commerce and communication and social interaction, and now it is integrated into practically everything that we do.
I think in some ways even though this downturn isn’t attributable to the rise of green, a lot of people have asked whether the recession spells death for green business. I say to the contrary, I think we’ve just begun. Although there are some indiciators like, in 2007 the most trademarked term from the USPTO was “green”–more new companies were using that term to describe either the name of a company or a product than anything else–I think we haven’t even begun to see the real waves of innovation that are going to come. We haven’t seen the equivalent of a green Google ( GOOG – news – people ), YouTube, etc., that’s really going to change people’s lives and how they interact.
So the thing I would focus on is not so much green widgets, not so much are people measuring their carbon footprint or otherwise trying to change their eco impact. The culture change that came with globalization, that came with the IT revolution, will also come with this revolution. This is at the end of the day less about whether Toyota ( TM – news – people ) or GM or Ford has more hybrids, and it’s less about whether GE, Siemens ( SI – news – people ) or United Technologies ( UTX – news – people ) has the most efficient gas turbine. It’s really about which companies are rethinking their processes and planning for a low-carbon economy characterized by natural resource constraint and changing stakeholder expectations around social and environmental responsibility. It’s about which businesses are poised to really take advantage of these forces for the long-term by changing how they perform environmentally, how they innovate, and how they influence and interact with the marketplace, and thus really reframing and understanding sustainability in that regard, for decades to come. This is more about creating a culture of environmental innovation within the enterprise than it is just 1,000 or 2,000 tons less carbon dioxide or one or two cycles more efficiency in a particular widget.
I think that the intersection of environmental sustainability and innovation is also about reduction, and reduction ultimately can also mean a reduction in expenses as well. I think that’s the area in which we’re going to see the most growth. Rather than creating a lot of new things, we’ll create a lot of internal efficiencies and companies with business plans and behaviors that support those internal efficiencies. We’re seeing a lot of existing building in the green building movement right now, rather than a lot of new green construction. I met with the USGBC last week in Washington and we were talking about the growth of LEED for existing building during this time because people are looking to invest more in what already exists rather than create new. I think that’s important to track.
Lewis Perkins: I absolutely agree with everything Andrew said. And I think that we’re already beginning to see the shakeout that mirrors the dot-com bust. I was working in the technology space from 1998 to 2002 and this feels very similar. Just two years ago, when I started with Mohawk, everyone was figuring out the new playground, so to speak. Just watching the pattern of our own decision-making within the company, we continue to stay invested in innovative products meant to move us toward a more sustainable future , move us away from petroleum, move us toward using a higher level of recyclable content, and move us away from PVC. However, some of our other initiatives that didn’t have such longer-term appeal in the new economy have fallen by the wayside.
Mark Johnson: I agree as well. And there’s a lot we can learn from the parallels to the dot-com era. In the past when we’ve seen these bubbles burst and companies go under, it was because either they never really had a viable business model to begin with (like pets.com) or they did things, particularly on the Internet, that were in the sweet spot of an incumbent and so were crushed before they ever really got going. One example is Planet RX, which tried to capitalize on the Internet in the pharmacy business but ran into Merck ( MRK – news – people ) Medco. Merck was an incumbent whose business model–mail-order pharmaceuticals–was enhanced by the Internet. When Planet RX targeted that same area, it wasn’t able to succeed because it was targeting the incumbent’s sustaining innovation, not introducing a disruptive one.
I think there’s a similar thing to be said here. We’ve got to be smart not only about the business models that will bring sustainable technologies to market but also about the competitive dynamics. We need to pay more attention to where these new business are going to take root. Better Place, for example, needs to consider how it will confront competition from the Chevrolet Volt. Maybe if Better Place comes to the U.S., it could start with neighborhood electric vehicles and work its way up. That’s how we have to think about the evolution of these things, in good-enough applications, with viable business models, carefully nurtured in favorable markets.
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