What are the key elements of an internally driven focus on sustainability and growth ? Through a series of interviews and deep-dive analyses, we have distilled seven core principles that guide the new sustainability champions’ focus on total return on resources. (See Exhibit 9.).
These principles may seem familiar management dictates for any major initiative, yet they take on special significance in the context of resource management.
The Seven Principles of Total Return on Resources :
Monetize Resource Management:
Even in emerging economies, resource management can take on the aura of a feel-good initiative designed to please stakeholders. If employees see it this way, they will never integrate it into core activities and planning. Instead, the organization has to adopt resource management as a strategic differentiator that will drive growth and profitability. People have to believe that they can monetize it.
Monetizing can work by increasing resource efficiency along the existing value chain and adding new products that improve resource management either internally or for suppliers or customers. The monetary gains have to exceed the costs within a manageable time horizon, and these gains must accrue to the company itself, not just to the industry or the wider society.
Shree Cement is explicit about optimizing cost as part of its commitment to sustainability. The company is constantly scrutinizing its operations to identify process or material innovations that could reduce costs. For example, in 2011, Shree estimated that it generated savings amounting to 8 percent of its aftertax profits for that year through measures such as installing rotary screens on fly ash silos and increasing direct deliveries to customers to reduce the use of secondary freight.
Embed Resource Management:
Exhorting employees to monetize sustainability is not enough. Companies also need to embed the key concepts of resource management within the organization. They must go beyond strategy and into corporate structure, governance, and the organization’s mission.
Focusing on resource management will be a major shift for many organizations and therefore may require some persuasion. Industry leaders will have few immediate tangible benefits to offer, especially for resources that have experienced only mild pricing pressures. They will need the vision and understanding to communicate the growing importance of total return on resources. Only then will the organization be ready to embrace projects with uncertain outcomes—and to adapt when roadblocks emerge. Resource management can’t have a project-of-the-month strategy; it has to be accepted as a standard part of how the company works.
Some organizations already have a culture built around sustainability. Jain Irrigation was started by an entrepreneur from an Indian village that was suffering from water shortages. He saw farmers sinking into terrible poverty, with many forced to let their farms fall into disrepair or to abandon their fields and move to the city. That motivated him to create a business around making agriculture sustainable through drip irrigation. This single-minded goal pervaded the organization as it grew, and the founder’s son continued to spread the word to employees when he took over.
Most organizations may not make a moral commitment to resource management the way Jain Irrigation has. But there is no reason they can’t appeal to higher motives. Equity Bank had no special commitment when it looked into the problem of reaching remote villages. But it soon realized that small farmers would never become substantial customers until they improved their productivity. And the bank would never be able to finance those improvements unless it could deliver services without physical branches. Those realizations led the bank’s executives to adopt sustainability as a deep-seated organizational value, one with the important side benefit of motivating employees who wanted their work to be more than just a job. Those motivated employees, in turn, not only figured out how to make mobile banking profitable sooner than board skeptics assumed but also how to reduce resource use in other areas. Their enthusiasm helped speed up Equity’s transition to paperless banking.
The Broad Group takes an even more holistic approach to embedding a culture of sustainability. Most of its operations take place on a “green campus” with energy-efficient buildings. Employees eat in a cafeteria supplied by the company’s own organic farm. They see examples of effective resource management all around them.
Measure, Measure, Measure :
While some industries have managed their resources for decades, most are only now starting to make the effort. They are often still in the exploratory stages, when it is tempting to set vague goals and just learn along the way. But as executives realized long ago, what gets measured gets managed—and everything else falls off the radar when people get busy. Measurement is fundamental for the companies we researched, and they measure relentlessly.
As soon as the organization has developed objectives or projects, it can define and communicate a set of indicators that show progress. These must be concrete and quantifiable enough so that managers can track results. Some initiatives will fail, while others will succeed faster than expected. The sooner the company can shift investments from one to the other, the more it will accomplish.
Transparency is essential here, not just for the layers of management but also for the full organization. The best way to demonstrate the importance of an initiative is to broadcast the metrics and post frequent updates—and to celebrate milestones. And while the company must demonstrate the seriousness of these measures, executives should also be ready to adjust them as the projects and their environments evolve.
Partly for those reasons, it is better to go with a few, easily understood “magic metrics” than with an exhaustive list of all the indicators around a process. Magic metrics can act as symbols of commitment and, hence, galvanize the organization and drive cultural change while giving the company something manageable to focus on.
Florida Ice adopted a limited number of indicators as part of its effort to produce no solid waste and to be water neutral and eventually carbon neutral. It installed permanent monitoring of these resources, and it now reports progress regularly to the broader organization. A single scorecard for sustainability, bringing all the metrics together, allows employees to see in a snapshot how the company is doing. The company combines metrics with education, and its employees have gotten caught up in the drive for improvement. More than 95 percent have gone on to volunteer on company-sponsored projects to restore local watersheds, educate consumers, and support suppliers and customers working to reduce their environmental footprints.
Look Widely at Resource Management :
Most companies tend to focus on the direct financial benefits of resource management. The best companies, however, have a much broader sense of the concept. They take a holistic perspective on their resource use, looking at all inputs and outputs.
Consider again Florida Ice, which could have been content to make its factories highly efficient in their consumption of water. Instead, the company also focused on the sustainability of local water supplies as a whole. So its factories worked with local communities to preserve the watershed that served everyone. In 2011, the company invested 7.1 percent of after-tax profits in environmental and social projects in alliance with local NGOs and community leaders.
This holistic approach can go a long way to reducing operational risks for a company. By working broadly with stakeholders, companies can promote better management of the resources they depend on. When companies are able to identify their operational risks and better mitigate and prevent them, they create competitive advantages. Shree began using a “scavenging” approach when it adapted its kiln to act as an incinerator. It disposed of solid waste from local communities while reducing its fuel bill.
Be Innovative with the Business Model :
Resource leaders will work to be innovative with the overall business model, not just to make changes within it. Just like products, business models have a limited lifespan and must evolve over time. The change can be as ambitious as a new value proposition for the main business. Or it can yield a complementary offering that strengthens the main one.
Jain started with irrigation units but eventually realized its growth would be limited as long as farmers couldn’t qualify for bank loans. One way farmers could qualify was to get sales contracts with commodities dealers. Finding no such dealers in many of its markets, Jain branched out into commodities wholesaling. As the company gained expertise, it was able to guarantee minimum prices for its customers, which in turn encouraged banks to lend to them.
This type of innovation often requires investments in research and development, either to bring out entirely new products or to adapt technology from elsewhere. The Broad Group wasn’t content with improving the energy conservation of their air conditioners. The need to improve building insulation was everywhere. So it retrofitted nearly a dozen of its buildings by incorporating thick thermal insulation and four-paned windows.
Shape the Business Ecosystem :
While they focus on improving their own operations, leaders in resource management will also want to look over their entire value chain. That means going beyond their own or their customers’ resource demands, as Jain and Broad have done from the start, and addressing the demands of suppliers and distributors, too.
In this way, companies can go beyond merely communicating priorities to suppliers or teaching customers about the efficient use of their products. Choices they make about product specifications can determine how the constituent materials get made or shipped. Smart companies will consider the full ramifications of these decisions. As long as the company monetizes the benefits, it may make sense to sacrifice some efficiency internally in order to reduce resource consumption elsewhere in the value chain.
Companies will even look to change mindsets in the society at large. The Broad Group applies its metrics to the public by measuring levels of air pollution in target communities. People who see regular reminders of pollution levels will be more inclined to buy a gas-powered air conditioner that won’t draw on coal-burning generating plants.
Going a step further, leading companies can gain a powerful competitive advantage by setting standards that most or all players in the category will have to follow. By partnering with or lobbying regulators, these pioneers can persuade governments to turn their practices into the regulatory standard. Even when governments aren’t involved, market leaders can convince suppliers and customers of the need to support those practices as industry norms—norms that match the company’s strengths. Rival companies will have to catch up or even reconfigure their own practices in order to meet the standard, giving the pioneer an advantage for years to come.
Equity Bank gained this edge when it innovated in mobile banking in Kenya. The government didn’t set standards, and other banks quickly jumped in. But Equity’s approach proved so popular that the new entrants had to imitate its agency structure and its interface with Safaricom’s technology, rather than adopt an approach customized for their own capabilities. They have yet to match Equity’s success.
Florida Ice was a model of effective lobbying when it worked with regulators. The government had initially implemented penalty-based rules on resource usage that threatened to add substantial costs as the company grew. Instead, Florida Ice persuaded regulators to move toward a positive system that offered credits for reductions in resource use in any part of a company’s business. That means that Florida Ice now gets full credit for the water conservation it promotes in communities beyond its plants.
Florida Ice also freely shares its practices with rivals. While that might not be advisable in every industry, it makes sense here because, as the market leader, Florida Ice is also trying to raise the reputation of the industry as a whole. That is important at a time when beer and soda bottlers are under attack for contributing to excessive alcohol consumption and obesity. This sharing also helps to ensure that Florida’s approach will guide the industry’s development as a whole.
Constantly Explore and Improve :
Finally, as more companies recognize the growing resource constraints, pioneers in resource management will have to keep moving. Their advantages will be temporary, so they will need to improve relentlessly in order to maintain an edge. They will want to readjust their targets on an ongoing basis—using those metrics that they have already invested in and finding new relevant ones to stay ahead of the curve.
Business intelligence is vital here—not just to know where the company stands with its rivals but also to see if others have had success with processes or materials that are under consideration. Looking out to the wider world is helpful also in setting benchmarks and grasping what is possible, after factoring in the different conditions at hand.
Even if rivals haven’t caught up, organizations will benefit from raising their expectations at frequent intervals. That way, employees can continue to feel the energy and satisfaction of reaching new peaks and avoid the complacency that comes from success.
The Broad Group focuses more on individual improvement. It starts with extensive employee training and development. As people advance professionally, they can accomplish more and reach higher targets. Constant improvement on the individual level helps the company push for gains on the company level.