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Leading Sustainable Innovation

Do Sustainability

Why Sustainability Requires Innovation

THE AIM OF THIS CHAPTER IS TO EXPLAIN why innovation is now becoming part of the role of the Sustainability Executive and is essential for those organisations that are embarking on ambitious strategies. We start with an overview of the evolution of sustainability, moving on to discuss new thinking and trends before considering what this means for the Sustainability Executive and their function.

Overview of corporate sustainability

The term 'sustainability' can be like marmite: some love it, some hate it. We have some sympathy – both of us have had to work with senior executives whose initial response is that this is fluffy, superfluous or even tree-hugging irrelevance. However, alternative terms such as 'corporate citizenship' or 'corporate social responsibility' (CSR) carry their own baggage. We use 'sustainability' here as a broad term covering management of environmental, social, ethical and governance issues. The fact that sustainability is also used in the sense of continuing profitable operation can also be useful (if at times confusing).

Sustainability emerged in the 1990s. Interface, under the inspirational leadership of Ray Anderson, helped define the term and they remain a benchmark for good practice. Their experience was instrumental in demonstrating that sustainability is consistent with business success.

Sustainability management might be broadly described as comprising three levels of increasing ambition:

1. Compliance, risk management and philanthropy;

2. Efficiency improvements and enhancing corporate reputation;

3. Opportunity – generating revenue from new products, services and business models and aiming for net positive environmental impacts.

The current generation of corporate leaders – companies such as Marks & Spencer (M&S), British Telecom (BT), Unilever, General Electric (GE), Kingfisher Group, Kyocera, Procter & Gamble (P&G) and Nike – are united in their commitment to level 3 sustainability. This is not a romantic philanthropic gesture or another example of 'greenwash'. These companies have all recognised sustainability as a key strategic objective and something that is key to their future success. They realise that resource constraints, climate change and social concerns played out in a world made transparent by social media and mobile technology present profound challenges to the future success and prosperity of their own organisations as well as the societies they serve. They also recognise that they can generate new value by addressing sustainability. In ever more competitive markets with rapid changes in technology, sustainability presents a major opportunity to generate new forms of revenue.

New thinking

There are emerging ideas that are helping drive the agenda forward:

'To zero and beyond'

This sounds like a misquote from Buzz Lightyear but is a good summary of the goals that leading organisations are setting themselves – namely to have zero impact or to be restorative. John Elkington has written about these as 'Zeronauts'. Some companies, such as BT, have adopted the term 'net good' to describe their aim to have a positive impact. These are essentially logical developments of earlier sustainability concepts.

Two other ideas, which also have the benefit that they avoid the term 'sustainability' for those who find the term unpalatable, are of interest:

'Shared value'

Michael Porter, a Harvard professor and authority on business strategy, and Mark Kramer, wrote an influential paper that introduced the term 'shared value'. This provides a great critique of CSR, and sets out the connection between social issues and competitive advantage that they claim will generate greater innovation and growth. Nestlé is one high profile corporate adopting this approach.

'The circular economy'

The circular economy is 'a generic term for an industrial economy that is, by design or intention, restorative and in which materials flows are of two types, biological nutrients, designed to re-enter the biosphere safely, and technical nutrients, which are designed to circulate at high quality without entering the biosphere'. Championed by the Ellen MacArthur Foundation, it focuses on a new business model that responds to resource constraints. The Foundation has published two insightful reports setting out in detail the ideas, which should be mandatory reading for the sustainability professional. The most recent report estimated that $700 billion in savings were possible if businesses apply circular economy principles to the consumer goods sector.

Neither shared value, nor the circular economy, are fundamentally different to how pioneer companies currently approach sustainability. Their biggest value may be in enabling a discussion about sustainability without the baggage of prejudice the term can invoke. The circular economy in particular is rapidly gaining traction by providing a clear focus on a solution, rather than emphasising environmental constraints. The Foundation, accompanied by a successful education programme, is rapidly gaining new supporters.

Whether a company uses sustainability, shared value or the circular economy to frame their strategies they will need to adopt radical innovation throughout all levels of the organisation – new processes, new products, new services and new business models – if they want to create new opportunities and competitive advantage from their insight. The sustainability agenda demands transformation of existing practices.

The changing skills of the sustainability function

The skills needed by Sustainability Executives, and the sustainability department, are very different for organisations moving into the third level where their aims become a strategic imperative. Levels 1 and 2 require organisations to develop new processes, standards for operations and reporting – traditional 'command-and-control' tools where technical subject matter expertise is vital. Moving up to level 3 requires Executives and teams with experience of leading innovation, managing change, creating new business plans and brands. Correspondingly, there is also a need for a greater understanding across the business in the non-sustainability functions of the environmental and social impacts of their roles.

Few corporates are currently operating anywhere near Level 3. M&S are a recognised sustainability leader, yet Mike Barry, their Head of Sustainable Business, candidly said that they are 'only 10–15% of the way to being sustainable'. In other words, there is long way to go and what lies ahead are the really challenging problems. We are entering a period that will see increased focus on innovation in sustainability. With no obvious end-point for sustainability – why stop at zero impact on the environment if you can support regeneration, and social issues and expectations will change overtime – it is unclear when this will stop or what comes next.

Convergence of sustainability and innovation?

Innovation is therefore set to play an increasingly important part in the role of the Sustainability Executive. Insights from sustainability can also support mainstream innovation processes by identifying new opportunities and filtering out bad ideas. As we discuss later, there are many similarities between managing innovation and sustainability. We are already seeing some leading companies explicitly merge responsibility for innovation and sustainability. A good example would be Nike, once a pariah of social and environmental campaigners, who have been recognised as the world's most innovative company in 2013.

Nike also launched a YouTube video, 'The Making of Making', in which they state, 'Make no mistake, we hate sustainability'. Instead, the slick video says: 'We're here to unveil a new age of design, one that is about making better things and making things better.' It is a little early to announce the death of the phrase 'sustainability' – there is no reason why you can't be focused and precise in using the term sustainability – but new thinking allows you to avoid it and if like Nike, you start to align sustainability and innovation, then you can move beyond it.

Innovation Theory and Practice

THERE IS A VAST LITERATURE ON INNOVATION and it is definitely not our intention to provide a comprehensive review. Our aim is to provide a short overview of current thinking and practice.

When thinking about innovation it is important to separate out the generation of ideas from their subsequent implementation. There are lots of different definitions – some authors call ideas generation 'invention', while others confusingly have used 'innovation'. Successful implementation or commercial application might be termed 'innovation' or 'entrepreneurship'. We use innovation to cover both idea generation and successful implementation, but it is important to acknowledge that there is a big difference between coming up with ideas and those that go on to be successful. As one of the most famous entrepreneurs Thomas Edison said, 'vision without execution is hallucination'.

Innovation can also be described in terms of three levels:

1. Process innovation.

2. New technology, products and services – this can range from incremental improvements to existing propositions to completely new offerings.

3. New business models that result in new revenue and cost structures.

One of the biggest myths about innovation is that it is about a creative genius having a flash of inspiration in an epiphany or 'eureka' moment. The fact that innovation is typically illustrated with the light bulb doesn't help – hopefully, the association will become lose its relevance as the filament light bulb is replaced. Innovation is a discipline, which can be managed and replicated.

Innovation – it's a managed discipline

The economist Joseph Schumpeter was one of the first people to develop theories in this field. He is credited with identifying innovation as the driving force of capitalism and entrepreneurs as the agents of innovation. Schumpeter is famous for the phrase 'creative destruction', describing the process where the old way of doing things is replaced by new paradigms; he observed innovation was hard to produce and harder to maintain.

However, it was the great thinker Peter Drucker who wrote the seminal management book on the subject in 1985. It is impressive given the technological advances since it was written that it retains its relevance today. The key idea in the book is that innovation is a systematic and purposeful process that can be followed by any organisation. Innovation is 'a discipline, capable of being learned, capable of being practised'. He states that innovation and entrepreneurship do not require geniuses – neither will be achieved if you wait for inspiration or the 'kiss of the muse'. Drucker acknowledges that different skills are required to support innovation as compared to traditional management techniques, but emphasises this is still a manageable process. The guidance he provides on creating a culture that rewards innovation is still as relevant today as ever.

Drucker didn't believe that innovators were necessarily inventors, capitalists or business owners. He also didn't consider innovators to be risk takers – instead he defined them by their attitude to change and said they were 'opportunity-focused'. An example of his prescience is that he believed the emergence of the entrepreneurial society would require individuals to take responsibility for their own continuous learning and development. He noted that habits and assumptions about schooling would be challenged and 'educators will have to accept that schooling is not for the young and the greatest challenge – but also the greatest opportunity – for the schools is the continuing re-learning of already highly schooled adults'. This helps explain the success of the massive open online courses (MOOCs).

Disruptive innovation

Clayton Christensen introduced the term 'disruptive innovation'. It describes the process, which at the time seemed counterintuitive, whereby an innovation that helps make a product or service available to new consumers at the lower end of a market can unexpectedly end up displacing the incumbent businesses. This happens because companies focus their attention on improving products and services for their most sophisticated customers where they can generate higher returns. This creates the opportunity for other organisations to innovate offerings for consumers who are less wealthy and therefore ignored by the current provider. Initially this may be lower-margin business but it provides a foothold from which a disruptive competitor can emerge with better and less expensive ways of meeting customer needs.

There are many examples of disruptive innovations, from the Ford Model T to the digital camera. They are therefore not necessarily the most 'advanced' technology rather a new combination that targets new consumers. Christensen originally used the term 'innovative technologies' but replaced this because it is the business model, rather than the technology itself, that generally creates the disruptive impact.

Organisations can respond to potentially disruptive innovations by either acquisition or establishing a competing business model. However, the speed of technology means that not all disruptive technologies start by offering an inferior product at a lower price. Navigation product makers have had to compete against maps that come preloaded for free on smart phones and are often better than the standalone device these companies sell.

An interesting development is frugal innovation, also referred to as 'Jugaad' after the Hindi word meaning clever improvisation. This refers to low cost innovations developed in emerging markets that are then introduced into developed economies. Such innovation inspired by scarce resources may also be why recessions have often seen the emergence of new innovative companies – to modify Plato's idiom, 'necessity is the mother of innovation'.

Open innovation

Companies traditionally pursued innovation through their own Research & Development capabilities. They worked on generating a series of new ideas that would then be filtered, through a fairly linear process, to select those that would be developed into new products or services. In 2003 Henry Chesborough published an influential book that proposed a collaborative approach to innovation. 'Open Innovation' involves companies working with external parties – suppliers, customers and even competitors – to increase innovation. This was a recognition that relevant specialist expertise can lie outside of the organisation. As firms operate in ever more competitive and global markets where the pace of new technology is faster, reaching outside the company boundary has become important. Consequently, innovation is now commonly seen as a collaborative process involving different organisations in an iterative and potentially complex framework.

Chesborough moved on to develop the idea of 'Open Service Innovation', in which he argues businesses must think of themselves as service providers and then work with customers to co-create a more meaningful experience. This is a change from the historical focus of innovation literature on physical products and technologies. This process of open innovation both accelerates and deepens innovation (and reduces cost) by promoting the specific capabilities residing in customers and other third parties. He acknowledges that building 'experience' is harder than building a specific product since it relies on 'tacit experience', that is, learning from experience. Using both internal and external sources of knowledge and having customers participate and contribute to innovation will enable quicker testing and feedback on ideas. Chesborough maintains his own online open innovation community.

The big exception to open innovation is Apple, arguably the most successful innovator of recent times. Apple is viewed as a closed and secretive organisation – they even use this to create hype around their new products. Internally though, they work across functions and clearly can connect and combine different ideas and technologies to create new products. Some have argued that they are starting to open up – they do allow apps to be built on their platform. It will be fascinating to see if this changes in the future. In general though, most businesses are seeking to work with external partners to provide expertise and skills not available internally.

This transition to open innovation demands new skills for managing collaborators whom may not work for the company. Trust between the parties is vital and must be earned through commitment to transparency. There is now a trend to sharing intellectual property to encourage new innovations.

Lean start-up

Lean start-up, a new concept defined by Eric Ries, promotes quick experimentation during start-up to test whether or not customers want the product or service. Originally developed with high tech companies in mind, this approach involves developing a not yet finalised version, a 'minimal viable product' that can be tested on customers to understand what features they actually want. The concept involves continuous deployment of updates and ongoing testing with customers. Lean startup has proven to be very successful and while not yet mainstream might well be adopted by larger companies in the future.

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Excerpted from Leading Sustainable Innovation by Nick Coad, Paul Pritchard. Copyright © 2013 Nick Coad and Paul Pritchard. Excerpted by permission of Do Sustainability.
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