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Strategic Innovation for Sustainability

By Professor Francisco Szekely and Research Associate Heidi Strebel – June 2012.

Strategic Innovation for Sustainability
Last week world leaders were convening in Rio de Janeiro for the United Nations Conference “Rio+20” to discuss no less than, “how we can reduce poverty, advance social equity and ensure environmental protection on an ever more crowded planet”. As a range of stakeholders from civil society, academia, government and the private sector join the discussion, we would like to take stock of one dynamic area of action.

The idea of change for sustainability is gaining ground in the private sector. While it is not yet part of mainstream practice, a growing number of businesses understand the impacts on competitiveness and are beginning to integrate different elements into their core strategies. Going even further, companies are seizing the opportunities in strategic innovation for sustainability, as highlighted in the seminal article “Why Sustainability is Now the Key Driver for Innovation” from 2009, by Ram Nidumolu, C.K. Prahalad and M.R. Rangaswami.

Strategic innovation for sustainability can be defined as the creation of something new that improves performance in the three dimensions – social, environmental and economic – of sustainable development. Both in theory and in practice there is much debate and confusion about what such improvements in performance entail but there is now growing agreement that, as with conventional innovation, they are not restricted to technological change but also include change in processes, operating procedures and practices, business models, thinking and systems.

There is a wide gap between ideas and action in this emerging domain. A first step in bridging that gap is to understand the different types of innovation for sustainability. There are three major types along a spectrum from incremental to radical to game-changing systemic innovation.

Incremental innovation in products and services

In theory strategic innovation in products and services for sustainability, also referred to as “eco-design”, encompasses a holistic view of product and service development, integrating environmental, social and economic considerations. In practice changes in products, services and internal processes have been largely path-dependent, incremental and biased towards environmental and economic considerations with much less emphasis on social considerations.

One of the main sub-types of incremental innovation for sustainability is “eco-efficiency”. In many cases change is still limited to add-on or end-of-pipe improvements to existing technologies and reductions in resource inputs, materials and wastes, referred to as increases in eco-efficiency. Even when a completely new “clean” technology is introduced, it often addresses a single criterion of environmental performance such as SO₂ emissions or water use.

Examples of step-by-step innovation for sustainability abound in a range of industries – in electricity and heat generation, transportation, building and manufacturing. However, even with incremental improvements in material and energy efficiency, in many cases overall efficiencies remain relatively low. Take the automobile industry. In response to progressively stricter regulations, voluntary initiatives and industry competition, over the past 40 years automobile manufacturers have developed innovations for the internal combustion engine that have increased energy efficiency and reduced emissions of greenhouse and other toxic gases. However by the end of the 20th century, the gradual progression in technology had resulted in an internal combustion engine that still transmitted only 25% of energy input to the drive train.

Radical innovation in processes and value chains

An understanding of how dynamic systems interact is crucial to achieving the far-reaching novelty of radical innovation for sustainability. Often this involves a shift in thinking from analyses of separate parts and problems, to the perception of multiple interdependent wholes, feedback mechanisms and non-linear change.

One of the main sub-types of radical innovation for sustainability is the transformation of supply chains. This calls for a systems view of the impacts of a company’s products and services, processes and operations, including social issues such as labor conditions, human health and gender equity, environmental issues such as sourcing of raw materials, manufacturing processes and end-of-life, and economic issues such as competitiveness and market share.

An example of radical innovation for sustainable agriculture is Unilever’s transformation, initiated in 2007, of the supply chain for its Lipton brand to certified sustainable tea. The company entered into a partnership with the international NGO Rainforest Alliance (RfA) to work on the process of certifying supplies from both large estates and smallholder farmers in South America, East Africa and South Asia. RfA certification encompasses three main areas: employee welfare, including standards for working conditions and occupational health; farm management, including requirements for soil management and integrated crop management; and environmental protection, including targets in water conservation and wildlife protection. To ensure effective roll out in different countries, Unilever and RfA developed further partnerships with local organizations and adapted to varying conditions on the ground related to farm size, the knowledge and skills of tea farmers, and socio-cultural structures and norms.

Game-changing systemic innovation for sustainability

Beyond radical novelty lies game-changing innovation that is transforming the relationships and interactions between industry competitors, people’s behaviors and lifestyles, and even the very aims of business.

Since the turn of the 21st century and in conjunction with the expansion of the Internet, there has been an escalation in sharing, borrowing and loaning around the world, a trend that has been described as the dawn of “the age of access” or “collaborative consumption”, one sub-type of game-changing innovation for sustainability. Information technology has enabled a range of bartering, trading, swapping and sharing activities, which have in turn fostered an increase in offline sharing schemes. Those activities can be divided into three types: redistribution markets where consumers swap goods instead of discarding them; collaborative lifestyles according to which consumers lend and share money, skills and time; and use-oriented product-service systems in which the use of a product, rather than the product itself, is sold. The rise of collaborative consumption has the potential to completely disrupt and reshape consumer markets.

Car sharing is an example of a use-oriented service innovation that is attracting more and more attention. Individuals and businesses gain access to the use of vehicles through car sharing schemes without incurring the costs of private ownership. In addition to the economic benefits for customers from avoiding the costs of ownership, increased car sharing can, for a given population, decrease car ownership, vehicle kilometers traveled, polluting emissions, traffic congestion and the demand for parking lots. Ultimately car sharing services can encourage behavioral change for sustainability, reducing product ownership and consumption and increasing the use of public transport.

Another sub-type of game-changing systemic innovation for sustainability is social entrepreneurship, which challenges the very definition of business as an organization that maximizes profit for shareholders to one that creates innovative solutions for social challenges. The emphasis is not on quarterly or even yearly performance but on the longer term, on spreading value and finding creative ways of filling institutional gaps. Social entrepreneurship can also prove game changing when it acts to alter perceptions and social norms that often constitute the greatest barrier to sustainable development.

There are several prominent examples of game-changing social entrepreneurship. One is Grameen Bank, which launched the provision of micro-credit for the poor and led to a transformation in social and commercial institutions, norms and perceptions about women, first in Bangladesh and then in other poor regions of the globe. Another is Husk Power Systems, a social business that generates electricity from rice husks, a waste product in the state of Bihar in India. The business distributes that electricity to poor communities, not through centralized power grids but through village systems. This is an example of game-changing innovation in both the business model and the service provided.

Francisco Szekely is the Sandoz Family Foundation Professor of Leadership and Sustainability and Director of the Global Center for Sustainability Leadership (CSL) at IMD.
Heidi Strebel is a research associate for IMD’s Global Center for Sustainability Leadership.

The CSL will host the EABIS 11th Annual Colloquium from July 2-4, 2012. With a theme of Strategic Innovation for Sustainability, this high-level, international event will feature perspectives from global business, thought leaders and world-leading academics and present research, case studies and conceptual work from corporate, academic, policy and independent experts.
To attend the event, you can register here: http://www.imd.org/calendar/EABIS-11th-Annual-Colloquium.cfm

Mardi 10 Juillet 2012

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