Sustainability as a Source of Competitive Advantage: Running Faster?
“Sometimes you still have to drag managers kicking and screaming to the sustainability party”, says Caeldries. But no one can escape the topic any longer. All managers should make certain decisions in this regard.
What is sustainability?
Everyone talks about sustainability, but what does it really mean? As defined by Brundtland in 1987, sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. The term is therefore broader than often assumed, considering not only environmental aspects, but the three E’s: social equity, economic growth and environmental problems. These have become the 3 P’s: Planet (environmental), People (social), Profit (economic). Sustainability is about balancing the three.
The relatively well-known 17 Sustainable Development Goals also interpret the concept of sustainability much more broadly. In addition to “climate action,” they include many other elements, such as “gender equality,” “zero hunger,” and “peace, justice and strong institutions.” “It is therefore important to remember that the concept of sustainability goes beyond the environment,” says Caeldries.
Not a matter of course: The example of Illy coffee
For Illy, sustainability is a big issue. They have five initiatives in their sustainability agenda: 1. They use recyclable paper. 2. Reducing the use of plastic. 3. They produce energy efficient coffee machines. 4. They respect biodiversity in coffee farming. 5. They minimize fertilizer. The first question is, do these initiatives benefit society? And the answer is obviously yes. The second question is: Do these initiatives give illy a competitive advantage? The answer is ‘probably not’ because everyone – including their competitors – can replicate each of illy’s initiatives.
“And that is the crux of the problem: sustainability measures often no longer lead to a competitive advantage because everyone is doing them,” says Caeldries. Companies need to ” choose their battles “. They cannot be leaders in all areas of sustainability. They have to decide which sustainability measures are right for them and which are not.
Can companies still turn sustainability into a competitive advantage?
When companies consider what role sustainability should play for them, Caeldries says there is an important first rule: “Always start with strategy! Never make sustainability investments ‘in isolation'”. Companies should also decide whether they really want to put sustainability at the heart a differentiated value proposition, or whether they want to focus on other things and do the bare minimum when it comes to sustainability. “There is nothing wrong with not leading on sustainability. It’s fine to ‘keep up with the Joneses,’ but it should be a conscious decision,” says Caeldries.
Statistics show that more and more companies are getting involved in sustainability. This is good for society, but it means that it is becoming increasingly difficult for companies to turn sustainability into a competitive advantage. The reasons for this development are, on the one hand, more regulations that force companies to be sustainable (coercive). On the other hand, stakeholder demands are pushing companies in this direction (normative) and companies are copying each other – if one company takes sustainability measures, the others follow suit (mimic).
There is therefore a normalization of sustainability practices, leading to convergence. This makes it more difficult to be distinctive, and the market value effect of sustainability practices decreases. In other words, the stick effect increases and the carrot effect decreases: Companies are punished if they do not implement sustainability measures and do not receive any additional positive effect if they do.
This can also be illustrated by the Red Queen Effect (van Valen’s Law): It is based on the story of Alice in Wonderland. Alice wants to escape from the land of the unpleasant Red Queen, so she runs and runs, but does not seem to be able to escape. The Red Queen then says, “Now, here, you see, it takes all the running you can do to stay in the same place. If you want to get somewhere else, you have to run at least twice as fast.” Translated to the business world, this means that if you do what everyone else is doing, it will never become a competitive advantage. You have to do something different than everyone else to stand out.
One example are the Heavenly Bed introduced by the Westin hotel. The company began equipping its rooms with these particularly comfortable beds in 1999. It wasn’t long before other hotels did the same. The consequence was that these beds quickly ceased to be an advantage for the company. This is the Red Queen effect in action.
Solutions: How companies can still stand out
First, companies should be aware that not all sustainability measures are equal. For example, there are material and non-material sustainability measures, and statistics show that firms focusing on material issues perform better. To find appropriate material measures, Caeldries suggests creating a (double) materiality matrix to find the most suitable measures for your company. In a materiality matrix, you look at what is important from the stakeholder’s point of view and compare it with the impact it has on the company. Another tool to find the best sustainability measure for your company is to perform a value chain analysis: Companies go through the manufacturing process and identify where they can have the best material impact. In other words, it helps identify where the issues are that matter.
Going back to the Illy coffee example, it may now be clear that while these initiatives are well-intentioned and have value for society, they do not provide the company with a competitive advantage. And why is that? Because everything they do can be done by others. A competitive advantage in sustainability – as in any other area – must be something that cannot be easily replicated. A good strategic material practice is not replicable because it is imperfectly imitable. “You have to be able to defend the difference,” says Caeldries.
Conclusion:
Finally, Caeldries summarizes the core advice about sustainability as a corporate advantage: “Start with the strategy. Be aware that sustainability has become a hygiene factor. Focus on material sustainability practices only. Ensure that your material sustainability practices are strategic. Align your sustainability practices in a system where practices reinforce each other, and remember that sustainability practices are only sustainable over time if they are based on non-tradable, non-imitable, non-substitutable resources or capabilities.”