Why Smart Managers Will Capitalize First [on Sustainability]

-- An interview with Richard M. Locke, MIT Professor

A founder of MIT Sloan’s Laboratory for Sustainable Business says the best way to get people to take sustainability seriously is to frame it as it really is: not only a challenge that will affect every aspect of management but, for first movers, a source of enormous competitive advantage.

As sustainability—economic, environmental, social, & personal—emerges to become the defining business issue of our times, what do leading managers need to know?

Locke:  A lot. Unlike what most managers believe about sustainability, there actually is good news. There’s opportunity here.

When you hear business people talk about sustainability—about what it means and what they can do—what are they generally thinking of?

Locke:  Right now they’re mostly thinking of Al Gore. We’ve bombarded people with evidence about environmental issues, some of which is convincing, some of which other people don’t believe. It’s the model that says: Sustainability is about the environment, and things are bad. And the reaction to that is, “Oh, God, there are big problems, but they’re not so immediate, so someday I’ll do something, but I don’t have to do something right away.” A McKinsey study showed that a big chunk of business people are saying, “I’ll wait for technology to get me out of it.”  So, we’ve kind of frightened people, and they know they should do something. But what we need to do is say, “There are other companies like you or like you want to be who are already paying attention to sustainability, and look what they’re doing.”  When I talk to start-up companies or medium-sized companies that don’t have a lot of money—who aren’t in the Fortune 500, say—their initial reaction often is, “Don’t lecture me on yet another added cost.” We have to show them that it is possible for them to act on sustainability issues, and that it’s actually going to be good for their business.

To leaders and managers, what do you think “sustainability” means?

Locke:  We don’t have a common language about this yet. I hear two different kinds of definitions in the circles that I travel in. One is from people who are fans of sustainability in terms of environment, and who say that we have to preserve and conserve the kinds of air, water, and land resources that we have, or else we’re going to be off balance and undermine the carrying capacity of the Earth in terms of human life.  The other conception is held by people who basically think of sustainability as a threat–usually a looming threat of carbon tax regulation. That McKinsey survey of CEOs showed that though 60% think sustainability is a problem, the vast majority of them say that they’re not really doing much about it. And yet, some 80% expect that within five years they’ll have some sort of carbon regulation in their home countries. So many of those people think of sustainability as just something that’s going to be bad for business, as opposed to thinking that it can be an opportunity for business. Which I’m convinced it is.

Your definition of sustainability is different.

Locke:  I build on the Brundtland Commission’s definition of sustainability, which focuses on using resources today in a way that ensures there’ll be resources to meet the needs of future generations. I look at not only the environment but at energy and social issues like human development and poverty alleviation as well. People hear about the environment but they don’t often talk about, say, labor justice. But that’s one of the keys.  Climate, environment, energy, social standards—they’re all linked. One of the metaphors we’ve used a lot over the last couple of years is to think of sustainability as a fabric. You pull a thread and everything comes together. Look at the example of greenhouse gas emissions. If we really care about reducing gas emissions, policy change in the United States won’t be enough. We have to care about looking at some of the big emerging markets, especially China and India. Now, why are they emitting so much carbon? Well, because they’re building a lot of power plants. And why are they building power plants? Because they need the energy to fuel their development. And suddenly a conversation that started around greenhouse gas emissions has shifted to the quality of development and social standards and water and waste and people. They’re all related.

What do you see driving companies to face sustainability issues?

One of the drivers is going to be whatever kinds of regulations appear around carbon. The European Union is already doing some things, and individual states in the United States, like California, have already become much more astute. There will be other kinds of regulations like this. And those regulations initially will be an added cost. They may drive out some of the less productive, less efficient, more polluting companies.

What else will confront managers with strategic choices that they’ll have to make?

Some developing areas are going to be hit with scarce water and problems around water purity. The developing countries, of course, are going to be hit even harder by the financial crisis. And I worry, quite honestly, about places that don’t have much of a buffer, where suddenly there may be no jobs and no public services and no tax revenues. I think that we’re going to see an uptick in conflict, and that’s going to make it really difficult to do business in some places. You know, you can start looking for uranium in Congo if you want, but who knows what’s going to happen to society there.

What will trigger new focus on sustainability-related management strategy inside organizations?

In addition to pressure from government because of the regulation, you’re going to have pressure from customers. All the surveys and experimental work for consumer goods, whether it’s about fair-trade certified or ethical or green products, all seems to suggest that people really value these things.  I think big pressure also is going to come from within the business itself—not from a missionary CEO, but from some of the functional managers. My theory is that it’s some group on the periphery, usually middle level, that figures out a solution to some real problem. They show that it works, and then they can start diffusing it. And then it gets embraced by the top. I seldom think that it’s a top-down thing.  For example, the redesign of supply chains to make them less intrusive on the environment is happening for clear cost reasons.

How does the redesign of supply chains become part of a sustainability equation?

One of the Nike people told me that they had built [their former] supply chain based on the assumption of cheap labor, cheap energy, decreasing costs of transportation and logistics, and no externalities. All of those are gone. So, now, some of the commodities are going down, but energy is still really expensive. Transportation costs are still very expensive.  So you have companies like Nike, like Proctor & Gamble, that are thinking of literally reconfiguring their supply chains to have regional hubs and fewer suppliers. I believe that there will be some interesting stimulus coming from buyers and suppliers who can step up. They are going to be able to maintain relationships they have with their global buyers in a way that the others aren’t.

Why is that? Because there’s some kind of competitive advantage?

What I’ve heard from companies on the supplier side and the buyer side is that, in their view, companies that have their act together around sustainability usually have their act together in other things, too. So those are the companies they want to work with.  Efficiency (lower unit costs), quality, reliability—often these “positive” attributes of companies go hand in hand, managers will tell you. Now think about sustainability. If a company is good at developing systems that deal with health and safety, and/or treating waste and water, and/or devising innovative ways to reduce energy consumption, and so forth, they usually have their act together on many other, fundamental, how-they-do-business fronts. In other words, companies that have thought hard about how to establish various management systems that promote more sustainable business practices are also companies that have thought hard about how to be more efficient or innovative or differentiate their products and services in the market.

Sustainability becomes a proxy for management quality. This is a quick way for others, be they buyers or customers or potential partners, to get information about vendors or any other value-chain partner and what kinds of systems they have. You can be an efficient company and probably even make good quality goods without being focused on sustainability. But I think it’s very hard for you to be a sustainable company and not also be good at those other things. And that’s why you have things like GRI [Global Reporting Initiative] and others which businesses use to signal to other companies, “We’re serious about this. It’s not just a PR thing.”

What are the impediments to moving forward? What will companies and managers have to overcome to make action happen on the sustainability front?

The first thing they have to fight are their own assumptions, their own mental model, which is that to embrace this is an extra cost or a drag on business. Especially now, during a period of financial crisis and declining demand, they’re going to say, “Look, we’re already having a hard time keeping our numbers. Don’t ask us to do anything on investment.”  But now is a great time for companies to revisit how they’re thinking about sustainability and what they’re doing, to see the opportunities to reduce consumption and change the way they’re doing things. It’s a cost savings that will set them up for the next growth spurt. In the end I think that efforts to act on sustainability issues are going to be a real stimulus for innovation—that’s one impact that I see clearly in the near-term future. But leaders and managers still have to be convinced that it’s possible.

Locke’s Sustainability Takeaways 

Definition of Sustainability

• Meet today’s needs so needs of future generations aren’t compromised

• Environment, economy, social standards, personal balance all liked

Drivers of Sustainability (with the biggest implications for managers)

• Government regulations, especially around carbon emissions

• Pressure from customers

• Environmental factors such as water scarcity

• Cost cutting measures developed internally

Threats and Opportunities

• Threat:  financial pressures of current economic crisis

• Opp: cos. strong on sustainability perceived as having superior management overall

Obstacles to Acting on Sustainability Problems/Opportunities

• Assumptions that sustainability initiatives mean extra costs

• Lack of empirical evidence and visible role models of successful sustainability strategies

Other Thoughts

• People are unwisely waiting “for technology to get me out of it”

• Conservation is not the same as sustainability

• We need to combat silo mentality of competing ideas not collaborating

About Richard Locke.  Trained as a political scientist, Richard Locke became known early on for expertise in supply chain labor practices and for advocating that social and economic concerns be integrated into curriculum and research. Now, as the Alvin J., Siteman Professor of Entrepreneurship at the MIT Sloan School of Management and a Professor in the political science department at MIT, Locke’s interdisciplinary cast of mind is evident in all the work he does—especially his exploration of sustainability. He has helped spearhead the development of MIT Sloan’s Laboratory for Sustainable Business, which not only investigates sustainable-management issues in the classroom but puts students inside companies that are grappling with sustainability challenges.

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