Academy al Management Executive, 2003, Vol. 17, No. 2

Creating sustainable value

Stuart L. Hart and Mark B. Milstein

Executive OverviewJust as tbe creation of shareholdeT value requires periormance on multiple dimensions,

the global challenges associated with sustainable development are also multifaceted,involving economic, social, and environmental concerns. Indeed, these challenges haveimplications for virtually every aspect of a firm's strategy and business model. Yet, mostmanagers frame sustainable development not as a multidimensional opportunity, butrather as a one-dimensional nuisance, involving regulations, added cost, and liability.This approach leaves firms ill-equipped to deal with the issue in a strategic manner.Accordingly, we develop a sustainable-value framework that links the challenges ofglobal sustainability to the creation of shareholder value by the firm. Specifically, weshow how the global challenges associated with sustainable development, viewedthrough the appropriate set of business lenses, can help to identify strategies andpractices that contribute to a more sustainable world while simultaneously drivingshareholder value; this we define as the creation of sustainable value by the firm.

"Sustainability is as foreign a concept tomanagers in capitalist societies as profits areto managers in the former Soviet Union."

—William RuckelshausFirst EPA Administrator

With the fall of communism over a decade ago,capitalism has emerged as the dominant economicideology in the world. Unfortunately, the resultsproduced by ten years of global capitalism havenot been uniformly positive.' Saturation in the de-veloped markets, a widening gap between richand poor, growing levels of environmental degra-dation, and concern that the developing world maybe losing control over its own destiny have com-bined to create drag on the global economy.^ Theterrorist attacks in the U.S. on September 11, 2001made it clear that the world is inextricably inter-connected and that poverty, hopelessness, andperceived exploitation in one part of the world willnot remain geographically isolated.^ Increasingly,global capitalism is being challenged to includemore of the world in its bounty and protect thenatural systems and cultures upon which theglobal economy depends."*

The idea of sustainability has come to representthese rising expectations for social and environ-mental performance. Global sustainability hasbeen defined as the ability to "meet the needs of

the present without compromising the ability offuture generations to meet their needs."^ Similarly,sustainable development "is a process of achiev-ing human development... in an inclusive, con-nected, equitable, prudent, and secure manner."^ Asustainable enterprise, therefore, is one that con-tributes to sustainable development by deliveringsimultaneously economic, social, and environmen-tal benefits—the so-called triple bottom line.''

A sustainable enterprise is one thatcontributes to sustainable developmentby delivering simultaneously economic,social, and environmental beneiits—theso-called triple bottom line.

Beyond this broad consensus on terminology,however, there remains disagreement amongmanagers regarding the specific meaning of andmotivation for enterprise-level sustainability.^ Forsome managers, it is a moral mandate; for others,a legal requirement. For still others, sustainabilityis perceived as a cost of doing business—a neces-sary evil to maintain legitimacy and right to oper-ate. A few firms have begun to frame sustainabil-ity as a business opportunity, offering avenues forlowering cost and risk, or even growing revenuesand market share through innovation.^

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2003 Hari and Milstein 57

For most firms, the pursuit of enterprise sustain-ability remains difficult to reconcile with the ob-jective of increasing shareholder value. Indeed,some have even advocated that creating a moresustainable world will require firms to sacrificeprofits and shareholder value in favor of the publicgood.^° By starting with legal or moral argumentsfor firm actions, however, managers inevitably un-derestimate the strategic business opportunitiesassociated with this important issue. To avoid thisproblem, managers need to directly link enterprisesustainability to the creation of shareholder value.The global challenges associated with sustain-ability, viewed through the appropriate set of busi-ness lenses, can help to identify strategies andpractices that contribute to a more sustainableworld and, simultaneously, drive shareholder val-ue; this we define as the creation of sustainablevalue for the firm.

The global challenges associated withsustainability, viewed through theappropriate set of business lenses, canhelp to identify strategies and practicesthat contribute to a more sustainablewor/d and, simultaneously, driveshareholder value.

This article develops the strategic logic for thepursuit of sustainable value. We begin by specify-

ing a multidimensional model of shareholdervalue creation. Next, we describe the emergingchallenges associated with global sustainability.Finally, we demonstrate how, through appropriatebusiness strategies and practices, the above chal-lenges are being converted by companies into in-itiatives to increase shareholder value. We closewith some thoughts about how to create truly sus-tainable value.

Shareholder Value Is a MultidimensionalConstruct

Figure 1 illustrates the basic components for ourshareholder-value framework. The model is builtusing two well-known dimensions that are asource of creative tension for firms. The verticalaxis in the model reflects the firm's need to man-age today's business while simultaneously creat-ing tomorrow's technology and markets. This di-mension captures the tension experienced by theneed to realize short-term results while also gen-erating expectations for future growth." The hori-zontal axis reflects the firm's need to grow andprotect internal organizational skills and capabil-ities while simultaneously infusing the firm withnew perspectives and knowledge from the outside.This dimension reflects the tension experienced bythe need to buffer the technical core so that it mayoperate without distraction, while at the same timeremaining open to fresh perspectives and new,disruptive models and technologies.'^

Tomorrow

Innovation &

iRepositloning

Internal External

Reputation &

Legitimacy J

Today

FIGURE 1Key Dimensions of Shareholder Value

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Juxtaposing these two dimensions produces amatrix with four distinct dimensions of perfor-mance crucial to generating shareholder value.The lower-left quadrant focuses on those aspectsof performance that are primarily internal andnear-term in nature: cost and risk reduction. Quar-terly earnings growth and reduction in exposure toliabilities and other potential losses are importantdrivers of wealth creation. Clearly, unless the firmcan operate efficiently and reduce its risk commen-surate with returns, shareholder value will beeroded.

The lower-right quadrant also focuses on perfor-mance dimensions that are near-term in nature butextends to include salient stakeholders external tothe firm—suppliers and customers in the immedi-ate value chain, as well as regulators, communi-ties, NGOs, and the media. Without appropriateinclusion of these stakeholder interests, the firm'sright to operate may be called into question. Cre-ative inclusion of these stakeholder interests canfoster a differentiated position for the firm, leadingto the enhanced reputation and legitimacy crucialto the preservation and growth of shareholdervalue.

Shifting to the upper-left quadrant of themodel, the firm must not only perform efficientlyin today's businesses but should also be con-stantly mindful of generating the products andservices of the future. Internally, this means de-veloping or acquiring the skills, competencies,and technologies that reposition the firm for fu-ture growth. Without such a focus on innovation,it will be difficult for the firm to create the newproduct and service flow needed to ensure that itprospers well into the future. The creation ofshareholder value thus depends upon the firm'sability to creatively destroy its current capabili-ties in favor of the innovations of tomorrow.

Finally, the upper-right quadrant focuses on theexternal dimensions associated with future perfor-mance. Credible expectations for future growth arekey to the generation of shareholder value; thisdepends upon the firm's ability to articulate a clearvision of what its future growth path and trajectorywill be. A convincing growth trajectory requireseither that the firm offer new products to existingcustomers or tap into previously unserved markets.The growth trajectory provides guidance and di-rection for new technology and product develop-ment.

Firms must perform well simultaneously in allfour quadrants of the model on a continuous basisif they are to maximize shareholder value overtime.'3 Performing within only one or two quad-rants is a prescription for suboptimal performance

and even failure. Firms like Kodak and Xerox,which failed to adequately invest in digital tech-nology, illustrate how overemphasis on today'sbusiness (to the exclusion of tomorrow's technol-ogy and markets) may generate wealth for a timebut will eventually erode shareholder value ascompetitors enter with superior products and ser-vices. •'' Similarly, the recent experience of manyInternet companies stands as testimony to howpreoccupation with tomorrow's business (to the ex-clusion of performing today) may be exciting andchallenging, but short-lived.'^ Finally, companiessuch as Monsanto, which failed to adequately ad-dress stakeholder concerns over genetically mod-ified food, demonstrate that overemphasis on theinternal aspects of the firm may enable short-termexecution but will ultimately blind the firm to theexternal perspectives that are so important to le-gitimacy and competitive imagination.'^

Just as the creation of shareholder value re-quires performance on multiple dimensions, sus-tainable development is also a multidimensionalchallenge. Yet, most managers frame sustainabil-ity not as a multidimensional opportunity, butrather as a one-dimensional nuisance.'' Neverthe-less, the multiple challenges associated withglobal sustainability, seen through the appropri-ate business lenses, can help to identify strategiesand practices which improve performance in allfour quadrants of the shareholder-value frame-work. This, in turn, facilitates the creation of sus-tainable value for the firm.

Most managers frame sustainability notas a multidimensional opportunity, butrather as a one-dimensional nuisance.

Global Drivers of Sustainability

There are four sets of drivers related to globalsustainability. A first set of drivers relates to in-creasing industrialization and its associated ma-terial consumption, pollution, and waste genera-tion. Industrial activity has grown to the pointwhere it may now be having irreversible effects onthe global environment, including impacts onclimate, biodiversity, and ecosystem function.'^While industrialization has produced tremendouseconomic benefits, it has also generated signifi-cant pollution burdens and continues to consumevirgin materials, resources, and fossil fuels at anincreasing rate.'^ Resource efficiency and pollu-tion prevention are therefore crucial to sustainabledevelopment.

2003 Hart and Milstein 59

A second set of drivers relates to the prolifera-tion and interconnection of civil society stakehold-ers. As the power of national governments haseroded in the wake of global trade regimes, non-governmental organizations (NGOs) and other civilsociety groups have stepped into the breach, as-suming the role of monitor and in some cases en-forcer of social and environmental standards.^o Atthe same time, the spread of the Internet and in-formation technology has enabled these groups tocommunicate with each other in ways that wereunimaginable even a decade ago. Internet-connected coalitions of NGOs are making it in-creasingly difficult for governments, corporations,or any large institutions to operate in secrecy.2'Sustainable development thus challenges firms tooperate in a transparent, responsive manner dueto a very well-informed, active stakeholder base.

As the power of national governmentshas eroded in the wake of global traderegimes, non-governmental organizations(NGOs) and other civil society groupshave stepped into the breach.

A third set of drivers relates to emerging tech-nologies that may provide potent, disruptive solu-tions that could render the basis of many of today'senergy- and material-intensive industries obso-lete.^^ Genomics, biomimicry, nanotechnology, in-formation technology, and renewable energy allhold the potential to drastically reduce the humanfootprint on the planet, making the problems ofrapid industrialization all but obsolete.^-^ For ex-ample, bio- and nanotechnology create productsand services at the molecular level, holding thepotential to eliminate the concept of waste andpollution.^-i Similarly, biomimicry represents an at-tempt to emulate nature's processes to create novelproducts and services without having to rely onbrute force to hammer out goods from large stocksof virgin raw materials.^^ Information technologyand renewable energy are distributed in character,meaning that they can be applied in the most re-mote and small-scale settings imaginable, elimi-nating the need for centralized infrastructure andwireline distribution, both of which are environ-mentally destructive.2^ Distributed technologiesthus hold the potential to meet the needs of thebillions of rural poor (who have thus far beenlargely ignored by global business) in a way thatdramatically reduces environmental impact.^^ In-novation and technological change are thus key tothe pursuit of sustainable development.

Finally, a fourth set of drivers relates to the in-creases in population, poverty, and inequity asso-ciated with globalization. While it took thousandsof years for the human population to reach 1 bil-lion, that number has swollen to over 6 billion injust the past two generations.^^ Such rapid popu-lation growth has resulted in massive migrationfrom rural areas to cities and growing inequities inincome. Today, for example, over 4 billion peoplesurvive on less than $1500 per year, the minimumincome needed to avoid serious deprivation.^^ Thecombination of rising population and growing in-equity is increasingly recognized as a prescriptionfor accelerating social decay, political chaos, andterrorism.̂ "^ Social development and wealth cre-ation on a massive scale, especially among theworld's poorest 4 billion, therefore appear to beessential to sustainable development.^' However,such development must follow a fundamentallydifferent course if it is not to result in ecologicalmeltdown.^2

In short, global sustainability is a complex,multi-dimensional concept that cannot be ad-dressed by any single corporate action. Creatingsustainable value thus requires that firms addresseach of the four broad sets of drivers. First, firmscan create value by reducing the level of materialconsumption and pollution associated with rapidindustrialization. Second, firms can create valueby operating at greater levels of transparency andresponsiveness, as driven by civil society. Third,firms can create value through the development ofnew, disruptive technologies that hold the poten-tial to greatly shrink the size of the human footprinton the planet. Finally, firms can create value bymeeting the needs of those at the bottom of theworld income pyramid in a way that facilitatesinclusive wealth creation and distribution.

Connecting the Dots: The SustainableValue

If viewed through the appropriate set of businesslenses, it becomes clear how the sustainabilitydrivers discussed above present opportunities forfirms to improve all four dimensions of share-holder value. As illustrated in Figure 2 (and de-scribed in more detail below), each driver of sus-tainability, and its associated business strategiesand practices, corresponds to a particular dimen-sion of shareholder value. Thinking through thefull range of challenges and opportunities is thefirst step managers can take toward the creation ofsustainable value for the corporation.

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Tomorrow

Drivers

• Dismption

• Clean Tech

• Footprint

Intemal

Drivers

• Pollution

• Consumption

• Waste

Slrategy:Clean TechnologyDevelop the sustainablecompetencies of the future

Corporate Payoff:Innovation & Repositioning

Strategy:Sustainability Vision

Create a shared roadmapior meeting unmet needs

Corporafe Payotl:Growth 7ra;ec(ory

Strategy:Pollution PreventionMinimize waste andemissions from operations

Corporate Payofi:Cost & Risk Reduction

Strategy:Product Stewardship

Integrate stakeholder viewsinto business process

Corporafe Payoff:Reputation & legitimacy

Today

FIGURE 2Sustainable Value Framework

External

Drivers

• Civil Society

• Transparency

• Connectivity

Growing Profits and Reducing Risk ThroughPollution Prevention

The problems of material consumption, waste, andpollution associated with industrialization presentan opportunity for firms to lower cost and riskthrough the development of skills and capabilitiesin pollution prevention and eco-efficiency.^^ Pollu-tion prevention is focused on improving the envi-ronmental efficiency of today's products and pro-cesses—that is, reducing waste and emissions fromcurrent operations. Less waste means better utiliza-tion of inputs, resulting in lower costs for raw mate-rials and waste disposal. Effective pollution preven-tion requires extensive employee involvement, alongwith well-developed capabilities in continuous im-provement and quality management.^^ By derivingmore saleable product or service per pound of in-put, pollution prevention can lead to lower costsand reduced risk. Environmental management sys-tems (e.g., ISO 14000) built on total quality princi-ples provide guidance for the development of sys-tematic processes geared toward removing wasteand lowering risk throughout a firm's operations.^^

Programs that reduce waste and emissionsthrough eco-efficiency have been widely adopted byfirms over the past decade and include such notablecases as Dow Chemical's Waste Reduction AlwaysPays (WRAP) and Chevron's Save Money and Re-

duce Toxics (SMART). Additionally, pollution-pre-vention programs have proliferated at the industrylevel and receive a great deal of attention fromregulatory bodies both in the United States as wellas Europe as potential alternatives to command-and-control regulation.^'' The well-publicized re-sults of pioneering programs like 3M's PollutionPrevention Pays (3P) illustrate the direct, bottom-line benefits that can be realized through pollutionprevention.2^ Indeed, between 1975 and 1990, 3Mreduced its total pollution by over 530,000 tons(a 50 per cent reduction in total emissions) and,according to company sources, saved over $500million through lower raw material, compliance,disposal, and liability costs. In 1990, 3M embarkedon 3P+ which sought to reduce the remainingwaste and emissions by 90 per cent with the ulti-mate goal being zero pollution.^^

Extensive empirical work has also now made itevident that, with the appropriate set of skills andcapabilities (e.g., employee involvement, continu-ous improvement), firms pursuing pollution-prevention and waste-reduction strategies actu-ally do reduce cost and increase profits.''" Pollutionprevention thus provides managers with the clear-est, fastest way to increase shareholder value bygrowing the bottom line for existing businessesthrough reductions in cost and liability.

2003 Har( and Milstein 61

Enhancing Reputation and Legitimacy ThroughProduct Stewardship

Whereas pollution prevention focuses on internaloperations, product stewardship extends beyondorganizational boundaries to include the entireproduct life cycle—from raw material access,through production processes, to product use anddisposal of spent products."" Product stewardshipthus involves integrating the voice of the stake-holder into business processes through extensiveinteraction with external parties such as suppliers,customers, regulators, communities, non-govern-mental organizations, and the media. As such, itoffers a way to both lower environmental impactsacross the value chain and enhance legitimacyand reputation by involving stakeholders in theconduct of on-going operations.•'^ By constructivelyengaging stakeholders, firms increase externalconfidence in their intentions and activities, help-ing to enhance corporate reputation and catalyzethe spread of more sustainable practices withinthe business system at

By constructively engaging stakeholders,firms increase external confidence intheir intentions and activities.

There are many actions firms can take to in-crease shareholder value through product stew-ardship. Cause-related marketing efforts appeal toconsumers' desires to associate their actions (pur-chases) with products that have positive social andenvironmental benefits.'*'' Life-cycle managementextends the value chain beyond traditional firmboundaries by including costs and benefits ofproducts from raw materials to production and ul-timately to disposal by consumers.'*^ Through in-dustrial ecology, firms can even convert the wastesfrom one operation into the inputs to another.''^In1997, for example, Collins & Aikman Floorcover-ings became the first carpet manufacturer to de-velop the capability to convert old carpet and post-industrial PVC waste into new carpet backing for anew product line. Called ER3 (which stands forEnvironmentally Redesigned, Restructured, andReused), this product has been central to the com-pany's growing reputation for environmentallysustainable products and has helped to fuel gainsin market share against competitors.^''

Companies such as Weyerhaeuser and Shellhave increased the use of stakeholder engagementthrough town hall-style meetings, Internet-basedcomment boxes, and other tools designed to pro-vide venues for stakeholders to voice their opin-

ions about a firm's operations. In Europe, a strongregulatory environment coupled with a very activeNGO community has led firms to pursue more col-laborative approaches in addressing business is-sues. Together with industry, European govern-ments are moving forward with leading legislationconcerning take-back laws for electrical, elec-tronic, and appliances manufacturers.^^

The company Nike serves as a recent, salientexample of the value of product stewardship.Faced with growing backlash in the late 1990sregarding its labor and environmental practices,the company turned to product-stewardship strat-egies to recover its reputation and preserve itsright to operate. The company enacted a world-wide monitoring program for all contract factories,using both internal and third-party auditors suchas PriceWaterhouseCoopers. Nike also became acharter member of the Fair Labor Association(FLA), a non-profit group that evolved out of ananti-sweatshop coalition of unions, human rightsgroups, and businesses. Additionally, Nike helpedfound the Global Alliance, a partnership amongthe International Youth Foundation, the MacArthurFoundation, and the World Bank dedicated to im-proving workers' lives in emerging economies.'^^

Aside from taking action on the labor (social)front, Nike also took action environmentally. Foot-wear designers started evaluating their new pro-totypes against a product-stewardship scorecard,using life-cycle analysis. Nike also launched theReuse a Shoe Project to downcycle old, unwantedfootwear. Nike retailers collected shoes andshipped them back to the company where theyground and separated the materials. Through part-nerships with sports surfacing companies, the out-sole rubber and midsole foam were turned intoartificial athletic surfaces. Profits from this busi-ness generated income for the Nike Foundationand the funding of sport surface donations.^^

As the Nike case makes clear, firms use productstewardship to demonstrate that stakeholdervoices and opinions matter and can affect com-pany behavior. Like pollution prevention, productstewardship is centered on improving existingproducts and services. As a consequence, changesare immediate and value is realized quickly in theform of improved community relations, legitimacy,and brand reputation.

Accelerating Innovation and RepositioningThrough Clean Technology

Clean technology refers not to the incremental im-provement associated with pollution prevention.

62 Academy of Management Executive May

but to innovations that leapfrog standard routinesand knowledge.^' The rapid emergence of disrup-tive technologies such as genomics, biomimicry,information technology, nanotechnology, and re-newable energy present the opportunity for firms—especially those heavily dependent upon fossilfuels, natural resources, and toxic materials—toreposition their internal competencies aroundmore sustainable technologies.^^' Thus, rather thansimply seeking to reduce the negative impacts oftheir operations, firms strive to solve social andenvironmental problems through the internal de-velopment or acquisition of new capabilities thataddress the sustainability challenge directly.^^The sustainable competencies that emerge fromthe search for clean technologies are central toa firm's efforts to reposition its internal skill setfor the development and exploitation of futuremarkets.

A growing number of firms have begun to de-velop the next generation of clean technology todrive future economic growth. BP and Shell areramping up investments in solar, wind, and otherrenewable technologies that might ultimately re-place their core petroleum businesses. In the auto-motive sector, Toyota and Honda have already en-tered the market with hybrid power systems intheir vehicles, which dramatically increase fuelefficiency. They also launched a market experi-ment in fuel cell vehicles in Japan at the end of2002. Also in 2002, General Motors launched theAUTOnomy project—a bold $1 billion initiative toreinvent the automobile around hydrogen fuel celltechnology. While many automakers have fuel cellinitiatives, most see the expensive combination ofa fuel cell with a big electric motor as a simplereplacement for the engine, which makes such ve-hicles economically uncompetitive compared tocurrent technology. GM, in contrast, has taken aclean-sheet approach, not only to vehicle designbut also to the entire manufacturing system. Byradically simplifying the design around a fuel cellwhich doubles as the vehicle's chassis, GM hopesto compensate for the higher cost of the fuel cell bydrastically reducing sourcing and productioncosts. While many carmakers talk of a transition toalternative power taking 20-30 years, GM, Toyota,and Honda are committed to making it a commer-cial reality within a decade.̂ "^

In addition, firms such as General Electric, Hon-eywell, and United Technologies are investing intechnologies that would lead to the development ofsmall-scale, widely distributed energy systemsthat could make centralized coal-fired and nuclearpower plants obsolete. Finally, firms such asCargill and Dow are exploring the development of

biologically based polymers to enable renewablefeedstocks such as corn to replace petrochemicalinputs in the manufacturing of plastics. Each ofthese cases is notable for the willingness of firmsto disrupt the very core technologies upon whichtheir businesses currently depend.

DuPont is an example of a large corporation witha well-developed clean-technology strategy. Inthe late 1800s, DuPont transformed itself from amanufacturer of gunpowder and explosives into achemical company, focused on the production ofsynthetic materials using petroleum feedstocks.This strategy produced nearly a century of successwith such well-known blockbuster products as Ny-lon, Lycra, Teflon, Corian, and Kevlar.

DuPont is an example of a largecorporation with a well-developedclean-technology strategy.

In the late 1990s, DuPont embarked on its secondmajor transformation—from an energy-intensivepetrochemical company to a renewable-resourcecompany focused on sustainable growth.^^ To real-ize this transformation, the company has pursuedan aggressive strategy of acquisition, divestiture,and internal technology development. Over thepast decade, for example, DuPont has invested inexcess of $15 billion in biotechnology, includingthe acquisition of Pioneer Hi-Bred, a major playerin the agricultural biotech business. It has alsodivested resource- and energy-intensive busi-nesses such as its oil subsidiary (Conoco) in the1990s and, most recently, its core Nylon and Lycrabusinesses in 2003.

In an effort to shrink its footprint dramatically,the company has set bold targets for 2010—to re-duce greenhouse gas emissions by two-thirdswhile holding total energy use flat, and to increaseits use of renewable resources to 10 per cent ofglobal energy needs. To hit such ambitious targetswhile continuing to grow as a company, DuPontmust fundamentally reorient its technology basetoward biology (e.g., genomics and biomimicry),renewable energy (e.g., fuel cells) and information(i.e., knowledge-intensive rather than resource-intensive products). To accelerate this process,DuPont is creating a venture fund focused on sus-tainable technology development and innovationsaimed at the developing world.

Bold strategies in clean technology continue tobe less common among large, established corpo-rations than are activities in pollution preventionor product stewardship. Payoffs from such invest-

2003 and Milstein 63

ments take time and are determined more by trialand error than internal hurdle rates. Entrenchedcorporate mindsets and standard operating proce-dures suppress the creation of structures that cancatalyze innovation. The risks associated withsuch investments stand in stark contrast to therisk-reducing efforts associated with the pollution-prevention programs discussed above. Firms thatinvest in clean-technology solutions tend to pursuemore novel approaches to long-term challengesand create organizational environments support-ive of the innovation process. Future economicgrowth will be driven by those firms that are ableto develop disruptive technologies that addresssociety's needs. The evidence is increasingly clearthat firms that fail to lead the development andcommercialization of such technologies are un-likely to be a part of tomorrow's economy.^^

Bold strategies in clean technologycontinue to be less common among large,established corporations than areactivities in pollution prevention orproduct stewardship.

Crystallizing the Firm's Growth Path andTrajectory Through a Sustainability Vision

The growing gap between rich and poor, and theunmet needs of those at the bottom of the economicpyramid, present opportunities for firms to define acompelling trajectory for future growth.^'' The real-ization of a more inclusive form of capitalism char-acterized by two-way dialogue and collaborationwith stakeholders previously overlooked or ig-nored by firms (e.g., radical environmentalists,shantytown dwellers, the rural poor in developingcountries) can help to open up new pathways forgrowth in previously unserved markets.^^ Thus, asustainability vision that facilitates competitiveimagination by creating a shared roadmap for to-morrow's business provides guidance to em-ployees in terms of organizational priorities, tech-nology development, resource allocation, andbusiness model design.

The Grameen Bank in Bangladesh is perhaps thebest known example of how a sustainability visioncan open up a completely new pathway for busi-ness growth.^^ Over twenty years ago, MuhammadYunas, an economics professor at the time, con-ceived the idea of a bank focused on offeringmicro-credit loans to the poorest of the poor. Mostbankers assumed that laziness or lack of compe-tence were the reasons that so many lived in abject

poverty. As a result, they focused their attention onmore affluent customers. But Yunas discoveredthat the poor were, for the most part, energetic,motivated, and knew exactly what they needed tomove themselves forward—gaining access tosmall amounts of credit to launch or expand smallenterprises—and built his enterprise to serve thisneed. By the late 1990s, Grameen Bank was provid-ing microcredit services in more than 40,000 vil-lages, better than half the total number in Bang-ladesh. The competitive imagination of GrameenBank has led to a global explosion of institutionalinterest in microlending over the past decade, in-cluding recent entry into this domain by financialgiants such as Citigroup.

Increasingly, MNCs are recognizing that listen-ing to the voices of the poor and disenfranchisedcan be a source of creativity and innovation. Forexample, Hindustan Lever Ltd. (HLL), a subsidiaryof Unilever PLC, has pioneered market develop-ment among the rural poor in India. Through prod-uct development dedicated specifically to theunique needs of the rural poor, HLL has been ableto apply top-class science and technology to bringaffordable shampoos and soaps to this large newmarket.™ Today, better than half of HLL's revenuescome from customers at the bottom of the pyramid.Even more importantly, using the approach toproduct development, marketing, and distributionpioneered in rural India, Unilever has been able toleverage a rapidly growing and profitable busi-ness to other parts of the developing world such asBrazil.61

Recognizing that information poverty may be thesingle biggest roadblock to sustainable develop-ment, Hewlett-Packard has begun to focus atten-tion on the needs of the isolated and disconnectedthrough their World e-Inclusion initiative. As partof their strategy, HP has created an R&D laboratoryin rural India with the express purpose of comingto understand the particular needs of the ruralpoor. They have quickly realized that this is notunoccupied space: local companies such asN-Logue and Tarahaat are also developing infor-mation technology and business models focusedon this enormous potential market. Throughshared access (e.g., Internet kiosks), wireless infra-structure, and R&D focused on cost reduction, thesecompanies are dramatically reducing the cost ofbeing connected.^^

Despite the success of organizations such asGrameen and Unilever, however, most companiescontinue to mistakenly assume that poor marketspossess no value opportunities and have yet to tryto understand the possibilities of serving the mar-kets they are used to ignoring. Firms that do take

64 Academy of Management Executive May

the time appear to recognize that those at the bot-tom of the pyramid lack attention and capital,not ingenuity and aspiration.^^ Companies likeJohnson & Johnson, Dow, DuPont, Coca-Cola, andProcter & Gamble are beginning to take steps tounderstand how best to leverage their skills andresources to meet the basic nutritional, energy,housing, and communications needs of the world'spoorest.s** Those steps include interacting with abroad range of stakeholders previously assumedto have nothing to offer a multinational corpora-tion (e.g., local NGOs, disenfranchised dwellers ofshanty towns, rural villagers, etc.) to highlightwhat unmet needs exist and how their organiza-tion's skills and capabilities might be wielded tomeet them. In turn, this understanding can becomea catalyst for the development of innovative tech-nologies, products, and services that meet thoseneeds and drive growth at multiple levels withinthe economy.^^ Thus, firms that take the time tocreate a compelling sustainability vision have thepotential to unlock future markets of immensescale and scope.

Firms that take the time to create acompelling sustainability vision have thepotential to unlock future markets ofimmense scale and scope.

Toward Sustainable Value

At this point it should be clear that the challenge ofglobal sustainability is complex, multidimen-sional, and emergent in character. Firms are chal-lenged to minimize waste from current operations(pollution prevention), while simultaneously reori-enting their competency portfolios toward moresustainable technologies and skill sets (clean tech-nology). Firms are also challenged to engage inextensive interaction and dialogue with externalstakeholders, regarding both current offerings(product stewardship) as well as how they mightdevelop economically sound solutions to socialand environmental problems for the future (sus-tainability vision).

Taken together, as a portfolio, such strategiesand practices hold the potential to reduce cost andrisk; enhance reputation and legitimacy; acceler-ate innovation and repositioning; and crystallizegrowth path and trajectory—all of which are cru-cial to the creation of shareholder value. The chal-lenge for the firm is to decide which actions andinitiatives to pursue and how best to managethem. Accordingly, we recommend the following

specific steps in the pursuit of sustainable value:diagnosis (taking stock of the company portfolio),opportunity assessment (strengths and weak-nesses in capability), and implementation (the de-sign of projects and experiments).Each is explored in more depth below.

Diagnosis

The sustainable-value framework can be used as asimple but important diagnostic tool. By assessinga company's (or SBU's) activity in each of the fourquadrants of the framework, managers can assessthe degree of portfolio balance. Extreme portfolioimbalance suggests missed opportunities—andvulnerability. Our research suggests that few in-cumbent firms seem to recognize—let alone ex-ploit^—the full range of sustainable business op-portunities available.^^ Most focus their time andattention only on the bottom half of the matrix—short-term solutions tied to existing products andstakeholder groups.

Indeed, programs in pollution prevention andproduct stewardship are well institutionalizedwithin most MNCs today and have saved hundredsof millions of dollars over the past decade. U.S.-based companies have been especially focused onthe efficiency gains and cost savings associatedwith pollution prevention. Highly publicized crisesat companies such as Monsanto and Nike, whofailed to successfully engage the views of stake-holders, have also caused growing numbers offirms to explore strategies for product stewardship.European companies have been particularly pro-active in this regard, actively pursuing strategiesfor stakeholder dialogue, extended producer re-sponsibility, and more inclusive forms of corporategovernance.

Opportunity Assessment

Relatively few established companies, however,have begun to exploit the opportunities associatedwith the upper half of the model—^the portion fo-cused on building new capabilities and markets.Indeed, most clean technologies today are beingdeveloped and commercialized by small, oftenunder-capitalized, new ventures—not by the MNCsthat possess the financial resources for doing sosuccessfully. Similarly, most business experimentsat the bottom of the economic pyramid have beeninitiated by NGOs or small local firms while theemerging market plays of MNCs have been limitedlargely to the elites or emerging middle classes inthe developing world. '̂'' Given that pursuit of cleantechnology and markets at the bottom of the pyra-

2003 Halt and Milstein 65

mid is disruptive in character, perhaps we shouldnot be surprised that large incumbent firms havenot actively blazed these trails or that entrepre-neurs have been likely to seek opportunities toleapfrog existing competitors and claim under-served market space.

Yet, it need not be this way. Just as particularcompetencies predispose some companies to bemore effective than others in implementing pollu-tion prevention and product stewardship (e.g.,quality management, continuous improvement,boundary-spanning capability), some MNCs willbe better positioned than others to pursue cleantechnologies and bottom-of-the-pyramid mar-kets—those with demonstrated ability in acquiringnew skills, working with unconventional partners,incubating disruptive innovations, shedding obso-lete businesses, and creatively destroying existingproduct portfolios, to name just a few. Incumbentfirms with these skill sets possess a potentiallypowerful first-mover advantage compared to thosefirms more oriented toward defending base busi-nesses.

investment in terms of new capability develop-ment and revenue growth.

Sustainable Value: A Huge Opportunity

The opportunity to create sustainable value—shareholder wealth that simultaneously drives ustoward a more sustainable world—is huge, but yetto be fully exploited. The sustainable-value frame-work makes clear the nature and magnitude of theopportunities associated with sustainable devel-opment and connects them to dimensions of valuecreation for the firm. The framework's simplicity,however, should not be mistaken for ease of exe-cution: understanding the connections is not thesame thing as successfully implementing the strat-egies and practices involved. The tasks are verychallenging and complex indeed, suggesting thatonly a few firms will be able to successfully carryout activities in all four quadrants simultaneously,especially those that require the greatest efforts interms of vision, creativity, and patience.

Implementation

To make this opportunity a reality, however, it isnecessary to organize the range of possible activ-ities into discrete projects and business experi-ments. Given the nascent nature of clean technol-ogy and bottom-of-the-pyramid markets, manysmall experiments are far preferable to a singlebig investment. These initiatives must be evalu-ated for funding using a separate set of criteriaand metrics, since they will almost never meet theshort-term revenue and profitability targets asso-ciated with projects designed to expand existingbusinesses.

We recommend using a real-options approach,rather than the more conventional discounted-cash-flow logic.*̂ ^ Real-options thinking introducesthe logic of the private equity market into the firm,with an expected payoff in the 5-7 year time frame,rather than the excessively short-term logic asso-ciated with conventional capital budgeting or theexcessively long-term logic associated with tradi-tional R&D.̂ ^ We also recommend creating a sep-arate pool of investment capital to fund these ini-tiatives and a separate organizational entity tohouse the business experiments aimed at openingup new markets. Without this early protection, thelogic of short-term performance in today's businesswill almost certainly guarantee failure."'" Only asmall percentage of the projects and business ex-periments have to succeed to more than justify the

The opportunity to create sustainablevalue—shareholder wealth thatsimultaneously drives us toward a moresustainable world—is huge.

Stagnant economic growth and stale businessmodels present formidable challenges to corpora-tions in the years ahead. Focusing on incrementalimprovements to existing products and businessesis an important step but neglects the vastly largeropportunities associated with clean technologyand the underserved markets at the bottom of theeconomic pyramid. Indeed, addressing the fullrange of sustainability challenges can help to cre-ate shareholder value and may represent one ofthe most under-appreciated avenues for profitablegrowth in the future.

Endnotes' See Siiglitz, J. 2002. Globalization and its discontents. New

York: W. W. Norton.^ See the National Research Council. 1999. Our comnion jour-

ney. Washington, DC: National Academy Press.^ Soros, G. 2002. Gfeorge Soros on globalization. New York:

Public Affairs.^ Protests at the World Trade Organization, World Bank,

World Economic Forum, G8, and other meetings in places likeSeattle, Washington, DC, Davos, and Rome have become themost visible examples of the frustration felt by many who viewglobalization as inequitable exploitation. See, Nye, J. 2001.Globalization's democratic deficit. Foreign Aifaiis. 80(4): 2-6.

66 Academy of Management Executive May

^ World Commission on Environment and Development. 1987.Our common iutuie. Oxford: Oxford University Press, p. 8.

^ Gladwin, T., Kennelly, J., & Krause, T. 1995. Shifting para-digms for sustainable development: Implications for manage-ment theory and research. Academy of Management Review,20(4): 878-907.

^ See Eikington, J. 1994. Towards the sustainable corporation:Win-win-win business strategies for sustainable development.California Management Review. 36(3): 90-100.

^ We use the terms "global sustainability," "sustainableworld," and "sustainable development" interchangeably to re-fer to the global-scale drivers of sustainability. Similarly, weuse the terms "sustainable enterprise," "corporate sustainabil-ity," and "enterprise sustainability" interchangeably to reier tofirm-level strategies and practices to build value by movingtoward a more sustainable world.

^ See, Holliday, C. 2001. Sustainable growth, the DuPont way.Haivaid Business Beview. 79(8): 129-132.

'" See Friedman, M. The social responsibility of business is toincrease profits. The New York Times Magazine 13 September1970, for the classic argument representing this point of view.

" See Christensen, C. 1998. The innovator's dilemma. Boston,MA: Harvard Business School Press for a detailed discussion ofthe paradox oi focusing on short- versus long-term value. Theconcept of "creative destruction" was first introduced by JosephSchumpeter (1942) in Capitalism, socialism and democracy, NewYork; Harper Torchbooks. More recently, the growing impor-tance of creative destruction to competitive success has beenpersuasively argued in Foster, R., & Kaplan, S. 2001. Creativedestruction. New York: Doubleday.

'̂ See Thompson, ]. 1967. Organiza(ions in action. New York:McGraw Hill for the classic discussion of balancing the needboth to sustain and destroy the technological core underlying afirm's business modei. More recently, these ideas have receivedgrowing attention in the form of work on "core rigidities" {e.g.,Leonard-Barton, D. 1992. Core capabilities and core rigidities: Aparadox in managing new product development. StrategicManagement Journal, 13(SSI): 111-125) and "dynamic capabili-ties" (e.g., Teece, D., Pisano, G., & Shuen, A. 1997. Dynamiccapabilities and strategic management. Stiategic ManagementJournal, 18(7): 509-533).

'̂ This idea is similar to the balanced scorecard (see Kaplan,R., & Norton, D. 1992. The balanced scorecard—measures thatdrive performance. Harvard Business fleview 72(1): 71-79) andother tools that emphasize the need to balance a portfolio ofactions to drive firm value over time.

'* Christensen, C, op. cit.^̂ The experiences of Enron and the numerous dot-bombs of

the tech wreck serve as Ihe most recent illustrations that whileit can be very glamorous to be viewed as on the cutting edge ofthe business world, bankruptcy provides a particularly ineffec-tive platform from which to generate future growth.

'̂ See Hamel, G., & Prahalad, C. K. 1991. Corpcrate imagina-tion and expeditionary marketing. Harvard Business Beview,69(4): 81-92.

'̂ See Rugman, A. M., & Verbeke, A. 1998. Corporate strate-gies and environmental regulations: An organizing framework.Sfrafegic Management Journal, 19(4): 363-375, which notes thatmost managerial approaches to environmental issues take avery simple, static view of the problem.

'^National Reseaich Council, op. cH.; and Daily, G. 1997.Nafure's services; Societal dependence on natural ecosystems.Washington, DC: Island Press.

'̂ See Hawken, P., Lovins, A., & Lovins, H. 1999. Natural cap-italism: Creating the next industrial revolution. Boston, MA:Litlle Brown & Company.

^"Florini, A. (Ed.). 2000. The third foice: The rise of transna-

tional civil society. Washington, DC: Carnegie Endowment forInternational Peace.

^' Rheingold, H. 2002. Smart mobs; The next social revolution.Cambridge, MA: Perseus Publishing.

^̂ See, for example. Hart, S., & Milstein, M. 1999. Global sus-tainability and the creative destruction ol industries. SloanManagement Beview, 41(1): 23-33.

^̂ To be sure, there are many new problems that these tech-nologies may create, making their ultimate contribution to sus-tainability more unknowable; witness the problems Monsantoencountered in pursuing its agricultural biotechnology strategyin the mid to late 1990s.

*̂ Drexler, E. 1986. Engines of creation. Garden City, NY: An-chor Press.

^̂ See Benyus, J. 1997. Biomimicry: Innovation inspired bynature. New York: Morrow.

^̂ Christensen, C, Craig, T., & Hart, S. 2001. The great disrup-tion. Foreign Affairs. 80(2): 80-95.

^'Coyle, D. 2001. Paradoxes of prosperity. New York: TexerePublishing.

^̂ See World Bank. 2000. World development report: Attackingpoverty. New York: Oxford University Press.

^̂ Easterly, W. 2001. The eJusive quest foz growth. Cambridge,MA; MIT Press.

°̂ National Research Council, op. cit. See also Hammond, A.1998. Which world? Scenarios for the 2Ist century, Washington,DC: Island Press.

'̂ See Prahalad, C. K., & Hart, S. 2002. The fortune at thebottom of the pyramid. Strategy + Business, Issue 26: 54-67.

^̂ Von Dieren, W. (Ed.). 1995. Pairing nature info account. NewYork: Copernicus.

^̂ The four strategies developed in this section were firstarticulated in; Hart, S. 1997. Beyond greening: Strategies for asustainable world. Harvard Business Review, 75(1): 66-76. Wewould also like to thank our colleagues at the SustainableEnterprise Academy—in particular, Brian Kelly, David Wheeler,Bryan Smith, John Ehrenfeld, Chris Galea, Art Hanson, DavidBell, Nigel Roome, Jim Leslie and Pat Delbridge—for helping usto clarify our thinking regarding how the drivers of sustainabil-ity, viewed through the proper set of business lenses, influenceshareholder value.

^̂ The most comprehensive treatment of eco-efficiency wasdone by the World Business Council for Sustainable Develop-ment in: DeSimone, L., & Popoff, F. 1997. £co-e//iciency; Thebusiness link to sustainable development. Cambridge; MITPress. See also James, P., & Bennett, M. 1994. Environmenf-reiated performance measurement in business: From emissionsto profit and sustainability? Ashridge Management Group Pub-lication.

^̂ Hart, S. 1995. A natural resource-based view of the firm.Academy of Management Review. 20(4): 986-1014.

^̂ Darnall, N. 2002. Why firms signal green: Environmentalmanagement system certification in the United States. Unpub-lished Ph.D. dissertation. University of North Carolina, ChapelHill.

^'See Marcus, A. 2002. Reinventing environmenfai regula-tion. Washington, DC: RFF Press. For more information onEuropean pollution prevention programs, see European Inte-grated Pollution Prevention and Control Bureau {http:!/eippcb.jrc.es/), the UK government's Enviro Wise Programme(http://www.envirowise.gov.uJc/), and the Implementation andEnforcement of Environmental Law (IMPEL) at http://europa.e-u.int/comm/environment/impel/index.htm). U.S. pollution-prevention programs are documented by the U.S. Environ-mental Protection Agency (http.7/www.epa.gov/epahome/

2003 and Milstein 67

^̂ For more information on these and other programs, seeSmart, B. 1992. Beyond compliance: A new industry view of theenvironment. Washington, DC: World Resources Institute.

^^3M Company. 1992. Poi/u(ion prevendon pays, videotape.'" See, ior example, Christmann, P. 1998. Eiiects ot 'best prac-

tices' of environmental management on cost advantage: Therole oi complementary assets. Academy of Management Jour-nal. 43(4): 663-680; and Sharma, S., & Vredenburg, H. 1998. Pro-active corporate environmental strategy and the developmentof competitively valuable organizational capabilities. StrategicManagement Journal. 19(8): 729-753.

'̂ Through early adoption of extended producer responsi-bility requirements, European governments and firms havepioneered efforts in product stewardship. See, for example,Roome, N., & Hinnells, M. 1993. Environmental factors in themanagement of new product development. Business Sfrafegyand fhe Environmenf, 2(1): 12-27; Welford, R. 1995. Environ-menfai sfrafegy and sustainable development. London:Routledge; and Stager, U. 1996. Managerial issues in closingthe loop. Business Sfrafegy and fhe Environmenf, 5(4):252-268.

*̂ Wheeler, D., & Sillanpaa, M. 1997. The stakeholder corpo-ration. London: Pittman Publishing.

"Eikington, ]. 1998. Cannibals with forks. Gabriola Island:New Society Publishing.

•̂' Hoeffler, S., & Keller, K. 2002. Building brand equity throughcorporate societal marketing. Journal of Public Policy and Mar-keting. 21(1): 78-89.

'"'Fiksel, J. 1995. Design for environment: Creating eco-effi-cient products and processes. New York: McGraw-Hill.

•"̂ For a leading example of industrial ecology, refer toGraedel, T., & Allenby, B. 1995. Industrial ecology. EnglewoodCliffs: Prentice Hall.

•••' Buffington, J., Hart, S., and Milstein, M. 2002. Tandus 2010:Race to sustainabiiity. Center for Sustainable Enterprise, Uni-versity of North Carolina, Chapel Hill.

*° See Proposal For a Directive of the European Parliamentand of the Council on Wasfe Electrical and Electronic Equip-ment and on the Restriction of the Use of Certain HazardousSubsfances in Electrical and Electronic Equipment. COM#(2000)347 available at h((p://europa.eu.inf/comm/environmenf/doc um/0034 7_en ,h fm.

*" McDonald, H., London, T., & Hart, S. 2002. Expanding theplaying Held: Nike's World Shoe project. Washington, DC: WorldResources Institute.

^° Ibid.•̂ ' See, for example, Vergragt, P., 8f van Grootveld, G. 1994.

Sustainable technology development in the Netherlands: The

first phase of the Dutch STD programme. Journa! of CleaneiProduction. 2(3/4): 133-139; Fussier, C. 1996. Driving eco-innova-tion. London: Pittman Publishing; and von Weizsacker, E., Lov-ins, A., & Lovins, H. 1997. Factor four. London: Earthscan Pub-lishing.

^̂ See Hart, S., & Milstein, M., op. cit.^̂ McDonough, W., & Braungart, M. 2002. Cradle to cradle.

New York: North Point Press.'"' Baum, D. 2002. GM's billion-dollar bet. Wired.com. www.

wired.com/wired/archivellO.O8/fuelceUcars.html).^̂ Holliday, C, op. cit.^̂ Hamel, G. 2000. Leading the revolution. Boston: Harvard

Business School Press; Foster, R., & Kaplan, S,, op. cit; andChristensen, C, Craig, T., & Hart, S., op. cit.

^•'See von Dieren, W., op. cit.; Prahalad, C. K., & Hart. S.,op. cit.; and Prahalad, C. K., & Hammond, A. 2002. Servingthe world's poor, profitably. Harvard Business fievJew, 80(9);4-11.

^^Hart, S., & Sharma, S. 2002. Radical transactiveness andcompetitive imagination. Presented at the Academy of Manage-ment Annual Meeting, Denver, CO, August 2002.

^̂ Counts, A. 1996. Give us credit. New York: Times Books.^ Balu. R. 2002. Strategic innovation: Hindustan Lever. Fast

Company, 47: 120-125.^' Prahalad, C. K., & Hart, S., op. cit.^̂ Prahalad. C. K., & Hammond, A., op. cit.^̂ See de Soto, H. 2000. The mystery of capital. New York:

Basic, for a discussion about the value that resides in informaleconomies.

®* These companies and others including Hewlett-Packardand Ford have joined the Base of the Pyramid Learning Labo-ratory at the University of North Carolina's Kenan-Flagler Busi-ness School to explore ways to enter the underserved markets ofthe world in ways that are culturally appropriate and environ-mentally sustainable.

^̂ Hart, S., & Christensen, C. 2002. The great leap: Drivinginnovation from the base of the pyramid. Sloan ManagementReview, 44(1): 51-56.

^̂ Hart, S., 8f Milstein, M., op. cit.^'' Hart, S., & Christensen, C, op. cit.^̂ See Amram, M., & Kulatiiaka, N. 1999. Real opfions. Boston:

Harvard Business School Press; and Milstein, M., & Alessandri,T. New tools for new times: Using real options to identify valuein strategies for sustainable development. Presented at theAcademy of Management Annual Meeting, Toronto, Canada,August 2000.

^̂ Foster, R., & Kaplan, S., op. cit.''° Christensen, C. op. cit.

Stuart L. Hart is a professor ofstrategic management, SarahGraham Kenan DistinguishedScholar, and director of theCenter for Sustainable Enter-prise at the University ol NorthCarolina's Kenan-Flagler Busi-ness School. He received hisPh.D. from the University ofMichigan. His research inter-ests center on strategy innova-tion and change, particularly thestrategic implications of environ-mentalism and sustainable devel-opment. Contact: sihc[r(@uiic.edii.

Mark B. Milstein is an adjunct as-sistant professor and director ofresearch for the Center far Sus-tainable Enterprise and is com-pleting his doctorate in strategicmanagement at Kenan-FlaglerBusiness School at the Universityof North Carolina at Chapel Hill.His research and teaching inter-ests are focused on the relation-ship between strategic deci-sion-making and organizationalchange, industry transforma-tion, and innovation. Contact:miJsfein@emaii.uiic.edu.