A Portfolio of Green Strategies

How do companies create value? There really are only so many ways. Borrowing from strategy guru Michael Porter's work and tweaking it a bit for the environmental age, there are four big buckets of value creation from thinking green: cutting costs, reducing risk, driving revenues, and enhancing brand value.

Within those buckets, companies find many tactics that work. But after years of pursuing environmental wins, some of the trend-setters have a good sense of the most productive paths.

So clearly there's real value in green. But where should companies start and what kind of value should they pursue? Before you can tackle these tougher questions, you need to start with some basic ones: what's the environmental impact or "footprint" for the company and for key products up and down the value chain? How do environmental issues affect us, our suppliers, and our customers?

Even these seemingly simple questions can be hard to answer, and even if the analysis is done, companies that understand their footprint along the value chain are often surprised in two related ways:

Look at electronics or transportation companies, for example. For both these industries, energy use - often a good proxy for total footprint - is large in two key areas of the value chain: upstream (mining metals) and manufacturing. But the full value-chain footprint is dominated by impacts during the customer use phase (a fancy way of describing when we drive our cars or use our computers). Picture a wedge of impact growing through the value chain, with the smaller (though still considerable) impact upstream and the larger end with customers.

At the other end of the spectrum, take the food or packaged goods industries. The customer use impact is negligible; aside from packaging, the product disappears. But the upstream energy and water use in agriculture dwarfs the operational footprint. As one dairy company executive told me, "Our risk is the cow." So reverse the wedge and put the big end in the back of the chain.

If you understand these wedges, track where the big environmental impacts are, and then reduce them, you'll create the most value, right? Not quite. First, getting everyone used to the idea of looking at the full value-chain impact is a big hurdle. Second, much of the value from reducing impacts elsewhere in the chain is not easily measured (or even captured). Finally, when you try to choose the best strategy for creating value, you may stumble on a second surprise.

The best bang for your buck - especially with hard-to-measure intangible value - may not come from the big part of the wedge of impacts. When impacts line up well with business value, everybody's happy. But reality is often more complicated.

Let's look at Mattel and toy makers again. These companies make many products that use energy and are made of plastic you can't recycle. They could probably reduce their measurable footprint the most by designing toys that use less or no energy (a downstream issue) and less plastic (a downstream issue with waste and a big upstream issue in petrochemical production).

But look at intangible value, and the picture is different. Think of the damage to both brand and revenues when lack of knowledge about the supply chain causes a scare about toxic lead. When your brand is a majority of total company value, avoiding a reputational hit is the critical environmental priority. Look, lead is a serious problem, but for many products the exposure is small. So it may not be the biggest environmental footprint issue in the value chain. But handling a lead problem well will still create the most value for the company.

A Portfolio Approach

So what's the answer to these challenges? In short, hedge your bets and develop a portfolio approach. Big companies have built portfolios of brands and businesses for years. Why not portfolios of strategies and approaches?

Of course, it's not a random process and you need to prioritize your green efforts. But you can't just rank the expected return on investments in financial terms and pick the top ones, since it's impossible to perfectly measure either the benefits from longer-term investments or intangible value. Given the imperfect connection between value created and environmental impact, you also can't choose based solely on your value-chain footprint analysis. It's a judgment game, so increase the odds of getting the most value from investments of time, money, and resources by diversifying.

The goal should be to create value in a range of ways; to hit all four buckets of value. Of course, heavy industry will continue cutting costs in operations while consumer products, electronics, and service businesses will likely drive revenues and brand value with green product innovation. But market dynamics can switch fast, so concentrating only on one bucket makes for a riskier portfolio.

How do you diversify by value buckets? I suggest thinking along three key tactical dimensions and you'll likely hit all the value buckets.

Small and Large

As Wal-Mart sustainability exec Rand Waddoups says, it's important to "Start small with things that have a high probability of paying out. You find the second step easier than the first, and soon you're sprinting." This idea is close to the "flywheel" concept in Jim Collins' Good to Great. If you get an organization moving in the right direction, you start to build serious momentum. But you need to throw in some big goals and projects as well. Wal-Mart set a goal of using 100 percent renewable energy and hard targets for its suppliers (a 25 percent reduction in energy use of the appliances it sells).

Short term and Long term

Mixing small and large benefits will correlate somewhat with time frame, but not perfectly. If you're lucky, you'll find short-term projects with large benefits. These no-brainer "low-hanging fruit" are still out there. Even the most efficient companies are discovering some shockingly easy ways to cut costs. In one of its giant, heat-creating server farms, Yahoo! slashed the energy needed to cool the building by two-thirds just by regularly cycling in outside air -they basically opened the door.

Most companies, if they have sustainability strategies at all, are looking at short-to medium-term time frames from a few months to a few years. But this is a mistake; much larger value may be waiting further down the road, if you start now.

Toyota's Prius was a decade-long journey to build the "twenty-first-century car." In recent years, as Toyota took the innovation mantel from its competitors, it reaped enormous value by selling many other cars and trucks. But that was only possible after laying the groundwork years before.

Exploring long-term threats and opportunities is necessary for an even more fundamental reason: it may be required to survive. As we answer the call to deal with climate change and other environmental challenges, we're seeing a fundamental shift in how we live our lives and how business is conducted. It's a profound change, and the winners will lead the way.

Up and Down the Value Chain

It's tempting to just pursue easily measured paybacks, which are usually cost reductions in operations. But given where the real environmental impacts lie, you may be missing tons of real and intangible value elsewhere in the value chain. For downstream issues, like energy use in products, one path is fairly obvious: design a better, lower-impact widget and you can take market share. That's top-line growth that every CEO loves.

But look also upstream into your supply chain; even if it seems those impacts are out of your control, you'll find value. First, you may guarantee access to critical supplies. More than a decade ago, amid concerns about the depletion of ocean species, Unilever helped create the Marine Stewardship Council to sustainably manage fisheries and ensure a steady supply for its frozen foods (no fish, no sales). Second, if you know your supply chain is greener, you can market that fact-think recycled paper at Staples or organic foods and personal care products from companies such as Horizon or Aveda. Third, you reduce the risk of brand-damaging events. IKEA audits its wood supply chain to ensure wood is harvested sustainably. Executives believe this is the right thing to do, but the effort also protects the brand.

Diversity in strategies, like in nature, makes for a more stable system. Again, companies need to prioritize by figuring out where the biggest impacts are and where to get serious value. But they can't solely approach it that clinically or they risk missing opportunities. The larger, longer-term projects that target different parts of the value chain are hard to justify in the short run and may not get funding. The successful green strategy becomes a balancing act of quick wins versus placing big bets, of greening current products and operations versus innovating for the future, and of scrutinizing your operations inside and out. Creating a portfolio of strategies and initiatives that pursue different kinds of green value is just good business.

*Footnotes