Companies now overwhelmingly embrace sustainability as integral to their mission. In one recent survey of major international enterprises, more than 70% reported they were already using or intending to use the U.N. Sustainable Development Goals to set specific performance targets, with particular focus on Goal 12 “Responsible Production & Consumption” and Goal 13 “Climate Action” [1].

Yet, even self-imposed environmental sustainability targets can be difficult to meet. Only 45% of the companies reported “a great deal” of success in achieving sustainability goals set for 2020, and 50% were relatively unhappy with the results of their efforts in addressing the most critical sustainability issues in their supply chain.

Amid the global pandemic, businesses are under more pressure than ever to “adapt or die”, with the focus in many cases purely on remaining profitable and financially solvent. Within this context, is sustainability just another burden in already turbulent times, as the United Nations fears in its most recent progress report? [2]

In this blog, we discuss the following ideas:

  • Economic growth and material consumption must be de-coupled
  • New business models might be needed to support environmental sustainability
  • Technological innovation across supply chain interfaces is required to sustain the step-change in environmental impact

At first glance, it is easy to see sustainability commitments only as a disruption to existing operations. For decades, businesses have been primarily measured against financial targets (e.g. ROCE), with their structure and operations evolving over the years subject to this selection pressure.

Sustainability targets have introduced new selection pressures that now force these “finely-tuned” operations to adapt. For instance, whilst continuing to increase revenue and profit each fiscal year, it is also now expected that businesses minimise their operating footprint, reducing waste, emissions, and the broader environmental impact of their product or service. The conundrum is to achieve all these targets concurrently. 

With the correct balance of business model and technical innovation, it is possible for the disruption of these targets to be recognised and transformed into an opportunity to build a stronger business.

Economic growth and material consumption must be de-coupled

Economic growth has historically been accompanied by an increase in resource consumption, waste and emissions. 

De-coupling growth from consumption is essential to any business wishing to undergo a sustainable transformation, and not doing so risks placing sustainability and profit in conflict. 

In principle, economic growth and material and energy consumption can be decoupled via business model innovation or sustainable technology innovation. In practice, the two often work best when they go hand in hand. 

New business models might be needed to support environmental sustainability

Company A sells packaging solutions. Customers have an option of buying different grades of packaging to transport their goods, with the price of each grade reflecting the amount of material in the packaging; higher grades are suitable for transport of heavier goods, over longer distances.

Performance-based pricing allows the weight of packaging to be reduced whilst simultaneously increasing profit.

Within the constraints of this business model, there is little incentive to reduce the amount of material used in products as this is directly coupled to revenue. One solution might be to change pricing strategy to performance-based metrics, rather than packaging weight. This new pricing strategy would allow Company A to reduce the amount of material it consumes each year without reducing revenue. 

A pay per use business model allows Company B to increase device lifetimes without jeopardising profit.

Company B manufactures white goods. With a reputation for high quality, low-energy appliances, customers have been benefitting from ever-increasing device lifetimes as Company B continues to invest in R&D and introduce new technological innovations.

The increased product lifetimes have already improved Company B’s sustainability standing relative to its many competitors. That said, it is obvious that offering extended lifetime reduces the need for the consumer to replace worn-out machines, potentially reducing revenues in the medium term. The company could look to offset that reduction, by selling at a higher price, but this poses the risk that the consumer will not buy into this ‘lowest cost of ownership’ offer. Alternatively, the company could switch to a now popular pay per use service, or recoup its investment by selling an annual service contract in a similar way to the automotive sector.

The greatest complication in applying this approach to external sensors are their sheer number, and the fact that they are located all over the car exterior. Recent Amazon acquisition, Zoox, uses 18 cameras, 10 radars and 8 lidars – this would require a lot of jets, wipers and liquid.  

This problem has been nicely summed up by Jim Schwyn of tier 1 automotive manufacturer Valeo: “Are we in a situation where we are going to take the gasoline tank from a car and replace it with a windshield washer reservoir to keep these things clean? [1]”

Technological innovation is required to sustain the step-change in environmental impact

In both cases, aligning the business model is essential, but not sufficient. Technological innovation is often required to make a business more environmentally sustainable whilst continuing to deliver an economic return.

With its new performance-based pricing, Company A is now incentivised to reduce the amount of material in its packaging whilst maintaining performance. To enable this shift requires a better understanding of design, materials and manufacturing technology to develop solutions that meet this new product offering, using data captured through extensive trials to substantiate its new value proposition. It also requires Company A to engage with its customers so that they buy into this concept.

Company B’s new service-based offering incentivises further investment in improving device lifetime and increasing serviceability. To enable their new service-based model, they need a platform for tracking number of washes and charging the customer appropriately. They would also now benefit financially from innovations that decrease the cost of ownership. What are the best technological solutions to enable this? 

Concluding remarks

Many of today’s societal, environmental and industrial practices are drastically unsustainable and there is foreboding evidence pushing for urgent, far-reaching and disruptive action. In 2020, most companies have embraced sustainable development goals and set themselves ambitious targets, shifting the question to how sustainability targets can be met in a financially sustainable manner.

Both companies from our simplified examples had to recognise that their existing business models did not incentivise sustainable transformations, thereby limiting the scope for change. By relaxing the constraints of their existing business models and considering new pricing strategies or service-based offerings, a solution could be identified that aligned sustainability and financial performance. 

Aligning these metrics was however not enough: technological innovation and development were required to realise the opportunities that the new business models had unlocked. In both cases, the companies had also become more invested stakeholders in the product beyond its traditional point of sale, and they would need to sell their new offering to their customers. 

Outside of our examples, it should not be forgotten that the operations of real companies take place in an interconnected world. Any change must be done within the context of, and coordinated with, all the other parties that form today’s complex supply chains.

To conclude, technology and business model must innovate together. Failure to develop the two in tandem could lead to missed opportunities and leave financial and environmental sustainability targets in conflict.

Samuel Hair & Michael Sequeira