Sustainable growth will be to corporate performance in this century what business productivity was in the last century. But creating the foundation for a sustainable growth strategy also will be among this century’s greatest challenges. Our professional experience tells us that sustainable growth demands senior executive attention as a business imperative. Yet it is our personal experiences that have reinforced this conviction.
That personal experience arrived for me (Kevin Kramer) while driving through Cleveland’s dilapidated inner-city neighborhoods for a meeting with the Boys & Girls Club. We talked about recruiting more kids to the club, and I asked the director whether the children in a building just across the street would be interested in joining. “Oh no!” said the director. “The kids in that building belong to a rival gang. If they walk across the street, there will be severe repercussions.” I asked myself: How can such a fractured community create a sustainable environment? And, correspondingly, how do we in the corporate world create mindsets that promote a sustainable relationship among our business, society, and the environment?
Another “aha” moment about sustainability came when I was president of Alcoa’s wheel business. A customer said, “Kevin, Alcoa has a great story—you just need to tell it.” I realized that the story was about sustainable growth, since we had been emphasizing the environmental benefits of using Alcoa’s aluminum for making automotive and commercial truck wheels. Soon after I took on my new role, I began reading widely about the connection between sustainability and innovation. The research gave me the framework for working with other senior executives to develop a steering committee, create a product focus, and develop a communications strategy to widen the sustainability effort across the company.
In my case (Jochen Zeitz), I was focused for years on restructuring and reengineering a business that was close to bankruptcy. After I managed to turn around PUMA’s brand and financials, I realized that I had to shift my thinking and consider business and its impacts on society and the environment in a more comprehensive and holistic way. I realized that the traditional paradigm of business delivering employment and growth was no longer enough, nor was it enough for me as a personal aspiration. I came to understand that the world cannot be compartmentalized and that the status quo—business creating profit and jobs, government setting the rules and infrastructure, civil society defining ethics, and religion presiding over spiritual matters—was not leading to the positive change we need in today’s world.
After having spent nearly 20 years traveling and living in Africa, in 2008 I established the Zeitz Foundation with headquarters in Kenya to support innovative sustainable projects and to promote the holistic balance of conservation, community, culture, and commerce. My private life and business life were merging. I realized that although business is part of the problem, it is potentially the best suited to solve it. I also was inspired to do something because I was in a position of influence to help change the old paradigm, where business works against nature, to one where it works with nature. This mission took further root when I met Anselm Grün, a prominent Benedictine monk and author on spirituality. We spent long hours over the course of many months exchanging ideas and belief systems, which we documented in the book Prayer, Profit and Principles: The Monk and the Manager. I also spent time in Grün’s monastery, which was the last step in my own transformation. These conversations were a turning point for me: I realized that I, too, had a responsibility. Jean-Paul Sartre once said: “Once we know and are aware, we are responsible for our action and our inaction. We can do something about it or ignore it. Either way, we are still responsible.” This quote resonated profoundly with me, and I have never looked back.
Although executives we know recognize that sustainable growth is important, it is not clear to many of them how to implement a new approach effectively. We define sustainable growth as the use of sustainability-driven innovation to generate new business revenues from sustainable products and services, new business models, and business platforms. We believe sustainable growth is critical as growth from traditional sources becomes constrained in developed countries and economic growth accelerates in emerging countries, along with concerns about its impact on the environment and society.
This article describes a strategic framework that ties together the principles for implementing sustainable growth—principles that involve both the emotions of the heart and the reasoning powers of the head. It is based on our experience over the past decade as senior executives at Alcoa and PUMA. Together, our two companies have funded hundreds of sustainability-based business initiatives, engaged thousands of employees in delivering sustainable products and services to millions of customers, and faced many successes and failures in implementing sustainable growth. We hope this experience in implementing sustainable growth across diverse industries, markets, and regions will be of use to leaders and employees of companies pursuing a similar quest.
A SUSTAINABLE GROWTH FRAMEWORK
What are the preconditions for initiating sustainable growth efforts in a company? First, external market conditions need to be conducive to initiating sustainable growth. They include growing customer expectations, increasing resource constraints for energy, water, raw materials, and other inputs needed by the company, heightening stakeholder expectations (especially among shareholders), and increasing environmental regulations.
In addition, market conditions need to be such that sustainability presents business opportunities for growth. This issue has been explored in greater detail in recent business literature; for example, Ram Nidumolu, C. K. Prahalad, and M. R. Rangaswami’s article “Why Sustainability Is Now the Key Driver of Innovation” in the September 2009 issue of the Harvard Business Review. At both Alcoa and PUMA, many of these external drivers were sufficiently in place by 2007 to create an environment for initiating sustainable growth efforts.
Although favorable external conditions are necessary for initiating sustainable growth, they are not sufficient. Internal organizational conditions are important, and there must be senior management involvement. Moreover, the organization’s culture needs to be amenable to adopting the difficult changes associated with sustainable growth. Even when these conditions are in place, success may not occur. The key to success is a strategic approach, a framework, that we describe below.
Executives need to grasp three overarching lessons to achieve sustainable growth. First, they need to understand that a new paradigm for doing business will require fundamental changes to mindsets, behaviors, and business models. In our experience, many senior executives, and even sustainability consortia and indexes, fail to recognize the scale and scope of the shifts needed. Second, sustainable growth takes place when core business units that generate most of the revenue adopt and make it central to their business. Third, middle management represents both the central challenge and the core opportunity for enabling sustainable growth.
In this article, we identify five phases that organizations will need to go through to implement sustainable growth.
PHASE I: FORM A COHERENT VIEWPOINT ON SUSTAINABLE GROWTH
Sustainable growth means different things to different companies. Companies need to begin their implementation by forming viewpoints on sustainable growth that are a good fit with their values and strengths. Some of these viewpoints emphasize reducing damage or making a positive contribution to the environment or resource sustainability. Others emphasize first targeting the societal and relational conditions underlying environmental and resource impacts. Each company must take an industry-specific approach.
Alcoa’s starting viewpoint in 2009 was eco-friendly growth. It directly sought to mitigate the environmental impacts of producing its products while emphasizing the fuel efficiency and recycling benefits of using aluminum and other products to pursue business growth. The aluminum industry is one of the most energy intensive operations in the world. It produces about 500 million tons of CO2 emissions annually (nearly 1 percent of global emissions). Energy costs are the primary drivers of production costs, which determine the energy source and location of operations. This is especially true of aluminum smelters, which consume the most energy and generate 80 percent of the carbon emissions from all value chain activities. As energy costs from fossil-based sources increase and the effects of CO2 emissions on climate change become clear, growth that explicitly incorporates environmental impacts has become a strategic imperative for Alcoa.
The organizational challenge Alcoa faced was to get senior management to recognize that although previous sustainability efforts continued to be necessary, they were no longer sufficient to address the needs of Alcoa’s customers. For example, Alcoa had long been recognized as a leader in environmental, health, and safety matters. Along with other leading aluminum companies globally, it had supported long-term goals for greenhouse gas reductions, safety improvements, water treatment and reuse, and mine reclamation. The main challenge now was to convince executive management and business unit leaders to go beyond these traditional goals and recognize that further sustainability was imperative and could lead to greater revenues.
For PUMA, the starting point and resulting PUMAVision initiative was ethical growth, which emphasizes a moral foundation for stakeholder relationships to create mutual trust and high performance in the organization. PUMA believes that sustainable growth takes place when employees and other partners embed ethical thinking and integrity into their interactions with one another and with the natural world. PUMA arrived at this point in 2008 after setting up intense planning sessions among the CEO, senior executives, and an outside team with expertise in the environment, biodiversity, human relationships, peace, the arts, ethics, and philosophy. PUMA defined ethical growth as being fundamentally fair, honest, positive, and creative, a combination of traits it calls the 4Keys. It then established three major programs—PUMA.Safe, PUMA.Peace, and PUMA. Creative—to oversee behavioral change within the company and enable measurable contributions for stakeholders, the environment, and society. PUMA.Safe’s aim is to reduce the company’s carbon footprint, facilitate the development of sustainable products, and raise work and production standards worldwide. The goal of PUMA. Peace is to create programs that foster a more peaceful world. The PUMA.Creative program aims to bring together individual artists and organizations and to provide them with a platform for creative exchange and international exposure.
The organizational challenge for PUMA in this phase was that understanding and implementing an ethical framework required a great deal of effort from PUMA employees. The company faced huge educational, behavior, and management challenges and set out on a path to commit the time and resources to create deep and long-lasting organizational change.
PHASE II: INITIATE CHANGE THROUGH EMOTIVE MEANS
The second phase of the process focuses on targeted changes to mindsets through affective means that address emotions and feelings, providing a crucial link to initiating behavior changes. Below are a few approaches that Alcoa and PUMA used.
Provide peer inspiration. Credible organizations or peers can be pivotal in changing mindsets and inspiring new norms of behavior. Alcoa organized several meetings on sustainability and innovation based on the best corporate practices of eco-friendly growth. During these workshops, Alcoa compared its efforts and identified new business opportunities that core businesses could explore. These conversations enabled the business units within Alcoa that were further along the path to sustainable growth to serve as reference points for units just getting started. This peer inspiration resulted in new thinking and action, specifically around opportunities that Alcoa was overlooking. The meetings were enhanced by the mix of people involved: group presidents of the midstream and downstream divisions, the chief financial officer of the primary products group, the chief technology officer, and several core business unit presidents and directors.
The main challenge for Alcoa was to convince the broader management team that behavior changes would provide competitive advantages—not just against aluminum manufacturing competitors, but also against companies that produced competing materials such as steel, glass, copper, and plastics. To strengthen these arguments, Alcoa’s growth initiatives group used recent consumer research and personal anecdotes about the changing priorities of key customers.
PUMA also used peer inspiration to unleash the emotive drivers of behavioral change. All employees, including the CEO, are expected to embody the 4Keys in their daily interactions. Employees are urged to guide each other through lapses in behavior or judgment, especially at meetings. Such peer inspiration and pressure have shaped norms of behavior among employees. For example, PUMA created a partnership with Yves Béhar, a leading industrial designer, to design a new packaging system for PUMA footwear, called the Clever Little Bag, that would substantially reduce consumption of fuel, water, and materials because of improved transport logistics and package content. This partnership proved catalytic, as the designs developed in collaboration with the in-house team led to critical recognition and awards. PUMA’s designers aspired to emulate Béhar’s contributions, recognizing that designs could be cool and sustainable at the same time. The experience tapped into the designers’ desire to create a better world and to emulate admirable peers.
Choose credible change agents. Role models are also an important means for enabling the new behaviors needed to implement sustainable growth. At Alcoa, the chief sustainability officer is the former chief financial officer for the primary products group, and he has strong credibility with the core business groups. PUMA hired a museum curator with expertise in cultural change to drive the implementation of PUMAVision, who has become central to the initiative.
Because reputation is a driver of emotive behaviors, it needs to be explicitly considered during the implementation phase. Choosing the specific reputation to influence is important. Many companies aim to achieve a high rank in sustainability indexes as an end in itself. But core business managers are more likely to be influenced by the business unit’s reputation among prospective employees, key customers, and the managers’ professional community. These reputations will drive sustainable growth behaviors more than scores on sustainability indexes. This focus also prevents greenwashing and can enable stronger partnerships with NGOs developing sustainable capacity.
For example, product designers at PUMA care deeply about their reputation among design publications. As part of PUMAVision, PUMA developed the Creative Africa Network, the world’s largest online network of African artists across different disciplines, and turned the network over to the artist community to own, operate, and expand. The sustainable designs and discussions generated in the community’s forum were then picked up and publicized by leading design magazines. The value of this publicity far exceeded what PUMA could have purchased through advertisements. Most important, it validated the appeal of sustainable and local designs for PUMA designers.
Although successes have been achieved through the Clever Little Bag and the Creative Africa Network, PUMA designers continued to view sustainable growth as a significant challenge because progress is complex and takes time. PUMA has needed to nurture and encourage the efforts of product designers continually to keep them on track.
PHASE III: EMBED SUSTAINABLE GROWTH INTO ORGANIZATIONAL IDENTITY
Once changes in mindsets and behaviors begin to jell, enterprises need to identify the most effective way to embed sustainable growth initiatives within core business activities. Fundamental questions such as “Who do we want to become as a company?” and the related question “Who are we now?” become a natural preoccupation for managers and employees.
Recent research, such as Mary Jo Hatch and Majken Schultz’s collection Organizational Identity, suggests an important difference between organizational identity and culture. Organizational identity focuses on the central, distinctive, and enduring aspects that describe what the organization stands for. It is more focused, explicit, instrumental, and textual than organizational culture, which is more unfocused, tacit, emergent, and contextual. Organizational identity is the tangible “we” that arises from the intangible processes of culture. An important aspect of organizational identity is organizational mission or purpose, but organizational identity is much more than mission or purpose. It is what the organization represents to its employees.
Because organizational identity informs the enterprise’s core business activities, efforts to embed sustainable growth within it must be supported and led by the CEO and senior executives. Sustainable growth becomes an effective part of organizational identity if it provides a clear justification for the future existence of the company and guides the experience of its customers.
Justification for future existence. At Alcoa, organizational identity was redefined through two related questions customers would ask in the future: “Why aluminum?” and “Why Alcoa?” Aluminum’s chief competitors are steel in the automotive industry, carbon fiberreinforced polymers (CFRP) in the aircraft industry, and polyethylene terephthalate (PET) in the packaging industry. Although primary aluminum is highly energy intensive in its production, it has advantages in reusability when compared to CFRP and PET and in fuel efficiency when compared to steel. Moreover, Alcoa has positioned itself as the market leader in developing new technologies for producing and using aluminum and other metals. By incorporating the viewpoint of eco-friendly growth, Alcoa’s organizational identity is slowly shifting from being a producer of primary aluminum to one that produces sustainable products and positions aluminum as the preferred environmental choice.
A challenge that Alcoa’s change agents faced was to prove why aluminum and Alcoa’s sustainable innovations made financial sense to customers. To do this, Alcoa developed a quantitative tool that showed a financial return on investment for the change. Another challenge was ensuring that a consistent message was sent to all stakeholders around sustainable growth. Alcoa leveraged the broader coalition of global aluminum associations in the United States, Canada, Europe, Australia, and elsewhere as well as the International Aluminium Institute in London. Getting all stakeholders, internal and external to Alcoa, to move toward sustainable growth was an important and difficult element, but it has justified the company’s future existence.
Guide desired customer experience. Once managers at PUMA became fluent in the 4Keys, the focus shifted to making sustainable growth a core part of PUMA’s organizational identity. PUMA changed its corporate mission to reflect the viewpoint of the customer. Before PUMAVision, the company’s mission was “to be the most desirable Sportlifestyle brand in the world.” Now PUMA sought “to be the most desirable and sustainable Sportlifestyle company in the world.” In addition, PUMA’s brand identity was changed to “We are the DJ: the brand that joyfully mixes the influences from sport and lifestyle with the desire to contribute to a better world.” This emphasis on sustainability, contribution to a better world, and a joyful experience in using PUMA’s products has been the driver of PUMA’s business strategy and products since 2008.
The main challenge for PUMA at this stage was the complexity of sustainability as it applied to a sports lifestyle company. The change agents at PUMA had to develop clear definitions of sustainable design, sourcing, and production, so that employees could better implement PUMA’s mission and brand identity.
PHASE IV: INSTITUTIONALIZE SUSTAINABLE GROWTH
Sustainable growth gathers momentum and is institutionalized in core businesses through formal mechanisms, such as business models, business systems and processes, and performance targets. These mechanisms need to go beyond the traditional sustainability steering committees; they need to focus on how sustainable growth opportunities will be systematically identified, justified, implemented, and evaluated in furthering strategy. In their absence, decisions on sustainable growth get made ad hoc and are informed primarily by enthusiasm and high ideals rather than by strategic thinking that focuses on business value, scale, and institutionalization.
Informal mechanisms, such as emotive means and organizational identity, and formal mechanisms, such as models, systems, processes, and performance targets, have an iterative and escalating relationship. Although informal mechanisms seed the ground through supportive mindsets and identities that initiate change to behaviors, formal mechanisms capture and communicate these changes in the familiar language of business. In turn, these changes build motivation and help change behaviors even more, leading to transformative changes.
At Alcoa, formal mechanisms for evaluating conventional market opportunities were modified to include sustainable growth. Several new opportunities have been identified in building and construction, transportation, and reuse of production waste, which could be worth billions of dollars, while significantly improving the environment. Alcoa also instituted an employee compensation system that incorporates performance incentives related to sustainability. Moreover, each business is required to report on sustainable growth progress at its quarterly business review with the company’s executive council.
An important implementation challenge for Alcoa has been clear corporate communication regarding how each employee can promote sustainability. This is especially important because 20 percent of an employee’s incentive compensation is tied to reaching internal targets. As more employees inquire about how they can help hit the sustainable growth targets, the incentives system appears to be gaining traction.
Environment-related product performance targets are also important of waste by 2015, much of which will take place through changes to its product distribution and packaging system. Last, PUMA has developed one of the world’s first formal environmental profit and loss (EP&L) systems, which will include targets for environment-related costs and benefits to measure business performance.
Currently, the principal challenge at PUMA is to create and implement a staged approach to introducing EP&L. PUMA is an early innovator; virtually no other company in the world has attempted to implement such a system. PUMA has to proceed carefully with EP&L to ensure it does not overwhelm the other considerable changes within the company.
PHASE V: EVOLVE BUSINESS FOUNDATION FOR SUSTAINABLE GROWTH
The first four phases create a basic foundation for sustainable growth. Yet the business foundation will continue to evolve because sustainable growth is an ongoing transformation whose long-term features are unclear. New and radically different business opportunities may arise that require implementation. Given the unfamiliarity of this growth paradigm, it is important to create a culture of learning, experimentation, evaluation, and persistence.
In our experience, it often takes four to five years of sustained commitment before core units begin to recognize sustainable growth as a new paradigm for business. Setbacks are bound to happen and should be viewed as occasions for learning. The best approach is to view resources spent on sustainable growth as an investment in building a business foundation that is critical for future success. Even when the basic elements of the business foundation are in place, profound questions about the nature of sustainable growth will continue to arise.
At Alcoa, sustainable growth is becoming especially important in the midstream and downstream businesses. The company is witnessing increasing demand for sustainable products in the automotive industry as US automakers recover and higher mileage standards are implemented. Emerging markets in China, India, and other countries are providing new and large markets for fuel-efficient transportation and green construction. Moreover, as the clean energy industry grows, new markets in renewable energy equipment are emerging. Globally, demand for aluminum in midstream and downstream markets is expected to grow from 53 million metric tons to 93 million metric tons between 2010 and 2020 for the industry as a whole. At Alcoa, sustainable growth initiatives are expected to add several billion dollars in incremental revenue by 2013. At the same time, Alcoa has also made significant progress in reducing its carbon emissions. For example, the upstream primary products group had set a goal of 20 percent reduction in carbon emissions by 2020 over 2005 levels; by 2010, it had already achieved a 22 percent reduction. In recognition of its sustainability efforts, Bloomberg-Maplecroft ranked Alcoa third among 350 US companies in climate-related innovation and carbon management.
Despite these opportunities, Alcoa continues to face profound questions that challenge the company and the industry. Aluminum is reusable and almost three-fourths of the aluminum that has been produced is still in use. Because of that, Alcoa is trying to ensure that CO2 emissions from the production of new aluminum are reduced, either through new operations technologies or by finding cleaner sources of energy. For the aluminum industry, upstream activities such as bauxite mining, alumina refining, and aluminum smelting are highly energy intensive and have high profit margins (ranging from 30 to 40 percent), whereas midstream and downstream activities such as extrusion, rolling, and finished products are less energy intensive but have lower profit margins (ranging from 10 to 25 percent). How can Alcoa continue to expand into more mid- and downstream products and increase its profit margins through new technologies and other innovations, while meeting the performance and cost expectations of its customers? How can Alcoa improve the business model for recycled aluminum to successfully enter markets beyond packaging? Moreover, how can Alcoa use the lessons learned in aluminum and apply them to the other materials it works with?
At PUMA, the success of PUMAVision is leading to new opportunities. By 2015, 50 percent of PUMA’s product portfolio is expected to be from sustainable products, representing €2 billion. PUMA has received numerous awards as a sustainability leader, including the German Sustainability Award for Most Sustainable Strategy 2010. Initial results of PUMA’s EP&L analysis show that the direct annual ecological impact of PUMA’s own operations is €7.2 million, and an additional €87.2 million is from the supply chain.
Sustainable growth is being implemented throughout the French multinational holding company PPR, which in addition to PUMA includes fashion, luxury, and high-end retail brands such as Gucci, Stella McCartney, Yves Saint Laurent, the Redcats Group, and Fnac. Ethical growth through fairness, honesty, creativity, and a positive outlook to work and relationships will be a key component of the group’s approach to sustainable growth. Although this expansion holds great possibilities, it also poses profound challenges. Highend fashion and luxury items are often perceived to be indifferent to, or even at cross-purposes with, sustainable growth. How can PPR implement a credible way to produce sustainable products for high-end items and still maintain its identity? How can PPR maintain a coherent approach across the disparate brands in its portfolio? And can PPR develop and implement an approach that leverages its global infrastructure to achieve a tipping point for sustainable growth within the holding company and industrywide?
Thomas Kuhn observed toward the end of his book The Structure of Scientific Revolutions, “If a paradigm is ever to triumph it must gain some first supporters, men who will develop it to the point where hardheaded arguments can be produced and multiplied.” The core message in implementing a sustainable growth paradigm is that it is a persistent, iterative, and constantly evolving effort, linking “soft” means to formal mechanisms that provide “hard” arguments. And, as Kuhn argued, it requires activist leadership.
We believe a sustainable growth framework is like a DNA double helix, comprising two interconnected strands that run in opposite directions but are mutually dependent. The strands in this case are not two polymers of nucleotides, but the heart and the head, with the heart governing the moral and ethical imperatives of sustainable growth and the head figuring out how to make them a practical reality. In the end, regardless of how the process of sustainable growth unfolds, one thing remains clear to us: Its successful implementation will make or break the credibility of business as a worldwide institution for meeting society’s economic needs.
Ram Nidumolu is CEO of InnovaStrat, an advisory and consulting company for sustainability strategy and innovation at global corporations.
Kevin Kramer is president of growth initiatives at Alcoa, and was previously president of the Alcoa wheels and structures business.
Jochen Zeitz is CEO of Sport & Lifestyle Group and chief sustainability officer of PPR, and chairman of the board of directors of PUMA.