Companies traditionally break work down into smaller units, including divisions, business units departments, teams and ultimately roles. This has created specialism of professions, where individuals within corporations focus on doing their best to optimise one part of a big complex network.

Over the last 20 years there has also been a thinning of middle management in the interests of cost reduction. This has eliminated the management layers with a deep understanding of how many of the component parts work and the skills to optimise across them. Further, those middle managers who remain are so busy overseeing the specialists that they have little time to consider and act on broader optimisation opportunities.

In parallel, the challenges of modern business have become more complex and impact most aspects of how a business operates: resource constraints are causing price rises and increasing business risk, externalities are increasingly being priced into the economy, uncertainty and volatility are at all-time highs, corporate social responsibility expectations are escalating, customer demands are increasing, and new technologies are rapidly emerging.

To quote Michael Porter, inventor of Porter’s Five Forces and the father of Competitive Advantage:

“Companies … remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their long-term success. How else could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell?” – Harvard Business Review, Jan/Feb 2011

This evolution of the modern corporation presents value creation opportunities through optimising systems rather than piece parts. We call these opportunities ‘System Value’.

Types of system value include:

• Supply chain partnering including supply community development
• Waste minimisation and recycling
• Closed loop manufacturing
• Site energy and heat management
• New technology investment, adoption, and commercialisation
• Transport and logistics optimisation (including across modes)
• Customer partnering/collaboration

Unlocking this value requires both a new approach and a range of skills. The new approach requires collaboration – ideally internally and externally (ideally including through open innovation). It is not about ‘management’ (involving a narrow focus on the activities of juniors) so much as ‘optimisation’ (involving broad coordination across an organisation at all levels). Perhaps we should acknowledge this by referring to the appropriately skilled class of executives as ‘optimisers’ rather than ‘managers’.

Regarding capabilities, most business schools, corporate education programs, and on-the-job training do not teach system optimisation. Often we have found the best trained on the subject sit within a company’s sustainability team whose systems understanding was often gained studying natural ecosystems.

It is important to note that the necessary skills do not just relate to understanding systems. To unlock system value, capabilities are also needed to quantify the value, design actions to secure it, build support for the actions across different stakeholder groups, create a business case for senior support/funding, and successfully implement the actions. This requires the collaboration of a variety of professionals.

For those who can unlock this system value, the rewards are substantial – and many companies are beginning to recognise this. From private equity firm KKR to manufacturers such as Interface Carpets and Xerox, the corporate world is beginning to capture system value.

KKR (Kohlberg Kravis Roberts), one of the world’s biggest private equity firms is thinking about system value through a sustainability lens to unlock profit opportunities within their acquired companies. This started in 2008 when KKR worked with environmentalists to reduce the planned emissions of their acquisition target TXU, the energy company, enabling a profitable buyout. Since then KKR have been working with the Environmental Defence Fund to reduce the environmental impacts – and costs – of a number of their acquisitions. These savings are significant: in 2010, KKR reported $160M in operating cost savings in the previous two years.

There has been plenty written about the system-wide transformation of Interface Carpets towards is vision of zero environmental impact. What is less known is the substantial system value that they have created – including cost savings (over $440M), staff productivity gains, and market share gains.

Fuji Xerox was facing closure in Australia – a market too small for them to economically compete given the cost of importing parts from Japan compared to lower cost Asian manufacturers. Instead, Fuji Xerox changed their business model to remanufacture components recovered from their installed base of copiers. This not only allowed the business to return to profitability, but also was adopted internationally by Xerox and has won global environmental awards.

• A sustainability transformation roadmap describing the building blocks of a successful program of action
• The three major challenges along the sustainability journey and how to overcome them
• Guiding principles which provide five simple tenets for success

The paper has been written recognising that every organisation is on its own unique journey, but often (from our experience) facing similar hurdles. We therefore hope that it offers something for every reader who is interested in sustainability. Click here to read the paper.

Before we dive into these, it is perhaps worth reflecting on 2011’s predictions to see how they fared (for the original predictions click here):

1. Energy efficiency is now being taken seriously and is widely recognized as the low risk ‘quick win’ to kick-start a company’s sustainability efforts with rapid payback.

2. The Marginal Abatement Cost Curve (MACC) has managed to hang on for another year, but the Emission Reduction Investment Curve (ERIC) is the most popular topic on Greg’s blog so interest is clearly increasing (see the discussion on ERICs Vs MACCs here).

3. Offshore wind saw its biggest growth year to date in 2011. According to the EWEA, 150 GW of offshore wind projects are now in various stages of planning in Europe. In 2011, an estimated 1,000 MW was installed in European waters, bringing total installed capacity to 3,294MW. The UK saw an increase of two-thirds in electricity from offshore wind in first three quarters of 2011 and now has enough installed wind capacity (onshore plus offshore) to supply more than 3,300,000 homes. This growth saw many companies entering the sector in 2011.

4. 2011’s Fukushima disaster and Germany’s consequent decision to shut down nuclear has left gas as the most likely transition solution to a renewable energy economy. The predicted supply concerns have intensified and are likely to worsen in 2012 as the environmental impacts of fraccing become more widely known and create doubt about viable coal seam gas volumes. This will further increase scrutiny of China’s likely gas sourcing strategy and impact on global gas demand.

5. China asserted its dominance of wind and solar manufacturing in 2011, which, combined with a tough market, resulted in the shut-down of BP Solar and German-based Solon, and the bankruptcy of US companies Solyndra, SpectraWatt, and Evergreen Solar.

We score ourselves around 80%, with all 5 directionally correct.

So for 2012, what do we expect?

1. Sustainability as a profit driver. A number of recent studies have demonstrated that laggard companies have recognized the need to up their game because they are missing out on substantial value including new products, new business models, cost reduction, risk reduction, staff engagement, licence to operate, and brand enhancement. Projecting forward, 2012 may be the year when the majority of companies become proactive about capturing sustainability rather than being reactive/compliant. For a longer discussion of the benefits on offer click here.

2. Focus on the ‘how’ of delivering sustainability. In our discussions with clients and on project work, we see increasing attention being paid to the practicalities of implementing a more sustainable approach – both top down using formal change levers and bottom up by engaging with staff and harnessing their enthusiasm for creating a better world. Many companies understand the ‘why’ and the ‘what’ of sustainability, but even those who have made significant progress can struggle with the ‘how’. We predict a strong focus in 2012 on how to embed sustainability into organisations.

3. Innovation as a key contributor to, and profitable output from, a more sustainable approach to business. Companies are rediscovering the power of innovation to drive both profitability and sustainability. It is the actions of line staff on a day-to-day basis that drives much of the environmental and social impact of a company, so good sustainability programs are engaging with line staff and providing them with formal and informal tools and support to encourage, capture, develop and share ideas. This innovation focus is improving company sustainability, identifying new profit improvement opportunities, and increasing staff morale.

4. A boom in LED lighting. Costs have decreased and quality increased to the point where LED lights are economically more attractive than alternatives on a whole-of-life basis. The growth in LED lighting will be assisted in the UK by the phase-out of incandescent bulbs in 2012 and the Green Deal. Note that some countries such as Australia have already phased out incandescents and a large number of other nations (including China, the US, and across Europe,) have either begun the phase-out or have plans to do so in the near future. Click here for more information on the phase-out.

We welcome your thoughts on these.

]]> http://www.laverypennell.com/http:/www.laverypennell.com/sustainability-predictions-for-2012/feed/ 0 http://www.laverypennell.com/http:/www.laverypennell.com/new-paper-unlocking-new-value-in-a-changing-world/ http://www.laverypennell.com/http:/www.laverypennell.com/new-paper-unlocking-new-value-in-a-changing-world/#comments Wed, 16 Nov 2011 19:12:12 +0000 admin http://www.laverypennell.com/?p=391 This paper explores how to unlock value from today’s business challenges. Much of this value remains largely untapped, creating rich returns for organisations looking to improve their bottom lines in tough market conditions. These new value opportunities are different from traditional sources of value and require an unusual combination of capabilities and a multi-pronged approach. Click here to read the paper.

Working with the Booz & Company Low Carbon & Sustainability team, Nick Pennell co-authored an article published in Strategy + Business looking at how the world’s cities develop their infrastructure over the next 30 years will determine the future path of global warming. Click here to read the article.