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Creating Sustainable Value [and Executive Commentary]Author(s): Stuart L. Hart, Mark B. Milstein, Joseph CaggianoSource: The Academy of Management Executive (1993-2005), Vol. 17, No. 2 (May, 2003), pp. 56-69Published by: Academy of ManagementStable URL: http://www.jstor.org/stable/4165956 .Accessed: 06/01/2011 10:48Your use of the JSTOR archive indicates your acceptance of JSTOR’s Terms and Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR’s Terms and Conditions of Use provides, in part, that unlessyou have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and youmay use content in the JSTOR archive only for your personal, non-commercial use.Please contact the publisher regarding any further use of this work. 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MilsteinExecutive OverviewJust as the creation of shareholder value requires performance 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.*-… … … … .e..-.. … … … …. … … .-. … …….-.. . . … …. … … ..-… …. … … … … …. … … … … …. … .. .-. … “Sustainabilityis as foreign a concept tomanagers in capitalist societies as profits areto managers in the former Soviet Union.”-WilliamRuckelshaus First EPA AdministratorWith 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 developed markets, a widening gap between richand poor, growing levels of environmental degradation, and concern that the developing world maybe losing control over its own destiny have combined to create drag on the global economy.2 Theterrorist attacks in the U.S. on September 11, 2001made it clear that the world is inextricably interconnected and that poverty, hopelessness, andperceived exploitation in one part of the world willnot remain geographically isolated.3 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.4The idea of sustainability has come to representthese rising expectations for social and environmental performance. Global sustainability hasbeen defined as the ability to “meet the needs ofthe present without compromising the ability offuture generations to meet their needs.”5 Similarly,sustainable development “is a process of achieving human development … in an inclusive, connected, equitable, prudent, and secure manner.”6 Asustainable enterprise, therefore, is one that contributes to sustainable development by deliveringsimultaneously economic, social, and environmental benefits-the so-called triple bottom line.7A sustainable enterprise is one thatcontributes to sustainable developmentby delivering simultaneously economic,social, and environmental benefits-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.8 Forsome managers, it is a moral mandate; for others,a legal requirement. For still others, sustainabilityis perceived as a cost of doing business-a necessary evil to maintain legitimacy and right to operate. A few firms have begun to frame sustainability as a business opportunity, offering avenues forlowering cost and risk, or even growing revenuesand market share through innovation.9562003 Hart and Milstein 57For most firms, the pursuit of enterprise sustainability remains difficult to reconcile with the objective 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.’0 By starting with legal or moral argumentsfor firm actions, however, managers inevitably underestimate 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 sustainability, viewed through the appropriate set of business lenses, can help to identify strategies andpractices that contribute to a more sustainableworld and, simultaneously, drive shareholder value; 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 sustainableworld and, simultaneously, driveshareholder value.This article develops the strategic logic for thepursuit of sustainable value. We begin by specifying 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 challenges are being converted by companies into initiatives to increase shareholder value. We closewith some thoughts about how to create truly sustainable value.Shareholder Value Is a MultidimensionalConstructFigure 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 manage today’s business while simultaneously creating tomorrow’s technology and markets. This dimension captures the tension experienced by theneed to realize short-term results while also generating expectations for future growth.” The horizontal axis reflects the firm’s need to grow andprotect internal organizational skills and capabilities 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.’2TomorrowInnovation & Growth Path &Repositioning TrajectoryInternal Shareholder ExternalCost & Risk Reputation &Reduction LegitimacyTodayFIGURE 1Key Dimensions of Shareholder Value58 Academy of Management Executive MayJuxtaposing these two dimensions produces amatrix with four distinct dimensions of performance 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. Quarterly 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 commensurate with returns, shareholder value will beeroded.The lower-right quadrant also focuses on performance dimensions that are near-term in nature butextends to include salient stakeholders external tothe firm-suppliers and customers in the immediate value chain, as well as regulators, communities, NGOs, and the media. Without appropriateinclusion of these stakeholder interests, the firm’sright to operate may be called into question. Creative 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 constantly mindful of generating the products andservices of the future. Internally, this means developing or acquiring the skills, competencies,and technologies that reposition the firm for future 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 capabilities in favor of the innovations of tomorrow.Finally, the upper-right quadrant focuses on theexternal dimensions associated with future performance. 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 direction for new technology and product development.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 quadrants is a prescription for suboptimal performanceand even failure. Firms like Kodak and Xerox,which failed to adequately invest in digital technology, illustrate how overemphasis on today’sbusiness (to the exclusion of tomorrow’s technology and markets) may generate wealth for a timebut will eventually erode shareholder value ascompetitors enter with superior products and services.’4 Similarly, the recent experience of manyInternet companies stands as testimony to howpreoccupation with tomorrow’s business (to the exclusion of performing today) may be exciting andchallenging, but short-lived.’-5 Finally, companiessuch as Monsanto, which failed to adequately address stakeholder concerns over genetically modified 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 legitimacy and competitive imagination.’6Just as the creation of shareholder value requires performance on multiple dimensions, sustainable development is also a multidimensionalchallenge. Yet, most managers frame sustainability not as a multidimensional opportunity, butrather as a one-dimensional nuisance.’7 Nevertheless, the multiple challenges associated withglobal sustainability, seen through the appropriate business lenses, can help to identify strategiesand practices which improve performance in allfour quadrants of the shareholder-value framework. This, in turn, facilitates the creation of sustainable value for the firm.Most managers frame sustainability notas a multidimensional opportunity, butrather as a one-dimensional nuisance.Global Drivers of SustainabilityThere are four sets of drivers related to globalsustainability. A first set of drivers relates to increasing industrialization and its associated material consumption, pollution, and waste generation. Industrial activity has grown to the pointwhere it may now be having irreversible effects onthe global environment, including impacts onclimate, biodiversity, and ecosystem function.18While industrialization has produced tremendouseconomic benefits, it has also generated significant pollution burdens and continues to consumevirgin materials, resources, and fossil fuels at anincreasing rate.’9 Resource efficiency and pollution prevention are therefore crucial to sustainabledevelopment.2003 Hart and Milstein 59A second set of drivers relates to the proliferation and interconnection of civil society stakeholders. As the power of national governments haseroded in the wake of global trade regimes, nongovernmental organizations (NGOs) and other civilsociety groups have stepped into the breach, assuming the role of monitor and in some cases enforcer of social and environmental standards.20 Atthe same time, the spread of the Internet and information technology has enabled these groups tocommunicate with each other in ways that wereunimaginable even a decade ago. Internetconnected coalitions of NGOs are making it increasingly difficult for governments, corporations,or any large institutions to operate in secrecy.21Sustainable 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 technologies that may provide potent, disruptive solutions that could render the basis of many of today’senergy- and material-intensive industries obsolete.22 Genomics, biomimicry, nanotechnology, information technology, and renewable energy allhold the potential to drastically reduce the humanfootprint on the planet, making the problems ofrapid industrialization all but obsolete.23 For example, bio- and nanotechnology create productsand services at the molecular level, holding thepotential to eliminate the concept of waste andpollution.24 Similarly, biomimicry represents an attempt 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.25 Information technologyand renewable energy are distributed in character,meaning that they can be applied in the most remote and small-scale settings imaginable, eliminating the need for centralized infrastructure andwireline distribution, both of which are environmentally destructive.26 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.27 Innovation and technological change are thus key tothe pursuit of sustainable development.Finally, a fourth set of drivers relates to the increases in population, poverty, and inequity associated with globalization. While it took thousandsof years for the human population to reach 1 billion, that number has swollen to over 6 billion injust the past two generations.28 Such rapid population 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.29 Thecombination of rising population and growing inequity is increasingly recognized as a prescriptionfor accelerating social decay, political chaos, andterrorism.30 Social development and wealth creation on a massive scale, especially among theworld’s poorest 4 billion, therefore appear to beessential to sustainable development.3′ However,such development must follow a fundamentallydifferent course if it is not to result in ecologicalmeltdown.32In short, global sustainability is a complex,multi-dimensional concept that cannot be addressed 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 potential 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 Framework33If viewed through the appropriate set of businesslenses, it becomes clear how the sustainabilitydrivers discussed above present opportunities forfirms to improve all four dimensions of shareholder value. As illustrated in Figure 2 (and described in more detail below), each driver of sustainability, and its associated business strategiesand practices, corresponds to a particular dimension of shareholder value. Thinking through thefull range of challenges and opportunities is thefirst step managers can take toward the creation ofsustatinable value for the corporation.60 Academy of Management Executive MayTomorrowDrivers Drivers Clean Strategy: TechnologySustainabilityStrategy: VisionDevelop the sustainablecompetencies of the futureCreate a shared roadmapfor meeting unmet needsCorporate Payoff:Growth TrajectoryCorporate Payoff:Innovation & Repositioning /Drivers vr * Disruption * Population* Clean Tech * Poverty* Footprint *InequityInternal Sustainable ExternalValue /Drivers Strategy:Pollution PreventionStrategy:Product StewardshipMinimize waste andemissions from operationsCorporate Payoff:Cost & Risk ReductionIntegrate stakeholder viewsinto business processCorporate Payoff:Reputation & Legitimacy /Drivers* Pollution * Civil Society* Consumption * Transparency* Waste * ConnectivityTodayFIGURE 2Sustainable Value FrameworkGrowing Profits and Reducing Risk ThroughPollution PreventionThe 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.34 Pollution prevention is focused on improving the environmental efficiency of today’s products and processes-that is, reducing waste and emissions fromcurrent operations. Less waste means better utilization of inputs, resulting in lower costs for raw materials and waste disposal. Effective pollution prevention requires extensive employee involvement, alongwith well-developed capabilities in continuous improvement and quality management.35 By derivingmore saleable product or service per pound of input, pollution prevention can lead to lower costsand reduced risk. Environmental management systems (e.g., ISO 14000) built on total quality principles provide guidance for the development of systematic processes geared toward removing wasteand lowering risk throughout a firm’s operations.36Programs 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 Reduce Toxics (SMART). Additionally, pollution-prevention 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 commandand-control regulation.37 The well-publicized results of pioneering programs like 3M’s PollutionPrevention Pays (3P) illustrate the direct, bottomline benefits that can be realized through pollutionprevention.38 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 ultimate goal being zero pollution.39Extensive empirical work has also now made itevident that, with the appropriate set of skills andcapabilities (e.g., employee involvement, continuous improvement), firms pursuing pollutionprevention and waste-reduction strategies actually do reduce cost and increase profits.40 Pollutionprevention thus provides managers with the clearest, fastest way to increase shareholder value bygrowing the bottom line for existing businessesthrough reductions in cost and liability.2003 Hart and Milstein 61Enhancing Reputation and Legitimacy ThroughProduct StewardshipWhereas 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.4′ Product stewardshipthus involves integrating the voice of the stakeholder into business processes through extensiveinteraction with external parties such as suppliers,customers, regulators, communities, non-governmental 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.42 By constructivelyengaging stakeholders, firms increase externalconfidence in their intentions and activities, helping to enhance corporate reputation and catalyzethe spread of more sustainable practices withinthe business system at large.43By constructively engaging stakeholders,firms increase external confidence intheir intentions and activities.There are many actions firms can take to increase shareholder value through product stewardship. Cause-related marketing efforts appeal toconsumers’ desires to associate their actions (purchases) with products that have positive social andenvironmental benef its.44 Life-cycle managementextends the value chain beyond traditional firmboundaries by including costs and benefits ofproducts from raw materials to production and ultimately to disposal by consumers.45 Through industrial ecology, firms can even convert the wastesfrom one operation into the inputs to another.46In1997, for example, Collins & Aikman Floorcoverings became the first carpet manufacturer to develop the capability to convert old carpet and postindustrial 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 company’s growing reputation for environmentallysustainable products and has helped to fuel gainsin market share against competitors.47Companies such as Weyerhaeuser and Shellhave increased the use of stakeholder engagementthrough town hall-style meetings, Internet-basedcomment boxes, and other tools designed to provide venues for stakeholders to voice their opinions about a firm’s operations. In Europe, a strongregulatory environment coupled with a very activeNGO community has led firms to pursue more collaborative approaches in addressing business issues. Together with industry, European governments are moving forward with leading legislationconcerning take-back laws for electrical, electronic, and appliances manufacturers.48The 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 strategies to recover its reputation and preserve itsright to operate. The company enacted a worldwide 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 improving workers’ lives in emerging economies.49Aside from taking action on the labor (social)front, Nike also took action environmentally. Footwear designers started evaluating their new prototypes 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 partnerships with sports surfacing companies, the outsole rubber and midsole foam were turned intoartificial athletic surfaces. Profits from this business generated income for the Nike Foundationand the funding of sport surface donations.50As the Nike case makes clear, firms use productstewardship to demonstrate that stakeholdervoices and opinions matter and can affect company 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 TechnologyClean technology refers not to the incremental improvement associated with pollution prevention,62 Academy of Management Executive Maybut to innovations that leapfrog standard routinesand knowledge.5′ The rapid emergence of disruptive technologies such as genomics, biomimicry,information technology, nanotechnology, and renewable energy present the opportunity for firmsespecially those heavily dependent upon fossilfuels, natural resources, and toxic materials-toreposition their internal competencies aroundmore sustainable technologies.52 Thus, rather thansimply seeking to reduce the negative impacts oftheir operations, firms strive to solve social andenvironmental problems through the internal development or acquisition of new capabilities thataddress the sustainability challenge directly.53The 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 develop 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 replace their core petroleum businesses. In the automotive sector, Toyota and Honda have already entered the market with hybrid power systems intheir vehicles, which dramatically increase fuelefficiency. They also launched a market experiment 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 vehicles 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 commercial reality within a decade.54In addition, firms such as General Electric, Honeywell, 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 ofbiologically 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 Nylon, 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.55 To realize 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 businesses 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 reduce 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 resourceintensive products). To accelerate this process,DuPont is creating a venture fund focused on sustainable technology development and innovationsaimed at the developing world.Bold strategies in clean technology continue tobe less common among large, established corporations than are activities in pollution preventionor product stewardship. Payoffs from such invest2003 Hart and Milstein 63ments take time and are determined more by trialand error than internal hurdle rates. Entrenchedcorporate mindsets and standard operating procedures suppress the creation of structures that cancatalyze innovation. The risks associated withsuch investments stand in stark contrast to therisk-reducing efforts associated with the pollutionprevention programs discussed above. Firms thatinvest in clean-technology solutions tend to pursuemore novel approaches to long-term challengesand create organizational environments supportive 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 unlikely to be a part of tomorrow’s economy.56Bold 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 VisionThe 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.57 The realization of a more inclusive form of capitalism characterized by two-way dialogue and collaborationwith stakeholders previously overlooked or ignored 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.58 Thus, asustainability vision that facilitates competitiveimagination by creating a shared roadmap for tomorrow’s business provides guidance to employees in terms of organizational priorities, technology 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 business growth.59 Over twenty years ago, MuhammadYunas, an economics professor at the time, conceived the idea of a bank focused on offeringmicro-credit loans to the poorest of the poor. Mostbankers assumed that laziness or lack of competence were the reasons that so many lived in abjectpoverty. 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 providing microcredit services in more than 40,000 villages, better than half the total number in Bangladesh. The competitive imagination of GrameenBank has led to a global explosion of institutionalinterest in microlending over the past decade, including recent entry into this domain by financialgiants such as Citigroup.Increasingly, MNCs are recognizing that listening 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 development among the rural poor in India. Through product development dedicated specifically to theunique needs of the rural poor, HLLhas been ableto apply top-class science and technology to bringaffordable shampoos and soaps to this large newmarket.60 Today, better than half of HLL’srevenuescome 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 business to other parts of the developing world such asBrazil.61Recognizing that information poverty may be thesingle biggest roadblock to sustainable development, Hewlett-Packard has begun to focus attention on the needs of the isolated and disconnectedthrough their World e-Inclusion initiative. As partof their strategy, HP has created an R&Dlaboratoryin 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 information technology and business models focusedon this enormous potential market. Throughshared access (e.g., Internet kiosks), wireless infrastructure, and R&Dfocused on cost reduction, thesecompanies are dramatically reducing the cost ofbeing connected.62Despite 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 markets they are used to ignoring. Firms that do take64 Academy of Management Executive Maythe time appear to recognize that those at the bottom of the pyramid lack attention and capital,not ingenuity and aspiration.63 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.64 Those steps include interacting with abroad range of stakeholders previously assumedto have nothing to offer a multinational corporation (e.g., local NGOs, disenfranchised dwellers ofshanty towns, rural villagers, etc.) to highlightwhat unmet needs exist and how their organization’s skills and capabilities might be wielded tomeet them. In turn, this understanding can becomea catalyst for the development of innovative technologies, products, and services that meet thoseneeds and drive growth at multiple levels withinthe economy.65 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 ValueAt this point it should be clear that the challenge ofglobal sustainability is complex, multidimensional, and emergent in character. Firms are challenged to minimize waste from current operations(pollution prevention), while simultaneously reorienting their competency portfolios toward moresustainable technologies and skill sets (clean technology). 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 (sustainability vision).Taken together, as a portfolio, such strategiesand practices hold the potential to reduce cost andrisk; enhance reputation and legitimacy; accelerate innovation and repositioning; and crystallizegrowth path and trajectory all of which are crucial to the creation of shareholder value. The challenge for the firm is to decide which actions andinitiatives to pursue and how best to managethem. Accordingly, we recommend the followingspecific steps in the pursuit of sustainable value:diagnosis (taking stock of the company portfolio),opportunity assessment (strengths and weaknesses in capability), and implementation (the design of projects and experiments).Each is explored in more depth below.DiagnosisThe 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 incumbent firms seem to recognize-let alone exploit-the full range of sustainable business opportunities available.66 Most focus their time andattention only on the bottom half of the matrixshort-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 stakeholders, have also caused growing numbers offirms to explore strategies for product stewardship.European companies have been particularly proactive in this regard, actively pursuing strategiesfor stakeholder dialogue, extended producer responsibility, and more inclusive forms of corporategovernance.Opportunity AssessmentRelatively few established companies, however,have begun to exploit the opportunities associatedwith the upper half of the model-the portion focused 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.67 Given that pursuit of cleantechnology and markets at the bottom of the pyra2003 Hart and Milstein 65mid is disruptive in character, perhaps we shouldnot be surprised that large incumbent firms havenot actively blazed these trails or that entrepreneurs have been likely to seek opportunities toleapfrog existing competitors and claim underserved market space.Yet, it need not be this way. Just as particularcompetencies predispose some companies to bemore effective than others in implementing pollution 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 markets-those with demonstrated ability in acquiringnew skills, working with unconventional partners,incubating disruptive innovations, shedding obsolete 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 businesses.ImplementationTo make this opportunity a reality, however, it isnecessary to organize the range of possible activities into discrete projects and business experiments. Given the nascent nature of clean technology and bottom-of-the-pyramid markets, manysmall experiments are far preferable to a singlebig investment. These initiatives must be evaluated for funding using a separate set of criteriaand metrics, since they will almost never meet theshort-term revenue and profitability targets associated with projects designed to expand existingbusinesses.We recommend using a real-options approach,rather than the more conventional discountedcash-flow logic.68 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 associated with conventional capital budgeting or theexcessively long-term logic associated with traditional R&D.69We also recommend creating a separate pool of investment capital to fund these initiatives 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.70 Only asmall percentage of the projects and business experiments have to succeed to more than justify theinvestment in terms of new capability development and revenue growth.Sustainable Value: A Huge OpportunityThe opportunity to create sustainable valueshareholder wealth that simultaneously drives ustoward a more sustainable world-is huge, but yetto be fully exploited. The sustainable-value framework makes clear the nature and magnitude of theopportunities associated with sustainable development and connects them to dimensions of valuecreation for the firm. The framework’s simplicity,however, should not be mistaken for ease of execution: understanding the connections is not thesame thing as successfully implementing the strategies 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.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 corporations 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 create shareholder value and may represent one ofthe most under-appreciated avenues for profitablegrowth in the future.Endnotes1See Stiglitz, J. 2002. Globalization and its discontents. NewYork: W. W. Norton.2 See the National Research Council. 1999. Our common journey. Washington, DC: National Academy Press.‘Soros, G. 2002. George Soros on globalization. New York:Public Affairs.4 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 Affairs, 80(4): 2-6.66 Academy of Management Executive May‘World Commission on Environment and Development. 1987.Our common future. Oxford: Oxford University Press, p. 8.6 Gladwin, T., Kennelly, J., & Krause, T. 1995. Shifting paradigms for sustainable development: Implications for management theory and research. Academy of Management Review,20(4): 878-907.7 See Elkington, J. 1994. Towards the sustainable corporation:Win-win-win business strategies for sustainable development.California Management Review, 36(3): 90-100.8 We use the terms “global sustainability,” “sustainableworld,” and “sustainable development” interchangeably to refer to the global-scale drivers of sustainability. Similarly, weuse the terms “sustainable enterprise,” “corporate sustainability,” and “enterprise sustainability” interchangeably to refer tofirm-level strategies and practices to build value by movingtoward a more sustainable world.9 See, Holliday, C. 2001. Sustainable growth, the DuPont way.Harvard Business Review, 79(8): 129-132.10See 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 of 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 importance of creative destruction to competitive success has beenpersuasively argued in Foster, R., & Kaplan, S. 2001. Creativedestruction, New York: Doubleday.12 See Thompson, J. 1967. Organizations 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 model. 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 capabilities” (e.g., Teece, D., Pisano, G., & Shuen, A. 1997. Dynamiccapabilities and strategic management. Strategic ManagementJournal, 18(7):509-533).13 This idea is similar to the balanced scorecard (see Kaplan,R., & Norton, D. 1992. The balanced scorecard-measures thatdrive performance. Harvard Business Review 72(1): 71-79) andother tools that emphasize the need to balance a portfolio ofactions to drive firm value over time.1″ Christensen, C., op. cit.‘5 The experiences of Enron and the numerous dot-bombs ofthe tech wreck serve as the most recent illustrations that whileit can be very glamorous to be viewed as on the cutting edge ofthe business world, bankruptcy provides a particularly ineffective platform from which to generate future growth.16 See Hamel, G., & Prahalad, C. K. 1991. Corporate imagination and expeditionary marketing. Harvard Business Review,69(4): 81-92.7 See Rugman, A. M., & Verbeke, A. 1998. Corporate strategies and environmental regulations: An organizing framework.Strategic Management Journal, 19(4):363-375, which notes thatmost managerial approaches to environmental issues take avery simple, static view of the problem.18 National Research Council, op. cit.; and Daily, G. 1997.Nature’s services: Societal dependence on natural ecosystems.Washington, DC: Island Press.19See Hawken, P., Lovins, A., & Lovins, H. 1999. Natural capitalism: Creating the next industrial revolution. Boston, MA:Little Brown & Company.20 Florini, A. (Ed.). 2000. The third force: The rise of transnational civil society. Washington, DC: Carnegie Endowment forInternational Peace.21 Rheingold, H. 2002. Smart mobs: The next social revolution.Cambridge, MA: Perseus Publishing.22 See, for example, Hart, S., & Milstein, M. 1999. Global sustainability and the creative destruction of industries. SloanManagement Review, 41(1):23-33.23 To be sure, there are many new problems that these technologies may create, making their ultimate contribution to sustainability more unknowable; witness the problems Monsantoencountered in pursuing its agricultural biotechnology strategyin the mid to late 1990s.24 Drexler, E. 1986. Engines of creation. Garden City, NY: Anchor Press.25See Benyus, J. 1997. Biomimicry: Innovation inspired bynature. New York: Morrow.26 Christensen, C., Craig, T., & Hart, S. 2001. The great disruption. Foreign Affairs, 80(2): 80-95.27 Coyle, D. 2001. Paradoxes of prosperity. New York: TexerePublishing.28 See World Bank. 2000. World development report: Attackingpoverty. New York: Oxford University Press.29 Easterly, W. 2001. The elusive quest for growth. Cambridge,MA: MIT Press.30 National Research Council, op. cit. See also Hammond, A.1998. Which world? Scenarios for the 21st century, Washington,DC: Island Press.31 See Prahalad, C. K., & Hart, S. 2002. The fortune at thebottom of the pyramid. Strategy + Business, Issue 26: 54-67.32 Von Dieren, W. (Ed.). 1995. Taking nature into account. NewYork: Copernicus.33 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 sustainability, viewed through the proper set of business lenses, influenceshareholder value.3 The most comprehensive treatment of eco-efficiency wasdone by the World Business Council for Sustainable Development in: DeSimone, L., & Popoff, F. 1997. Eco-efficiency: Thebusiness link to sustainable development. Cambridge: MITPress. See also James, P., & Bennett, M. 1994. Environmentrelated performance measurement in business: From emissionsto profit and sustainability? Ashridge Management Group Publication.35Hart, S. 1995. A natural resource-based view of the firm.Academy of Management Review, 20(4):986-1014.36Darnall, N. 2002. Why firms signal green: Environmentalmanagement system certification in the United States. Unpublished Ph.D. dissertation, University of North Carolina, ChapelHill.3 See Marcus, A. 2002. Reinventing environmental regulation. Washington, DC: RFF Press. For more information onEuropean pollution prevention programs, see European Integrated Pollution Prevention and Control Bureau (http:lleippcb.jrc.esl), the UK government’s Enviro Wise Programme (http:llwww.envirowise.gov.ukl),and the Implementation andEnforcement of Environmental Law (IMPEL)at http://europa.eu.int/commlenvironmentlimpellindex.htm).U.S. pollutionprevention programs are documented by the U.S. EnvironmentalProtectionAgency(http://www.epa.gov/epahomel p2pgram.h tm).2003 Hart and Milstein 673 For more information on these and other programs, seeSmart,B. 1992.Beyond compliance: A new industry view of theenvironment. Washington, DC:WorldResources Institute.3MCompany, 1992.Pollution prevention pays, videotape.40See, forexample, Christmann,P. 1998.Effects of ‘best practices’ of environmental management on cost advantage: Therole of complementary assets. Academy of Management Journal, 43(4):663-680;and Sharma, S., &Vredenburg,H. 1998.Proactive corporate environmental strategy and the developmentof competitively valuable organizational capabilities. StrategicManagement Journal, 19(8):729-753.41 Through early adoption of extended producer responsibility 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 Strategyand the Environment, 2(1): 12-27; Welford, R. 1995. Environmental strategy and sustainable development. London:Routledge; and Steger, U. 1996.Managerial issues in closingthe loop. Business Strategy and the Environment, 5(4):252-268.42 WVheeler, D., & Sillanpaa, M. 1997.The stakeholder corporation. London:Pittman Publishing.43Elkington, J. 1998.Cannibals with forks. Gabriola Island:New Society Publishing.44 Hoeffler,S., &Keller,K.2002.Building brand equity throughcorporate societal marketing.Journalof Public Policy and Marketing, 21(1):78-89.45 Fiksel, J. 1995.Design for environment: Creating eco-efficient products and processes. New York:McGraw-Hill.46 For a leading example of industrial ecology, refer toGraedel, T., & Allenby, B. 1995.Industrial ecology. EnglewoodCliffs: Prentice Hall.47Buffington,J.,Hart,S., and Milstein, M. 2002.Tandus 2010:Race to sustainability. Center for Sustainable Enterprise, University of NorthCarolina, Chapel Hill.48 See Proposal For a Directive of the European Parliamentand of the Council on Waste Electrical and Electronic Equipment and on the Restriction of the Use of Certain HazardousSubstances in Electrical and Electronic Equipment, COM#(2000)347available at http://europa.eu.int/comm/environmentidocum/00347_en.htm.49McDonald, H., London, T., & Hart, S. 2002.Expanding theplaying field: Nike’sWorldShoe project.Washington, DC:WorldResources Institute.`0Ibid.SlSee, for example, Vergragt, P., & van Grootveld, G. 1994.Sustainable technology development in the Netherlands: Thefirst phase of the Dutch STD programme. Journal of CleanerProduction,2(3/4):133-139;Fussler, C. 1996.Driving eco-innovation. London:Pittman Publishing; and von Weizsacker, E.,Lovins, A., & Lovins, H. 1997.Factor four. London:Earthscan Publishing.52 Hart,S., &Milstein, M.,op. cit.5 McDonough, W., & Braungart, M. 2002. Cradle to cradle.New York:NorthPoint Press.5 Baum, D. 2002. GM’s billion-dollar bet. Wired.com.www.wired.com/wired/archive/lO.08/fuelcellcars.html).55Holliday, C., op. cit.‘Hamel, G. 2000. Leading the revolution. Boston: HarvardBusiness School Press; Foster, R., & Kaplan, S., op. cit; andChristensen, C., Craig, T., &Hart,S., op. cit.57 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 Review, 80(9):4-11.58Hart, S., & Sharma, S. 2002. Radical transactiveness andcompetitive imagination. Presented at the Academy of Management Annual Meeting, Denver, CO, August 2002.59Counts, A. 1996.Give us credit. New York:Times Books.60Balu, R. 2002.Strategic innovation: Hindustan Lever. FastCompany, 47: 120-125.61Prahalad, C. K.,&Hart,S., op. cit.62Prahalad, C. K.,&Hammond,A., op. cit.“See de Soto, H. 2000. The mystery of capital. New York:Basic, fora discussion about the value that resides in informaleconomies.6 These companies and others including Hewlett-Packardand Ford have joined the Base of the Pyramid Learning Laboratoryat the University of NorthCarolina’s Kenan-Flagler Business School to explore ways to enter the underserved markets ofthe world in ways that are culturally appropriate and environmentally sustainable.65Hart, S., & Christensen, C. 2002. The great leap: Drivinginnovation from the base of the pyramid. Sloan ManagementReview, 44(1):51-56.6 Hart,S., &Milstein, M.,op. cit.67Hart,S., &Christensen, C., op. cit.68 See Amram,M.,&Kulatilaka,N. 1999.Real options. Boston:HarvardBusiness School Press; and Milstein, M.,&Alessandri,T.New tools fornew times: Using real options to identify valuein strategies for sustainable development. Presented at theAcademy of Management Annual Meeting, Toronto, Canada,August 2000.69Foster, R.,&Kaplan, S., op. cit.70 Christensen, C., op. cit.Stuart L. Hart is a professor ofstrategic management, SarahGraham Kenan DistinguishedScholar, and director of theCenter for Sustainable Enterprise at the University of NorthCarolina’s Kenan-Flagler Business School. He received hisPh.D. from the University ofMichigan. His research interests center on strategy innovation and change, particularlythestrategicimplicationsof environmentalismand sustainabledevelopment.Contact:[email protected] an adjunctassistant professorand directorofresearch for the Center for Sustainable Enterpriseand is com-114 pleting his doctoratein strategicmanagement at Kenan-FlaglerBusiness Schoolat the Universityof NorthCarolinaat Chapel Hill.His research and teaching interests are focused on the relationship between strategic decision-making and organizationalchange, industry transformation, and innovation. Contact:[email protected] Academy of Management Executive MayExecutive Commentary….-…………..-………………………-…….. ……………….. ………-………-………-…-..-…v………………………….. ..- …….- ..Joseph CaggianoChevron TexacoAll multinational companies are parties to the debate about sustainable development-none moreso than the energy industry. Accessing non-renewable energy sources like oil, gas, and coal is bydefinition extractive, so the resource available tofuture generations is inevitably reduced. On theconsumption side, hydrocarbon fuels raise enormous environmental issues about the sustainability of entire-perhaps global-ecosystems. So,sustainability is by no means a foreign concept inthe energy industry. We’re acutely aware of it onboth the raw-material and the finished-productsides of the business.All multinational companies are partiesto the debate about sustainable development-noneenergy industry.more so than the That having been said, this article adds refreshing insight to the argument for incorporatingsustainability into business policy and decisionmaking. Assuming for the moment that sustainability isn’t a moral imperative or legal requirement, businesses still need to ask whether itmakes good economic and competitive sense toembrace sustainable development. The significantplayers in the energy business have no doubt thataddressing sustainability is a competitive necessity. The authors identify drivers for sustainabilitythat are central issues for the energy industry, including resource efficiency, pollution prevention,and attentive, demanding global stakeholders.These are often headline issues for energy companies. In addition, both access agreements to hydrocarbon resources and licenses to operate have increasingly explicit sustainability requirements,ranging from pollution prevention and environmental footprint to community development.It’s not surprising, then, that three energy multinationals are among the companies cited in thearticle. My company has certainly evolved alongthe path described by the author from pollutionprevention-a minimum, critical requirement inall our operations-to product stewardship alongthe entire life cycle. Pollution prevention and product stewardship are actually part of a larger set ofpractices, called Operational Excellence, thatguide our operations. Safe, reliable operations arethe starting point for Operational Excellence. Butthe practices also include environmental responsibility, product stewardship, and stakeholder involvement in the areas where we do business-allfactors that contribute to sustainable value. Mycompany takes these practices very seriously.Managers are held accountable for them. All employees are expected to apply them in their work.The highest executive levels pay personal attention to our progress.Operational Excellence responds to one of theglobal drivers identified by the author-resourceefficiency and pollution prevention. The authorsare correct that a corporate paradigm like Operational Excellence will enhance a company’s reputation. This is particularly important to energymultinationals, given how they are often portrayed. Operational Excellence also drives directlyto the company’s bottom line, potentially savingbillions of dollars in operating costs while servingsustainability. There is no tension here betweenshareholder value and sustainable development.The authors identify two additional drivers ofsustainability: (1) interconnected global stakeholders, and (2) global social inequity and maldistribution of wealth. The energy industry is a case studyin developing strategies to respond to these drivers. Consider stakeholders. In one sense, we’re allstakeholders in the energy business-energy isthe lifeblood of our societies. The way we use energy over time has the single greatest impact onthe global environment and the ecosystem we livein. At the same time, no companies are more prominent in the public eye than multinational energycompanies. Each price increase at the gas station,conflict over oil and gas access, or tanker accidentpropels the industry into the headlines and Internet forums, often with denunciations of conspiracyor malevolence. Given the stakes and level of public interest, it would be suicidal for an Americanenergy multinational not to operate with the greatest possible transparency. My company, like many,has demanding and enforced ethical standards,including this one in our statement of values: “Wewelcome scrutiny and we hold ourselves accountable.” Energy companies-apart from rogues likeEnron- have been on a learning curve aboutNGOs and networked interest groups. Some companies in the industry now have working relation2003 Hart and Milstein 69ships with NGOs on environmental and socialmatters such as community development and HIV/AIDS prevention and treatment.Beyond transparency and cooperation with vocalstakeholders, the authors point out deep issues ofglobalization and social disruption. Together withthe environmental challenge, these issues are, tome, inescapable drivers toward sustainable development. Ultimately, of course, governments controlnatural resource wealth and are responsible fornational development and social equity. However,it may surprise people to know that progressivecompanies in the energy industry recognize thatresource extraction must be balanced by lastingcontributions to the welfare and prosperity of hostcountries, particularly those in the developingworld. Companies like mine are embracing principles of Corporate Social Responsibility (CSR), aconcept pioneered by the European Union andsometimes used synonymously with sustainabledevelopment. In the authors’ sustainable-valueframework, CSR could be another driver for sustainability or a comprehensive set of responses tothe drivers that they identify. Either way, CSRtakes companies into new responsibilities for human rights, labor practices, community engagement, and other activities that traditionally havebeen the concern only of governments and civilauthority. The corporate role in these activities isstill controversial and in the formative stage, bothfrom the shareholders’ view and as a matter ofpublic policy. The authors’ sustainable-valueframework can easily be used to frame this activediscussion.Resource efficiency, environmental stewardship,and social equity are large-scale, geopoliticaldrivers external to the corporation. The author alsoidentifies a less-obvious intersection between sustainability and a corporation’s internal need forrenewal and innovation. Any opportunity to exploitdisruptive change for competitive advantage isclearly in shareholders’ interest. This article depicts sustainability as a vast field of opportunityfor technology innovation, product development,and the opening of untapped markets. Any business should be excited by such prospects, even ifit’s not persuaded by the authors’ other drivers.Here again, the energy industry is at technologythresholds around alternative fuels, transportation, and power generation. It isn’t a strategy ofenergy multinationals to stifle these developments. The authors’ disruptive-change driver addsnicely to the argument about why energy companies should embrace and lead the transformationto sustainability.Energy multinationals are actively engaging allthe drivers for sustainability discussed in this article. The idea of sustainable value ties the driverstogether in a very accessible framework thatbroadens the meaning of shareholder value. I willrefer colleagues to this article as a way to bringseparate discussions about sustainable development onto the same page.loseph Caggiano is a strategy consultant forChevron Texaco, with 17yecars’experience in the energy industry. He advises on geopoliticalissues influencing corporate strategy ond on organizational capabilities needed for key initiatives. The views expressed in thiscommentary are those of the author alone. Contact: [email protected]

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