As the majority of the world dips toward recession, the primary concern of most businesses is not to save the world, but save the business.
Can you blame business leaders for taking this approach? Sustainable goods can be more expensive than their grey counterparts. Social responsibility is judged to be a cost, not a profit centre. These are hard times and they call for hard realities. Is it time to put the sustainability agenda on the back burner?
The premise above relies on a view that your sustainability activity is part of what the organisation feels it has to do, rather than it being core to what the business delivers. In a time of slowing growth, the first priority is to be defensive and ensure business survival, but, at the same time, the groundwork must be laid for offensive strategies that gain competitive advantage when the economy turns, and here sustainability can reap benefits.
As many commentators have already mentioned, companies which spend in recessions come out of them faster and more aggressively. The Institute of Practioners in Advertising emphasised this point in March, using the Profit Impact of Marketing Strategies database. Its analysis demonstrated that firms that cut back during a recession had a better return on capital employed (no surprise), but lost out against competitors which had spent during a recession when growth returned to the economy. So, empirically it is better to invest and lay the groundwork now, than not.
Where should investment be made? The simplistic but accurate answer is in those areas where sustainable competitive advantage can be created.
All the indicators are that environmental and social sustainability will be the battleground for competitive advantage over the next ten years, as EU legislation targeting emissions and landfill quotas will considerably affect the supply chain and the consumer worldview. Businesses will have to become more responsible for their products and services from ‘cradle to grave’. Some see this as an opportunity. Procter & Gamble hopes to generate $20bn (£13.4bn) in cumulative sales with a reduced environmental impact within five years.
Creating the products, services and brands to benefit from the opportunity requires the groundwork to be laid now. As P&G has shown with Ariel, small realisations can open markets, gain share and provide tangible benefits for consumers (by creating a range of cold-water detergents, it has reduced consumer energy bills, while providing secondary benefits such as a reduction in CO2 emissions). Nakheel is doing this in Dubai with its Blue Communities initiatives (premium coastal properties only retain their value if the coast is not destroyed during development), GE with ecomagination (from aero engines to lightbulbs, GE understands that CO2 reduction and energy efficiency are their primary customer needs), and BP remains alone among the big oil companies for its portfolio of investment and incubation of new forms of commercial-scale energy.
They are doing this because they realise future commercial success is linked to having sustainability at the core of their products and services, not at the periphery. In doing so, sustainability is at the centre of what they are and what their brands represent – creating competitive advantage based on a truth, not by just being seen to do the right thing.
Marks & Spencer faces the first major test of its conviction to this strategy. ‘Plan A’ was very publicly launched on 15 January. At the time, chief executive Sir Stuart Rose told the BBC the initiatives would cost £200m over five years. This month, market research group TNS has highlighted declines in clothing, leading to an extraordinary 20 per cent-off pre-Christmas sale. This has suddenly thrown ‘Plan A’ into sharp relief. A reversal or suspension of this strategy would make it appear that M&S was being opportunist, rather than building long-term competitive advantage. No doubt time will tell.
The recession will hurt business in the short term, but failure to ensure that an organisation is prepared to fight in the growth landscape of the future may cause that hurt to continue well past the end of the current financial downturn.
Creating future competitive advantage through sustainability
• It is empirically proven that investments in driving market share pay off at the end of recessionary periods. This feels counter-intuitive, but then all the best ideas usually are
• The drivers behind the sustainability agenda will not disappear, regardless of short-term commercial issues
• Future competitive advantage is likely to stem from this area, allowing organisations to gain market share
• In a challenging market, this requires real commitment and strength. If it is seen as non-essential activity, then momentum will be lost or the scheme will fail
• As Procter & Gamble boss AG Lafley said, ‘We have a philosophy and a strategy. When times are tough, you build share’
Duncan Daines is director of strategy at Start Creative