Invest in sustainability to roar out of the coming recovery, Part 1
Part 1 of a 2 part series
The COVID-19 pandemic has heightened our public awareness not only of how far businesses have to go to become truly sustainable organizations, it has also revealed the urgency for doing so. It’s becoming crystal clear that the stakes, in the face of the similar but larger-scale threat of climate change, are even higher now. Companies need to methodically invest in their sustainability journeys to become more resilient before any future crisis appears.
Economists have a simple truism — to get ahead, save when time are good, spend when they’re bad. Academic research shows they’re right.
Strategically, the COVID-19 recession offers business a great opportunity to invest in and accelerate their efforts to become more sustainable. Those that do will be best positioned for the coming recovery.
In a 2010 paper “Roaring Out of Recession”, Harvard professors Ranjay Gulati and Nitin Nohria, with then Kellogg student Franz Wohlgezogen, demonstrated how, in times like these, companies that “deployed [an] optimal mix of defensive and offensive moves” during recessions outperformed their peers at the end of those downturns. Studying what business did after the bursting of the Internet Bubble and during the Global Financial Crisis of 2007–2008, they dubbed organizations that invested in this mix of moves as “progressive companies”.
Businesses that … invest in market development today that integrates into products the sustainable qualities that consumers seek, will be the leaders once we are past the COVID-19 pandemic
Gulati, Nohria, and Wohlgezogen found that a combination of “defensive” prevention-focused moves for operational efficiency, when paired with a mix of “offensive” promotion-focused market development and asset investments, saw companies achieve a 13 percent increase in sales and 12.2 percent increase in their post-recession EBITDA (Earnings before interest, taxes, depreciation, and amortization). In comparison, the performance of businesses that focused on reducing their workforce only experienced 3.3 to 4.6 percent sales growth and -5.2 to 6.6 percent EBITDA, while those that tried a mix of reductions and other prevention focused efforts were more successful, with sales growth up 5.2 to 9.2 percent, though EBITDA was more hit or miss, ranging from -0.5 to 4.6 percent change.
Today, when executives look at the most impactful ways to improve operational efficiency, launch new market development efforts or deploy new investments in assets, more and more they are taking into account the sustainability aspects of such efforts — and, optimally, investing across their organizations to become a wholly sustainable business.
Get ready to roar, sustainably
Improving operational efficiency nowadays inevitably means applying sustainable practices such as decreasing use of total packaging, water and materials, and reducing waste produced, all of which create meaningful cost savings.
“In the context of social impact, operational efficiency enables companies to continue to maintain the quality of their products or services while reducing their environmental and social effects,” write Rhonda Evans and Tony Siesfeld in a 2020 Deloitte Review article, “Measuring the business value of corporate social impact”.
“Operational efficiency is the easiest driver to translate into business value, since it is immediately translatable into cost impacts,” explain Evans and Siesfeld, “and it is often the area where the biggest direct business value can be achieved.” To illustrate the point, they cite a We Mean Business coalition report outlining how companies that had collectively made US$8.2 billion in investments in low-carbon solutions, which reduced their emissions by 3.3 percent, achieved an average internal rate of return (IRR) of 27 percent on their investments.
The authors of “Roaring Out of Recession” point out another important factor in the decision-making of companies that seized opportunity in the midst of a crisis that is fundamental to our discussions of sustainability strategies today. They note that “Progressive companies stay closely connected to customer needs — a powerful filter through which to make investment decisions.”
As we outline in our book “Leading Sustainably”, in the B2C world, one of the most impressive shifts in consumer buying preferences is how consumers have a newly heightened awareness of the impacts of their purchasing decisions. Consumers these days have a more skeptical and savvy perspective on companies’ actions. The pandemic has only increased the scrutiny that they are applying to the sustainability of brands and how businesses have responded to the crisis. These consumers will remember actions taken now by companies in their future purchasing decisions.
A recent study from NYU Stern’s Center for Sustainable Business that found 50.1 percent of CPG category growth was driven by sustainable brands between 2013 and 2018, with those marketed as sustainable growing 5.6 times faster than products not marketed as such. This represents a real shift in consumer buying preferences. Businesses that focus on meeting these new customer needs, by investing in market development today that integrates into products the sustainable qualities that consumers seek, will be the leaders once we are past the COVID-19 pandemic and recession.
This new focus on sustainability is no less true of customers in B2B sectors, where major buyers are steadily increasing their social and environmental requirements within their supply chains. Gulati, Nohria, and Wohlgezogen show how examining your supply chain is another opportunity to excel later in a case study of the retailer Target’s response to the 2000 recession.
Target at that time reduced costs, improved productivity, and enhanced the efficiency of its supply chain operations by consolidating its store brands and co-founding a global business-to-business electronic marketplace with 12 other retailers. As a result, “the company [grew] sales by 40 percent and profits by 50 percent over the course of the recession. Its profit margin increased from 9 percent … to 10 percent”.
‘… sustainability is where the growth lies; it is where the money is’ — Dr Mark Milstein, Director of Cornell’s Center for Sustainable Global Enterprise
Today, we recognize that by applying sustainable principles in improvements to their supply chains, businesses will not only achieve cost savings and drive future profits, they prepare themselves for future shocks. A sustainable supply chain is an optimized one, with the kind of increased traceability and visibility that allows a company to better mitigate environmental pressure on critical materials and related pricing pressures.
A time to invest
The findings in “Roaring out of Recession” are even timelier now that a whole host of new forces are causing businesses to rethink all aspects of their operations and position within society. And, like the findings of Gulati, Nohria, and Wohlgezogen concerning recessions, such reexaminations are not just gestures, they lead to greater profit. As Dr. Mark Milstein, the Director of Cornell’s Center for Sustainable Global Enterprise, says in the Foreword of our book, “business as usual is no longer an option. Not because companies “ought” to address sustainability concerns, but because research results and performance outcomes are quickly making clear what the investment community has come to realize in their own right in recent years — sustainability is where the growth lies; it is where the money is.”
Businesses have the opportunity to take this unique moment in the COVID-19 recession to integrate sustainability-driven decisions in their strategies for operational efficiency, market development and asset investment. Don’t let the moment pass without taking action by investing in your company now.
Still, focusing on these three “moves” is not enough, according to Gulati, Nohria, and Wohlgezogen, to fully prepare companies to rise out of a crisis as new sales leaders.
What can businesses do to succeed when investing in sustainability to “roar out of the recession”? We’ll discuss how companies need to look beyond their hard assets and consider the mindset and behaviors of their leadership and teams in Part 2 of this article. To show how to do so, we introduce the “Five Steps to a Sustainable Business Model”, a practical, systematic path to spread sustainable thinking across your organization. Come back soon for the final piece of the puzzle.
