Short-term thinking and acting has led to the current financial crisis, but has it precipitated a move to more long-term thinking in business & industry? This article discusses the tensions between short-term actions and long-term consequences on sustainable development, with a special focus on the internal challenges of embedding sustainability strategies in firms, using examples from the global food and beverage industry.
When it comes to the formidable challenges of sustainable development, are managers still inclined to say “I’ll think about that tomorrow…”, to quote the wayward Scarlett in the epic drama Gone with the Wind? Given the jarring shocks of the on-going financial crisis, itself an epic result of blindly short-term focus – are there any signs of a shift to the type of longer term business thinking that is also more favourable to sustainable development?
Shifting sands affecting sustainability
In any case, the last decade has seen a dramatic shift in economic power and markets. Whilst Europe and the United States struggle in self-created mire, some BRIC countries such as Brazil and China are looking rather better on the global economic stage, with in particular the Chinese sleeping giant living a new dawn as a major global superpower. However, with more and more people in such countries joining the ranks of consumers in an increasingly overcrowded world, such shifts have major sustainability implications.
The writing is unequivocally on the wall: at IMD business school in Switzerland, year on year research on the multiple trends affecting the business context indicate that sustainability is increasingly in focus as a key business concern for the foreseeable future.1 Yet, as one manager coined it: “As a company, if you don’t grow, you die, and that’s the main industry challenge around sustainable development.” Amidst the financial crisis, growth – and “shop ‘til you drop”, ergo consuming – is more than ever the order of the day for global business and industry. But we know scientifically and rationally that on a non-expanding planet, there simply are limits to growth.[ms-protect-content id=”9932″]
Problems created by “normal” booms and busts in supply and demand, which are due to economic, political or speculative reasons, are actually dwarfed in comparison to those created by environmental limits. Because when it’s gone, it’s gone; meaning “no resources=end of business”. With more people, thus consumers, in the world than ever before, natural resources are also under stress as never before and commodity prices are rising as a result.
Oil has recently seen significant price increases, impacted by the financial crisis and events in the Middle East, but also by the fact that we are still unreasonably dependent on this non-renewable polluting source of energy at the heart of the changing climate dilemma. Rising temperatures due to greenhouse gases created by carbon emissions are rapidly changing the environment around us. We already witness an increase in the number and intensity of climate related natural disasters such as rains, floods and droughts.
But getting governments to go “cold turkey” and become less dependent on oil faster is a rather thankless task in the midst of a global financial crisis, whatever the urgency. Moreover, although lulled by a false sense of complacency, one alternative seemed to be winning public acceptance – nuclear power – until it was once again politically shelved owing to public pressure following the devastating consequences of the explosions of the Fukushima reactors in Japan in 2011.
A lesser known fact is that the rare earth elements used to develop the technologies powering the activities of the new digitally connected generation are experiencing supply vulnerability and have also seen significant price increases. Even lesser known again is the fact that these same elements are required for developing renewable energies.
Beyond the limits to availability of basic non-renewable resources such as copper and steel, agricultural commodities – theoretically renewable at least within the land surface available to agriculture – actually give most cause for concern since food scarcity is now a growing problem. Since 2004, prices for foods such as sugar and cereal have increased dramatically, leaving consumers in poor countries unable to purchase basic foodstuffs. Water is the single biggest challenge: almost 70% of available freshwater is used for agriculture and, according to a United Nations report, farmers will need 19 per cent more water by 2050 to meet increasing demands for food, much of it in regions already suffering from water scarcity. Do the math.
The challenge of embedding strategic sustainability
The Corporate Sustainability Management Platform (CSM) – a corporate membership driven learning initiative within IMD’s newly launched Global Center for Sustainability Leadership – has been researching and tracking the uncomfortable tension between the long term focus needed for sustainable development and the short term thinking dominating day to day business for over a decade. The good news is that in the last few years, CSM has observed various shifts that promote strategic innovation for sustainability and that have affected how certain companies approach sustainability. Reactive risk driven approaches are gradually making way for changes to the core business of companies in order to leverage opportunities. From “Ecolaboration”2 (Nespresso) to “Ecomagination”3 (General Electric), the innovation landscape of sustainability is full of new buzzwords.
In an intriguing development, NGOs have succumbed to “getting into bed with the enemy” and some are involving themselves in productive and collaborative stakeholder-driven relationships with business and industry. The greater awareness amongst up and coming managers about sustainability issues affecting the business has meant that a gradual move away from purely compliance-driven approaches to robust examples of “beyond compliance” activity has become possible. The previously philanthropy driven traditional CSR model is gradually being replaced by new business models development based on finding innovative solutions to solve current challenges. Also, the words “shared value”, are more in vogue nowadays especially since Michael Porter got on the bandwagon.4
But complacency is misplaced…although the words “mainstreaming sustainability” are also currently being bandied about, pundits agree that there is still a long way to go before a tipping point is anywhere near reached. Consider an industry example. When CSM carried out comprehensive empirical research on the business case for sustainability in the food & beverage industry ending in 2007,5most companies were found either to be in an experimental stage with sustainability concepts and principles, and/or at the beginning of stakeholder engagement processes to fill knowledge gaps amongst managers about environmental and social issues of relevance to the business. The industry was not yet comprehensively addressing sustainability issues of economic – and thus strategic – importance.
However, industry leaders such as Unilever and Danone had already initiated significant action that has since been comprehensively documented, including by IMD. In an early example of a sustainability partnership with an NGO (WWF), Unilever – then in the frozen fish business – launched the Marine Stewardship Council (MSC)6 and set itself some breathtakingly ambitious objectives (considering the conservatism of the industry) for sourcing its fish only from certified fisheries by 2005.7 Danone has an undercurrent of social responsibility in its strategic focus dating back some decades, although as far back as 1972 – thus 40 years ago – Danone’s CEO Antoine Riboud made a speech where he stated:
It is clear that growth should no longer be an end in itself, but rather a tool used to serve quality of life without ever being detrimental to it.8
There is room for cynicism when one reads this in the light of the current crisis.
Internal barriers and managerial mind-set
In extensive cross industry research (9 sectors) from 2001 to 2004, CSM found that managerial reflection on the economic reasoning behind internalization of sustainability issues as part of business strategy, behaviour and actions was sorely lacking.9 During the hundreds of interviews carried out, most managers had not actually thought about the business case for sustainability at all, until actually asked about it there and then; yes, it is that new a concept. In the food and beverage industry, by 2007, even sustainability leaders were struggling with the difficult process of assuring organizational alignment behind their more well-worked out sustainability strategies. Often, such strategies were not being taken into account by key business functions (such as procurement, finance, marketing and sales), so key messages about sustainability strategies were not being transmitted up and down value chains as far as suppliers and consumers. A more structured approach was definitely still required.
Looking further into the promoting factors for embedding sustainability strategies and the barriers to rollout, the CSM research identified some major challenges. For example, in the view of not only managers responsible for sustainability in their organizations, but also of functional managers, internal barriers were almost as difficult to overcome as external barriers such as lack of demand from customers/consumers and/or investors. The mind-sets of managers (both short-term and fixed), knowledge gaps and absence of organizational cultures to “breed” more responsible managers were amongst the most significant barriers perceived by the managers themselves.
But wait…surely these were also areas that are entirely within any given corporation’s direct sphere of influence; so was this a beacon of hope? There was indeed a temptation to conclude that the potential for exploiting business cases for sustainability was more substantial than might first appear, since recruitment, executive development, and the fixing of corporate purpose and value systems is within the competence and control of each and every organization…
Where are we now?
But that was back in 2007… and then along came the on-going financial crisis. Did it help or hinder and have managers started to change the goalposts? In many ways, the fact that the corporate world has now had its comeuppance on issues around corporate behaviour and responsibility is a wakeup call so loud that theoretically it should catapult the corporate sustainability agenda to the top of the business and political agenda.
At the onset of the crisis, sustainability professionals harboured the hope that at least one positive outcome of the crisis would be a rethink around the consequences of short term thinking and acting that would filter through to broader questions around sustainable development. After all, it’s all part of the same jigsaw puzzle. The crisis is having and will have dramatic social and environmental consequences for some time to come, whether through the poor getting poorer, hesitant short term cost saving on investment on sustainable energy, or the political dallying around any decision-making with longer term environmental and social benefits. And yet the world has never been more in a position to find the right language to convince decision-makers in industry and in government of the benefits of more long-term business planning in the short-term.
But unsurprisingly, firms are being pushed back onto the “merry-go-round” by investors and customers. The pressure is to get back as soon as possible to business as usual. Granted, there are some “alterations to the hem and sleeve” of the capitalist model in store but no overhaul is in view. On sustainability, we observe a schizophrenic scenario emerging; an increase in the rhetoric around sustainable development amongst industry leaders, while operational managers in all industries are ever more preoccupied by the short-term business result. It’s not all greenwash; consummate care is being taken by many global firms to demonstrate that they are taking sustainability issues seriously, and that they are walking the talk, but they are just as careful to ensure that they do not rock the boat too much. In the absence of a global regulatory level playing field, firms find themselves in a viciously competitive economic environment amidst on-going financial chaos. So innovation remains incremental and hardly radical.
However, a daring move demonstrating industry discomfort with the short-term driven focus and its effects on firm behaviour was recently taken by Pol Polman, the CEO of Unilever who last year ordered his company managers to stop delivering quarterly results to the financial markets.10 He wants all stakeholders, including his managers but crucially investors, to take a longer term view of company success factors rather than only ever looking ahead to the next quarter’s figures.
Sustainability partnerships as a solution?
To trigger innovation for sustainability, industries, NGO and governments increasingly look towards partnerships as a solution.11 It has been a major strategic challenge for key companies in diverse industries to join forces – sometimes with NGOS and/or governments – both in spirit and in action, and share experiences or work on strategies in order to create or apply new industry standards and build on best practice. This is not a customary way of doing business for companies that mainly compete against each other to succeed and they struggle with these new models. In the USA, concerns about anti-trust quickly enter the discussion and legions of lawyers get involved as soon as there is talk of sharing information with competitors. And, despite a proliferation of environmental management tools and various standards available – and a corresponding army of sustainability consultants to help develop and apply them – it is still patently clear that managers still need help to manage the increasingly complex and uncertain business environment within which they operate.
But there are industries that are getting heads together on some of the most pressing sustainability challenges, because there are key business reasons why they should act. An interesting example of industry collaboration around sustainable sourcing in agricultural commodities is the Sustainable Agriculture Initiative (SAI) Platform.12The SAI Platform is a consortium of food & beverage companies that has an objective of embedding sustainable standards and norms in sourcing agricultural commodities in the food & beverage industry. The SAI Platform – celebrating its 10th anniversary this year – was initiated by Unilever, Danone and Nestlé, three industry heavyweights. The membership of the platform has been going from strength to strength and is currently at a level of some 40 corporations. Technical commodity groups of managers from the companies themselves have developed commodity-specific standards and guidelines for sustainable agriculture. Now all that is needed is to apply them.
Incentive systems in global firms urgently need to encompass the longer-term goals of a sustainability strategy.
But like many young initiatives, the SAI Platform has experienced teething problems. Interestingly, one of these is precisely the embedding of these voluntary practices within the operations of the members themselves. The reasons are manifold and much related to the CSM research findings to date. Specialists in sustainable sourcing are permanently under the short term pressure of finding the best quality sources for production, and for the best price. This is even more so in a financial crisis and especially when commodity prices are rocketing… In the throes of a crisis, managers find it difficult to put their heads above the parapet to think objectively about how they can do things differently, ergo more sustainably. So managers are locked into behaviours that work for them within the current system, especially since firms tend to have incentive schemes that reward and thus perpetuate the short-term oriented behaviours that are at odds with the achievement of more sustainable long term objectives. In short, incentive systems in global firms urgently need to encompass the longer-term goals of a sustainability strategy.
And then we come to knowledge gaps. Professional managers balk at the idea that they may be prone to knowledge gaps. However, in this extremely fast moving world, even the most competent, highly educated managers are not always aware of and able to recognize the innovation opportunities, efficiency benefits, and risk reduction potential of tackling sustainability issues more strategically. This relative ignorance can lead managers either not to innovate themselves or even more destructively, prevent others from building and rolling out project and unit-specific business cases for sustainability.
For these reasons the SAI Platform and IMD’s CSM Platform have entered a partnership and jointly created a Master Class Workshop experience to address at least part of the problem on a pilot basis. The Workshop is an opportunity for managers involved in sourcing to share challenges, solutions and experiences with peers, close existing knowledge gaps through open innovation knowledge brokering sessions, and learn how to instigate change within their organizations by creating networks and working with and through them. The Workshops help managers to understand the business relevance of sustainable sourcing, identify informal networks of sustainability champions positioned in key strategic areas throughout companies, and experience interdisciplinary dialogue between managers across the value chain. They are “innovation incubators” generating research on innovation for sustainability, and learning about how managers overcome their sticking points.
Although rising, the price of raw materials is still small compared with the processing and marketing costs of final products. Most valiant efforts related to the sustainability in leading food & beverage companies are currently focused upstream – on challenges in the supply chain – but there is substantial potential to work on downstream impacts and any current initiatives in that regard are very much in their infancy. For example, we observe a dragging of heals in the industry around the rocketing statistics on obesity and diabetes in developed countries (and now, increasingly in emerging economies). Why? Maybe because it is just too profitable – in the short term – to keep heads in the sand.
In general, building internal awareness and education on sustainable development should eventually change the way companies relate to the consumer, since this helps to change mindsets over time and engage strategically important managers such as those in marketing and sales. Unilever proved it possible to “mainstream sustainability” when it decided to make its premium Lipton Tea brand 100% sustainable, in fact provoking a domino effect leading to a value chain sustainability conversion in the entire tea industry.13 By looping in consumers, more radical innovation based on sustainability drivers, will eventually go beyond experimental projects and piloting exercises and reach across the value chains. However, today, supporting frameworks for such a move are still lacking.
For a quantum leap forward, industry leaders must join with trade initiatives to support changes to the economic and political framework within which the industry is operating. Industry would also do well to support more mainstreamed “quasi-regulatory” labelling initiatives such as certification, and the establishment of a level playing field through regulation that makes sense. Also, actors in the entire value chain of food and beverage need an effective multi-stakeholder platform to focus on sustainable solutions – including technological – to feeding the world (healthily) tomorrow. The pre-crisis words of a food industry expert interviewed by CSM still ring true today:
Current moves are on such a small scale that it’s difficult to see a quantum leap taking place. There are many vested interests in maintaining the current system. No single major company has reinvented itself to fundamentally challenge the status quo. We need more radical innovation.
But let’s not underrate either the power of marginal improvements that companies tend to opt for in the current business context. Such changes will at least be long-lasting. During the IMD-CSM workshops, it is always apparent that the only way to truly embed sustainability strategies in an organization is by going “the full Monty”: that is, not holding anything back. This means recruiting managers with the right mindset to start with, rebooting internal value systems, and rewarding managers for changing behaviors and achieving longer-term sustainability objectives. It also means having executive development policies that ensure managers are kept abreast of rapidly-evolving changes in the external environment that are leading to both business risks and opportunities. It means empowering managers to effect bottom-up changes in organizations. And it means creating networks of sustainability champions in strategic business units for whom sustainability is not just a nice extra but a business imperative. Few companies, if any, have as yet got past the winning post.
About the author
Dr. Aileen Ionescu-Somers directs IMD’s Corporate Sustainability Management Platform, a learning platform within IMD’s Global Center for Sustainability Leadership. She has overseen many large-scale projects and written multiple prize-winning case studies on strategic integration of sustainability in organizations. Before IMD, she headed project operations at WWF, overseeing field and policy projects globally. She has advised multiple organizations such as Nestlé/Nespresso, Hilti, Hoffmann LaRoche, West LB, Bombardier, WWF, GAIN, Ecole Hotelière de Lausanne, the WEC, and the SAI Platform. She is on the sustainability boards of companies such as Firmenich, and Coca Cola Hellenic. She holds a first class honours BA, and an MA, HDE and PhD from University College Cork, Ireland. She also holds an MSc in environmental management from Imperial College of Science & Technology, UK. Her latest books are Business logic for sustainability and Sustainability partnerships: The manager’s handbook, published with Palgrave Macmillan.
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4.Porter, M. Creating Shared Value. Harvard Business Review; Jan/Feb2011, Vol. 89 Issue 1/2, p62-77
5.Ionescu-Somers, A. & Steger U. (2008) Business logic for sustainability: A food and beverage industry perspective. Hampshire, UK: Palgrave Macmillan
6.Nick, A., and Steger, U Ionescu-Somers, A. (2006) Transforming the global fishing industry: The Marine Stewardship Council at full sail?
7.In fact, Unilever missed this ambitious target and reached 70% by 2005 in its sourcing of sustainably certified fish, still a formidable achievement.
9.Steger U. (ed.) (2004) The business of sustainability: Building industry cases for corporate sustainability. Hampshire, UK: Palgrave Macmillan
11.Steger U., Ionescu-Somers, A., Salzmann O.& Mansourian, S. (2009) Sustainability partnerships: The manager’s handbook. Hampshire, UK: Palgrave Macmillan
13.Ionescu-Somers, A., Tania Braga & Ralf Seifert (2011) Unilever Sustainable Tea: Revitalizing Lipton’s Supply chain (IMD-6-0327) and Ionescu-Somers, A, Tania Braga & Ralf Seifert (2011) Unilever Sustainable Tea: Going beyond low- hanging fruits (IMD-6-0328)