Sustainable Innovation

Build Your Company's Capacity to Change the World

Andrew Hargadon

• Publisher: Stanford Business Books
• Year: 2015
• ISBN:
  9780804795029
• Edition: 1
• Topic: Commerce
• Subtopic: Développement durable en entreprise

If we can carry in our pockets more computing power than the Apollo program needed to put a man on the moon, why can't we solve problems like climate change, famine, or poverty? The answer lies, in part, in the distinctive challenges of creating innovations that address today's pressing environmental and social problems. In this groundbreaking book, Andrew Hargadon shows why sustainable innovation—the development of financially viable products that support a healthy environment and communities—is so difficult when compared to creating the next internet ventures or mobile apps that disregard these criteria.

While other books treat innovation across sectors equally, Hargadon argues that most effective innovation strategies hinge on attention to the context in which they are pursued. Instead of relying on a stale set of "best practices, " executives must craft their own strategies based on the particulars of their industries and markets. But, there are some rules of the road that foster a triple bottom line; this book provides a research-based framework that outlines the critical capabilities necessary to drive sustainable innovation: a long-term commitment, nexus work, science and policy expertise, recombinant innovation, and robust design. Sustainable Innovation draws on a wide range of historical and contemporary examples to show business readers and their companies how to stand on the shoulders of successful pioneers.

CHAPTER 1

SUSTAINABLE INNOVATION

DRAW TWO CIRCLES, overlapping slightly. Label one “sustainability” and the other “innovation.” Now shade the overlap between them. This is where the challenge of sustainability meets the promise of innovation and the promise of sustainability meets the challenge of innovation; this book is for those who create and compete in this space. Call it “sustainable innovation”—the development of new products or processes that consume fewer environmental resources, foster the health of individuals and communities, and are financially viable for producers and consumers alike. It has a second meaning, too. This space is also about creating organizations capable of innovating time and again at a pace they can sustain.

Add another circle intersecting the first two and call it “information technology” (IT); this is where the information revolution shapes, and is shaped by, both sustainability and innovation and enables sustainable innovations. Change the label to “automobiles,” “agriculture,” or “energy,” and it describes the space where sustainability and innovation will drive change in a technology or market. If you want to get more complicated, you could add a fourth circle and see how, for instance, IT and automobiles converge with sustainability and innovation, maybe by making smarter engines that increase efficiency and reduce emissions. The combinations are endless.

The point is that the topics of sustainability and innovation—our two original circles—are vast. Nevertheless, they overlap in distinct and specific places. Not all aspects of sustainability require innovation—reducing your factory’s carbon footprint through improved lighting or cooling, employee carpooling, or switching from Styrofoam cups to glass mugs in the break rooms are not innovation. And not all aspects of innovation are sustainable—the latest pizza delivery application on your iPhone, for example, will not be our salvation. The key is understanding where, when, and how sustainability and innovation overlap in your company, your markets, your industry.

This book is about the challenges companies will face and the capabilities needed to overcome them in the pursuit of sustainable innovation. It’s not a promise that sustainable innovation is a wise or profitable strategy. I hope we’re past that now. It’s not a sermon on our obligation to save the planet for future generations, although this motivates many of us. It’s not an inventory of sustainable technologies, although a better understanding of innovation sheds light on competing alternatives. And it’s not a pitch about the most effective policies to support sustainable innovation, although a better understanding of innovation informs policy. It is based on the results of five years of research on sustainable innovation and ten years spent working alongside corporate leaders, entrepreneurs, investors, scientists, and policy makers attempting to bring sustainable new technologies to the market. From that work came an understanding of the capabilities that enable companies to discover and pursue opportunities for growth or pivot from emerging threats through innovation.

Who will face these challenges? Everyone. The demand for sustainability is spreading across all sectors, all markets, and all niches, like ripples from a rock dropped into a pond. It’s already brought new opportunities and new threats to those sectors where we would most expect them: energy, transportation, and construction. But the waves keep expanding outward, creating disruptions in places few expected. A number of companies have embraced this reality and aggressively pursued sustainable innovations. Some did so because they were relatively small and nimble and had these values baked into their culture and customers. Think of Patagonia, Body Works, Smith and Hawken, North Face, Revolution Foods, and Tesla Motors. Others did so because they were large and, for whatever reasons, were the first to experience the threats emerging today and see the opportunities in them. Consider General Electric, Interface, Walmart, Nike, Morrison and Foerster, Unilever, Johnson Controls, and many others. In other words, some of these companies chose to find and pursue opportunities for sustainable innovation; others were forced to.

Yet these companies are only the most recent. The last several centuries may be a history of industrialization, but they are also a history of innovations that responded to and overcame the environmental and social challenges of their time, dramatically changing the fates of companies, industries, and entire nations. James Watt’s steam engine dramatically improved the efficiency of existing engines and, by doing so, brought steam power to the factories, railroads, and ships of the first industrial revolution. Thomas Edison’s electric lighting reduced the demand for coal gas (and its accompanying environmental costs) and brought electric power into homes, offices, and factories. Henry Ford’s mass-produced automobile replaced horses, then more populous in New York City alone than across the United States today, and their attendant feed and manure.

We can and will learn from many of these cases, from their mistakes and successes. Whether you’re in an established firm or are starting one, if you want to positively influence the environment and society or simply survive the coming changes, this book is meant to help you.

Why Now?

Many executives have asked, “Is it worth rethinking, and rebuilding, parts of our organization for sustainable innovation, or is this just a passing fad?” After all, the modern sustainability movement began around fifty years ago with Rachel Carson’s Silent Spring, which raised public awareness that pesticides were devastating the environment.¹ The backlash led to the creation of the US Environmental Protection Agency; the banning of DDT, leaded gas (tetraethyl lead), chlorofluorocarbons (CFCs), and other industrial chemicals; and the enactment of a raft of new federal regulatory policies: the Endangered Species Act, the Clean Air and Clean Water Acts, and roughly a dozen other federal environmental laws in the 1970s. The oil crises of the 1970s provided a temporary boost for alternative energy: the modern wind and solar industries emerged, the first modern electric vehicles hit the market, building codes began requiring installation of insulation and other energy efficient practices, and the corporate average fuel economy (CAFE) standards for fuel efficiency were created. Indeed, most of the seminal research on climate change was done in the 1970s. But let’s face it: despite all the scientific and regulatory efforts, the last fifty years of the environmental movement have been characterized by more sound and fury than progress.

The last decade brought a surging consensus on—and often direct experience with—the realities of climate change and related challenges. This has led to a growing awareness of how a changing environment can and will affect us. The latest Intergovernmental Panel on Climate Change report provides increasingly dire warnings of ecological collapse, famine, flooding, and pestilence.² That’s reinforced by a 2014 Pentagon report that calls climate change a “threat multiplier[] that will aggravate stressors abroad, such as poverty, environmental degradation, political instability, and social tensions.”³ And corporations are now feeling the direct effects: disruptions in supply chains and operations caused by remote flooding or drought, repercussions from use of toxic materials or equally toxic labor practices by suppliers, the rising costs of insurance and capital, rapidly shifting customer preferences that are the result of growing awareness, shifting demographics, and the radical transparency of the Internet age. But will this be enough to make sustainable practices stick? Will it give permanence to shifting market preferences, emerging technologies, and bolder regulatory policies? Or will the pressures subside again, leaving those companies that committed to sustainable innovations high and dry? History and unfolding events suggest that the past half century of sound and fury is coming to an end and that when such periods end the world changes rapidly.

Long Fuse, Big Bang

History may not repeat itself, Mark Twain supposedly said, but it sure does rhyme. From the past, we can learn valuable lessons about how change happens over time. Cycles of innovation, for example, tend to have a long fuse and a big bang. Or as the late economist Rudi Dornbusch noted, things take longer to happen than you think they will, and then they happen faster than you thought they could.⁴

Take electric lighting. In the first decade of the 1800s, with the first electrochemical batteries, European scientists began experimenting with electric light. Two technologies quickly emerged—arc lighting, which sent sparks jumping a gap between conductors, and incandescence, which heated a conductor. For the next seventy-five years or so, these technologies evolved in parallel and with almost no effect on business or society until, in 1882, Edison turned on the Pearl Street Power Station in Manhattan. Within the next decade, the modern utility model of electric power was born, along with the electric utility and equipment companies that would dominate this sector for the next century. Long fuse, big bang.

Don’t be fooled—a lot happened during the period of seeming calm that preceded the big bang. The time from when electricity was first captured in batteries to when Edison opened his Pearl Street station was anything but quiet. The technology was evolving as scientists and entrepreneurs explored new ways to generate, transmit, and use electricity. The first commercial application to emerge was the telegraph, and its broad diffusion led to the development of better batteries and wiring, as well as an entire generation of scientists, technicians, and tinkerers in the United States and Europe working in and around the technologies of the telegraph, including young Edison.⁵ But this system still relied on electricity generated from chemical reactions in batteries. The first commercially viable generators, or dynamos, were developed in the late 1860s, and by the late 1870s the new dynamos were powering strings of arc lights that lit New York’s Brooklyn Bridge and Central Park.⁶ Soon after, entrepreneurs were building and selling isolated electric systems—combining steam engines, dynamos, wiring, and lights for use in ships, hotels, and office buildings and even personal use in mansions.

For seventy-five years, the elements of electric lighting slowly emerged and evolved. Then, with Edison’s introduction of the first commercially viable utility model of electricity generation, distribution, and sales, it took only a decade for the major elements of the industry to solidify. Ironically, Edison’s system, which relied on direct current (DC), would be quickly challenged by Westinghouse (founded in 1886) and other companies promoting systems based on alternating current (AC), which had the advantage of being better at transmitting electricity over distance—a feature made useful only by the utility model Edison pioneered. And while the electric power sector has grown, it has barely changed in form since. Today’s major companies Siemens, General Electric (the consolidation of Edison’s companies), Westinghouse, and Alstom (originally Thomson-Houston) were born in this period.⁷

Such periods of relative calm followed by revolutionary change are more common than you might think. That same pace of change describes the early days of the railroad, the automobile, and the Internet. The railroad industry had been developing for half a century when the first commercially viable system, the Liverpool to Manchester Railway, launched in 1830. Then, within less than two decades, it spread across Europe and the United States. The automobile industry began in the mid-1800s with steam-powered vehicles (trains without tracks). The first commercial automobiles emerged in the 1890s, led by entrepreneurs like Gottlieb Daimler, Wilhelm Maybach, and Karl Benz. By the turn of the century, however, there were more electric- and steam-powered cars than internal combustion engines, and the industry faced confusion and uncertainty over which direction it was heading. Ford’s Model T, introduced in 1908, marked a pivotal moment. In the decade that followed, almost all the major American automobile manufacturers as well as their major parts suppliers would be founded, including Chevrolet, Chrysler, Buick, Cadillac, and General Motors. The Internet, born in the 1960s as a project sponsored by DARPA (Defense Advanced Research Projects Agency) to connect mainframe computing resources on separate college campuses, spent almost three decades evolving in universities and national laboratories before, beginning in the mid-1990s, companies like Amazon, Google, and Facebook (not to mention a host of companies that enable the backstage operations) emerged to become today’s consumer- and corporate-facing infrastructure.⁸ Again, after thirty years of tinkering, the major players and basic structure of the industry emerged and were set within a decade. Long fuse, big bang.

In large part, the speed and scope of the big bang depend on the events of the long fuse. By the time Edison began his work on electric power, the central elements of the revolution were already in place: the technologies of lighting, generators, and wiring; a public ready for electric lighting; and scientists, engineers, investors, entrepreneurs, and investors prepared to join in. Edison’s task was not developing the individual elements so much as seeing how and when they might come together and what they might become and then building a company able to make that vision a reality. The impact doesn’t come from any one technology or entrepreneur but rather from the interactions of many independent elements that seem to converge suddenly. Over a decade or so, advances in one begin to drive, and be driven by, advances in others until everything changes, seemingly overnight.

The Elements of Sustainability

In the last fifty years of the sustainability movement, elements have emerged that are setting the stage for rapid changes within and across industries over the coming decades. We can see, for example, how the science of sustainability and its effects have come into focus with shifting consumer preferences and bolder policies at the federal, state, and local levels. These elements are converging in different forms for different markets, bringing the promise of sudden and significant impact.

The science of the effects of unsustainable practices includes our understanding of climate change, ability to track greenhouse gas emissions and measure their impact, and understanding of agriculture, nutrition, water use, and so many other aspects of modern society. But more importantly for corporate leaders, it includes accepted theories and standards for modeling and measuring the impacts and risks associated with sustainability. For a long time, we’ve known that the assets of the natural environment (clean air and water, forests, biodiversity, and climate stability) have value and, conversely, that their depletion has costs. But until we could agree on how to predict and measure those assets and costs, it was difficult to make decisions based on them. That has begun to change. For example, Dow Chemical is working with the Nature Conservancy to develop a set of tools, metrics, and models for valuing nature in business decisions. The investment firm KKR is working closely with the Environmental Defense Fund to develop analytic tools for managers to assess and track improvements on a range of environmental metrics.⁹ Insurer Swiss Re is working with cities to model the expected economic costs of natural disasters and identify infrastructure investments in, for instance, “[improving] education, reinforcing sea defenses, retrofitting buildings and changing building codes” to reduce potential losses.¹⁰ Finally, the Sustainable Accounting Standards Board (SASB), founded in 2011, is working with investors representing over $17 trillion in market capital to develop a common reporting standard for disclosing risks associated with sustainability. Reaching consensus on sustainability metrics enables businesses to account—as both assets and liabilities—for their relationship with the natural environment. This practice will have significant impact as lenders, investors, and insurers make choices based on these accounts.¹¹

In parallel with these developments, new technologies have emerged and evolved. The economics of clean energy technologies has improved to the point of competing evenly with traditional (read carbon intensive) energy sources. For example, over the last thirty years, the cost of wind energy has fallen by more than 90 percent, from fifty cents per kilowatt-hour to under five cents, where it now competes with new natural gas plants. It took forty years to install the first fifty gigawatts (GW) of solar power and then another two and a half years to install the next fifty GW (doubling again to two hundred GW by 2015).¹² Solar costs have dropped dramatically as well. In 2008, US residential consumers paid seven dollars per watt for best-in-class systems that in 2013 had dropped to less than four dollars. The bulk of these reductions came from lower hard costs (modules and other equipment), but the industry is maturing rapidly, and a recent McKinsey study estimates that accompanying reductions in the costs of financing, customer acquisition, regulatory incentives, and approvals w...