As Published In May 2006

Running Lean and Green
By Jim Newcomer

Sustainability is reaching the tipping point.

In recent years, some of the most far-sighted companies worldwide—such as Apple, HP, and Toyota—have led the way in environmental and social responsibility. Originally they may have done it for moral and humanitarian reasons, to comply with increasingly strict environmental laws, to avoid future regulations they anticipated, or even to avoid customer and stockholder protests. But reasons for social and environmental commitment have changed rapidly in the last year from basic compliance or altruism to just plain good business.

Four Steps to Sustainability

First, companies with clear environmental and social policies are leading their industries: Profits typically go up, operating costs go down, workers are enthusiastic, and the public looks upon them positively. Even though reducing emissions and waste, redesigning processes, enhancing employee benefits, or cutting energy use may require investment, the changes can provide good returns. Many firms are now going sustainable just to stay competitive, and some experts are saying that the tipping point has been reached. Within a decade it is possible that attention to the environmental impact of a company's decisions will be just as important to assuring its future as its financial bottom line or its executives' integrity.

Second, for business-to-business sales, sustainability has begun to offer tangible marketing rewards by attracting and retaining good customers who are interested in more than the lowest price and who share the common goal of a commitment to human values.

Third, defending against environmental regulation becomes less of a problem for companies whose production values are designed to enhance sustainability. Redesigning production is neither easy nor cheap, but it can eliminate environmental compliance problems. This trend will grow when companies doing business in Europe, Japan, and soon California begin complying with new, tougher environmental laws in electronics and chemistry by rethinking their production techniques—and their suppliers.

Fourth, many companies that embrace sustainability also report that they can attract and retain better employees. Young engineers, economists, designers, and other skilled workers are eager to work for companies that do good in addition to doing well, and sometimes they will even give up higher wages for the privilege. They are attracted to companies that commit to sustainability.

A Comprehensive Plan

A further consideration is the set of intangible assets such as market valuations and relations with all kinds of stakeholders, such as employees, unions, suppliers, regulators, customers, and the media. If an executive tries to frame policies toward each group independently, complications can multiply as actions in one field unexpectedly affect others. What often works is integrating all values to develop a single strategy that can guide and coordinate action across all fields. The stock price of one retail giant provides a clear example: Sales were up strongly at the end of 2005, yet the stock was down, largely as a result of investor reluctance to bet on the company's future based on some of its policies toward stakeholders and communities.

Most successful companies take time to develop an effective blanket statement of policy for quality and integrity against which all company decisions can be weighed. That statement would be empty if it did not specify both environmental and social standards.

Rethinking Old Practices

The surprise is really how long it took for companies to discover that incorporating sustainability makes business sense. After all, financing, insuring, attracting employees, and maintaining markets are vitally important. These reasons are as compelling as simple humanitarian concerns or compliance with tightening government regulations. In the last year, of course, they have become more pressing than ever, as a combination of hurricanes, fuel prices, air and water pollution reports, chemical spills, and class action suits have aroused public concern for both social conditions and the environment as never before. The issues will not go away, for the conditions that draw increasing attention to them will persist and increase in importance.

Financial companies now must anticipate global warming and its effects. Besides the energy crunch, pollution and health have become issues for more companies, especially since the revolution in communications has enabled ordinary people all over the world to create photographs and transmit them instantly across continents, and this has created a whole new sensitivity to social as well as environmental effects.

A corporate decision to develop a set of sustainability goals or an environmental responsibility statement is not a simple decision. To ensure uniform application of the principles, successful companies have reorganized within; cross-functional teams under the guidance of the core executive group meet and select potential improvements, explore the ways and costs of implementing them, and assess the effects of any given change on other parts of the organization. The process resembles the Lean organizational practices already familiar to many people. Perhaps it is more than coincidence that two major innovations in management in the last few decades, first Total Qualtiy Management-Lean and now sustainability, require the same reorganization of company policy-making, devolving major decisions to teams working day-to-day for improvements far from—but coordinated by—central management. In fact, the initiative for adopting sustainability sometimes originates from work teams or even individuals outside of central management.

The Business Circle

A Chinese government policy called the Circular Economy might provide a framework for thinking within a company. By viewing the business as a circular process, targets can be established for periodic review and redesigning, if necessary, and every stage in the circle can be used to track progress—product design, purchasing of raw materials, production, sales, use and maintenance, and finally, end of life as the product, now used up, becomes raw material for a succeeding process. A company can begin with small steps that, taken alone, would only be tokens. But in the context of the company's commitment to sustainability, small steps are seen as vital contributions to reaching the ultimate goals. The circular economy, as an image of the company's business, gives all decision-makers a basis for a complete vision from start to finish and on to start again—and a way to measure progress over the entire range.

The results? Stakeholders understand and support the company. Government environmental regulations no longer inspire fear. Stockholders' support of management's policies tends to grow, and the increasing number of socially responsible investors takes an interest in the company. Frustration on the part of shareholders, NGOs, environmentalists, and other potential targets of bad publicity tends to disappear. And best of all, the company gains a reputation as a leader, and that can be translated into market share, stock prices, and profitability. A recent article in Profit (see "Forward Thinking," August 2005) pointed out the value of corporate responsibility by citing a study indicating that "85 percent of executives and investors rank corporate responsibility as a key consideration in investment decisions." They also noted, "That percentage is almost double the figure from a similar survey five years ago."

Furthermore, if based on clear corporate sustainability goals and the Lean organization structure, if innovation bubbles up from the bottom to meet good corporate prioritization from top management, the results can reinvigorate a company, stimulate productivity, and motivate workers. There may be some companies that don't care if they have eager, responsible workers, or product innovation, or lower costs of production, but we have been unable to find them. Maybe that's because they are disappearing.