Sustainability and the Bottom Line

Andrea Larson studies adaptive, fast-moving, and innovative growth companies. An associate professor in the Darden School of Business, she examines the conditions under which companies generate new ideas, new products, and new ways of doing business. From her observations, the new frontier for innovation is sustainability.

At a time when corporate giants like Wal-Mart have announced green initiatives, this is not a completely unexpected conclusion—but it does reflect the beginning of a surprising shift in American business culture. “In the past, American business people associated the environment with compliance and regulation, Earth Day, or nonprofits,” Larson says. “Increasingly, they are seeing it as a source of competitive advantage.”

With Karen O’Brien of the Green Chemistry Institute, Larson is putting the finishing touches on a new book, tentatively titled Green Strategy: Business Innovation and the Environment, that describes how companies have uncovered ways to employ sustainability as a strategic means to realize cost savings and capture new markets.

One reason that innovative organizations can focus on sustainability is that they possess a more inclusive understanding of the environment. For them, the environment is not a thing apart. They see themselves as part of natural systems that span the globe, systems that are increasingly being constrained by exponential population growth and finite resources.

When these pioneering businesses look to the future, they see the cost of many raw materials rising along with the costs of waste disposal. They see environmental regulations becoming increasingly stringent and the risks of liability becoming progressively more onerous. As a result, they view sustainability as a way to minimize and even eliminate the negative consequences of these changes to their bottom line.

At the same time, business models that reflect environmental awareness are a source of opportunity. Larson cites Toyota and Honda. “Culturally, the Japanese have a deeper appreciation for environmental risk than we do, and experience has taught them what it means to be dependent on outside oil sources,” she says. “It was easier for them to make the decision to invest in hybrid technology than it was for us.” But Larson argues that they did so in large part because they saw the dramatic advantages they would gain from assuming leadership in gas-efficient, low-emission automobiles. Not only is the popularity of Japanese hybrids proving to be a decisive advantage in the U.S. market, but, in her view, it also will place them in an excellent position to outperform other automakers in China. That is the ultimate prize. “The Chinese government is well aware of the pollution problems caused by the automobile and the economic and political costs that come with imported oil,” she says. “They are not eager to put every Chinese citizen behind the wheel of a standard internal combustion engine.”

Toyota and Honda are not alone. In her book, Larson cites many large companies, including Dell, GE, Electrolux, IKEA, UTC, and Kaiser Permanente, as well as smaller firms that have found in aspects of sustainability a source of competitive advantage. “This is not a fad,” she says. “It is a new perspective about doing business that companies ignore at their peril.”