Competition.jpgI always find it rewarding when a study comes out that underscores the business value of sustainability, especially when backed up with statistics and hard dollars.  Such is the case with a 2008 study by researchers from the Georgia Institute of Technology (GIT).  The research study, entitled An Empirical Investigation of Environmental Performance and the Market Value of the Firm, was authored by Brian W. Jacobs, Vinod R. Singhal, and Ravi Subramanian.  The study analyzed the shareholder value effects of environmental performance by measuring the stock market reaction associated with announcements of environmental performance. 


The study focused on how markets react to Corporate Environmental Initiatives (CEI) and Environmental Awards and Certifications (EAC).  The results of the study provided compelling data that suggested that “announcements of philanthropic gifts to environmental causes are associated with significant positive market reaction, voluntary emission reductions are associated with significant negative market reaction, and ISO 14001 certifications are associated with significant positive market reaction”.  For me this report validates my devotion over the past 15 years working with small to large manufacturers and public agencies in designing, implementing and maintaining ISO 14001 certifications and in making the argument that “proactive environmental management makes business sense”.  I’m not some crazed environmentalist after all (although my passion occasionally borders on the “evangelical” side)!


The research study focused on reviewing the “market value impacts of specific events (such as use environmental announcements) as a “proxy for the difficult-to-measure construct of environmental performance”.   The study found a statistically significant market reaction to the hundreds of environmental performance announcements evaluated, suggesting a causal link between environmental performance and financial performance.   Specific to ISO 14001 announcements, the market was seen as reacting positively (on a statistical basis) to announcements of ISO 14001 certifications. Years of literature and case studies have offered volumes of data that support the positive impact of EMSs in general as well as direct evidence that ISO 14001 certification improves company performance over long periods of time. The authors of the GIT believe that they are the “first to provide empirical evidence of the impact of ISO 14001 certification on market value.


 

Body of Evidence


 

Forays into proactive environmental management and attainment of internationally recognized certifications like ISO 14001, RC 14001 or LEED are not always “window dressing’ to demonstrate commitment to sustainability, as some may believe.  These efforts are more often than not the real deal when it comes to demonstrating value-added savings and long term return on investment and access to new market.  While the skeptics continue to throw cold water on CEI’s and EAC’s the evidence continues to stack up in favor of long term benefits.


The results were based on analysis of 811 announcements (430 CEI announcements and 381 EAC announcements) that appeared in the daily business press during the period 2004-2006.  Now, you may pause and say “well that was a long time ago…what about post recession?” A recent article by Phil Covington in Triple Pundit asked that same question. Covington cites a recent Fast Company’s recent article concerning Bloomberg’s business of measuring companies “Environmental, Social and Governance” (ESG) performance, which found that “the number of investors accessing ESG data is up by 29% comparing the first half of 2010 with the second. Investors use it to identify smart practices – for example, companies who operate in a socially responsible manner may be viewed as forward thinking and well managed.” While this report suggests that there is increased attention being paid to companies that “do good” or that implement proactive ESG practices, the results are still not statistically treated like the GIT study.  But either way, as Covington concludes “This surely portends that markets will inevitably respond favorably to sustainability efforts, especially when the data shows improved governance and profits result directly, and in the long run, from sustainability”.


 


strategy.jpgSince the 2006 study period cited in the GIT study, there have been more studies that provide compelling proof of the market value of environmental initiatives or certification.  Here are a couple of stand-out examples.  First, a study entitled Which Competitive Advantages can Firms Really Obtain from ISO14001 Certification? demonstrate statistically that there is a significant difference between firms with ISO14001 certification and firms without ISO14001 certification.  Internal efficiency benefits are considered significantly higher for firms with ISO14001 certification.  Therefore managers’ expectations of improving internal efficiency might be the real reason that encourages firms to make the voluntary decision of investing in ISO14001 certification.  


 

Another study, by the Arava Institute for Environmental Studies entitled Comparative Advantage: The Impact of ISO 14001 Environmental Certification on Exports, suggested that EMS certification appears to imply a supplier who is managing its business well and is showing ethical responsibility. The fact that a supplier was awarded the ISO 14001 or EMAS certification by an independent entity enhances perceived reliability. Importers evaluated felt more confident engaging a new supplier, saving time and effort associated with clarification and research prior to placing a purchase order.  The survey results, as well as other available literature, corroborate the view that ISO 14001 accreditation confers economic benefits and greater “market value". These include a standard of worldwide recognition, organizational efficiency, better waste management resulting in costs reduction, marketing advantages, and competitiveness by reducing risk and exposure to costly litigation.


 

What Are You Waiting For?


 

As of 2008, when the GIT study was published, more than 188,000 organizations worldwide had become ISO 14001 certified in 155 countries and economies. Worldwide, ISO 14001 certifications grew by more than 77,000 from 2004 to 2008 - a 70% increase.  These companies must be onto something.    As I had written about previously, throughout a variety of industries, there are leaders and there are laggards.  Innovators who lead and can establish “first mover” status have the most market share to gain from proactive environmental management and attaining certifications like ISO 14001. 


 

The GIT studies and the many others that have been produced over the past five years or so are healthy indicators of how proactive approaches to sustainability can positively influence behavior up and down the supply chain, and can add total market value in a recovering economy.

 

IMG_0927.JPGLast week, I was honored to be the dinner keynote speaker at the European Petrochemical Associations 2nd Interactive Supply/Demand Chain Workshop  in Brussels, Belgium.  What a beautiful place, where cobblestones meet bullet trains- two completely differing eras of transportation systems still working after all these years.  This years’ workshop theme was “21st Century Supply Chains for the Chemical Industry”.  2011 has also been declared by the United Nations Educational, Scientific and Cultural Organization as the International Year of Chemistry (see the EPCA’s cool new video, “Chemistry- It’s All About You” here).


Throughout the highly interactive, roll up your sleeves workshop, the dialogue centered on innovative tools and value-added approaches to drive supply chain sustainability. Discussion focused on how the chemical industry and its supply chain can support an evolution from the old linear, materials economy mindset to a more circular, systems based sustainability minded economy, as Annie Leonard describes in the Story of Stuff.  As a matter of fact, that short film was the lead-in to my speech on supply chain sustainability and the nexus with consumerism, and the important role of chemical industry and its supply chain.



As I noted in last week’s post, consumer demand appears to be contributing (at least in part) to some of the gains in eco-friendly and sustainability focused design and manufacturing progress that’s being made in the global marketplace. In addition, shipping and logistics partners are showing leadership in embedding sustainability in the “source, make, deliver and return” product value chain as well. 


The (Re) Emergence of “Co-opetiton”


Picture1.pngThe 21st Century Supply Chain is a rapidly evolving business landscape.  Prior to around 2005,   the supply chain landscape centered on vertical collaboration between subsequent actors in the same supply chain, or between suppliers, manufacturers and customers.  Since the mid 2000’s, collaboration has refocused along the horizontal axis.   What appears to be happening is more evidence of collaborative exchanges between companies in the same market, or alliances, partnerships, clusters, and networked organizations.  This represents a real paradigm shift” that collaboration between producers, service providers and their customers. 


Another older term coined in the mid 1990’s, “co-opetition” (or cooperative competition), may now find its place in the 21st century supply chain lexicon.  Co-opetition occurs when companies work together for parts of their business where they do not believe they have competitive advantage and where they believe they can share common costs.   The basic premise of co-opetition strategy relies on leveraging alliances, partnering with other shippers (even competitors!) to control logistics  and transportation costs.   In  “games theory, this would be called a “plus-sum” scenario, in which the sum of what is gained by all players is greater than the combined sum of what the players entered the scenario with.  For instance, co-warehousing or load consolidation in transportation and warehousing are straightforward examples where collaborative competition has enormous financial and environmental benefits.  Co-opetition can in effect lead to expansion of the market and the formation of new business relationships, perhaps even the creation of new forms of enterprise.


Co-opetition partners typically include:


  1. Producers, Customers, Consumers who drive producer demand and determine product eco-footprint
  2. Shippers and Terminal Operators: who generate the freight flows and provide the critical infrastructure for product flow
  3. Logistic Service partners (3PLs): who can design and implement optimized solutions and move the freight
  4. Fourth Party Providers: who can facilitate partnerships, referee blockages, find common ground; and
  5. Governments who can assure that legal and regulatory arrangements are in place to support seamless collaboration


At the same time, though for co-opetition to be truly sustainable, there must also be  a cultural fit, strategic fit,  economic and operational fit,  and, trust and resources.


 

Co-opetition implies that cooperation and competition merge together to form a new kind of strategic interdependence between firms, giving rise to a co-opetitive system of reciprocal value creation.   This new era of globalization has opened the door to co-opetition for small to midsized businesses that lack the scalable resources that larger companies have.  So this makes me think that if competition is a key driver behind innovation, and collaboration is a key 21st Century supply chain success factor, then collaborative competition (co-opetiton) may be a new solution to drive supply chain sustainability. I posed this theory to a generally warm response by the 60 plus chemical industry logistics professionals in Brussels. Yes, it’s a bit of a heretical idea, but one that has shown in some industries to work.  Take Proctor & Gamble’s Connect + Develop or Nikes Considered Design and the Environment open innovation models.  Both offer opportunities to collaborate and drive innovative solutions that can benefit consumers, and open business channels to entrepreneurs lacking resources to bring new (possibly more sustainable) products or processes to market.

 


Summary- Forging New Links in the Chain


Co-opetition offers opportunities for manufacturers and their upstream suppliers and customers to strengthen each other’s performance, enhance differentiation and foster end-consumer brand loyalty in the following ways:


  1. By tapping into to customer and consumer preferences, industry can adapt its processes, products and services to enhance competitiveness
  2. By collaborating, customer-supplier teams can address Triple Bottom Line (3BL)-related technical challenges that affect the profitability and performance of the overall supply chain.
  3. Reciprocal value creation through vertical and horizontal “co-opetition” means recognizing and quantifying each other’s value contributions
  4. By sharing intelligence and know-how about 3BL issues & emerging technologies.
  5. By incorporating 3BL advantages into their products and services, e.g., reduced cost of ownership.


What ideas do you have to forge new links in the sustainable supply chain?  Let's start the collaboration now, shall we?

 

Next week, I’ll have the honor being the dinner keynote speaker at the European Petrochemical Associations 2nd Interactive Supply/Demand Chain Workshop  in Brussels, Belgium.  This years’ theme is “21st Century Supply Chains for the Chemical Industry”.  The topic is timely given how there’s been so much talk concerning over-consumption, consumer behavior, corporate social responsibility and increased growth of sustainability in manufacturing and supply chain management.  And the chemical industry indeed plays a large role in much of what we consume.  It reminds me of the old Monsanto commercial…”without chemicals, life itself would be impossible”.  It’s just that these days, chemicals in the global marketplace appear to be getting ‘greener’.


Consumer Demand for Sustainable Products


consumer_shopping.jpgConsumer demand appears to be contributing (at least in part) to some of the gains in eco-friendly and sustainability focused design and manufacturing progress that’s being made in the global marketplace.  There is certainly a higher degree of consumer awareness and understanding of the need to make healthier, socially conscious and eco-friendly products.  However, the Green Confidence Index, a monthly online survey (~2,500 Americans by GreenBiz.com) noted last year that U.S. consumers cite price and performance as the principal reasons for not buying more green products- the flat growth was partially attributed to stale economy.  The slow economic growth of 2010 appeared to also be slowing widespread innovation by small to medium sized businesses focused on green manufacturing.


In contrast, the consumer business disconnect appears to be alive and well in other parts of the world. In fact, it’s my thinking that businesses are significantly underestimating consumer interest and awareness in sustainability and green issues.  For instance, consumer demand for sustainably manufactured or ‘green’ products and services in China, India and Singapore are outstripping supply (according to an independent survey conducted by TÜV SÜD Asia Pacific). I’ve no doubt the same is the case in Europe, often considered way ahead in terms of consumer sensitivity regarding sustainability. The TÜV SÜD Asia Pacific found that:


  1. 84% of consumers prepared to pay an average 27% premium for green products, services.
  2. Only 43% of business believes consumers to be willing to pay more  or even produce or trade green products in China, India and Singapore.
  3. 74% of businesses either do not have a policy or guideline to  minimize environmental in place or are failing to clearly communicate  they have one.

·        

Chemical Industry Response to Sustainability and Supply Chain Impacts


Manufacturers in the chemical industry and peripheral services have progressively been responding to end-consumer and customer driven pressures. The emergence of ‘green, (or sustainable) chemistry” and restricted materials initiatives over the past half dozen or so years have propelled the chemical industry and global consumer products manufacturers to rethink how products are made, consumer health effects and long term eco-impacts.  Traditionally, supply chain management of hazardous products has focused more on reducing the exposure to hazards than on hazard elimination. The advent of green chemistry has provided opportunities to refine supply chain management, including procurement policies and practices, by developing safer products. Redesigned products and processes can dramatically reduce the risks encountered in manufacturing, storage, transportation and waste control by mitigating the hazards associated with them. From a risk management perspective, since it is fundamentally better to mitigate hazards than to try to protect against them, green chemistry has proven to be highly beneficial and contributes by default to greener supply chain management and supply chain-related risk management


Many manufacturers have risen to the occasion in recent years to drive green chemistry and supply chain management to lessen their eco-footprints and support development of safer products.  Global chemical manufacturer BASF chooses its carriers, service providers and suppliers not just on the basis of price, but also include their performance in the fields of environmental and social responsibility when making our decisions. In addition to following the internationally recognized Responsible Care program requirements for environmental, health and safety, BASF has established product stewardship goals designed to reduce its overall eco-footprint.


“What counts for us is acting responsibly throughout the entire supply chain because we want to build stable and sustainable relationships with our business partners. This is why we choose carriers, service providers and suppliers not just on the basis of price, but also include their performance in the fields of environmental and social responsibility when making our decisions.”


The company also maintains several key features of its global supply chain management program, including:


 

  1. Safe transportation to our customers
  2. Evaluate and support partner companies
  3. Monitoring of suppliers
  4. Product types and sources important
  5. Providing advice for better services
  6. China: sustainability in the value chain
  7. Minimum social standards for suppliers



Dupont SSC.pngMeanwhile, DuPont’s Mission is focused on “creation of shareholder and societal value while we reduce the environmental footprint along the value chains in which we operate”.  Throughout the production-supplier-consumer value chain, DuPont strives through end to end supply chain communication to 1) manage risk and be adaptable; 2) gain efficiencies & profitable flexibility; and 3) enable sustainable product performance and verification through its entire supply chain. Sustainability efforts are tracked and managed for continual improvement through a combination of business management integration approaches and supply chain design and operation.


On the retail side, Walmart has asserted itself in the past several years, by clarifying its stance about reducing toxics in products.  In response, American Chemistry Council  members have pledged to lower GHG intensity by 18% by 2012 using 1990 as a base-reporting year and has exceeded that initial commitment and has reduced carbon intensity by 36%.  In addition, Dow Chemical’s is working to harmonize the Walmart goal with its own sustainability objectives of decreasing its environmental footprint and maximizing product performance throughout the supply chain.


"Given the challenges associated with running a global chemical manufacturing supply chain, we have been focused on sustainability for a long time - not just our own but also how we address sustainability with our customers and our customers' customers," - Anne Wallin, director of sustainable chemistry and life cycle assessment at Dow Chemical.


Logistics Providers Stepping Up to the Challenge


Among supply chain and logistics businesses, the 2009 14th Annual 3PL Study found that shippers want to create more sustainable, environmentally conscious supply chains. The survey found a need to strike a balance between labor & transportation costs.  Surveyed 3PL’s also noted the market value of carbon-reducing processes, compressed production cycles, and less carbon intensive transportation modes that beat the competition. 


AmShipper SurveyDrivers.pngMost recently, American Shipper just published its Environmental Sustainability Benchmark Study of over 200 shipping companies.  According to the study, “survey respondents clearly see environmental sustainability has an emerging impact and increasing importance in their supply chain. On a scale of one to five (one lowest; five highest) the study average ranked sustainability as 2.42 two or three years ago, 3.41 today, 3.95 in five years, and 4.17 in 10 years". Interestingly, customer demands, at 25% percent (see graphic below) are on a par with company policies as a leading driver of environmental sustainability adoption.  Most respondents saw potential return on investment (ROI) although ROI was clearly a potential barrier to sustainability adoption.


In response, leading 3PLs and fourth party logistics providers (4PL’s) are focusing more attention on business practices that are intentionally drive business efficiencies , but (perhaps unintentionally) enhance overall environmental performance, namely:


 

    1. In-Store Logistics
    2. Collaborative warehousing & infrastructure
    3. Reverse Logistics
    4. Demand Fluctuation Management
    5. Energy/Fuel Use Management


End consumer preference certainly has its place in deriving sustainability in the 21st century, but as I see it, the chemical industry and its shipping and logistics partners are showing leadership in embedding sustainability in the “source, make, deliver and return” product value chain. 


My next post will explore how competitive collaboration, or “co-opetition”, is making resurgence in the supply chain sustainability conversation.  In the meantime, I’m looking forward to next week’s conference and all the hospitality that Brussels has to offer.