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Creating Sustainable Value

Article · May 2003

DOI: 10.5465/AME.2003.10025194

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姝 Academy of Management Executive, 2003, Vol. 17, No. 2

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Creating sustainable value

Stuart L. Hart and Mark B. Milstein

Executive Overview
Just as the creation of shareholder value requires performance on multiple dimensions,
the global challenges associated with sustainable development are also multifaceted,
involving economic, social, and environmental concerns. Indeed, these challenges have
implications for virtually every aspect of a firm’s strategy and business model. Yet, most
managers frame sustainable development not as a multidimensional opportunity, but
rather as a one-dimensional nuisance, involving regulations, added cost, and liability.
This approach leaves firms ill-equipped to deal with the issue in a strategic manner.
Accordingly, we develop a sustainable-value framework that links the challenges of
global sustainability to the creation of shareholder value by the firm. Specifically, we
show how the global challenges associated with sustainable development, viewed
through the appropriate set of business lenses, can help to identify strategies and
practices that contribute to a more sustainable world while simultaneously driving
shareholder value; this we define as the creation of sustainable value by the firm.
........................................................................................................................................................................

“Sustainability is as foreign a concept to the present without compromising the ability of

managers in capitalist societies as profits are future generations to meet their needs.”5 Similarly,
to managers in the former Soviet Union.” sustainable development “is a process of achiev-
ing human development . . . in an inclusive, con-
—William Ruckelshaus
nected, equitable, prudent, and secure manner.”6 A
First EPA Administrator
sustainable enterprise, therefore, is one that con-
tributes to sustainable development by delivering
With the fall of communism over a decade ago, simultaneously economic, social, and environmen-
capitalism has emerged as the dominant economic tal benefits—the so-called triple bottom line.7
ideology in the world. Unfortunately, the results
produced by ten years of global capitalism have
not been uniformly positive.1 Saturation in the de- A sustainable enterprise is one that
veloped markets, a widening gap between rich contributes to sustainable development
and poor, growing levels of environmental degra- by delivering simultaneously economic,
dation, and concern that the developing world may social, and environmental benefits—the
be losing control over its own destiny have com- so-called triple bottom line.
bined to create drag on the global economy.2 The
terrorist attacks in the U.S. on September 11, 2001
made it clear that the world is inextricably inter- Beyond this broad consensus on terminology,
connected and that poverty, hopelessness, and however, there remains disagreement among
perceived exploitation in one part of the world will managers regarding the specific meaning of and
not remain geographically isolated.3 Increasingly, motivation for enterprise-level sustainability.8 For
global capitalism is being challenged to include some managers, it is a moral mandate; for others,
more of the world in its bounty and protect the a legal requirement. For still others, sustainability
natural systems and cultures upon which the is perceived as a cost of doing business—a neces-
global economy depends.4 sary evil to maintain legitimacy and right to oper-
The idea of sustainability has come to represent ate. A few firms have begun to frame sustainabil-
these rising expectations for social and environ- ity as a business opportunity, offering avenues for
mental performance. Global sustainability has lowering cost and risk, or even growing revenues
been defined as the ability to “meet the needs of and market share through innovation.9
56
2003 Hart and Milstein 57

For most firms, the pursuit of enterprise sustain- ing a multidimensional model of shareholder
ability remains difficult to reconcile with the ob- value creation. Next, we describe the emerging
jective of increasing shareholder value. Indeed, challenges associated with global sustainability.
some have even advocated that creating a more Finally, we demonstrate how, through appropriate
sustainable world will require firms to sacrifice business strategies and practices, the above chal-
profits and shareholder value in favor of the public lenges are being converted by companies into in-
good.10 By starting with legal or moral arguments itiatives to increase shareholder value. We close
for firm actions, however, managers inevitably un- with some thoughts about how to create truly sus-
derestimate the strategic business opportunities tainable value.
associated with this important issue. To avoid this
problem, managers need to directly link enterprise
Shareholder Value Is a Multidimensional
sustainability to the creation of shareholder value.
Construct
The global challenges associated with sustain-
ability, viewed through the appropriate set of busi- Figure 1 illustrates the basic components for our
ness lenses, can help to identify strategies and shareholder-value framework. The model is built
practices that contribute to a more sustainable using two well-known dimensions that are a
world and, simultaneously, drive shareholder val- source of creative tension for firms. The vertical
ue; this we define as the creation of sustainable axis in the model reflects the firm’s need to man-
value for the firm. age today’s business while simultaneously creat-
ing tomorrow’s technology and markets. This di-
mension captures the tension experienced by the
The global challenges associated with need to realize short-term results while also gen-
sustainability, viewed through the erating expectations for future growth.11 The hori-
appropriate set of business lenses, can zontal axis reflects the firm’s need to grow and
help to identify strategies and practices protect internal organizational skills and capabil-
that contribute to a more sustainable ities while simultaneously infusing the firm with
new perspectives and knowledge from the outside.
world and, simultaneously, drive
This dimension reflects the tension experienced by
shareholder value. the need to buffer the technical core so that it may
operate without distraction, while at the same time
This article develops the strategic logic for the remaining open to fresh perspectives and new,
pursuit of sustainable value. We begin by specify- disruptive models and technologies.12

FIGURE 1
Key Dimensions of Shareholder Value
58 Academy of Management Executive May

Juxtaposing these two dimensions produces a and even failure. Firms like Kodak and Xerox,
matrix with four distinct dimensions of perfor- which failed to adequately invest in digital tech-
mance crucial to generating shareholder value. nology, illustrate how overemphasis on today’s
The lower-left quadrant focuses on those aspects business (to the exclusion of tomorrow’s technol-
of performance that are primarily internal and ogy and markets) may generate wealth for a time
near-term in nature: cost and risk reduction. Quar- but will eventually erode shareholder value as
terly earnings growth and reduction in exposure to competitors enter with superior products and ser-
liabilities and other potential losses are important vices.14 Similarly, the recent experience of many
drivers of wealth creation. Clearly, unless the firm Internet companies stands as testimony to how
can operate efficiently and reduce its risk commen- preoccupation with tomorrow’s business (to the ex-
surate with returns, shareholder value will be clusion of performing today) may be exciting and
eroded. challenging, but short-lived.15 Finally, companies
The lower-right quadrant also focuses on perfor- such as Monsanto, which failed to adequately ad-
mance dimensions that are near-term in nature but dress stakeholder concerns over genetically mod-
extends to include salient stakeholders external to ified food, demonstrate that overemphasis on the
the firm—suppliers and customers in the immedi- internal aspects of the firm may enable short-term
ate value chain, as well as regulators, communi- execution but will ultimately blind the firm to the
ties, NGOs, and the media. Without appropriate external perspectives that are so important to le-
inclusion of these stakeholder interests, the firm’s gitimacy and competitive imagination.16
right to operate may be called into question. Cre- Just as the creation of shareholder value re-
ative inclusion of these stakeholder interests can quires performance on multiple dimensions, sus-
foster a differentiated position for the firm, leading tainable development is also a multidimensional
to the enhanced reputation and legitimacy crucial challenge. Yet, most managers frame sustainabil-
to the preservation and growth of shareholder ity not as a multidimensional opportunity, but
value. rather as a one-dimensional nuisance.17 Neverthe-
Shifting to the upper-left quadrant of the less, the multiple challenges associated with
model, the firm must not only perform efficiently global sustainability, seen through the appropri-
in today’s businesses but should also be con- ate business lenses, can help to identify strategies
stantly mindful of generating the products and and practices which improve performance in all
services of the future. Internally, this means de- four quadrants of the shareholder-value frame-
veloping or acquiring the skills, competencies, work. This, in turn, facilitates the creation of sus-
and technologies that reposition the firm for fu- tainable value for the firm.
ture growth. Without such a focus on innovation,
it will be difficult for the firm to create the new
product and service flow needed to ensure that it Most managers frame sustainability not
prospers well into the future. The creation of as a multidimensional opportunity, but
shareholder value thus depends upon the firm’s rather as a one-dimensional nuisance.
ability to creatively destroy its current capabili-
ties in favor of the innovations of tomorrow.
Finally, the upper-right quadrant focuses on the
Global Drivers of Sustainability
external dimensions associated with future perfor-
mance. Credible expectations for future growth are There are four sets of drivers related to global
key to the generation of shareholder value; this sustainability. A first set of drivers relates to in-
depends upon the firm’s ability to articulate a clear creasing industrialization and its associated ma-
vision of what its future growth path and trajectory terial consumption, pollution, and waste genera-
will be. A convincing growth trajectory requires tion. Industrial activity has grown to the point
either that the firm offer new products to existing where it may now be having irreversible effects on
customers or tap into previously unserved markets. the global environment, including impacts on
The growth trajectory provides guidance and di- climate, biodiversity, and ecosystem function.18
rection for new technology and product develop- While industrialization has produced tremendous
ment. economic benefits, it has also generated signifi-
Firms must perform well simultaneously in all cant pollution burdens and continues to consume
four quadrants of the model on a continuous basis virgin materials, resources, and fossil fuels at an
if they are to maximize shareholder value over increasing rate.19 Resource efficiency and pollu-
time.13 Performing within only one or two quad- tion prevention are therefore crucial to sustainable
rants is a prescription for suboptimal performance development.
2003 Hart and Milstein 59

A second set of drivers relates to the prolifera- Finally, a fourth set of drivers relates to the in-
tion and interconnection of civil society stakehold- creases in population, poverty, and inequity asso-
ers. As the power of national governments has ciated with globalization. While it took thousands
eroded in the wake of global trade regimes, non- of years for the human population to reach 1 bil-
governmental organizations (NGOs) and other civil lion, that number has swollen to over 6 billion in
society groups have stepped into the breach, as- just the past two generations.28 Such rapid popu-
suming the role of monitor and in some cases en- lation growth has resulted in massive migration
forcer of social and environmental standards.20 At from rural areas to cities and growing inequities in
the same time, the spread of the Internet and in- income. Today, for example, over 4 billion people
formation technology has enabled these groups to survive on less than $1500 per year, the minimum
communicate with each other in ways that were income needed to avoid serious deprivation.29 The
unimaginable even a decade ago. Internet- combination of rising population and growing in-
connected coalitions of NGOs are making it in- equity is increasingly recognized as a prescription
creasingly difficult for governments, corporations, for accelerating social decay, political chaos, and
or any large institutions to operate in secrecy.21 terrorism.30 Social development and wealth cre-
Sustainable development thus challenges firms to ation on a massive scale, especially among the
operate in a transparent, responsive manner due world’s poorest 4 billion, therefore appear to be
to a very well-informed, active stakeholder base. essential to sustainable development.31 However,
such development must follow a fundamentally
As the power of national governments different course if it is not to result in ecological
meltdown.32
has eroded in the wake of global trade
In short, global sustainability is a complex,
regimes, non-governmental organizations multi-dimensional concept that cannot be ad-
(NGOs) and other civil society groups dressed by any single corporate action. Creating
have stepped into the breach. sustainable value thus requires that firms address
each of the four broad sets of drivers. First, firms
can create value by reducing the level of material
A third set of drivers relates to emerging tech-
consumption and pollution associated with rapid
nologies that may provide potent, disruptive solu-
industrialization. Second, firms can create value
tions that could render the basis of many of today’s
by operating at greater levels of transparency and
energy- and material-intensive industries obso-
lete.22 Genomics, biomimicry, nanotechnology, in- responsiveness, as driven by civil society. Third,
formation technology, and renewable energy all firms can create value through the development of
hold the potential to drastically reduce the human new, disruptive technologies that hold the poten-
footprint on the planet, making the problems of tial to greatly shrink the size of the human footprint
rapid industrialization all but obsolete.23 For ex- on the planet. Finally, firms can create value by
ample, bio- and nanotechnology create products meeting the needs of those at the bottom of the
and services at the molecular level, holding the world income pyramid in a way that facilitates
potential to eliminate the concept of waste and inclusive wealth creation and distribution.
pollution.24 Similarly, biomimicry represents an at-
tempt to emulate nature’s processes to create novel
products and services without having to rely on Connecting the Dots: The Sustainable
brute force to hammer out goods from large stocks Value Framework33
of virgin raw materials.25 Information technology
and renewable energy are distributed in character, If viewed through the appropriate set of business
meaning that they can be applied in the most re- lenses, it becomes clear how the sustainability
mote and small-scale settings imaginable, elimi- drivers discussed above present opportunities for
nating the need for centralized infrastructure and firms to improve all four dimensions of share-
wireline distribution, both of which are environ- holder value. As illustrated in Figure 2 (and de-
mentally destructive.26 Distributed technologies scribed in more detail below), each driver of sus-
thus hold the potential to meet the needs of the tainability, and its associated business strategies
billions of rural poor (who have thus far been and practices, corresponds to a particular dimen-
largely ignored by global business) in a way that sion of shareholder value. Thinking through the
dramatically reduces environmental impact.27 In- full range of challenges and opportunities is the
novation and technological change are thus key to first step managers can take toward the creation of
the pursuit of sustainable development. sustainable value for the corporation.
60 Academy of Management Executive May

FIGURE 2
Sustainable Value Framework

Growing Profits and Reducing Risk Through duce Toxics (SMART). Additionally, pollution-pre-
Pollution Prevention vention programs have proliferated at the industry
level and receive a great deal of attention from
The problems of material consumption, waste, and
regulatory bodies both in the United States as well
pollution associated with industrialization present
as Europe as potential alternatives to command-
an opportunity for firms to lower cost and risk
through the development of skills and capabilities and-control regulation.37 The well-publicized re-
in pollution prevention and eco-efficiency.34 Pollu- sults of pioneering programs like 3M’s Pollution
tion prevention is focused on improving the envi- Prevention Pays (3P) illustrate the direct, bottom-
ronmental efficiency of today’s products and pro- line benefits that can be realized through pollution
cesses—that is, reducing waste and emissions from prevention.38 Indeed, between 1975 and 1990, 3M
current operations. Less waste means better utiliza- reduced its total pollution by over 530,000 tons
tion of inputs, resulting in lower costs for raw mate- (a 50 per cent reduction in total emissions) and,
rials and waste disposal. Effective pollution preven- according to company sources, saved over $500
tion requires extensive employee involvement, along million through lower raw material, compliance,
with well-developed capabilities in continuous im- disposal, and liability costs. In 1990, 3M embarked
provement and quality management.35 By deriving on 3P⫹ which sought to reduce the remaining
more saleable product or service per pound of in- waste and emissions by 90 per cent with the ulti-
put, pollution prevention can lead to lower costs mate goal being zero pollution.39
and reduced risk. Environmental management sys- Extensive empirical work has also now made it
tems (e.g., ISO 14000) built on total quality princi- evident that, with the appropriate set of skills and
ples provide guidance for the development of sys- capabilities (e.g., employee involvement, continu-
tematic processes geared toward removing waste ous improvement), firms pursuing pollution-
and lowering risk throughout a firm’s operations.36 prevention and waste-reduction strategies actu-
Programs that reduce waste and emissions ally do reduce cost and increase profits.40 Pollution
through eco-efficiency have been widely adopted by prevention thus provides managers with the clear-
firms over the past decade and include such notable est, fastest way to increase shareholder value by
cases as Dow Chemical’s Waste Reduction Always growing the bottom line for existing businesses
Pays (WRAP) and Chevron’s Save Money and Re- through reductions in cost and liability.
2003 Hart and Milstein 61

Enhancing Reputation and Legitimacy Through ions about a firm’s operations. In Europe, a strong
Product Stewardship regulatory environment coupled with a very active
NGO community has led firms to pursue more col-
Whereas pollution prevention focuses on internal
laborative approaches in addressing business is-
operations, product stewardship extends beyond
sues. Together with industry, European govern-
organizational boundaries to include the entire
ments are moving forward with leading legislation
product life cycle—from raw material access,
concerning take-back laws for electrical, elec-
through production processes, to product use and
tronic, and appliances manufacturers.48
disposal of spent products.41 Product stewardship
The company Nike serves as a recent, salient
thus involves integrating the voice of the stake-
example of the value of product stewardship.
holder into business processes through extensive
Faced with growing backlash in the late 1990s
interaction with external parties such as suppliers,
regarding its labor and environmental practices,
customers, regulators, communities, non-govern-
the company turned to product-stewardship strat-
mental organizations, and the media. As such, it
egies to recover its reputation and preserve its
offers a way to both lower environmental impacts
right to operate. The company enacted a world-
across the value chain and enhance legitimacy
wide monitoring program for all contract factories,
and reputation by involving stakeholders in the
using both internal and third-party auditors such
conduct of on-going operations.42 By constructively
as PriceWaterhouseCoopers. Nike also became a
engaging stakeholders, firms increase external
charter member of the Fair Labor Association
confidence in their intentions and activities, help-
(FLA), a non-profit group that evolved out of an
ing to enhance corporate reputation and catalyze
anti-sweatshop coalition of unions, human rights
the spread of more sustainable practices within
groups, and businesses. Additionally, Nike helped
the business system at large.43
found the Global Alliance, a partnership among
the International Youth Foundation, the MacArthur
By constructively engaging stakeholders, Foundation, and the World Bank dedicated to im-
firms increase external confidence in proving workers’ lives in emerging economies.49
Aside from taking action on the labor (social)
their intentions and activities. front, Nike also took action environmentally. Foot-
wear designers started evaluating their new pro-
There are many actions firms can take to in- totypes against a product-stewardship scorecard,
crease shareholder value through product stew- using life-cycle analysis. Nike also launched the
ardship. Cause-related marketing efforts appeal to Reuse a Shoe Project to downcycle old, unwanted
consumers’ desires to associate their actions (pur- footwear. Nike retailers collected shoes and
chases) with products that have positive social and shipped them back to the company where they
environmental benefits.44 Life-cycle management ground and separated the materials. Through part-
extends the value chain beyond traditional firm nerships with sports surfacing companies, the out-
boundaries by including costs and benefits of sole rubber and midsole foam were turned into
products from raw materials to production and ul- artificial athletic surfaces. Profits from this busi-
timately to disposal by consumers.45 Through in- ness generated income for the Nike Foundation
dustrial ecology, firms can even convert the wastes and the funding of sport surface donations.50
from one operation into the inputs to another.46In As the Nike case makes clear, firms use product
1997, for example, Collins & Aikman Floorcover- stewardship to demonstrate that stakeholder
ings became the first carpet manufacturer to de- voices and opinions matter and can affect com-
velop the capability to convert old carpet and post- pany behavior. Like pollution prevention, product
industrial PVC waste into new carpet backing for a stewardship is centered on improving existing
new product line. Called ER3 (which stands for products and services. As a consequence, changes
Environmentally Redesigned, Restructured, and are immediate and value is realized quickly in the
Reused), this product has been central to the com- form of improved community relations, legitimacy,
pany’s growing reputation for environmentally and brand reputation.
sustainable products and has helped to fuel gains
in market share against competitors.47
Companies such as Weyerhaeuser and Shell Accelerating Innovation and Repositioning
have increased the use of stakeholder engagement Through Clean Technology
through town hall-style meetings, Internet-based
comment boxes, and other tools designed to pro- Clean technology refers not to the incremental im-
vide venues for stakeholders to voice their opin- provement associated with pollution prevention,
62 Academy of Management Executive May

but to innovations that leapfrog standard routines biologically based polymers to enable renewable
and knowledge.51 The rapid emergence of disrup- feedstocks such as corn to replace petrochemical
tive technologies such as genomics, biomimicry, inputs in the manufacturing of plastics. Each of
information technology, nanotechnology, and re- these cases is notable for the willingness of firms
newable energy present the opportunity for firms— to disrupt the very core technologies upon which
especially those heavily dependent upon fossil their businesses currently depend.
fuels, natural resources, and toxic materials—to DuPont is an example of a large corporation with
reposition their internal competencies around a well-developed clean-technology strategy. In
more sustainable technologies.52 Thus, rather than the late 1800s, DuPont transformed itself from a
simply seeking to reduce the negative impacts of manufacturer of gunpowder and explosives into a
their operations, firms strive to solve social and chemical company, focused on the production of
environmental problems through the internal de- synthetic materials using petroleum feedstocks.
velopment or acquisition of new capabilities that This strategy produced nearly a century of success
address the sustainability challenge directly.53 with such well-known blockbuster products as Ny-
The sustainable competencies that emerge from lon, Lycra, Teflon, Corian, and Kevlar.
the search for clean technologies are central to
a firm’s efforts to reposition its internal skill set
for the development and exploitation of future DuPont is an example of a large
markets. corporation with a well-developed
A growing number of firms have begun to de- clean-technology strategy.
velop the next generation of clean technology to
drive future economic growth. BP and Shell are
ramping up investments in solar, wind, and other In the late 1990s, DuPont embarked on its second
renewable technologies that might ultimately re- major transformation—from an energy-intensive
place their core petroleum businesses. In the auto- petrochemical company to a renewable-resource
motive sector, Toyota and Honda have already en- company focused on sustainable growth.55 To real-
tered the market with hybrid power systems in ize this transformation, the company has pursued
their vehicles, which dramatically increase fuel an aggressive strategy of acquisition, divestiture,
efficiency. They also launched a market experi- and internal technology development. Over the
ment in fuel cell vehicles in Japan at the end of past decade, for example, DuPont has invested in
2002. Also in 2002, General Motors launched the excess of $15 billion in biotechnology, including
AUTOnomy project—a bold $1 billion initiative to the acquisition of Pioneer Hi-Bred, a major player
reinvent the automobile around hydrogen fuel cell in the agricultural biotech business. It has also
technology. While many automakers have fuel cell divested resource- and energy-intensive busi-
initiatives, most see the expensive combination of nesses such as its oil subsidiary (Conoco) in the
a fuel cell with a big electric motor as a simple 1990s and, most recently, its core Nylon and Lycra
replacement for the engine, which makes such ve- businesses in 2003.
hicles economically uncompetitive compared to In an effort to shrink its footprint dramatically,
current technology. GM, in contrast, has taken a the company has set bold targets for 2010 —to re-
clean-sheet approach, not only to vehicle design duce greenhouse gas emissions by two-thirds
but also to the entire manufacturing system. By while holding total energy use flat, and to increase
radically simplifying the design around a fuel cell its use of renewable resources to 10 per cent of
which doubles as the vehicle’s chassis, GM hopes global energy needs. To hit such ambitious targets
to compensate for the higher cost of the fuel cell by while continuing to grow as a company, DuPont
drastically reducing sourcing and production must fundamentally reorient its technology base
costs. While many carmakers talk of a transition to toward biology (e.g., genomics and biomimicry),
alternative power taking 20 –30 years, GM, Toyota, renewable energy (e.g., fuel cells) and information
and Honda are committed to making it a commer- (i.e., knowledge-intensive rather than resource-
cial reality within a decade.54 intensive products). To accelerate this process,
In addition, firms such as General Electric, Hon- DuPont is creating a venture fund focused on sus-
eywell, and United Technologies are investing in tainable technology development and innovations
technologies that would lead to the development of aimed at the developing world.
small-scale, widely distributed energy systems Bold strategies in clean technology continue to
that could make centralized coal-fired and nuclear be less common among large, established corpo-
power plants obsolete. Finally, firms such as rations than are activities in pollution prevention
Cargill and Dow are exploring the development of or product stewardship. Payoffs from such invest-
2003 Hart and Milstein 63

ments take time and are determined more by trial poverty. As a result, they focused their attention on
and error than internal hurdle rates. Entrenched more affluent customers. But Yunas discovered
corporate mindsets and standard operating proce- that the poor were, for the most part, energetic,
dures suppress the creation of structures that can motivated, and knew exactly what they needed to
catalyze innovation. The risks associated with move themselves forward— gaining access to
such investments stand in stark contrast to the small amounts of credit to launch or expand small
risk-reducing efforts associated with the pollution- enterprises—and built his enterprise to serve this
prevention programs discussed above. Firms that need. By the late 1990s, Grameen Bank was provid-
invest in clean-technology solutions tend to pursue ing microcredit services in more than 40,000 vil-
more novel approaches to long-term challenges lages, better than half the total number in Bang-
and create organizational environments support- ladesh. The competitive imagination of Grameen
ive of the innovation process. Future economic Bank has led to a global explosion of institutional
growth will be driven by those firms that are able interest in microlending over the past decade, in-
to develop disruptive technologies that address cluding recent entry into this domain by financial
society’s needs. The evidence is increasingly clear giants such as Citigroup.
that firms that fail to lead the development and Increasingly, MNCs are recognizing that listen-
commercialization of such technologies are un- ing to the voices of the poor and disenfranchised
likely to be a part of tomorrow’s economy.56 can be a source of creativity and innovation. For
example, Hindustan Lever Ltd. (HLL), a subsidiary
of Unilever PLC, has pioneered market develop-
Bold strategies in clean technology ment among the rural poor in India. Through prod-
continue to be less common among large, uct development dedicated specifically to the
established corporations than are unique needs of the rural poor, HLL has been able
activities in pollution prevention or to apply top-class science and technology to bring
affordable shampoos and soaps to this large new
product stewardship.
market.60 Today, better than half of HLL’s revenues
come from customers at the bottom of the pyramid.
Even more importantly, using the approach to
Crystallizing the Firm’s Growth Path and
product development, marketing, and distribution
Trajectory Through a Sustainability Vision
pioneered in rural India, Unilever has been able to
The growing gap between rich and poor, and the leverage a rapidly growing and profitable busi-
unmet needs of those at the bottom of the economic ness to other parts of the developing world such as
pyramid, present opportunities for firms to define a Brazil.61
compelling trajectory for future growth.57 The real- Recognizing that information poverty may be the
ization of a more inclusive form of capitalism char- single biggest roadblock to sustainable develop-
acterized by two-way dialogue and collaboration ment, Hewlett-Packard has begun to focus atten-
with stakeholders previously overlooked or ig- tion on the needs of the isolated and disconnected
nored by firms (e.g., radical environmentalists, through their World e-Inclusion initiative. As part
shantytown dwellers, the rural poor in developing of their strategy, HP has created an R&D laboratory
countries) can help to open up new pathways for in rural India with the express purpose of coming
growth in previously unserved markets.58 Thus, a to understand the particular needs of the rural
sustainability vision that facilitates competitive poor. They have quickly realized that this is not
imagination by creating a shared roadmap for to- unoccupied space: local companies such as
morrow’s business provides guidance to em- N-Logue and Tarahaat are also developing infor-
ployees in terms of organizational priorities, tech- mation technology and business models focused
nology development, resource allocation, and on this enormous potential market. Through
business model design. shared access (e.g., Internet kiosks), wireless infra-
The Grameen Bank in Bangladesh is perhaps the structure, and R&D focused on cost reduction, these
best known example of how a sustainability vision companies are dramatically reducing the cost of
can open up a completely new pathway for busi- being connected.62
ness growth.59 Over twenty years ago, Muhammad Despite the success of organizations such as
Yunas, an economics professor at the time, con- Grameen and Unilever, however, most companies
ceived the idea of a bank focused on offering continue to mistakenly assume that poor markets
micro-credit loans to the poorest of the poor. Most possess no value opportunities and have yet to try
bankers assumed that laziness or lack of compe- to understand the possibilities of serving the mar-
tence were the reasons that so many lived in abject kets they are used to ignoring. Firms that do take
64 Academy of Management Executive May

the time appear to recognize that those at the bot- specific steps in the pursuit of sustainable value:
tom of the pyramid lack attention and capital, diagnosis (taking stock of the company portfolio),
not ingenuity and aspiration.63 Companies like opportunity assessment (strengths and weak-
Johnson & Johnson, Dow, DuPont, Coca-Cola, and nesses in capability), and implementation (the de-
Procter & Gamble are beginning to take steps to sign of projects and experiments).
understand how best to leverage their skills and Each is explored in more depth below.
resources to meet the basic nutritional, energy,
housing, and communications needs of the world’s
Diagnosis
poorest.64 Those steps include interacting with a
broad range of stakeholders previously assumed The sustainable-value framework can be used as a
to have nothing to offer a multinational corpora- simple but important diagnostic tool. By assessing
tion (e.g., local NGOs, disenfranchised dwellers of a company’s (or SBU’s) activity in each of the four
shanty towns, rural villagers, etc.) to highlight quadrants of the framework, managers can assess
what unmet needs exist and how their organiza- the degree of portfolio balance. Extreme portfolio
tion’s skills and capabilities might be wielded to imbalance suggests missed opportunities—and
meet them. In turn, this understanding can become vulnerability. Our research suggests that few in-
a catalyst for the development of innovative tech- cumbent firms seem to recognize—let alone ex-
nologies, products, and services that meet those ploit—the full range of sustainable business op-
needs and drive growth at multiple levels within portunities available.66 Most focus their time and
the economy.65 Thus, firms that take the time to attention only on the bottom half of the matrix—
create a compelling sustainability vision have the short-term solutions tied to existing products and
potential to unlock future markets of immense stakeholder groups.
scale and scope. Indeed, programs in pollution prevention and
product stewardship are well institutionalized
within most MNCs today and have saved hundreds
Firms that take the time to create a of millions of dollars over the past decade. U.S.-
compelling sustainability vision have the based companies have been especially focused on
potential to unlock future markets of the efficiency gains and cost savings associated
immense scale and scope. with pollution prevention. Highly publicized crises
at companies such as Monsanto and Nike, who
failed to successfully engage the views of stake-
holders, have also caused growing numbers of
Toward Sustainable Value
firms to explore strategies for product stewardship.
At this point it should be clear that the challenge of European companies have been particularly pro-
global sustainability is complex, multidimen- active in this regard, actively pursuing strategies
sional, and emergent in character. Firms are chal- for stakeholder dialogue, extended producer re-
lenged to minimize waste from current operations sponsibility, and more inclusive forms of corporate
(pollution prevention), while simultaneously reori- governance.
enting their competency portfolios toward more
sustainable technologies and skill sets (clean tech-
Opportunity Assessment
nology). Firms are also challenged to engage in
extensive interaction and dialogue with external Relatively few established companies, however,
stakeholders, regarding both current offerings have begun to exploit the opportunities associated
(product stewardship) as well as how they might with the upper half of the model—the portion fo-
develop economically sound solutions to social cused on building new capabilities and markets.
and environmental problems for the future (sus- Indeed, most clean technologies today are being
tainability vision). developed and commercialized by small, often
Taken together, as a portfolio, such strategies under-capitalized, new ventures—not by the MNCs
and practices hold the potential to reduce cost and that possess the financial resources for doing so
risk; enhance reputation and legitimacy; acceler- successfully. Similarly, most business experiments
ate innovation and repositioning; and crystallize at the bottom of the economic pyramid have been
growth path and trajectory—all of which are cru- initiated by NGOs or small local firms while the
cial to the creation of shareholder value. The chal- emerging market plays of MNCs have been limited
lenge for the firm is to decide which actions and largely to the elites or emerging middle classes in
initiatives to pursue and how best to manage the developing world.67 Given that pursuit of clean
them. Accordingly, we recommend the following technology and markets at the bottom of the pyra-
2003 Hart and Milstein 65

mid is disruptive in character, perhaps we should investment in terms of new capability develop-
not be surprised that large incumbent firms have ment and revenue growth.
not actively blazed these trails or that entrepre-
neurs have been likely to seek opportunities to
leapfrog existing competitors and claim under- Sustainable Value: A Huge Opportunity
served market space.
The opportunity to create sustainable value—
Yet, it need not be this way. Just as particular
shareholder wealth that simultaneously drives us
competencies predispose some companies to be
toward a more sustainable world—is huge, but yet
more effective than others in implementing pollu-
to be fully exploited. The sustainable-value frame-
tion prevention and product stewardship (e.g.,
work makes clear the nature and magnitude of the
quality management, continuous improvement,
opportunities associated with sustainable devel-
boundary-spanning capability), some MNCs will
opment and connects them to dimensions of value
be better positioned than others to pursue clean
creation for the firm. The framework’s simplicity,
technologies and bottom-of-the-pyramid mar-
however, should not be mistaken for ease of exe-
kets—those with demonstrated ability in acquiring
cution: understanding the connections is not the
new skills, working with unconventional partners,
same thing as successfully implementing the strat-
incubating disruptive innovations, shedding obso-
egies and practices involved. The tasks are very
lete businesses, and creatively destroying existing
challenging and complex indeed, suggesting that
product portfolios, to name just a few. Incumbent
only a few firms will be able to successfully carry
firms with these skill sets possess a potentially
out activities in all four quadrants simultaneously,
powerful first-mover advantage compared to those
especially those that require the greatest efforts in
firms more oriented toward defending base busi-
terms of vision, creativity, and patience.
nesses.

The opportunity to create sustainable

Implementation value—shareholder wealth that
To make this opportunity a reality, however, it is simultaneously drives us toward a more
necessary to organize the range of possible activ- sustainable world—is huge.
ities into discrete projects and business experi-
ments. Given the nascent nature of clean technol-
Stagnant economic growth and stale business
ogy and bottom-of-the-pyramid markets, many
models present formidable challenges to corpora-
small experiments are far preferable to a single
tions in the years ahead. Focusing on incremental
big investment. These initiatives must be evalu-
improvements to existing products and businesses
ated for funding using a separate set of criteria
is an important step but neglects the vastly larger
and metrics, since they will almost never meet the
opportunities associated with clean technology
short-term revenue and profitability targets asso-
and the underserved markets at the bottom of the
ciated with projects designed to expand existing
economic pyramid. Indeed, addressing the full
businesses.
range of sustainability challenges can help to cre-
We recommend using a real-options approach,
ate shareholder value and may represent one of
rather than the more conventional discounted-
the most under-appreciated avenues for profitable
cash-flow logic.68 Real-options thinking introduces
growth in the future.
the logic of the private equity market into the firm,
with an expected payoff in the 5–7 year time frame,
rather than the excessively short-term logic asso-
Endnotes
ciated with conventional capital budgeting or the
1
excessively long-term logic associated with tradi- See Stiglitz, J. 2002. Globalization and its discontents. New
York: W. W. Norton.
tional R&D.69 We also recommend creating a sep- 2
See the National Research Council. 1999. Our common jour-
arate pool of investment capital to fund these ini- ney. Washington, DC: National Academy Press.
tiatives and a separate organizational entity to 3
Soros, G. 2002. George Soros on globalization. New York:
house the business experiments aimed at opening Public Affairs.
4
up new markets. Without this early protection, the Protests at the World Trade Organization, World Bank,
World Economic Forum, G8, and other meetings in places like
logic of short-term performance in today’s business
Seattle, Washington, DC, Davos, and Rome have become the
will almost certainly guarantee failure.70 Only a most visible examples of the frustration felt by many who view
small percentage of the projects and business ex- globalization as inequitable exploitation. See, Nye, J. 2001.
periments have to succeed to more than justify the Globalization’s democratic deficit. Foreign Affairs, 80(4): 2– 6.
66 Academy of Management Executive May

5
World Commission on Environment and Development. 1987. tional civil society. Washington, DC: Carnegie Endowment for
Our common future. Oxford: Oxford University Press, p. 8. International Peace.
6 21
Gladwin, T., Kennelly, J., & Krause, T. 1995. Shifting para- Rheingold, H. 2002. Smart mobs: The next social revolution.
digms for sustainable development: Implications for manage- Cambridge, MA: Perseus Publishing.
22
ment theory and research. Academy of Management Review, See, for example, Hart, S., & Milstein, M. 1999. Global sus-
20(4): 878 –907. tainability and the creative destruction of industries. Sloan
7
See Elkington, J. 1994. Towards the sustainable corporation: Management Review, 41(1): 23–33.
Win-win-win business strategies for sustainable development. 23
To be sure, there are many new problems that these tech-
California Management Review, 36(3): 90 –100. nologies may create, making their ultimate contribution to sus-
8
We use the terms “global sustainability,” “sustainable tainability more unknowable; witness the problems Monsanto
world,” and “sustainable development” interchangeably to re- encountered in pursuing its agricultural biotechnology strategy
fer to the global-scale drivers of sustainability. Similarly, we in the mid to late 1990s.
use the terms “sustainable enterprise,” “corporate sustainabil- 24
Drexler, E. 1986. Engines of creation. Garden City, NY: An-
ity,” and “enterprise sustainability” interchangeably to refer to chor Press.
firm-level strategies and practices to build value by moving 25
See Benyus, J. 1997. Biomimicry: Innovation inspired by
toward a more sustainable world. nature. New York: Morrow.
9
See, Holliday, C. 2001. Sustainable growth, the DuPont way. 26
Christensen, C., Craig, T., & Hart, S. 2001. The great disrup-
Harvard Business Review, 79(8): 129 –132. tion. Foreign Affairs, 80(2): 80 –95.
10
See Friedman, M. The social responsibility of business is to 27
Coyle, D. 2001. Paradoxes of prosperity. New York: Texere
increase profits. The New York Times Magazine 13 September Publishing.
1970, for the classic argument representing this point of view. 28
See World Bank. 2000. World development report: Attacking
11
See Christensen, C. 1998. The innovator’s dilemma. Boston, poverty. New York: Oxford University Press.
MA: Harvard Business School Press for a detailed discussion of 29
Easterly, W. 2001. The elusive quest for growth. Cambridge,
the paradox of focusing on short- versus long-term value. The MA: MIT Press.
concept of “creative destruction” was first introduced by Joseph 30
National Research Council, op. cit. See also Hammond, A.
Schumpeter (1942) in Capitalism, socialism and democracy, New 1998. Which world? Scenarios for the 21st century, Washington,
York: Harper Torchbooks. More recently, the growing impor-
DC: Island Press.
tance of creative destruction to competitive success has been 31
See Prahalad, C. K., & Hart, S. 2002. The fortune at the
persuasively argued in Foster, R., & Kaplan, S. 2001. Creative
bottom of the pyramid. Strategy ⫹ Business, Issue 26: 54 – 67.
destruction, New York: Doubleday. 32
12 Von Dieren, W. (Ed.). 1995. Taking nature into account. New
See Thompson, J. 1967. Organizations in action, New York:
York: Copernicus.
McGraw Hill for the classic discussion of balancing the need 33
The four strategies developed in this section were first
both to sustain and destroy the technological core underlying a
articulated in: Hart, S. 1997. Beyond greening: Strategies for a
firm’s business model. More recently, these ideas have received
sustainable world. Harvard Business Review, 75(1): 66 –76. We
growing attention in the form of work on “core rigidities” (e.g.,
would also like to thank our colleagues at the Sustainable
Leonard-Barton, D. 1992. Core capabilities and core rigidities: A
Enterprise Academy—in particular, Brian Kelly, David Wheeler,
paradox in managing new product development. Strategic
Bryan Smith, John Ehrenfeld, Chris Galea, Art Hanson, David
Management Journal, 13(SSI): 111–125) and “dynamic capabili-
Bell, Nigel Roome, Jim Leslie and Pat Delbridge—for helping us
ties” (e.g., Teece, D., Pisano, G., & Shuen, A. 1997. Dynamic
to clarify our thinking regarding how the drivers of sustainabil-
capabilities and strategic management. Strategic Management
ity, viewed through the proper set of business lenses, influence
Journal, 18(7): 509 –533).
13
This idea is similar to the balanced scorecard (see Kaplan, shareholder value.
34
R., & Norton, D. 1992. The balanced scorecard—measures that The most comprehensive treatment of eco-efficiency was
drive performance. Harvard Business Review 72(1): 71–79) and done by the World Business Council for Sustainable Develop-
other tools that emphasize the need to balance a portfolio of ment in: DeSimone, L., & Popoff, F. 1997. Eco-efficiency: The
actions to drive firm value over time. business link to sustainable development. Cambridge: MIT
14
Christensen, C., op. cit. Press. See also James, P., & Bennett, M. 1994. Environment-
15
The experiences of Enron and the numerous dot-bombs of related performance measurement in business: From emissions
the tech wreck serve as the most recent illustrations that while to profit and sustainability? Ashridge Management Group Pub-
it can be very glamorous to be viewed as on the cutting edge of lication.
35
the business world, bankruptcy provides a particularly ineffec- Hart, S. 1995. A natural resource-based view of the firm.
tive platform from which to generate future growth. Academy of Management Review, 20(4): 986 –1014.
36
16
See Hamel, G., & Prahalad, C. K. 1991. Corporate imagina- Darnall, N. 2002. Why firms signal green: Environmental
tion and expeditionary marketing. Harvard Business Review, management system certification in the United States. Unpub-
69(4): 81–92. lished Ph.D. dissertation, University of North Carolina, Chapel
17
See Rugman, A. M., & Verbeke, A. 1998. Corporate strate- Hill.
37
gies and environmental regulations: An organizing framework. See Marcus, A. 2002. Reinventing environmental regula-
Strategic Management Journal, 19(4): 363–375, which notes that tion. Washington, DC: RFF Press. For more information on
most managerial approaches to environmental issues take a European pollution prevention programs, see European Inte-
very simple, static view of the problem. grated Pollution Prevention and Control Bureau (http://
18 eippcb.jrc.es/), the UK government’s Enviro Wise Programme
National Research Council, op. cit.; and Daily, G. 1997.
Nature’s services: Societal dependence on natural ecosystems. (http://www.envirowise.gov.uk/), and the Implementation and
Washington, DC: Island Press. Enforcement of Environmental Law (IMPEL) at http://europa.e-
19
See Hawken, P., Lovins, A., & Lovins, H. 1999. Natural cap- u.int/comm/environment/impel/index.htm). U.S. pollution-
italism: Creating the next industrial revolution. Boston, MA: prevention programs are documented by the U.S. Environ-
Little Brown & Company. mental Protection Agency (http://www.epa.gov/epahome/
20
Florini, A. (Ed.). 2000. The third force: The rise of transna- p2pgram.htm).
2003 Hart and Milstein 67

38
For more information on these and other programs, see first phase of the Dutch STD programme. Journal of Cleaner
Smart, B. 1992. Beyond compliance: A new industry view of the Production, 2(3/4): 133–139; Fussler, C. 1996. Driving eco-innova-
environment. Washington, DC: World Resources Institute. tion. London: Pittman Publishing; and von Weizsacker, E., Lov-
39
3M Company, 1992. Pollution prevention pays, videotape. ins, A., & Lovins, H. 1997. Factor four. London: Earthscan Pub-
40
See, for example, Christmann, P. 1998. Effects of ‘best prac- lishing.
52
tices’ of environmental management on cost advantage: The See Hart, S., & Milstein, M., op. cit.
53
role of complementary assets. Academy of Management Jour- McDonough, W., & Braungart, M. 2002. Cradle to cradle.
nal, 43(4): 663– 680; and Sharma, S., & Vredenburg, H. 1998. Pro- New York: North Point Press.
54
active corporate environmental strategy and the development Baum, D. 2002. GM’s billion-dollar bet. Wired.com. www.
of competitively valuable organizational capabilities. Strategic wired.com/wired/archive/10.08/fuelcellcars.html典.
55
Management Journal, 19(8): 729 –753. Holliday, C., op. cit.
41 56
Through early adoption of extended producer responsi- Hamel, G. 2000. Leading the revolution. Boston: Harvard
bility requirements, European governments and firms have Business School Press; Foster, R., & Kaplan, S., op. cit; and
pioneered efforts in product stewardship. See, for example, Christensen, C., Craig, T., & Hart, S., op. cit.
57
Roome, N., & Hinnells, M. 1993. Environmental factors in the See von Dieren, W., op. cit.; Prahalad, C. K., & Hart, S.,
management of new product development. Business Strategy op. cit.; and Prahalad, C. K., & Hammond, A. 2002. Serving
and the Environment, 2(1): 12–27; Welford, R. 1995. Environ- the world’s poor, profitably. Harvard Business Review, 80(9):
mental strategy and sustainable development. London: 4 –11.
58
Routledge; and Steger, U. 1996. Managerial issues in closing Hart, S., & Sharma, S. 2002. Radical transactiveness and
the loop. Business Strategy and the Environment, 5(4): competitive imagination. Presented at the Academy of Manage-
252–268. ment Annual Meeting, Denver, CO, August 2002.
42 59
Wheeler, D., & Sillanpaa, M. 1997. The stakeholder corpo- Counts, A. 1996. Give us credit. New York: Times Books.
60
ration. London: Pittman Publishing. Balu, R. 2002. Strategic innovation: Hindustan Lever. Fast
43
Elkington, J. 1998. Cannibals with forks. Gabriola Island: Company, 47: 120 –125.
61
New Society Publishing. Prahalad, C. K., & Hart, S., op. cit.
44 62
Hoeffler, S., & Keller, K. 2002. Building brand equity through Prahalad, C. K., & Hammond, A., op. cit.
63
corporate societal marketing. Journal of Public Policy and Mar- See de Soto, H. 2000. The mystery of capital. New York:
keting, 21(1): 78 – 89. Basic, for a discussion about the value that resides in informal
45
Fiksel, J. 1995. Design for environment: Creating eco-effi- economies.
64
cient products and processes. New York: McGraw-Hill. These companies and others including Hewlett-Packard
46
For a leading example of industrial ecology, refer to and Ford have joined the Base of the Pyramid Learning Labo-
Graedel, T., & Allenby, B. 1995. Industrial ecology. Englewood ratory at the University of North Carolina’s Kenan-Flagler Busi-
Cliffs: Prentice Hall. ness School to explore ways to enter the underserved markets of
47
Buffington, J., Hart, S., and Milstein, M. 2002. Tandus 2010: the world in ways that are culturally appropriate and environ-
Race to sustainability. Center for Sustainable Enterprise, Uni- mentally sustainable.
65
versity of North Carolina, Chapel Hill. Hart, S., & Christensen, C. 2002. The great leap: Driving
48
See Proposal For a Directive of the European Parliament innovation from the base of the pyramid. Sloan Management
and of the Council on Waste Electrical and Electronic Equip- Review, 44(1): 51–56.
66
ment and on the Restriction of the Use of Certain Hazardous Hart, S., & Milstein, M., op. cit.
67
Substances in Electrical and Electronic Equipment, COM Hart, S., & Christensen, C., op. cit.
68
#(2000)347 available at http://europa.eu.int/comm/environment/ See Amram, M., & Kulatilaka, N. 1999. Real options. Boston:
docum/00347_en.htm. Harvard Business School Press; and Milstein, M., & Alessandri,
49
McDonald, H., London, T., & Hart, S. 2002. Expanding the T. New tools for new times: Using real options to identify value
playing field: Nike’s World Shoe project. Washington, DC: World in strategies for sustainable development. Presented at the
Resources Institute. Academy of Management Annual Meeting, Toronto, Canada,
50
Ibid. August 2000.
51 69
See, for example, Vergragt, P., & van Grootveld, G. 1994. Foster, R., & Kaplan, S., op. cit.
70
Sustainable technology development in the Netherlands: The Christensen, C., op. cit.

Stuart L. Hart is a professor of Mark B. Milstein is an adjunct as-

strategic management, Sarah sistant professor and director of
Graham Kenan Distinguished research for the Center for Sus-
Scholar, and director of the tainable Enterprise and is com-
Center for Sustainable Enter- pleting his doctorate in strategic
prise at the University of North management at Kenan-Flagler
Carolina’s Kenan-Flagler Busi- Business School at the University
ness School. He received his of North Carolina at Chapel Hill.
Ph.D. from the University of His research and teaching inter-
Michigan. His research inter- ests are focused on the relation-
ests center on strategy innova- ship between strategic deci-
tion and change, particularly the sion-making and organizational
strategic implications of environ- change, industry transforma-
mentalism and sustainable devel- tion, and innovation. Contact:
opment. Contact: slhart@unc.edu. milstein@email.unc.edu.
68 Academy of Management Executive May

Executive Commentary
........................................................................................................................................................................

Joseph Caggiano
ChevronTexaco

All multinational companies are parties to the de- guide our operations. Safe, reliable operations are
bate about sustainable development—none more the starting point for Operational Excellence. But
so than the energy industry. Accessing non-renew- the practices also include environmental responsi-
able energy sources like oil, gas, and coal is by bility, product stewardship, and stakeholder in-
definition extractive, so the resource available to volvement in the areas where we do business—all
future generations is inevitably reduced. On the factors that contribute to sustainable value. My
consumption side, hydrocarbon fuels raise enor- company takes these practices very seriously.
mous environmental issues about the sustainabil- Managers are held accountable for them. All em-
ity of entire—perhaps global— ecosystems. So, ployees are expected to apply them in their work.
sustainability is by no means a foreign concept in The highest executive levels pay personal atten-
the energy industry. We’re acutely aware of it on tion to our progress.
both the raw-material and the finished-product Operational Excellence responds to one of the
sides of the business. global drivers identified by the author—resource
efficiency and pollution prevention. The authors
are correct that a corporate paradigm like Opera-
All multinational companies are parties tional Excellence will enhance a company’s repu-
to the debate about sustainable tation. This is particularly important to energy
development—none more so than the multinationals, given how they are often por-
energy industry. trayed. Operational Excellence also drives directly
to the company’s bottom line, potentially saving
billions of dollars in operating costs while serving
That having been said, this article adds refresh- sustainability. There is no tension here between
ing insight to the argument for incorporating shareholder value and sustainable development.
sustainability into business policy and decision- The authors identify two additional drivers of
making. Assuming for the moment that sustain- sustainability: (1) interconnected global stakehold-
ability isn’t a moral imperative or legal require- ers, and (2) global social inequity and maldistribu-
ment, businesses still need to ask whether it tion of wealth. The energy industry is a case study
makes good economic and competitive sense to in developing strategies to respond to these driv-
embrace sustainable development. The significant ers. Consider stakeholders. In one sense, we’re all
players in the energy business have no doubt that stakeholders in the energy business— energy is
addressing sustainability is a competitive neces- the lifeblood of our societies. The way we use en-
sity. The authors identify drivers for sustainability ergy over time has the single greatest impact on
that are central issues for the energy industry, in- the global environment and the ecosystem we live
cluding resource efficiency, pollution prevention, in. At the same time, no companies are more prom-
and attentive, demanding global stakeholders. inent in the public eye than multinational energy
These are often headline issues for energy compa- companies. Each price increase at the gas station,
nies. In addition, both access agreements to hydro- conflict over oil and gas access, or tanker accident
carbon resources and licenses to operate have in- propels the industry into the headlines and Inter-
creasingly explicit sustainability requirements, net forums, often with denunciations of conspiracy
ranging from pollution prevention and environ- or malevolence. Given the stakes and level of pub-
mental footprint to community development. lic interest, it would be suicidal for an American
It’s not surprising, then, that three energy multi- energy multinational not to operate with the great-
nationals are among the companies cited in the est possible transparency. My company, like many,
article. My company has certainly evolved along has demanding and enforced ethical standards,
the path described by the author from pollution including this one in our statement of values: “We
prevention—a minimum, critical requirement in welcome scrutiny and we hold ourselves account-
all our operations—to product stewardship along able.” Energy companies—apart from rogues like
the entire life cycle. Pollution prevention and prod- Enron— have been on a learning curve about
uct stewardship are actually part of a larger set of NGOs and networked interest groups. Some com-
practices, called Operational Excellence, that panies in the industry now have working relation-
2003 Hart and Milstein 69

ships with NGOs on environmental and social and social equity are large-scale, geopolitical
matters such as community development and HIV/ drivers external to the corporation. The author also
AIDS prevention and treatment. identifies a less-obvious intersection between sus-
Beyond transparency and cooperation with vocal tainability and a corporation’s internal need for
stakeholders, the authors point out deep issues of renewal and innovation. Any opportunity to exploit
globalization and social disruption. Together with disruptive change for competitive advantage is
the environmental challenge, these issues are, to clearly in shareholders’ interest. This article de-
me, inescapable drivers toward sustainable devel- picts sustainability as a vast field of opportunity
opment. Ultimately, of course, governments control for technology innovation, product development,
natural resource wealth and are responsible for and the opening of untapped markets. Any busi-
national development and social equity. However, ness should be excited by such prospects, even if
it may surprise people to know that progressive
it’s not persuaded by the authors’ other drivers.
companies in the energy industry recognize that
Here again, the energy industry is at technology
resource extraction must be balanced by lasting
thresholds around alternative fuels, transporta-
contributions to the welfare and prosperity of host
tion, and power generation. It isn’t a strategy of
countries, particularly those in the developing
world. Companies like mine are embracing princi- energy multinationals to stifle these develop-
ples of Corporate Social Responsibility (CSR), a ments. The authors’ disruptive-change driver adds
concept pioneered by the European Union and nicely to the argument about why energy compa-
sometimes used synonymously with sustainable nies should embrace and lead the transformation
development. In the authors’ sustainable-value to sustainability.
framework, CSR could be another driver for sus- Energy multinationals are actively engaging all
tainability or a comprehensive set of responses to the drivers for sustainability discussed in this ar-
the drivers that they identify. Either way, CSR ticle. The idea of sustainable value ties the drivers
takes companies into new responsibilities for hu- together in a very accessible framework that
man rights, labor practices, community engage- broadens the meaning of shareholder value. I will
ment, and other activities that traditionally have refer colleagues to this article as a way to bring
been the concern only of governments and civil separate discussions about sustainable develop-
authority. The corporate role in these activities is ment onto the same page.
still controversial and in the formative stage, both
Joseph Caggiano is a strategy consultant for Chevron Texaco, with 17
from the shareholders’ view and as a matter of
years’ experience in the energy industry. He advises on geopolitical
public policy. The authors’ sustainable-value issues influencing corporate strategy and on organizational capa-
framework can easily be used to frame this active bilities needed for key initiatives. The views expressed in this
discussion. commentary are those of the author alone. Contact: JCAG@
Resource efficiency, environmental stewardship, chevrontexaco.com.
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