Managing an organizational transition towards Corporate Social Responsibility- n interview with Mr. James Gray-Donald, Sustainability Leader at Sears Canada Inc. Mr. Gray-Donald says if you’re able to respond to societal challenges and solve problems with your core business, whether it’s health, security, the environment or even the disposable income reduction which most people in North America are facing, it is likely that you are going to have to change the approach you take. Whether that’s just a marketing change or a strategic change, you will need to re-orient your approach. If you just pitch your product in a slightly different way, chances are that’s not going to grab new market share and be convincing in the marketplace.
What does it take to innovate? Arcus Consulting Group has launched a major initiative to explore growth and innovation as key elements of corporate and business unit strategy. A majority of executives say it involves a pervasive corporate culture, deeper customer insight and a comprehensive strategy that will enable an organization to offer its customers important added value. They say such steps reduce costs, increase sales and achieve higher earnings. But how does one come up with new solutions, and can innovation really be part of a strategy plan? Arcus’ multi-industry survey of senior executives found that of all the challenges companies face in this area, the biggest challenge is finding ways to create a “culture of innovation”.
As Arcus research indicates, doing so means that you need to be surrounded by highly talented people. It also means finding a way to transmit your passion to them, so they will buy into your vision of the future, perform at the highest possible levels, and come up with innovative solutions to the challenges of achieving the vision. No surprise, then, that the topic of innovation has been gaining ground as CEOs seek to incorporate concepts like a “culture of innovation” into their assessments of a company’s long-term value.
Arcus: What challenges do Organizations face with regard to sustainability?
Mr. Gray-Donald: The challenge many companies are facing now is the transition of sustainability. So basically you are a cost centre in the organization that performs a function that many people in the organization didn’t think was necessary and a few people think is necessary now maybe from a risk aversion / maybe slight brand enhancement / a few shareholders might be demanding it perspective. [Sustainability] is sort of a responsibility reporting function, saying “We are an ethical member of the corporate community and of society and here is a bit of evidence that’s the case”.
As a reporting function, Sustainability is how we are viewed in the community and it means we need to be participating in the green side. Sometimes that comes about from someone’s role within the organization, it could be through what competitors or doing or in some cases, it’s even cocktail parties where executives hear about examples of where cost savings have been seen. Then the efficiency side comes up. Maybe 10-20 percent of executives have a strong belief that sustainability practitioners within an organization can find efficiency improvements that other people haven’t found. And there will be lots of studies that say 75 percent of CEO’s think that things are fantastic. But when it comes to actually executing a business imperative and dedicating resources to actual process changes within that organization I would say the number would be quite a bit smaller.
Sustainability is also another channel for charity. Historically, we normally wrote cheques to social organizations but now maybe companies consider writing some of those cheques to environmental ones. And probably that means we are going to spread it a bit broader rather than increasing our donations in not a particularly good year. Oftentimes an organization doesn’t have the inhouse knowledge of how to execute and so experts with a sustainability type of background may be brought in to help.
Sustainability and Society
Arcus: Michael Porter talks about the importance of shared value- for an organization to understand its core value proposition to society. Can organizations recalibrate their strategies to focus on both- shareholder value and good for society?
Mr. Gray-Donald: When you look at where Sustainability is going, look at Michael Porter’s article around shared values that looks at how sustainability can be accretive, or increase the value to an organization, through re-understanding of the core value proposition that the organization offers to society.
If you’re able to respond to societal challenges, whether it’s health, insecurity, the environment or even the disposable income reduction which most people in North America are facing; if you can solve those things, with your core business, likely you are going to have to change the approach you take. Whether that’s just a marketing change or a strategic change, you need to re-orient your approach. If you just pitch your product in a slightly different way, chances are that’s not going to grab new market share and be convincing in the marketplace.
There is a well know U.S. commentator who did an exhaustive study of what the business elite in America believe, what is their fundamental belief. And at the end of it he said that a fundamental belief is doing well equals doing good. So, if you are financially successful, you are performing as a good to society. So if you want to be ethical, the best way to be ethical is to be highly profitable and highly successful.
If you’re creating jobs, you’re creating the space for charity. So the fundamental belief of the very wealthy in North America is that doing well financially leads to doing well socially. In a sense it’s a justification for becoming extremely wealthy, becoming extremely wealthy because that’s good for society.
Arcus: Can you share some examples of organizations that have operationalized the belief that doing well financially leads to doing well socially?
Mr. Gray-Donald: Think about the Gates foundation which is trying to solve the malaria problem. They work with companies who are saying, yes, we have mosquito nets that have these chemicals and we’re really interested in any research that will help solve this malaria problem. In a sense, they’re doing social good. They’re protecting millions of people from malaria. But they are also selling a ton more nets. They’ve identified a social good, they’re focused on delivering upon a social good… and in that they are creating new markets for their products.
If they are a brilliant company they’ll no longer just sell nets, they’ll market their trusted status in communities around South America, Africa and Asia and say, “hey, what other problems can we help solve? You know, drinking water, we can supply them with porcelain filters for drinking water.”
You know, P&G said that they want to add 1 billion customers. I don’t think they are generally thinking of starting from the idea of what social good are they providing, they are starting with we just need a core market. And within developed markets it’s very hard to gain market share. The cost of customer acquisition in developing markets is much lower. I think if they were to genuinely orientate, if internally they said, “You know, we only want to enter new markets if we can improve the lives of people in true ways.” That wouldn’t be putting out the single use shampoo to more places and leaving garbage everywhere, and not considering what chemicals are in there. If they were to say “What are the social needs within those communities, for personal cleanliness, these types of things”. Well, I think that’s where it should go. I think that’s where you’ll see certain leading companies going.
Another company to look at is Pulse Energy, they’re Vancouver based and are doing real-time energy monitoring. They do complex algorithms to provide you with much better data around what your building is doing, and optimization of energy use within your building. While there are tons of companies that will promise they can reduce the energy use of buildings for Sears, most of them are selling product that’s not really going to do what they promise. Or they’re not really addressing my real issues. The companies who have a pulse sense focus on research and development and are truly trying to understand the problems their customers are facing, and provide solutions to those problems.
Generally, if you move to real-time energy monitoring solutions, if you have good algorithms in place, a good company in the back, and a strong contract with them… you’ll probably see a 10 to 12 percent energy reduction. So for someone the size of Sears, you know, you’re looking at 5 million plus a year in savings. That’s what happens if the company, if the vendor, is truly orientated towards answering our problems. The issue is that so many companies are orientated towards selling their out of a box solution, and then trying to stuff the customer into it. I think, where sustainability is going, innovative problem solvers with product service sweeps, who will be able to address other corporate or customer problems, will come out on top.
The Value Chain and Climate Change
Arcus: How does the value chain need to change to impact the sustainability strategies of organizations?
Mr. Gray-Donald: Visibility is the first driver, in a way, of the motivation around doing good. Look at Nike; they have made huge strides in labour compliance, but most of that was after a 15 year campaign when they realized that their reputation was impacting sales, and from the attraction of talent to the organization. Some celebrities felt uncomfortable, and they were prevented from having positive social messaging around their brand.
People’s involvement in their value chain and their aspiration as to what they can achieve in their value chain is exaggerated. There is a logical sequence to it and it’s a very romantic notion. Whether you believe in climate change or not, if you’re not improving the efficiency of your operation, if you’re not doing the most competitive sourcing in your supply chain, then your cost of goods will go up or you won’t outperform your competitors. You know, companies want to create good news stories but what they are really trying to do is to get greater insight into their supply chain, or value chains.
If they can create competition in their value chain then they know that they’re getting good value from their vendors and that they are minimizing exposure to certain long term risks. So if you take a huge company and they are sourcing from one factory in China, 10 million t shirts, it is quite difficult for them to suddenly say “Oh, I am going to go to so and so factory to produce the same quality, same style t-shirt 10 million units in a few months.” So what they do is they say to that manufacturer, “I want to know your carbon footprint. I want to know this, I want to know that.” So I tend to think that if companies get a bit more insight into what is happening such that they can increase their competitiveness and make smarter decisions as to who they are going to deal with… that’s the imperative.
Another way to look at it would be to have someone look at their numbers and say, “Our costs are going up and up and we’ve had to do so many audits at our vendors’ facilities. What if we actually published who all our facilities are and said to all the people who hate us, that, you know, here is who we are sourcing from. If you have problems with any of the factories, you let us know.” By doing that you have actually reduced your compliance cost because you have other people helping you. And now you’ve got a story. If they report something like a factories using child labour, then you follow up. You actually do something about it, which you are legally obliged to do for various reasons
Realistically, any time a company does something of substance with regards to sustainability there at least has to be a double bottom line, maybe a triple. But the fiduciary responsibility to the shareholders, is not incompatible with sustainability; sustainability, if positioned right, doesn’t contravene that, again it’s adding more consideration to the position matrix. Things that were previously discarded, that were thought inconsequential, you are now saying, those things are actually a consequence, now that, for example, energy prices are going up substantially.
Sustainability and Innovation
Arcus: What innovations are you seeing in the area of sustainability initiatives?
Mr. Gray-Donald: Now that we have a much more interconnected world, with advances in technology and packaging, what you thought 5 years ago was cost prohibitive, well, the equations have changed but the skill set and the knowledge that in many companies hasn’t changed. People from outside who don’t have preconceived notions about how the industry should work are asking the types of questions that perhaps consulting companies might ask. These questions, even the ones that aren’t good, they won’t all lead to great results, but they are being asked and it is a source of innovation which previously, had been lacking in many companies. So I think sustainability conceived well for many companies is an innovation strategy. When it’s poorly conceived, at the worst, it’s just a PR exercise. For the largest companies who have the most to gain and to lose, they are taking that step towards sustainability equals innovation.
If they are getting enough return on the efficiency side, then they feel they can afford to spend a certain budget on sustainability, which equals innovation and, hopefully, new market growth. Or, at least the next level of efficiency gain. So essentially sustainability is a proxy for chains that lead to better shareholder value. With each step of evolution you encounter new problems. And the thinking to address those problems has to evolve as well. But this is being done not because it’s the morally right thing to do, but because margins are tighter and there is more competition. If managed well, these externalities actually yield cost savings, new markets and improved employee engagement.
So I believe the race in coming years will be which company will be collecting the right new data sets and how are they going to analyze those data sets in order to generate greater return. For example, SAP has a sustainability module that you can tack onto your regular SAP system. They have like 170 metrics that you can collect. It costs a lot of money to tack that on. Most companies will look and will say 170, I have trouble collecting 2 new data points… but whether it is 5 years or 10 years from now, I believe that most global companies will be topping up that 170 indicators and having statisticians and finance people mining those data sets to find interesting correlations between those factors.
So all of that ladders up to some see value in all this mosaic of different components, essentially getting more integrated with each other and could add up to better value in the long run. Let’s talk about the Cradle to Cradle Certified program for a moment. One of the people who helped create the program realized that it had limited applicability to a number of other sectors, because they are just using so many chemicals that fall outside of the Cradle to Cradle program. We need something to serve as a bridging mechanism. Like creating the Bluesign standard. Bluesign combines the aspects of consumer safety, water and air emissions and occupational health in a single standard. Blue products are those that are the best available technology. If the source material you want is black, a product you cannot use and be certified under bluesign, they help you find the substitutions that are readily available that are in the blue category. And they have been doing this in the outdoor apparel sector.
So, again, a black dye that stays in fabric, there aren’t any natural ones at the moment. And to get breathable water repellency, well, there aren’t those purely natural substances that can perform those functions. Gore-Tex is doing some work in the States. DuPont may be moving away from Teflon or maybe Teflon, they are moving from black to blue, maybe some people have figured out the next step, but there is an upfront cost to a manufacturing facility making Gore-Tex jackets to make the switch. So in the early days, people like Mountain Equipment Coop and REI had to financially invest and share costs.
What the manufacturers have generally seen is that they hadn’t had really good engineers optimize their processes for quite a number of years. So there was an upfront cost, but when they actually optimized the processes, the number of chemicals, complexities and the per unit price went down. It historically required an external intervention for this process to start and, to me, government is less willing or less able to intervene in these things, so it the companies themselves which are finding it is in their interest to intervene at strategic places in their supply chain, where it makes sense for them.
So for Mountain Equipment, their brand, it relies on them to be the leader in sustainability. If they are not a leader in sustainability, many of their customers, their shareholders, will kick and scream very substantially. They are fantastic. They are global leaders.
Sustainability is a constant challenge, because there is still such a common belief that it equals extra cost and reporting and even if it is going to increase profitability, even if it makes business sense, it is an extra layer of complexity. When you change a process, you have to ask different questions. For many people in business or in government, or in whatever sector, they are psychologically unwilling or incapable of asking those questions. So you have people who have a fear avoidance response, i.e. I am not going to tell you, I might even know myself, but I don’t want that metric because I am not hitting my numbers on other things. Even if it’s not in my bonus structure, even if it’s just another metric out there, it might show things aren’t going as well as I hoped, it might show a decline over time. I can’t handle that.
Tracking of Indicators
Arcus: How are companies tracking their sustainability strategies and outcomes? Where are the opportunities for improvement?
Mr. Gray-Donald: If you looked at 100 publicly listed companies of reasonable size and divided them into those who are not tracking indicators, those who are tracking and then those who are tracking and disclosing what they are doing… Let’s say there are 107 indicators. One company might be doing it [tracking and disclosing], five to fifteen would realistically have some course charted, and 80 percent would be essentially doing nothing.
If you went to SMEs, it would drop dramatically. This is where companies can truly differentiate themselves – IBM with their smart planning program, SAP and others – they have the opportunity to take a gamble and essentially create free software service for SMEs, or an introductory module for enterprise. It should be one of the big players and they should put it in the public domain. If they did, there would be some adoption to it. I think CDP is getting better, but there is absolute feeding frenzy around CDP where companies are helping other companies, cashing huge.
I think companies should be asking themselves, and one or two have, “Do I want to be in the business of getting people to where they can report or do I want the reporting function to be super easy so that that company has money left over to do something about it.” Because the majority of companies, those that are outside of the very largest – the P&G’s, the Unilevers, the Nikes – those companies feel that the cost of internally billing out the capacity of getting this data is not there. So they are unlikely to substantially progress until the cost and complexity goes down.
Consumers are not necessarily asking about these metrics but some companies say it doesn’t matter if customers are asking or not. The indicators can yield savings within supply chain. Packaging optimization can yield very significant cost reduction as well as environmental benefits. And then publishing carbon numbers on a quarterly basis, through our finance department, puts non- financial metrics onto a team that will then be incentive to make sure these things are done accurately and fairly. This is quantitative based and quarter by quarter they can see that it is associated with the bottom line.
Retail in the next 5 to 10 years
Arcus: What are the vectors of change that will drive sustainability strategies in retail over the long term?
Mr. Gray-Donald: First, there is very little conversation around quality and durability. When you look at the life cycle of the product now, few, if any, people look at the longevity of the product. When you look at a cotton t-shirt versus an organic cotton t-shirt… What is the carbon footprint difference? What is the difference in the total number of chemicals used?
I was having a discussion with a friend in the States and asking you know, what brands of t-shirts have you bought that have lasted for more than 2 years. I shouldn’t mention brand because I know this is on tape, but there are certain brands that sell quite well which he hadn’t seen last for more than a year. While I have some t-shirts from Buffalo that I bought close to 10 years ago. I wear them at least once a month. And 10 years later I still like wearing them and my wife isn’t embarrassed when I wear them. So I think, for me, that’s the thing.
So the first is durability. The second is connected to social media and consumer reports, specifically around how relevant retailers will be versus consumers going directly to brand. If eco-minded consumers are interested in something, how much research can be done on line and how much choosing will be done online. Perhaps not necessarily purchased online, you might not see that level of detail. I think Amazon is showing that people want product. They want particular product and they want the right price and they want to know what people who have bought it think about it. Now the Amazon brand is associated with vast quantity of products and fair transparency into performance of that product. Now, with sustainability, I think it is unlikely that you will see perfect score cards and people making perfect decisions, but you will have a lot more decisions being made through online research.
The third, we will see a number of industry networks that will increasingly collaborate to solve problems – the Retail Council, the more global social compliance programs. So, retailers will be sharing social compliance audits with each other. For example, there is an organization called the Global Social Compliance Program. You register with them, you pay the money and they determine where your labour standards fit and they give you a score for your labour standards. You can then choose to share that with other retailers. Say Sears and HBC; we say here is our labour component that is being benchmarked for this organization. Is this good enough for you HBC? If HBC says, “Yes, that is good enough for us”, then will HBC now accept labour audits run by Sears of its vendors? This is actually beneficial for both partners if HBC passes our initial test – we can cut our labour compliance costs in half or we can double the reach of it. Similarly with packaging, the global packaging coalition there is the sustainable packaging coalition. So, the third is greater IT being shared by the world’s largest retailers.
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