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KKR and Michael Porter:Profitable sustainability goes mainstream

Mainstream business is catching up to what the sustainability community has intuitively known for a long time: a sustainable approach is more profitable. From KKR (the private equity firm) to manufacturers such as Interface FLOR (famous amongst the sustainability community but not often known outside it) to household names like Xerox, corporations are beginning to embrace the profit benefits of taking a more considered approach.

Why? Because reducing emissions saves energy costs, reducing waste saves raw materials, recycling avoids manufacturing costs, meeting changing customer needs wins market share, giving staff a cause improves productivity and morale, raising the bar for competitors creates competitive advantage, and addressing long term risks is good business practice.

Management guru Michael Porter recognized this in the Jan/Feb edition of the Harvard Business Review this year.

KKR (Kohlberg Kravis Roberts), one of the world’s biggest private equity firms who have raised over $47B in funds in the last 5 years, have just this week announced their intention to invest in European wind farms. This does not seem significant in itself as there are plenty of investors in renewable energy projects.

But digging deeper, KKR are using sustainability principles to unlock profit opportunities within their acquired companies. This started in 2008 when KKR worked with environmentalists to reduce the planned emissions of their acquisition target TXU, the energy company, enabling a profitable buyout. Since then KKR have been working with the Environmental Defence Fund to reduce the environmental impacts – and costs – of a number of their acquisitions. These savings are significant: in 2010, KKR reported $160M in operating cost savings in the previous two years.

So this week’s announcement of investment in wind farms demonstrates that KKR’s profitable sustainability thinking continues to evolve to unlock further areas of sustainable value. For more details of KKR’s green thinking see http://green.kkr.com

There has been plenty written about the transformation of Interface FLOR towards is vision of zero environmental impact. What is less known is the substantial cost savings (over $440M), staff productivity gains, and market share gains they have achieved through their approach. Information on their journey can be found at http://www.interfaceflor.com/default.aspx?Section=3&Sub=4.

Fuji Xerox was facing closure in Australia – a market too small for them to economically compete given the cost of importing parts from Japan compared to lower cost Asian manufacturers. Instead, Fuji Xerox changed their business model to remanufacture components recovered from their installed base of copiers.  This not only allowed the business to return to profitability, but also was adopted internationally by Xerox and has won global environmental awards.

Michael Porter is revered as one of the greatest thinkers on corporate strategy. He invented Porter’s Five Forces and has written extensively on Competitive Advantage. In December 2006 his and Mark Kramer’s first thoughts on shared value were published in Harvard Business Review. This work was further developed in the Jan/Feb edition of the HBR in 2011 in an article entitled “Creating Shared Value: How to Reinvent Capitalism – and Unleash a Wave of Innovation and Growth”. Quoting from this paper:

“Companies … remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their long-term success.  How else could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell?”

Porter talks about the solution in terms of the “principle of shared value, which involved creating economic value in a way that also creates value for society by addressing its needs and challenges”. He sees this as being above corporate responsibility or sustainability and instead an extension of capitalism which captures value that is not today being realized.

To illustrate his thesis, Porter talks about the consequences of relocating production to lower wage locations. While this may create a temporary cost advantage for the company, the jobs lost in the local community reduce the ability of that market to purchase the company’s goods. Further, the cost to look after the unemployed is borne by the community – further reducing its prosperity by shifting social services costs to the government. So offshoring destroys value for the community and eventually for the company too.

To conclude, big leading companies are accessing new economic value through more sustainable practices. This is being recognized and codified by the world’s foremost thinkers on corporate strategy and value creation. Now is the time for companies to act to secure their share of this new value by changing how they do business – or risk being left behind. Many companies have begun this journey but even the most advanced recognize they still have a long way to go.

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