Andrew Winston

Apple's Greatness, and Its Shame

Mon, 06 Feb 2012 08:11:29 -0500

Is there such a thing as too much profit? A disciple of Milton Friedman would say "never." The idea that companies should only maximize shareholder value has had a stranglehold on the business world for decades. It's time to rethink this assumption.

A couple of weeks ago, Apple reported breathtaking earnings. In the fourth calendar quarter of 2011, Christmas shoppers snapped up 15 million iPads and 37 million iPhone 4Ss. The world's most innovative company brought in $46 billion in revenues, $13 billion in profit, and an eye-popping $17.5 billion in cash flow. Apple is the only company competing with, and now beating, Exxon for the title of "most profitable company ever."

Right when Apple's earnings came out, the New York Times also hit us with two powerful articles about Apple's supply chain that revealed some deeply troubling issues for the company's business model. The first, "How the U.S. Lost Out on iPhone Work," painted a dim picture of U.S. competitiveness by demonstrating what Chinese suppliers are willing to do to get Apple's business. But the second article, "In China, Human Costs are Built Into an iPad," shows us the enormous human cost of getting work for cheap. It's a horrifying picture of life at the now infamous Foxconn facilities.

Combine Apple's incredible earnings with the reality of life in its supply chain, and it's clear that the tech giant could afford to do much better by workers. It's not sustainable for any company to continue relying on people with such limited rights and life prospects.

But is it fair to pick on Apple? Yes, to some degree, since other companies with deep connections to China have done better on working conditions (a Times source name checks HP, Intel, and Nike for example). In the spirit of being balanced, a few points: (1) even with a few good actors, worker treatment is a systemic challenge common to electronics, apparel, and any other sector with complex, worldwide supply chains; (2) Apple has put some effort into improving supplier conditionsand CEO Tim Cook replied last week to the concerns; (3) Consumers also take on some responsibility-we should be demanding more transparency and information about how our products are made (I'm targeting myself here as well since I'm typing this on a MacBook Pro).

But Apple too should be doing far more.

We'll only fix the problem if the largest, most profitable, and most powerful brands demand better treatment for all people who work on a product. The most damning quotes in the Timespiece come from former Apple execs: "Noncompliance is tolerated...If we meant business, core violations would disappear" and "Suppliers would change everything tomorrow if Apple told them they didn't have another choice."

So am I suggesting companies pursue unprofitable paths? Hardly. These labor challenges are complicated, but any argument that it would be too expensive to pay people better and give them much better working conditions is absurd.

Some reasonable estimates from The Atlantic place the cost of materials (of a mid-level 32GB $600 iPad) at about $325. Labor is a whopping $10. If we assume, very conservatively, that iPhone assembly costs the same, then in the fourth quarter, Apple spent about $500 million assembling iPhones and iPads.

Let's imagine that Apple tripled expense on assembly to ensure better pay and worker treatment. The total additional cost: $1 billion The cost of an iPad or iPhone would go up $20 or — and here's a radical thought — Apple would make a little bit less money. I'm not remotely saying Apple shouldn't be profitable.

But would anybody in their right mind be disappointed with $16.5 billion in quarterly cash flow instead of $17.5 billion?

Am I making a complex issue too simple? To check my thinking, I spoke with a former Nike exec with deep experience in supply chains and China. Here's his view:

"Someone needs to break the cycle...why not Nike — or Apple? I don't see that as an oversimplification at all. The current "low cost" business model is not really low cost. Isn't one purpose of business to create the prosperity needed to increase the number of consumers capable of buying the goods we make? In fact, I would argue that what Apple is doing now is against the best interests of the shareholders...I've never heard a lucid explanation of what I'm missing."

This is about what we value in the world. Consider IKEA, one of the most sustainability-minded large companies in the world. The Swedish furniture giant has its own challenges (some history of labor issues as well and concerns about the sustainability of its short-lived products, for example), but the company has stated clearly that it's about "low prices...but not at any price."

Why is that a radical idea? I refuse the notion that maintaining a moral compass is anti-business, anti-competitive, or naïve in some way. Smart, innovative, lean companies can make plenty of money and do the right thing. And, frankly, since companies have an awful lot of the rights of humans, they should share some of the moral responsibility as well.

Our system of competition yields amazing results — incredible technological innovation provided in massive quantities very quickly. But these marvels often rely on very real human costs. The whole system has some deep flaws that we must fix.

Apple prides itself on changing the game. So just imagine a world where the company applied its staggering innovation and design skills to create the iSupplyChain or iWorkingConditions. Everyone, including this fan of Apple products, would be a lot iHappier.

(This post first appeared at Harvard Business Online.)

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Ecosystem Economics: Navigating the Water-Food-Energy Nexus

Mon, 30 Jan 2012 16:11:18 -0500

(Note: This blog is co-authored with Andy Wales, Global Head of Sustainable Development for SABMiller plc, one of the world's largest brewers)

When we talk about natural resource constraints on business — such as shortages in water or increases in the cost of energy or agricultural products — we tend to forget how deeply intertwined these commodities are. In the business community, just as in a natural ecosystem, an individual organism (in this case a company) is vulnerable to changes in the availability of these systemic inputs.

The risks are greater than we realize because the availability of any of these key resources deeply affects the availability of the others. For example, it takes 95 liters of water to produce one kilowatt-hour (kWh) of electricity; and each year, the US uses 520 billion kilowatt hours — or roughly 13 percent of all electricity consumed — to move, treat, and heat water. With agriculture accounting for roughly 70 percent of water use, you can imagine how complicated it can become to maintain a steady supply of all three to industry, citizens, and municipalities.

This interdependent nexus is now evolving in a way that will threaten the wellbeing of billions. In 2050, to meet demand from a rising and increasingly carnivorous population, we will need to grow and process 70 percent more food. This technological and logistical challenge is made all the harder by the fact that by 2030, we'll be confronting a water supply shortage of approximately 40 percent due to a toxic combination of rising demand and climate-change-driven shifts in water supply. Facing these clear resource constraints, businesses will need to adapt, and soon.

At the World Economic Forum in Davos this week, a new brand of resource realism will begin to take hold in the business community with the launch of the Water Resources Group, which recognizes these constraints and the need for adaptation. This public-private collaboration includes the International Finance Corporation and food and beverage giants such as Coca-Cola, Nestle, and SABMiller. Together, these diverse players will help governments, companies and communities work together to manage the nexus. Rather than well-meaning but one-sided solutions, these business leaders hope to harness the private sector's comprehensive, value-chain viewpoint to solve these multifaceted problems.

That comprehensive viewpoint is critical, as a supply shock in any of these resources can cause ripple effects elsewhere. The energy industry has witnessed its resource co-dependencies first hand in Texas, where the state's worst ever single year drought has threatened to stall plans for new power production and distribution projects.

Companies will need to measure and prepare for potential resource shortages and price increases, which will deeply affect their business operations, supply chains, and customers. These issues create collective risks that cannot be managed in silos. Companies will need to look along and beyond their own value chains to become agents of change. They'll bring together communities, governments and NGOs to address the challenge holistically.

All sectors — not just agriculture — must recognize how their actions are interlinked with all the people who use and depend on these resources. Consider, for example, how any facility needing water must work to ensure that all agricultural players in the community are adopting clean, non-polluting practices in local watersheds. If a community runs out of water, it affects everyone in the area, even companies that were good stewards of the resource. The collective nature of these resources means that everyone shares both the responsibilities for their protection and the risks of their scarcity.

For businesses, understanding the implications of this nexus begins with assessing how a lack of water can impact the bottom line. For example, a business dependent on food can only fully understand its vulnerability if it assesses the availability of water to feed the crops it needs upstream.

In recent years, multi-national food and beverage companies with a clear stake in how the nexus plays out have begun to assess their "water footprint." This exercise allows them to identify risks and opportunities in their own supply chains, and discover how they can create more value while consuming less.

Forward-looking companies must assess the risks of mismanaging this resource nexus, learn to partner outside their comfort zone, and integrate resource-saving initiatives into their long-term business plans. It's the only way we can ensure the long-term security and supply of the resources that our economy and society depend on.

(This post first appeared at Harvard Business Online.)

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A Vision of Real Corporate Leadership on Sustainability

Sun, 22 Jan 2012 13:50:09 -0500

[This piece appears on Sustainable Brands' site as part of a special monthlong focus on leadership. Chris Laszlo and I are guest editing. We have laid out a framework for true sustainability leadership to help shape the discussion. We each are also offering a deeper dive on one half of the two-by-two matrix we suggested. I'm focusing on the “external” side of leadership which focuses mainly on (a) how a company responds to global sustainability pressures and (b) how it does business in a way that’s visible to the outside world…its products, processes, relationships, and so on.]

The basics of sustainability excellence are fairly well known by now: reduce your footprint, create products and services that help customers do the same, drive employee engagement, think value chain, track data and enable transparency, and on and on. But real leaders will go further and address the scale of the sustainability challenges we face by fundamentally remaking their companies. Here’s what I envision in a few key areas:

Science-Based Goals

Footprint reduction targets are important, but if the goals are not based on what scientists tell us – i.e., we need an 80% reduction in absolute greenhouse gas emissions – they’re not good enough. Sony and a few others have targeted zero impact by 2050. This level of commitment needs to become the norm, and then a few brave souls can go beyond reducing harm (even to zero) and set goals to build restorative enterprises.

Policy

While uncommon today, the basic level of performance on policy should be to make lobbying efforts consistent with core business strategy and public messaging (for example, are you proudly launching products that use less energy, yet lobbying hard against higher efficiency standards?). Real leaders go much further and lobby for stricter standards and aggressive action on climate. CEOs can demonstrate their external leadership by promoting this agenda with corporate peers and government leaders. Some companies are on track, committing to the recent “2 Degree Challenge Communiqué” or joining groups like BICEP (led by Ceres, Nike, and others) which demand strong climate policy action.

Product and Service Innovation

Reducing the customer’s footprint will need to be the core aim of all innovation efforts and all product lines (not just a sliver of the portfolio as it is today). Sustainability innovators will open up their creativity process, inviting customers and partners to offer innovative solutions (GE’s Ecomagination Challengeis a good example). Innovators will embrace disruption and heresy (which I’ve written about before) by helping customers use less of their products. For a glimpse of the future, see Unilever’s campaigns to get customers to reduce water use and Patagonia’s Common Threads, which offers a grand bargain: “We make useful gear that lasts a long time…You don’t buy what you don’t need.”

Valuation and Investments: Financial and Operational Metrics

Leaders such as P&G and GE have set aggressive revenue targets for their greener products. A few companies put a price on carbon for internal capital allocation decisions or, like DuPont and Owens Corning, set aside a percentage of capex for eco-efficiency investments. These actions help correct the inherent flaws of ROI decision-making by valuing sustainability more explicitly. The next step is fully incorporating intangible value – employee engagement, customer loyalty, brand value, and the like – as well as measuring and including all externalized costs in investment decisions. Two trendsetters, Puma and Dow, have begun this important journey.

Investor Relations

I believe that the relentless pursuit of short-term, quarterly profit goals to please Wall Street analysts is bad for companies – great enterprises very rarely seek profit alone – and certainly isn’t good for the planet. Like Unilever’s CEO Paul Polman, the real leaders will stop providing quarterly guidance and ask managers to focus on the real measures of success: making great products, serving customer needs, creating good jobs, and driving both cash flow and long-term profitability. The most sustainable companies will become “benefit companies” or “B Corps”, with a broader charter than just pursuing shareholder value. Seek greatness and sustainability, and the money will follow.

Resources Dedicated

Most companies give their sustainability execs woefully inadequate resources to do their stated jobs, let alone transform their companies. A truly committed organization will allocate resources equal to the challenge and will give the sustainability function real power. I suggest creating a “skunk works” team run by sustainability, along with perhaps corporate strategy and R&D, to question everything and challenge the core business model (e.g., What if the product were a service? What if we used no fossil fuels?). This is how companies can systematize heretical innovation.

Employee Engagement

Educating all employees on sustainability principles and creating green teams are good first steps. Tying all executive compensation directly, and substantially, to sustainability goals is even better. But real leaders should work to convince those hostile to change throughout the organization…or eliminate them. In the words of Jim Collins in Good to Great, “get the right people on (and off) the bus.” Leaders will also help employees pursue sustainability in their own lives and communities and provide an outlet for organizing campaigns, such as the awareness-raising “climate ride” conducted by apparel company Eileen Fisher. If the workplace is appropriate for United Way drives, why not for climate action?

In short, I’m imagining a very different kind of company. The overwhelming challenges we face demand profound shifts. Of course, much more than I’ve mentioned will need to change – on the social side of the equation for sure – so please let me know what you would add to my vision of true leadership.

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New Year's Resolution: Optimism

Mon, 02 Jan 2012 09:13:28 -0500

In the days right before this last, zen week of family time and no email, I read a few news items about the sorry state of our global commons. From the real costs of extreme weather ($52 billion in damages in the U.S. alone in 2011) to massive dangers in the melting of the global permafrost (which could quickly account for 15% of global emissions), the news was not good. Add in the failure of global climate negotiations, and it’s hard to stay positive about our future.

And yet, there is so much progress (see my top 10 stories of 2011 for more on both sides of the equation). In those same couple of weeks pre-holiday, Yale e360 published a great story about a big utility CEO, NRG’s David Crane, and his compelling, reality-based case for green energy and electric cars (he also, much to my great enjoyment, called those who say they don’t believe climate change liars). Another story, a New York Times piece, described how the latest iteration of the age-old Coca-Cola/Pepsi war is about which company has the greenest bottle.

Fossil fuel CEOs taking climate change seriously, companies competing head-to-head on green, and from my top 10 list, companies like Patagonia and Unilever seriously pushing the envelope on sustainable consumption…these are pretty good signs.

And while I was mulling all this, I took an eye-opening family trip to ski in Great Barrington, MA last week. There’s no natural snow right now -- so the ski industry knows that the climate is in fact changing. The vacationers get it as well...some folks on the lifts told us that you’d have to be crazy to not believe anymore. But even so, I was surprised to see how much the region appeared to be embracing green.

For example, the two restaurants we picked randomly both had significant environmental efforts. The first, Barrington Brewery, uses solar power to brew the beer and the second, Four Brothers Pizza, captures its used cooking oil to produce energy. Also, on the way into town, we drove by the Berkshire School and saw the largest private school solar array in New England (a stunning 2 megawatts covering 8 acres).

I choose to see all these microcosms as harbingers of the future. The full logic of green -- the economic, environmental, social, and moral imperative -- is dawning on everyone from joe skier to fossil-fuel CEOs and local entrepreneurs.

Of course at the macrocosm level, the brutal facts coming out of the scientific community are not pretty, and staying positive is hard. So I choose optimism -- we'll get a lot more done if we believe that our species will in fact get its act together.

But of course it wouldn’t be a New Years’ resolution if it were easy!

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Water's Economics as Muddy as Ever

Mon, 28 Nov 2011 17:10:23 -0500

(Note: This blog is co-authored with Andy Wales, Global Head of Sustainable Development for SABMiller plc, one of the world's largest brewers)

It's hard to put into words how dry and hot Texas was this past summer. "Off the charts" is both figuratively and literally accurate: the data for the last 100 years shows a tight regression of temperature and water availability in Texas...except for the 2011 drought, which is far off the line (three degrees hotter with an inch less rainfall than any previous year).

The economic cost of the drought has been incredible; Texas lost $5.2 billion in agricultural production alone. With agriculture making up 9 percent of the state's economy, and water shortages already threatening growth in the state's energy industry, it's not a reach to suggest that the future of the Texas economy will be tied closely to water availability. And it's not a short-term problem, either. As Columbia University's Richard Seager told the New York Times this summer, "You can't really call it a drought because that implies a temporary change...You don't say, 'The Sahara is in drought.' It's a desert. If the models are right, then the Southwest will face a permanent drying out."

The trend is clear globally as well. Due to rising population, coupled with increasing demands by the agriculture and energy industries (often referred to as the water-food-energy nexus), global demand for clean water will outstrip supply by an average of 40 percent by 2030. While this reality poses grave risks to thousands of communities, it is also the driver of a daunting, and often confusing, economic dilemma which businesses must prepare for. It's time for companies operating in the many dry regions around the world to equip themselves with the tools and mindset they need to navigate this new normal.

While access to water has been recognized as a basic human right, it is also increasingly clear to see that it is a commodity — a resource in high demand that should be valued according to its supply.

But for such a transparent substance, water's economics are anything but clear. Water is one of the world's most glaring commercial anomalies, with a price reflecting nothing more than the costs to extract and distribute it. The value is exempt from the ebb and flow of the market. Even as demand vastly outpaces supply, the market price is as static as a boulder in stream.

With such imprecision in the marketplace, companies must take it upon themselves to identify long term risks, quantifying the true value of water in order to steer clear of long-term hazards. Much of the leading work in understanding water risk has come from Coca-Cola. The beverage giant is now working with the World Resources Institute's Aqueduct Initiative and sharing its extensive global database of previously proprietary data on water availability and risk. By identifying these risks, Coca-Cola is providing a strategic resource for broader communities facing water shortages.

Many companies are now calculating their "water footprint," which adds up the water they use throughout the value chain. The first corporate water footprint was jointly published by SABMiller and WWF in 2009, and since then Coca-Cola, Nestle, and UPM-Kymmene, and others have published footprints for key product lines. However, while the problem affects people globally, water is inherently local, so a global corporate footprint is only so useful. What the calculation does do, however, is help companies highlight those specific, local dangers where a low water supply could disrupt both business operations and the surrounding community.

But managing the risk, and preparing for the 40 percent global supply gap, will require a tough balance of local and large-scale, collective action in cities and watersheds around the world. Andy Wales' company, SABMiller, recently invited businesses, NGOs and other organizations to join a global water initiative, the Water Futures Partnership, in conjunction with the World Wildlife Fund (WWF) and the German development agency (GIZ). This article is part of an ongoing invitation to companies and NGOs worldwide to join the partnership.

From SABMiller's experience — and the work of others across many business sectors — we have learned that once a company understands water's real economic value, both innovation and efficiency weave their way into long term water plans. MillerCoors, for example, has partnered with The Nature Conservancy to help farmers develop a tool to save potentially more than 400,000 gallons of water in every crop rotation - a saving of nearly 20 percent. This kind of deep supply chain work fits the model of "shared value" creation that strategy guru Michael Porter laid out in HBR earlier this year.

While some voices in Texas have called for more action from the government, the real opportunity for leadership will be in the private sector. The leading water-aware companies may be better attuned to slowly emerging water disasters and best equipped to help reduce the gap between supply and demand. They will avoid business disruptions and build more resilient enterprises. They will also, by recognizing the true value of water, help protect everyone's access to clean water.

(This post first appeared at Harvard Business Online.)

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You Can't Impress Stock Analysts...and Shouldn't Try

Sun, 06 Nov 2011 21:41:49 -0500

ExxonMobil reported last week that its net income reached $10.3 billion...in just the third quarter. The oil giant is arguably the most profitable corporation in history. Ten billion in three months is historic, but as the New York Times reported, "analysts were not impressed."

Is there a better distillation of the serious problem with our economic system? Not to put too fine a point on it, but the relentless pursuit to satisfy analysts, and not customers or other stakeholders, is killing our economy and our planet.

Earlier this year, I asked a CEO of Fortune 100 company how he dealt with analyst pressure. Even though he answered on stage in a public forum, I'll keep this anonymous in case it was a moment of mistaken honesty. What he said was this: "I don't know any CEO that would want to run a company the way analysts would want us to."

And yet...I keep hearing from top executives at large, profitable companies that they're under "P&L pressure." This pressure comes not from being anywhere near unprofitable; no, it stems from fear of not hitting growth targets for earnings per share. What all senior executives seem to have forgotten — in some mass delusion — is that these growth targets are arbitrary.

Who declared 7 or 10 or 15 percent growth in earnings a sacrosanct pursuit, above all other corporate goals — like the innovation that leads to novel solutions that address customer needs? If you believe the best-selling business books from the last 25 years, companies are "In Search of Excellence" or trying to go from "Good to Great." Nobody writes a paean to the search for 9 percent EPS growth.

Moreover, pure growth targets are even wackier right now. The debt and overleverage explosion artificially inflated our economies and corporate earnings. So expecting growth in earnings today, while we re-set the economy to a more "normal" growth level, is absurd.

Now imagine for a moment that a proverbial alien lands on the planet and looks at the financial statements of many of our largest companies (I know, aliens might have better things to do, but go with it). They would see massive profits, tons of free cash flow, and healthy balance sheets. Since they wouldn't know that the companies had set and missed growth targets, they'd declare them very successful. But not the analysts.

Our big, profitable companies have the resources to do everything they might consider a priority in the long run — invest in R&D, pay shareholders well, build new businesses and hire people, create a more sustainable enterprise...whatever.

The strategic decisions that would lead to these outcomes require broader thinking, not quarterly focus. But the pressure to "impress analysts" means that leaders can't pursue the long-term perspective that creates truly lasting, great, and sustainable organizations. It's a strategic and operational straight-jacket.

A few leaders — from companies such as Google and Unilever — have told Wall Street that they won't provide "guidance" anymore. In essence, they'll report their results to GAAP standards and as the SEC, FASB, and other quasi-regulatory bodies require...but they won't answer to analysts. Not coincidentally, these CEOs are also deep sustainability thinkers.

I have a sneaking suspicion that most CEOs and CFOs would enjoy this kind of freedom from analyst conversations. Wouldn't it be more personally rewarding for them — and all the layers of management beneath them — to build and lead fundamentally more profitable organizations (versus maximizing short-term profits)?

As Unilever CEO Paul Polman told the crowd at the World Economic Forum in Davos in January, "The worse thing would be to do what is probably right for the long-term benefit of society and being forced out of that because you don't get the short-term results...I want people to focus on cash flow, which is a much longer-term measure than short-term profit."

Sustainability is about the real long-term health of both the planet and enterprise. I hope we see more leaders walking away from these absurd pressures that keep them from building innovative, profitable, sustainable companies.

(This post first appeared at Harvard Business Online.)

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"Wall Street Doesn't Get It"

GE's Eco-Innovation Platform

Mon, 31 Oct 2011 09:43:21 -0500

"We're looking for new models of innovation. We don't have all the answers or all the capabilities." This candid admission comes from Beth Comstock, GE's Chief Marketing Officer and Senior Vice President. Comstock was telling me about the company's growing innovation platform, the GE Ecomagination Challenge which inspires collaboration between GE and entrepreneurs.

The ecomagination brand has done yeoman's duty over the last six years. It started as a business strategy that wrapped a handful of greener products into one brand story about helping both the environment and customers. Now this strategy/brand hybrid has evolved into an umbrella idea to cover everything from operational improvements — such as eco-efficiency "Treasure Hunt" events that have saved GE a whopping $150 million in energy costs — to innovation initiatives, both internal and external. The Ecomagination Challenge, now in its second year, is GE's foray in to the fast-growing world of "open" innovation.

Starting in mid-2010, GE asked the world for their ideas about "Powering the Grid" and, later on, "Powering Your Home." In 12 months, GE received an astonishing 5,000 business plans. GE and its venture capital (VC) partners such as Kleiner Perkins and Rockport Capital have invested $134 million (of $200 million allocated) in a small selection of these businesses.

The Challenge "winners" range from relatively established clean tech companies such as software provider Hara, to a range of "two guys in a garage" innovators (ten of these small start-ups received $100,000 Innovation Awards). GE then set aside an additional $20 million for the Ecomagination Innovation Fund, run by VP of ecomagination Mark Vachon, to help accelerate some of the best ideas by launching commercial pilots with GE businesses.

While GE has worked for years with outside thinkers in universities and research labs, the scale of this effort is unique. And it's expanding — GE recently launched both a China-focused ecomagination Challenge and, in a nice brand extension, a Healthymagination Challenge to identify healthcare technology ideas.

I see three major reasons that this kind of joint innovation between small and large companies is both exciting and absolutely necessary.

Entrepreneurs need GE: Crossing the "Valley of death"

The technologies needed to solve sustainability challenges, at the scale we need them, are not going to come cheap. We're revamping multi-trillion dollar industries in energy, transportation, and buildings — this isn't like software or social media businesses that can grow with limited capital. VC money isn't going to take these ideas far enough. The yawning gap from what a start-up needs in seed funding to what's required to build billion-dollar businesses is often called the "valley of death" in funding circles.

Who can help new techs cross the valley? Of course government can provide capital and buying power. But we need the private sector to provide those inputs, plus critical know-how on building a business. GE's Innovation Fund provides an example of how to fulfill this need; its purpose is to accelerate the scaling and commercialization of new ideas.

GE needs entrepreneurs: Challenging assumptions

Sustainability challenges are broad, deep, complex, and daunting. To paraphrase a famous quote from Einstein, we're not going to solve these problems with the thinking that got us here or, more simply, you can't get there from here. Entrepreneurs are put on this Earth to challenge assumptions. Large companies, to put it mildly, are careful, conservative, and vested in the status quo.

As many have pointed out, the horse-and-buggy companies did not develop the car. Will new eco-technologies sweep some currently dominant technologies into the dustbin of history? Most definitely. Will GE or other mega-corporations lead the transition? Perhaps, but their odds are a lot better if they identify the technologies and business models that will bleed away their profits and get to them before others do.

Although the idea of this whole initiative was to challenge the world's entrepreneurs, it ended up challenging GE even more. As Comstock described the experience, "It's changing the way we're working...Mainly it challenged our assumptions...many ideas came in and we thought at first, this is not scientifically possible, but then we'd look closer and figure out why it is."

I spoke also to Professor Karim Lakhani, a Harvard professor and expert on open innovation contests. Lakhani, who GE asked to assess the Challenge, put it all in context: "It was new for a company like GE to open up the ideas funnel and admit that, 'hey, we don't entirely know what we don't know.' "

Entrepreneurs need each other: The Challenge as platform

Perhaps the most important element of the Challenge is that all of these ideas can find not just funding and acceleration, but each other. As Professor Lakhani describes it, "What was novel here was that GE was trying to create a platform and an ecosystem around green." Apparently it worked.

One of the contestants, Sam Qin, told GE that his innovation, From Net Zero to Waste Zero, "only provides a subset of an Ecohome solution...the Challenge has put us in touch with companies that provide the other pieces." In total GE gathered 70,000 innovators from 150 countries and received more than 80,000 comments.

In any open innovation process, winnowing the funnel of ideas to the 'good ones' is a thorny task (more in a later post on this), but one method is to let the community itself figure out the best ideas. We'll see more of this approach as companies get more comfortable opening up.

So large and small companies all need each other. As Comstock put it, "What can we learn from start-ups? A lot, but there's also a lot that a big company can teach a start-up."

Given the nature of our problems, programs like GE's may be our best hope of marrying capital with ideas, seasoned hands with entrepreneurs, and practicality with, well, hope.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

What Sustainability Should Learn from Steve Jobs

Mon, 10 Oct 2011 09:14:26 -0500

The passing of Steve Jobs was in no way surprising – we knew it had to be serious for him to leave the company he loved. But it’s still a shock that we’re robbed of his brain and all the amazing things that he would have invented.

I had always hoped that this once-in-a-generation genius would turn his prodigious mental powers to solving the world’s largest challenges. Imagine a Jobs-designed, must-have iCar that people would want as badly as an iPad…Or an iHome that uses drastically less energy with its iFridge and iWasher…Or how about an iCity or iTrain to tackle urban design and transportation challenges?

We’ll never get those products from Jobs, so other innovators will have to fill the void. But there is one incredibly important lesson that sustainability-minded leaders can learn from Jobs’ legacy: you should lead your customers and show them a better way.

Steve Jobs did not ask people if they could use a tablet computer. In fact, in a long list of amazing quotes from the man, one of the most powerful is this: "It's really hard to design products by focus groups. A lot of times, people don't know what they want until you show it to them."

Before the iPad came out, plenty of pundits asked why anyone would really need a tablet. After all, laptops were fairly small already and we had connectivity and games on our phones. Why add this midsize device to our lives? Steve Jobs made us want to.

In my experience, most large companies today are “fast followers” – a strategy that has seemingly lower risk for a public company. But just look at the playing field littered with tablet computer also-rans to see how expensive second-place can be. And yet it still seems like the preferred (or default) approach for most companies.

This fiscal and strategic conservatism breeds a culture where execs prefer to wait and talk to customers before doing anything drastic. Of course customer (and other stakeholder) perspectives are critical. But as with tablet computers, when it comes to sustainability, often the customers don’t really know what they need.

Companies often gather data on what their business customers think a sustainable product should be, and the survey might show that including recycled material is important, even if that’s a tiny part of the real footprint story. Nobody knows the value chain of your product and service as well as you do (or if someone else does, get them in the room pronto). So figure out where the impacts really lie and what you can do to reduce your customer’s footprint in ways they hadn’t considered. This might require asking heretical questions about whether the product should even exist in its current form or should be converted into more of a service.

Do most people think they need a hybrid car, or would they even imagine that they’d share a car using a service like ZipCar? Probably not, but if the experience can be made fun and profitable enough, perhaps they will. The Toyota Prius has sold well, in part, because it did some exciting new things (ran quiet on no gas at times) in a familiar midsize car framework, much like the iPad looked like a big iPhone but could do so much more.

I wish I could come up with more examples of companies truly leading with sustainable products. It’s a sparse field for now, but that will change. The next generation’s Steve Jobs will most likely focus on sustainability since that’s where the largest challenges and business opportunities lie. Consider the case of William Kamkwamba, a boy from rural Malawi, one of the poorest countries in the world. At 14, this self-taught “Boy Who Harnessed the Wind” built a working wind turbine from scraps. He’s now at Dartmouth College.

The world contains some true innovators. Will our big companies find these leaders and harness them…or be brought down by them? I know which one I’d pick if I were normally a “fast follower.”

Here’s hoping we find the next Steve Jobs quickly, someone who can bring us green things we never knew we wanted so badly. Rest in peace, Steve.

Climate Reality

Tue, 13 Sep 2011 15:27:39 -0500

I believe in science and facing facts or, to borrow words from an important awareness-building event today, I believe in “climate reality.” I'm donating my Twitter feed and this blog space to point people to the Climate Reality Project , Vice President Gore's latest attempt to light a fire under everyone about our climate.

In my work, I try to convey the benefits of going green to executives around the world. I generally avoid talking about climate change, at least in the U.S. where it's such a political hot potato. So instead I demonstrate how profitable it is to reduce your footprint (including carbon), regardless of the science on climate change.

My basic logic is this: decoupling our companies and economy from fossil fuels, and oil in particular, is just good business. By reducing energy use and carbon pollution, companies save money, reduce the risk that comes from relying on volatilely-priced fuels, and reap the benefits of taking part in the clean economy, which will drive innovation and generate vast wealth. But it's also a matter of national security (which is why the U.S. Navy is greening itself faster than any company I know). So, no, it doesn't matter if you "believe" in climate change.

But every now and then, I have to state clearly what I believe. Saying "it doesn't matter" is true, but it's not leveling with everyone about the depth of the challenge.

So here's my belief: The scientific evidence that the earth is warming and humans are the primary cause is vast, overwhelming, and very convincing. We are destabilizing our one home, and it's endangering our economies, communities, and even our species. The fundamental change in how the planet works – which has begun already with record droughts, floods, heat waves, and storms – is larger than we realize..

I think a lot about what a "real" approach on climate would mean for business, which will play a pivotal role in finding and spreading solutions to our energy and climate challenges. While many companies have begun the hard work, they need to step up their game.

On the day-to-day level, that means setting much more aggressive carbon reduction goals (80 to 100% reduction by mid-century or sooner). A few leaders, such as Wal-Mart, P&G, and Sony have set 100% renewables (and/or "zero impact") as goals. The rest of the business world needs to follow, and truly lay out a path to get there.

On the larger level, companies need to pursue what I call "heretical" innovation that rethinks business models and provides goods and services with dramatically reduced environmental footprint (see my blogs on this, here and here).

I see a deep parallel in all of this with one of strategy guru Jim Collins' major principles in Good to Great: "Confront the brutal facts." Collins makes a compelling case that businesses won’t succeed if they don’t tell themselves the truth.

The same logic applies to each of us as individuals, and to all of us collectively as a country and planet. It's time to confront our brutal facts -- our climate reality -- and get moving.

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

Weak Environmental Regulations Show Little Faith in U.S. Business

Mon, 12 Sep 2011 15:10:06 -0500

Before the big job speech, President Obama made an important decision about the economy and public health. About 10 days ago he reversed himself and his own EPA to stop a regulation that would've reduced smog-causing pollution. The U.S. Chamber of Commerce and the Republican Congressional leadership quickly declared this a major victory for "job creators" and business in general.

It's anything but.

I'll give a major concession on this argument and put aside for the moment the danger of ignoring solid science and what it tells about public health (which is that, in the words of NRDC Director Frances Beinecke, "strong smog standards would have saved up to 4,300 lives and avoid as many as 2,200 heart attacks every year...[and] made breathing easier for the 24 million Americans living with ashthma...").

Ok, let's imagine those health benefits don't matter. Even from a business perspective these laws make sense and it's ridiculous to keep them weaker than they should be.

Choosing weaker environmental regulations actually makes our country less competitive and shows amazingly little faith in our business community to innovate.

Just because something may be difficult doesn't mean it will be expensive as well. For decades now, every major environmental regulation has met significant resistance from the industries most affected. That should be expected, but let's deal in reality, not hyperbole.

This time, industry opponents say it will cost enormous sums of money to comply with a regulation that moves the standard from 75 parts per billion to 60 to 70 ppb. We've heard this argument before. The claims of economic destruction, outrageous costs, and lost jobs are almost always seriously overblown.

Every now and then, a business leader admits the falseness of these Chicken Little cries. Former BP CEO John Browne once told Fortune, "Every time there's a new piece of regulation, we say it's the end of our industry...[we have] an appalling track record in this regard."

The most famous example, though, is the battle over the Clean Air Act Amendments of 1990, ultimately signed into law by the first President Bush. This law established the first major "cap and trade" system; it didn't restrict carbon dioxide as current iterations propose, but mandated reductions in acid-rain-causing sulfur dioxide. At the time, industry claimed compliance would cost up to $1,500 per ton of SO2 reduced. For the next decade, the industry never spent more than $200 per ton, and usually far less, as Dan Esty and I discussed in Green to Gold (see p. 75). So business was off on cost estimates by a factor of 10.

But it gets better every time. Friday's laughable assertion from Representative Eric Cantor that changing the smog standard would cost the economy $1 trillion and millions of jobs makes the acid rain cost claims seem quaint.

Granted, the fiscal logic for stricter pollution standards doesn't seem as clear as the cost-saving potential of energy efficiency standards such as those for light bulbs and cars. (Of course politicos are fighting those as well, even though the fact that they truly drive innovation and save everyone money has already been demonstrated repeatedly). But this seeming lack of economic logic applies if you only consider one side of the ledger, the cost to companies most affected. But on the other side we have public health savings, which are estimated at $37 billion per year, and the benefits to other industries.

What about the companies and entrepreneurs that create cleaner ways of operating or provide the pollution-reducing technologies? Those are real jobs too, aren't they? And our companies will be more competitive globally as every country struggles with pollution. Or just consider the productivity benefits to all companies of having their asthmatic employees breathe easier.

But here's what really galls me: saying that stricter pollution standards will cost enormous sums of money shows a staggering disregard for our capacity to innovate.

If American business is the engine of growth that our politicians make it out to be, why can't we find new ways to do things that save money, cut pollution, and make our companies more competitive. When given constraints, the tough and smart get going and innovate (and, by the way, the new standard wouldn't go into effect until 2013, giving us some time).

I have faith in our businesses.

Why don't our industry and political leaders?

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

Headlines You'll Never Read About Renewables...

Thu, 25 Aug 2011 09:51:44 -0500

The New York Times reported today that geologists have “sharply cut” their estimate of how much natural gas exists in the rock formation called the Marcellus Shale. They now guess it holds 84 trillion cubic feet, down 80% from the Energy Information Agency’s estimate just this year.

Seeing this headline got me thinking about some of the benefits of renewables, and what we’re unlikely to see reported in the future…

Meteorologists Sharply Cut Estimate of Amount of Sun Hitting Earth
Off-shore Wind Farm Explodes, Massive Wind Spill Coats Coast of Gulf
Algae Mine Collapses Burying 33 Chilean BioFuel Farmers
Heat Source for Geothermal Plants Drying Up
Tides Seem to be Slowing Down
Troop Deployment Begins to Defend Vast Sun Fields Abroad
Scientists Concerned That We’ve Reached Peak Sun and Peak Wind

Kidding aside, it seems clear that our days of relying on fossil fuels are numbered. That’s not a political or moral statement – it’s a scientific one. The 84 trillion cubic feet is still a lot, but getting to it is fairly difficult. Easy oil and easy gas are almost oxymoronic at this point. Getting our traditional energy will be expensive and dangerous – think digging a mile under the ocean – from now on.

I’m sure the snarky will point out that renewables have their problems – intermittency being the big one. But the challenge of how to store energy that comes and goes is solvable – more and better battery technology, for example. Or millions of electric vehicles acting as a massive, mobile power storage unit…one that is parked and plugged in at night when the wind blows on the grid.

But more importantly, I can guarantee that we’ll never run out of the heat of the earth, the sun beating down on the planet (ok, in 5 billion years we will), or the wind driven by the sun’s heat. These sources will not be harder to get to tomorrow than today. They will only get cheaper in comparison to the buried kind of energy, with a variable cost of about zero.

Those seem like some pretty solid business reasons to invest and switch our economy quickly.

Excess Inventory Wastes Carbon and Energy, Not Just Money

Mon, 22 Aug 2011 09:35:19 -0500

Inventory. For those of us not in operations, supply chain, or logistics, it's a vaguely familiar line item we learned about in finance class. We know it's important and that we're supposed to reduce it by increasing "turns."

But inventory is not a minor issue. By some estimates, the world is sitting on roughly $8 trillion worth of goods held for sale, and nearly $2 trillion in the U.S. alone, according to a report by the Council of Supply Chain Management Professionals (note: the full report requires membership, but this number is mentioned about 9 minutes into the video at the CSCMP site).

That's a lot of capital tied up in warehouses. It also represents a tremendous amount of environmental footprint "embedded": logic suggests that this inventory stock, since it represents a healthy percentage of our economic output, required a good percentage of our energy and water to produce (so billions of tons of carbon emitted, for example). If we could permanently reduce the amount of product sitting idle, we'd save money, energy, and material.

So managing inventory well is both a financial win and a sustainability victory.

Perhaps the most powerful lever over inventory levels is predicting how much product customers will want, or what's called "demand planning." I recently delved into this meld of art and science when I spoke at a meeting held by Terra Technology, a relatively new and successful player in the "demand sensing" world (the difference between "sensing" and "planning" is about gathering data as close to real-time as possible and feeding it back up the supply chain quickly).

While I know little about the field of demand estimation — or what tools companies are using — my interest was in learning about anything that helps companies save money and reduce their environmental footprints. (Full disclosure: Terra Technology was my client for this event.)

At the meeting were representatives from many of the world's largest consumer product (CPG) companies. The giants in the field, such as P&G and Unilever, spend a lot of money on demand planning, each employing hundreds of people, many with advanced math degrees...and for good reason: P&G's 2010 total inventory, for example, was valued on the balance sheet at $6.4 billion.

Even though predicting the future is devilishly hard, I figured that the explosion of point-of-sale and operational data over the last 20 years, would give companies a good handle on how much of something they'll sell. I was wrong.

As I learned at the conference, according to Terra Technology's benchmarking study, the error rate for CPG companies on estimated vs. actual sales is shockingly high. Even with the fastest-selling, most predictable products, the estimates are off by an average of more than 40 percent. Imagine that a CPG company believes that 1 million bottles of a fast-turning laundry detergent will sell this week. With 40 percent average error, half the time sales will actually fall between 600,000 and 1.4 million bottles. And the other half of the time sales will be even further off the mark.

The repercussions of all this uncertainty are dramatic in terms of cost and material use. Companies have to keep much more inventory, since going out of stock is really unpleasant to explain to consumers, your CEO, or, say, Wal-Mart. The buffer is called "safety stock," and its sole purpose is to mitigate this risk. There's a lot of safety stock out there — nobody knows exactly how much, but what stock level would you keep on hand if you didn't know whether sales would be 1 or 2 million units?

As we've found so many times before, data and software can play a critical role in making operations more efficient and sustainable. For example, using both demand sensing software and good management practices, P&G has cut 17 days and $2.1 billion out of inventory. All that production avoided saves a lot of money in manufacturing, distribution, and ongoing warehousing. It also saves a lot of carbon, material, and water.

Like many companies that realize there's a green element to their offerings, Terra Technology is now making this footprint-reduction case as part of its pitch for better demand prediction. As Robert F. Byrne, the company's CEO, puts it, "I want people to think of inventory as not just piles of cash, but also piles of carbon and piles of water." It's smart positioning, especially because it's true.

The definition of what makes a "green" initiative is broadening, and that's a good thing. Companies would certainly include a lighting retrofit at a warehouse in their list of sustainability or eco-efficiency projects. But until recently, it probably hadn't occurred to logistics execs that reducing the inventory itself could be the greenest thing they do.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

A Giant of Sustainability: Rest in Peace, Ray

Mon, 08 Aug 2011 21:58:18 -0500

I just learned that one of my personal heroes, Ray Anderson, died on Monday at the age of 77 after battling cancer for that last 2 years.

Ray was known best for his inspirational role in the world of sustainability (so many of the leaders of the movement count Ray as a role model). And when I say inspirational, I mean it very personally. When I was searching for my mission in life over a decade ago, and was trying to find out how you could marry the strategies and tools of business with environmental concern, someone suggested I check out Ray's book, Mid-Course Correction. It was literally the first step in my own transformation.

After I had gone about my sustainability journey -- my mid-course correction -- for a number of years, I had the incredible fortune of sharing the stage with Ray at a conference a couple of years ago. Watching Ray the engineer lay out the irrefutable logic for a different way of doing business was like seeing the Beatles perform their greatest hits -- it was all familiar, and we knew the tune, but it was still amazing to see it all live. I didn't know Ray well, and I'm poorer for not spending more time with him. But I am glad I had the chance to tell him how important his work was to me.

Ray's books, including last year's much more personal tale, Confessions of a Radical Industrialist, tell the amazing story of a deeply transformational experience, Ray's own personal road to Damascus conversion. His journey began with a book as well, the remarkable and inspirational The Ecology of Commerce by Paul Hawken, which hit Ray like "a spear in the chest." He had discovered what the rest of world is still figuring out...the business ecosystem that we had relied on, for all the success and wealth it created, was fundamentally broken. It treated the planet's resources, the balance sheet of the world, as limitless and of no inherent value.

As founder and Chairman of Interface (a flooring company), Ray had never really thought about where all the materials in his petroleum-based products came from, or where they went after he sold a carpet tile (or millions of them). He had built a successful business of scale, employing many people, but now found himself wondering where he had gone wrong.

Ray set Interface on a course to climb what he called "Mount Sustainability" and build a truly sustainable business...even one that replenishes the world instead of drawing down its resources. Over the last 17 years, Interface has discovered how hard a job that really is, but has arguably come further than any enterprise on the planet.

Historians will report that in the late 20th century the world and its business giants began a slow, sometimes painful, pivot away from traditional industrial capitalism to something different...something healthier, more passion-driven, and, yes, more profitable. When they write about this period, a few names and moments will be pivotal. Ray's conversion and evangelism will be at the center of that history.

Instead of easing into retirement, Ray made it his mission to tell the world about his journey and wake business people up to the risks and opportunities in sustainability. He spoke to many thousands of people, giving an astonishing 1500 speeches. His books reached many thousands more. He fundamentally changed the careers and lives of many people looking for a deep connection to their work and their world. Count me among the converted.

Thank you Ray for all that you did.

A New Green IT Report from CDP

Thu, 28 Jul 2011 22:24:46 -0500

Just a quick heads up about a nice, pithy report on how cloud computing can reduce the large, and growing, IT energy footprint.

"Cloud Computing - The IT Solution for the 21st Century" comes from one of my favorite agitators for transparency and climate action, the Carbon Disclosure Project.

Fyi, there's a short piece I wrote in the report, most of which is taken from this blog from earlier this year, "Cloud Computing is Greener."

Enjoy...

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

Andrew Winston

Apple's Greatness, and Its Shame

Ecosystem Economics: Navigating the Water-Food-Energy Nexus

A Vision of Real Corporate Leadership on Sustainability

New Year's Resolution: Optimism

Top 10 Green Business Stories of 2011

Water's Economics as Muddy as Ever

You Can't Impress Stock Analysts...and Shouldn't Try

GE's Eco-Innovation Platform

What Sustainability Should Learn from Steve Jobs

Climate Reality

Weak Environmental Regulations Show Little Faith in U.S. Business

Headlines You'll Never Read About Renewables...

Excess Inventory Wastes Carbon and Energy, Not Just Money

A Giant of Sustainability: Rest in Peace, Ray

A New Green IT Report from CDP