As many businesses understand, growing and developing a competitive advantage in highly competitive markets is the key to strong growth and profitable returns. At the same time that businesses are searching for this often elusive 'competitive advantage', businesses are changing their 'old' views that protecting the environment is incompatible with strengthening a business's bottom line. Instead, they are discovering the benefits of sustainability (people, economics and environment) and its ability not only to improve profitability but also increase a business's brand, reputation and retain talented employees.
So are the two inextricable linked? Can a well executed sustainability strategy lead to a competitive advantage with all the distractions associated with the global financial crisis, rising energy and fuel costs?
This paper will investigate this topic as follows:
The link between sustainability and competitive advantage;
The evolution of sustainability into a competitive advantage;
Economic issues (Carbon Tax or Trading Scheme) affecting both sustainability and competitive advantage;
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Implementing sustainability; and
Sustainability as a competitive advantage in the Mining Industry
Many firms strive for a competitive advantage, rarely do businesses understand what it is or how to achieve and keep it. A competitive advantage can be gained by offering the consumer or a client greater value than its competitors1. This can be achieved by offering a lower price, providing quality services or other innovations that justify a premium price. The strongest competitive advantage is a strategy that that cannot be imitated by other companies.
Sustainability (from a business perspective) is about 'adopting business strategies and activities that meet the needs of the enterprise and its stakeholders today while protecting, sustaining and enhancing the human and natural resources that will be needed in the future'.2
Michael Porter3 identified three types of competitive advantage in his book: cost advantage, differentiation advantage and focus. Prior to now, cost and differentiation strategies have been two separate 'positional advantage' (describes a business's position in an industry) strategies that businesses could pursue. So in which strategy does Sustainability fit and why can't it be in both? Competitive advantage is created by either lowering a business's costs or through superior benefits to the client (differentiation), all benefits that can be derived from an effective sustainability policy.
'Competitive advantage grows fundamentally from the value a firm is able to create ... Value is what buyers are willing to pay and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset higher prices.'4
Porter5 wrote that 'after several decades of vigorous expansion and prosperity, many firms lost sight of competitive advantage in their scramble for growth and pursuit of diversification.' 'Today (1985), the importance of competitive advantage could hardly be greater.'6 One would argue that competitive advantage has never been so important in 2010. In today's markets, businesses face slower growth as well as domestic and global competitors who 'are no longer acting as if the expanding pie were big enough for all.'7 After a global financial crisis and the great climate change debate, sustainability is hot on the lips of many executives who not only want to reduce costs but to set themselves apart from their competitors and build strategies to weather the next global financial crisis and impending carbon tax/trading scheme.
This paper will analyse the growing link between an effective sustainability policy and competitive advantage.
Competitive Advantage Strategies and Sustainability
So what were Porter's competitive advantage strategies and how do they link to sustainability?
Cost leadership is a straight forward strategy for businesses to adopt. The primary goal of a business pursuing this strategy is to become the lowest cost producer/service provider in its particular industry.8 For example, a contract minor must find the lowest cost method to move dirt, coal or iron ore from one point to another. Rather than being one of several firms vying for possible work, it focuses on methods to reduce costs, delivering economies of scale, deliver value through procurement, to and win work through a cost leadership strategy. A cost leader must also maintain some degree of parity with its competitor's performance in other areas while out performing them on price.
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Businesses who employ a cost leadership strategy are realising that sustainability can deliver results in boom times when consumption needs to be controlled and more importantly sustainability demonstrates results in recessionary times. Businesses are achieving benefits in all facets of their operations particularly in the form of bottom line cost reductions.9 Examples include businesses reducing energy costs through efficient lighting, alternative fuels and driver education training. All of these initiatives help to lower the businesses operating costs, which in turn reduces costs from the bottom line which allows them to be more competitive in their industry.
Differentiation on the other hand is where a business seeks to be the proven performer in its industry by delivering a superior service or product to its client.10 Businesses are selected by their ability (often unique ability) to deliver a service or product at a premium (they still must maintain some price parity). This strategy differs from cost leadership as it is possible to have multiple businesses pursuing a similar strategy in the same industry.
Businesses that adopt this strategy are using sustainability to differentiate themselves from their competitors as a way of ensuring access to future resources, whether globally or locally. In this example, resources can comprise not only of minerals in the ground but also highly capability people, finance, and positive community attitudes. These businesses are more often than not, influencers, those actively leading and setting the industry agenda.11
This strategy is selected by businesses who wish to take a more targeted approach to develop niche markets. They will focus on a particular segment or group within an industry as a whole.12 A business who selects this strategy often tailors its strategy (sustainable strategy) to serve the needs of a particular group. The focuser develops a competitive advantage by developing a niche in highly competitive markets.
The evolution of Sustainability and its introduction as a Competitive Advantage
Throughout the 1970s and 1980s, sustainability was predominately linked to pollution control: 'the treatment and/or disposal of industrial waste and its discharge to air, water, or land were the centrepiece of environmental management' for many organisations.13 Businesses were ensuring they met legislative obligations and no more as environmental management was often purely a risk management tool. From this point, businesses attitudes moved towards pollution prevention, which focused on business activities to reduce the waste generated during production and which was eventually extended to supply chains.14
This has changed even more significantly in the last decade as the debate over climate change deepens within the wider community. Sustainability moved to the top of both the business and the political agenda (energy, climate change, water and waste) with many industry leading businesses making non-financial commitments/performance indicators to ensure that energy and water consumption within their operations are efficiently and effectively managed.15
Today, we are seeing sustainability at the forefront of innovative thinking for many businesses. They are looking to make sustainability a core part of every decision they make, and a means of creating opportunity, not just minimizing risk and ensuring compliance to legislation. Many businesses are including their sustainability credentials when tendering for government work and major industry projects as a means to differentiate themselves from their competitors.
Aberdeen undertook a survey of business leaders to understand the top pressures that drive sustainability production in their organisations16:
Achieve competitive advantage in the marketplace
Ensure compliance to current and future regulations
Need to impact organisations bottom line financials
Customers demanding eco-friendly products
They also uncovered key statistics on businesses and their ability to reduce emissions and energy consumption17.
Best in Class:
30% reduction in carbon emissions
24% reduction in energy consumption
19% out-performance of corporate operating margin goals
5% reduction in carbon emissions
7% reduction in energy consumption
8% out-performance of corporate operating margin goals
1% increase in carbon emissions
2% increase in energy consumption
5% under-performance of corporate operating margin goals
Economic issues (Carbon Tax or Trading Scheme) affecting Sustainability and Competitive Advantage
As the world grapples with climate change, carbon taxes, carbon abatement schemes and/or direct action, Australian businesses are still struggling to understand that sustainability can deliver a dramatic competitive advantage. As stated earlier, businesses are starting to realise that sustainability can deliver results in boom times and more importantly in recessionary times.18 Businesses are achieving cost savings and benefits in all facets of their operations in their bid to attract and satisfy customers, staff and clients.
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Marius Klooper, CEO of BHP Billiton, recently stated that 'any industry that has a carbon footprint is subjected to a future carbon tax/trading scheme and many fear the negative impacts on competitive advantage.'19 According to Bloomberg, Marius Klooper also stated that 'Australia must work ahead of a global initiative to maintain its competitive advantage.'20
With Marius Klooper's statements in mind, businesses that have the opportunity to adopt a sustainability model early (first mover advantage), prior to the introduction of a carbon tax or trading scheme in Australia, stand to gain tremendous ground over their competitors who will find it difficult to match in a rapidly changing environment.21 Businesses that use sustainability to rethink current business practices stand the chance of building resilience against the peaks and troughs of economic cycles and shifting consumer expectations. They also have the ability to deliver positive outcomes in new or emerging markets for themselves, clients and customers.
In a recent survey conducted by the Aberdeen Group, the introduction of a carbon tax emerged as a top metric that mattered most for businesses looking to grow sustainability as a competitive advantage.22
Achieve competitive advantage it the marketplace
Ensure compliance to current and future regulations
Reduce costs to improve bottom line financials
Customers demanding environmental friendly goods/services
Thought leadership in sustainability
Carbon management has also moved from a 'nice to understand' to a 'must have' for companies recognising the business risks, strategic impact of this new tax or trading scheme.23 Beyond the traditional business focus on cost efficiencies, carbon management has become the new cost-efficiency metric, driving and motivating staff to reduce and monitor the affect their role has on a business carbon emissions and energy consumption. Carbon management as part of a corporate sustainability strategy is becoming a key driver of brand management/recognition and most importantly competitive advantage. Service providers with a proven track record of recording, managing and reducing their carbon emissions stand a far greater chance of winning business with ethical business partners.
As part of managing the overall corporate liability, CFO's in Australia will soon be faced with the prospect of managing the economic impact of carbon as a financial liability on the income statement and balance sheets.24 First-mover businesses face a far greater chance of reducing this financial liability by investing and investigating carbon reduction schemes prior to the release of a carbon tax or emissions trading scheme. Not only do businesses reduce carbon emissions and therefore lower their tax liability longer term but also uncover immediate savings.
Best-in-class businesses are turning the risks of carbon management into opportunities and improved performance through investment in technologies to measure, monitor, communicate and collaborate to create a competitive advantage in uncertain times.25
Implementation Sustainability to achieve a Competitive Advantage
The experiences of executives who have undertaken sustainability-driven business initiatives suggest that businesses need not make large, immediate investments in new programs.26 Sustainability needs to be thought of more broadly, especially as a driver for innovation and financial savings.
Table 1: Implementation Plan for building sustainability into businesses to foster a competitive advantage27:
Formalize Business Sustainability Strategy and Policy
Prepare sustainability policy and procedures
Identify social and environmental trends and business opportunities.
Have staff suggest ideas and be involved in identifying sustainability improvement opportunities
Develop the tools and infrastructure necessary to manage a companywide sustainability program.
Engage your Staff
Assess and benchmark each business unit annually on its sustainability progress and identify product opportunities and capabilities that can be translated into the sustainability value proposition
Competitive Advantage Identification & Development
Develop a meaningful sustainability value proposition for customers/clients.
Communicate business sustainability policy, initiatives and plans to internal and external stakeholders.
Report sustainability initiative performance to stakeholders, clients, government departments and to the public through an annual Sustainability Report.
According to a leading industry analyst group, a number of highly successful businesses implemented sustainability practices for the following reasons:28
Driving energy efficiency cost savings;
Developing a sustainable supply chain that analyses whole-of-life costs as well as design factors for environmental compliance;
Measuring performance in quantitative terms;
Taking advantage of information technology that is now more cost-effective;
Considering resources as the driver for change;
Embracing automation as a key element in sustainability;
Designing for longevity, with a goal to remain in business for a century or more; and
Sustainability and building a competitive advantage in the Mining Industry.
'Sustainable development in its broadest sense is identified by the mining industry as an important focus'.29 For mining companies, sustainability raises a number of issues, especially since efficiency drives value which in turn affects their 'licence to operate, shareholder value, and the trade-off between dealing with environmental impacts and social issues through prevention or retrofit and corrective measures'. 30 Reducing costs at new sites and maintaining the efficiency of existing sites with the increasing costs associated with capital, resource and plant costs is also a critical component.
'The best way to get people to take sustainability seriously is to frame it as it really is: not only a challenge that will affect every aspect of management but, for first movers, a source of enormous competitive advantage'.31
Sustainability allows mining businesses to focus on efficiency improvement opportunities as a means to reduce costs which in turn enhances business value (create value through innovative products and services). With increasing government intervention through legislation, including National Greenhouse and Energy Reporting and the Energy Efficiency Opportunities program, many miners are no longer given the choice to ignore sustainability. If they are not growing sustainability as a competitive advantage they are being forced by the government to lower their energy and greenhouse gas emissions which many are finding is delivering savings simultaneously.
For the mining businesses that are seeing environmental legislation as a means to drive change within their business, many are moving the thought processes of their people from an environmental focus, to a wider focus on economic and community sustainability.32 With this in mind, the mining industry, who have been under immense public scrutiny in recent years, has been able to focus on both its reputation and its role in sustainability.32 They are also seeing a positive effect on their brand which drives value to their stakeholders (share holders).33 The ability of companies to engage the trust of communities, governments and investors is critical to their future, with business reputation playing a significant role in the success of their competitive advantatge.34
Jacynthe Côté from Rio Tinto Alcan in a recent interview was quoted as saying that 'At Alcan, we are convinced that there is an increasingly close relationship between the protection of the environment, socio-economic progress and competitive advantage'.35 'Because we are competing for finite resources in a world that is increasingly focused on sustainability, we are determined to invest in a manner that not only strengthens our competitiveness but also produces maximum benefit for local communities,' continued Côté.37
In closing, Ms. Côté said 'Alcan is striving to be ahead of the game in sustainability and to help create vigorous and proud communities that will thrive long after we're gone'. She finished by stating that businesses that identify and tackle the ever present sustainability challenges we face, have the greatest chance of gaining the first mover competitive advantage.38
Sustainability continues to gather ever-greater public attention and fierce debate. The subject ranks high on the legislative agendas of most governments around the work; media coverage of the topic has flourished; and sustainability issues are of increasing concern to the general public.39
Today, more than ever we are seeing a shift in people's thoughts and feelings towards sustainability. Businesses are looking to make sustainability a core value, imbedding its values into every decision as a means of creating savings, reducing risk and just as importantly, increasing their competitive advantage.
There are multiple reasons for this paradigm shift. Firstly, changing global economics. After a global financial crisis, fluctuating energy and food prices and growing consumer debt levels, businesses and consumers are changing the way they shop, save and economise. 'In addition to basic economics, there is evidence of a values shift. Identity, belonging, and a strong desire to contribute to, or experience, something "meaningful" rather than to acquire more things is slowly emerging as a set of values that may come to rival consumption-driven wealth and status, especially among the millennial and digital generations.'40 Thirdly, technology is changing at a rapid pace and evolving in a way that makes it more possible for consumers to understand the implications of their purchasing habits and their behaviour. Where was the product made, using what products/chemical, long-term benefits of a products use. 'Finally, the rise of globalisation means that new solutions with radically improved efficiency are crucial to the largest market opportunities today and in the future.'42
Business are finding new opportunities to make significant advancements in sustainability through a heightened focus on product design, consumer engagement, use, and end-of-use elements of their product or service.
The real benefit of embracing sustainable consumption is that it provides a shield against price volatility, potential supply shortages of key commodities and the impact of a carbon tax. More importantly, sustainability has emerged as an area particularly ripe for innovation, adaptation and a new competitive advantage strategy for the bold.