FEATURE – The impact of humankind on the environment is now beyond dispute. Yet, too little is being done to adapt our business models. This compelling read explains why we need to create prosperity beyond profit.
Words: Rose Heathcote and Eivind Reke
Success is traditionally measured by profit. It is based on profit that a company’s performance is assessed. It is based on profit that investors pick which horses to back. In time, however, we have also learned that an isolated measure of profit drives leaders to put money before morals, swinging performance down a one-way street. It also makes us vulnerable to inequality, environmental damage, and failures in the economy. It’s a trajectory that is only lucrative for a select few. Decision making in this setting drives shareholder ahead of stakeholder value through cost-down strategies or by raising top-line revenues without much care for how it’s done.
TARGET MORAL PROFIT
Businesses need to perform financially to reinvest, grow and create stable employment. That’s not the debate. The issue is rather how we achieve profit and what we do to prosper. The Lean Community has for decades challenged traditional thinking, confronting how we think about profit and what the market is willing to bear (figure 1).
Figure 1: Traditional vs lean thinking about cost and profit
Gone are the days of hiking up the price to raise profit. Cutting operations and budgets to the bone won’t get us far either. Instead, we develop through well-focused kaizen, a proven method to bring costs down over time through long-term reform. We raise revenue by designing better products, doing better work, and delighting our customers. The shift from traditional thinking to Lean Thinking is indeed an important one. It influences how we take care of talent, focus change, and generate returns. But it also requires us to rethink how we value and measure success if we are to prosper. Measure more than financial performance and see costs differently (not just what’s in the management accounts, but the hidden, unchecked, out-of-sight costs), then consciously work to close the gaps.
Generating profit to the detriment of the planet is a cost and growing a business in this way is unethical and as offensive as profiteering.
We operate in a global ecosystem and narrowly focusing on in-house success makes us guilty of insular, short-term thinking. Here we venture outside company borders to judge how we truly perform and to make sound judgments.
Figure 2: Rethinking success and striking a balance for prosperity
How we see success influences our decisions. It affects how we produce, consume, and distribute scarce resources to serve customers – all decisions that affect whether we spend or save the limited natural capital available to us. It will move us closer to or further from sustainability.
In figure 2, therefore, we illustrate a healthy balance of decisions to achieve prosperity and improve the condition in which we leave our planet to future generations. Prosperity implies financial stability but profit alone cannot steal the limelight. Removing the shareholder value blinkers helps us to rethink how we measure success, show how we perform across a broader selection of measures, and reframe the problems we spend time on.
ADAPT FOR SUSTAINABILITY
Times are changing fast. There is growing awareness among employees, investors and customers about sustainable performance, compelling organizations to do more than ever before to care for the planet. Indeed, purpose-driven companies are adapting their business models and strategies to suit.
- Consumer behaviors are constantly shifting. Customers are gravitating to products that represent greener values. Before adding a product to their cart, people increasingly look at what’s in it, how it’s made and whether it’s recyclable. They’re shifting from gas-guzzling, carbon emitting vehicles to better environmental performers that still meet the driver’s quality and emotional requirements. They’re improving how they live and run their homes to consume less. What new customer problems will you solve to stay relevant?
- Competitiveness is hotter than ever as companies differentiate themselves through sustainable practices and supply chains, nudging others to follow suit. How will you ensure you’re ahead and not behind?
- Government intervention is increasing through incentives, such as grant funds or penalties and fines. How might you benefit and avoid unnecessary costs? What voluntary changes can you make ahead of legislation changes?
- Skilled talent chooses to work for responsible employers, especially the up-and-coming generation. What can you do to become an employer of choice?
- Even C-level execs are compensated for sustainable results and packages are restructured to suit. How will you reward impactful decision making and outcomes?
- Forward-thinking financial institutions favor sustainable business models giving preference to applicants that pollute less and deliver positive impact. What does your future value proposition look like and what financial instruments will become accessible to you? By how much will it improve company market valuation?
The conversion to the sustainable enterprise is no longer a nice-to-have. It’s an order qualifier, an investor lure, a strategy to woo, focus, nurture and retain talent and a path to secure loan capital. This conversion is how we’ll survive and thrive for generations to come.
ACCOUNT FOR REALITY, ACT REAL-TIME
In a Financial Times article, Sir Ronald Cohen explains how investors need to know companies’ social and environmental effects5. He asked what we might find if we compared the total environmental cost or the effect of deficient diversity in the workforce across companies and encouraged a race to the top. Cohen writes about the “impact revolution” and how this will help to reimagine capitalism. If governments force companies to publish impact-weighted accounts, this would focus their attention on social and environmental problems. Referring to a published assessment of 3,000 companies, 450 companies created more environmental damage in dollar terms than profit in a single year. That is a very good reason to take this seriously, urging transparency to drive investor and decision making.
How we account for reality drives what we improve. Unless companies make performance transparent and then do something about it, there is little chance we will see the change we need in the time we need it. Our impact on natural resources is just one aspect at a critical point if you refer to figure 3. This is not fear mongering, but current reality in a handful of areas. Brushing true performance and the role we play in it under the carpet supports profiteering.
Figure 3: A reality check on the planet’s current condition
Disclosure is key to focusing lean strategies and deployment. Because traditional accounting ignores the cost of degradation and profit is a poor indicator of overall performance, we need a holistic measure of prosperity to guide us. The concept is not new and sustainable accounting has been on the cards for a while, albeit lacking global acceptance as a standard. Institutions such as Harvard University initiated an “impact-weighted accounts project” that aims to create corporate accounting statements for financial, social, and environmental performance. This is good progress, but we need to act faster.
Cohen explains that the power of accounting rules must now be applied to ESG (Environmental, Social and Governance) and impact investing. This is a big step in the right direction, but sustainable accounting is a lagging indicator and waiting for the data to present is a loss of critical problem-solving time. Real-time leading indicators are also needed to focus our efforts and drive daily improvement. Our challenge is to translate 3P challenges into tangible problems to solve, to connect sustainable strategy with what we choose to improve on the ground (figure 4).
Figure 4: Connecting sustainable strategies, accounting and initiatives
Accounting for sustainability prompts us to put a number to how well we perform in each of the 3 Ps. Granted, this may vary from company to company, but it leads us towards meaningful change. We get what we value; we account for it through metrics; we drive learning, outcomes, and results.
To discover and unravel your most pressing problems, consider how you might improve accounting for sustainability and install real-time probes where possible:
Across the value chain
- The environmental impact at each stage, from extraction or purchase to disposal of materials. The impact of these on the global vital signs.
- The material yield, or how well output is generated from the input material.
- The measurement and improvement in the 7 green wastes (an adaption from Taiichi Ohno’s seven wastes, including energy, water, materials, garbage, transport, emissions and biodiversity waste).
For your people
- A physically safe (accident-free) environment for employees to work in.
- A psychologically safe (fearless organization) environment for employees to flourish and solve problems in.
- The creation of equal opportunities through recruitment, retention, and promotion.
- Diverse representation and inclusivity in the teams solving the problems.
- Performance in job retention and job creation.
- Investment in training and education to develop strong, capable teams.
As a lens on finance and investments
- Measuring and reporting on environmental costs using impact-weighted line items, illustrating positive and negative impact on stakeholders.
- The generation of new revenues through sustainable practices.
- Impact investing and capital investment in projects that meet return on investment as well as impact on sustainability performance.
In our experience companies find it hard to translate targets and measures into hands-on initiatives. We often end up referring to the Sustainable Development Goals or, if you are a lean aficionado, the Toyota Environmental Challenge 2050. It’s worth checking out some of the cases that Toyota presented as examples of work they are doing. But what about outside of Toyota?
In Norway, there are companies moving from intent to action in meaningful ways. A small furniture maker on the south-west coast of Norway established a circular hub where local school children and students are taught how to re-design and sell products made from old and discarded furniture. Addressing both the challenge of quality education as well as responsible production. Another company, on the west coast of the country, has been challenged to halve its climate impact by 2030, but has also decided to develop products that have a net positive impact on the environment. Finally, a large manufacturing company in Stavanger is building on its capabilities to involve the whole organization in continuous improvement of sustainability as part of their Hoshin Kanri process. These examples are encouraging and measurable.
MOVE BEYOND TRADITIONAL MODELS
Business models drive where we place focus and how success is accounted for. Following the Industrial Revolution, the “take-make-waste” business model became the norm bringing with it a general disregard for the pressure we place on the environment and the natural capital and how it’s measured. There is a premium to converting to responsible practices and offerings, but many have continued on a wasteful trajectory because it is cheaper to do so and perhaps in the past no-one was really paying attention.
From the time we extract resources out of the ground and put them back to rest in their processed, used form, we have a responsibility to do better. To waste less, produce efficiently and consume responsibly. To target every stage of the value chain and reduce the drain on natural resources. Lean makes us think about respect for humanity, which ultimately hinges on respect for the planet. Our business models need to reflect this.
It’s time to judge ourselves more harshly when it comes to how well we integrate prosperity into our Lean Thinking. It takes courage to critically evaluate the current business model, how true performance is disclosed, and what tough questions to ask. Resist the urge to do more of the same. Challenge the leadership team to rethink how success is measured. Develop a model to account for prosperity, not just profit.
Rose Heathcote is a learner, writer and teacher dedicated to solving problems that matter.
Eivind Reke is a lean author and Chairman of Los Norge.