Four Strategies for Responding to
Sustainability-Oriented Competitors
Sustainability-focused startups are
entering established companies’ market space, bringing both new threats and new
opportunities.
Employees want to work for them, customers
are willing to pay more for their products and investors are eager to become
shareholders. “Hybrid social ventures” like Whole Foods, Patagonia, and Honest
Tea that combine commerce with sustainability missions are leading the movement
for sustainability-oriented innovation in business.
For established companies that were
not necessarily built with sustainability in mind, these new entrants are
competing for their most attractive customers and talent. Customers that prefer
sustainability-oriented products and services tend to be young and relatively
wealthy. Talented employees who have a choice of where to work, particularly
millennials, increasingly want to use their skills at companies that they
perceive to be doing good in the world. A continued generational shift toward
sustainability-oriented values threatens to shift the balance even further in
favour of companies that have sustainability baked into their DNA.
Although these hybrid social
ventures are still relatively small in many industries, forward-thinking
executives have begun to take notice and create plans for responding to them.
The competitive dynamics of
responding to hybrid social ventures differ from responding to a traditional
entrant. Paradoxically, hybrid social ventures have an incentive to help
established companies move toward more sustainable strategies. First, they
benefit from the network effect of a larger business ecosystem of
sustainability-oriented customers and suppliers that the involvement of a
large, established company can help to create. Clothing company Patagonia, for
example, facing short supply of organic cotton, shared information on its
supply chain with Marks & Spencer and Nike, and joined forces with these
companies through the Sustainable Apparel Coalition to create a stronger market
for responsibly-grown cotton. Second, influencing established companies offers
a large-scale channel to achieve their sustainability missions.
Established companies must thus
balance impulses to compete with cooperation. To treat them like any other
competitor would potentially miss an opportunity to capture some of the value
of sustainability-oriented business.
How to respond?
So how can they respond to these
rapidly growing upstarts and how might they benefit from their motivation to
collaborate?
In
a recently-published paper, Strategic
Responses to Hybrid Social Ventures (co-authored with Jason Jay of MIT Sloan),
we sought to answer these questions. We started by analysing eight established
consumer-facing companies and how they responded to social ventures arriving on
the scene. We then categorised these responses in terms of how they fit within
the established companies’ overall strategies.
The acquisition approach
The first response method we studied
was the “integrated response” that sought to collaborate with the hybrid social
venture in order to create sustainability-oriented value with its own customers
and employees. In these examples, the established company acquired the hybrid
social venture and integrated its offerings and practices into its core
businesses.
For example, Danone’s acquisition of
Stonyfield Farm was followed by long-term efforts to integrate
sustainability-oriented offerings and practices of the hybrid social venture
into the company’s business. In 1998, Danone became one of the first companies
to begin issuing annual reports combining economic and social performance and
in 2001 acquired a majority stake in Stonyfield. Post-acquisition, Stonyfield’s
CEO gave Danone managers open access to study its climate action process. This
informed Danone’s move to measure its environmental footprint across product
lines and business units.
In addition, Danone, Stonyfield and
Cargill jointly invested in R&D for Polylactic Acid (PLA), to be used as an
alternative to petroleum-based plastics in yogurt packaging and used
Stonyfield’s brand as the test market. By 2014, Danone began incorporating PLA
into its own packaging. Danone then built on this by creating a new organic
yogurt brand and went on to acquire a majority interest in an Irish organic
dairy. By experimenting and knowledge sharing in its acquisition, Danone was
able to more readily appeal to both customers and employees that value
sustainability.
The customer-centric response
In the second category sits many
established companies that have a niche of customers who might be willing to
pay more for sustainable offerings, but their general position might be
threatened by launching a company-wide sustainability strategy. This might be
because their core businesses are highly price sensitive or sustainable values
might cause internal disruption.
Coca Cola, for example, bought
Honest Tea in 2011 as the company saw it “sitting at the intersection of…social
responsibility, health and wellness and environmental consciousness”. The move
gave Coke a short-term solution to satisfy its sustainability-oriented
customers, while also providing a foothold for future expansion of its
sustainability-oriented offerings through the Honest brand. For now, Honest Tea
allows Coke to respond to growing customer demand for sustainable offerings
while managing the brand at arm’s-length as part of its portfolio.
The employee-centred response
Some companies are caught between a
strong employee desire to be more sustainable and a customer base unwilling to
pay for more sustainable offerings. Panera Bread, a fast-casual restaurant
chain with more than 1,700 outlets in 44 U.S. states and Canada, was one such
case. The company had long operated philanthropy programmes such as in-kind
donations of Panera products, but a coalition of Panera franchisees, along with
the company’s founder and CEO Ron Shaich, wanted to develop a programme that
did a better job of expressing its philanthropic goals and identity.
It consulted New Jersey-based Better
World Café, a hybrid social venture operating a pay-as-you-can model that
subsidises meals for the poor. Building on this model, Shaich and these key
franchisees led the launch of Panera Cares, a pay-as-you-can concept featuring
the Panera brand and product. Panera went on to open in five Panera Cares
locations across the U.S. The programme has also received an unexpectedly high
level of positive media attention.
Defence
Finally, companies can choose not to
pursue sustainability-oriented innovations to protect their core businesses.
Companies responding in this way, which often occupy low-cost positions, will
typically continue to keep a close eye on hybrid social ventures, with
responses typically focused on protecting the core business. ConAgra, for
example, owner of several popular food brands including Orville Redenbacher and
Peter Pan, was called out by sustainability activists for its perceived failure to address sustainability issues. While
sustainability-oriented products are succeeding in ConAgra’s product
categories, they are inconsistent with ConAgra’s low-cost position, which
depends heavily on low prices and bulk retail channels. In addition,
perceptions of ConAgra as non-environmentally
conscious were so great that any move into the area might have come across as
“green washing”.
In the long-run, however, the choice
to defend the core business without making moves toward sustainability may
prove untenable. McDonald’s had long adopted a “wait-and-see” approach on
sustainable meat. But in recent years, under pressure from consumers and
competitors like Chipotle who loudly promote their sustainability efforts
(McDonald’s, ironically, once held a majority stake in Chipotle), McDonald’s
has committed to begin sourcing beef from sustainable providers.
How deeply the sustainability
movement affects other low-cost players, whose customers and employees tend to
be very price-sensitive, remains to be seen.
Choosing the right approach
The sustainability movement is still
unfolding, and companies must make decisions with limited information and
adjust strategy over time. Managers can begin to consider their options for
responding to hybrid social ventures in two ways. First, evaluate the
sustainability orientation of your customers and employees. Do your employees
express interest in sustainability in their outside activities? Are your
customers willing to pay more? Are there trends in this direction, and if so,
how quickly or slowly are they moving?
The second step is to gauge the
willingness of hybrid social ventures to enter into a partnership. In
conversations with potential partners, remember that the hybrid social venture
benefits are related to leveraging your resources and scale. Some might be
sceptical about losing their identity if an acquisition or other loss of
control is on the table. Overcoming this scepticism is a key step in realising
the potential value of such a partnership.
Hybrid social ventures and
established corporations are often seen as operating in two separate worlds.
But as the sustainability movement matures, they will find themselves in the
same markets more and more – as competitors, but also as potential allies in a
societal-level shift toward a more sustainable form of capitalism.
Matthew Lee is an Assistant Professor of Strategy at INSEAD.
Read more with exhibits at http://knowledge.insead.edu/responsibility/four-strategies-for-responding-to-sustainability-oriented-competitors-4098#6YMBQeWD1okxw8oD.99
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