from Suzanne Lunday
Interface, Inc. Case Analysis
Interface CEO, Ray Anderson, was deeply moved by Paul Hawken’s landmark novel The Ecology of Commerce; so much so that he moved from a compliance attitude to one of transformation and leadership in environmental sustainability. Anderson understood that sustainability was not only the right thing to do for the environment, but that by instilling and reinforcing sustainable business practices throughout the key activities of the value chain, Interface could gain deep layers of competitive advantage that would be difficult to replicate.
The social-environmental mission of Interface included a 7-point plan to instill sustainability throughout all key activities. Central to the zero-waste mission was to create manufacturing processes that could “close the loop”. Deloitte’s report on sustainable consumption outlined closed loop value chain systems (systems in which created waste are put back into production, therefore creating a zero waste production process) as central to achieving sustainability. This value chain system is meant to mirror the ecological processes found in nature. Improved manufacturing processes not only had a large environmental impact, it also saved Interface $67 million in costs in the first three-and-half year period.
Central to this structural change, was a move away from linear thinking to that of holistic systems planning. Interface identified ways to reduce the amount of carpeting entering landfills, reduced nylon content by 25%, and stream lined transportation systems. Essential to this holistic planning was to change consumer sentiment from value being delivered by the good itself to that of the value being delivered by the service. This shift in business model from focus on sale of the good to a focus on solutions via sale of a service is echoed in the HBR article, A Roadmap for Natural Capitalism. In theory, the sale of a service model promotes resource productivity and closed loop production. This thesis underpinned Anderson’s strategic thinking as he shaped and introduced the Evergreen Service Agreement (ESA) model. ESA did not sell carpets, but sold “long-term floor covering services”. ESA promised to deliver value to the client via regular maintenance, replacement of worn out sections (typically 20% of the carpet in heavily trafficked areas), and removal at the end of the lease. Clients were able to use operating budgets instead of capital budgets to obtain the ESA service which had a positive impact on key balance sheet ratios such as ROA. By structuring the service as a lease, Interface was able to recoup the original carpet at the end of the lease term and introduce it back into the production cycle. This material reduction helped to reduce costs and environmental impact.
The central managerial issue facing Interface was its inability to close on ESA deals. Management had a difficult time clearly expressing the value of an ESA lease and explaining the complex financing. I believe it was a misstep by Interface to fail to introduce additional ESA-specific incentives to the sales team. The sales people were not properly incentivized or trained to sell this complex lease agreement. Many potential consumers were compelled to purchase the green product once they heard a rousing speech by Anderson. However, once lease structure details were teased out, many consumers were left confused and resorted back to “what they understood” – outright purchase of a carpet system. Additionally, once customers understood the full cost of carpet ownership highlighted through the lease contract (which previously was not well understood) they perceived the cost of the ESA system to be much higher than outright ownership. In the 2008 article Cultivating the Green Consumer by Bonini and Oppenheim, the authors point out that consumers perceive green products to be of lower quality and more expensive, thus impeding the adoption of the green product. Imperative to selling the value proposition of the green product (or green service) is clearly demonstrating the financial and environmental benefit to the end user. Interface failed to effectively deliver its unique selling proposition and green benefits of the ESA system to its potential clients. The firm also failed to properly structure the costs of the leasing structure. The lack of additional selling incentives coupled with the complex language and financing needed for the leasing structure greatly impeded ESA’s success.
It is interesting to note that some may view the ESA structure and Interface’s pledge to be a zero waste company as significant constraint. I wholeheartedly disagree with this view point. Design constraints (product, managerial, strategic, etc.) help to sharpen a manager’s focus on how to deliver value to its customers. This laser like focus also helps managers make clear trade-offs on how they will and will not compete. Frank Gehry once famously turned down an offer to build any structure of his choosing with an unlimited budget because he felt that he could not design without constraints. To Gehry, constraints were opportunities. Thus, the legitimate infusion of Interface’s sustainability pledge throughout its organization helped to create new business models and key activities with potency because of its sustainability constraints.
Interface started with an internal transformation of its structure and manufacturing process to realize the holistic goal of sustainability. In order to realize its dream of sustainability through green service, it will need to educate the consumer and sell a better product. As noted in Cultivating the Green Consumer, “87% of consumers are concerned about the environment and social impacts of the products they buy”. However, these consumers need businesses to lead the way in compelling them to act and change their behaviors.
Bonini, S., & Oppenheim, J. (2008). Cultivating the Green Consumer. Stanford Social Innovation Review, 56- 61.
Lovins, A. B., Lovins, H. L., & Hawken, P. (2007). A Road Map for Natural Capitalism. Harvard Business Review, 172-183.
Oliva, R., & Quinn, J. (2003). Interface’s Evergreen Services Agreement. 2003: Harvard Business School.