Category Archives: Sustainability

Interface’s ESA Initiative

Brian McCabe writes…

 

Organizations face a number of challenges when attempting to communicate the value of their products to customers.  For those with social missions, this task only becomes exponentially more complex.  At Interface, the world’s leading producer of carpet tile, this realization manifested itself when the organization pursued the strategy of licensing products as services under the initiative known as The Evergreen Services Agreement (ESA).  The new business model that ESA proposed would help to fulfill Interface’s social mission by creating a closed loop product lifecycle that transformed the business from a flooring product supplier to a floor covering services provider.

The new model involved leasing out the flooring solutions that Interface manufactured and then eventually reclaiming carpet tiles as raw material inputs for new products.  In doing so, the model provides for a cyclical life cycle that eliminates waste, and fulfills one of the seven goals the organization laid out in its plan for sustainability.  While the business plan was set and the organization primed to roll out the initiative, the challenge was to gain acceptance in the marketplace and make customers realize the value of sustainable business.  In order to better understand these challenges, it is important to consider the potential barriers that the organization faced in gaining widespread support for the service.  To do this, let’s consider four of the five barriers discussed in Bonini & Oppenheim’s article, Cultivating the Green Consumer(Bonini & Oppenheim, 2008).

 

Lack of Awareness

One of the largest hurdles for green organizations is their ability to make their product offerings well known among customers and the general public.  Despite a growing demand for green products among consumers, as Bonini & Oppenheim point out, fully two-thirds of American and British consumers cannot name a green brand.  Much of this is due not to the ignorance of the consumer, but rather to the failure of businesses to educate the market.  Easier said than done, this requires leading organizations to step up and set the example for the industry in which they operate.  Nowhere is this behavior more prevalent than in the bold global action taken by Walmart in 2005.

As the largest retailer in the world, Walmart is uniquely positioned to make sustainability a shared value with its customers and a key priority for its suppliers and manufacturers.  Trying to recover from a lingering poor image related to unfair labor practices and discriminatory pay among other issues, Walmart needed a brand-bolstering campaign that would help transform the business while also creating value for the organization.  With some key guidance from environmental consultant Jib Ellison, then CEO of Walmart Lee Scott undertook a massive campaign to position the company as a leader of global social responsibility in the 21st century.

This move was critical not only for Walmart to recreate its corporate image in the eyes of customers, but also in creating a major breakthrough toward greater awareness of sustainable products and practices.  Walmart began by reengineering product packaging to eliminate wasteful use of excess cardboard and plastic.  Their fleet of tractors was modified to reduce engine idle and fresh foods were beginning to be sourced locally to ensure quality and reduce transportation costs.  These breakthroughs, on behalf of the world’s largest retailer, are paramount to advancing the adoption of consumer sustainability practices.  The global reach of Walmart’s stores facilitates both the education and fulfillment of consumer demands for creating positive change in the environment.

Much like Walmart, Interface is strategically positioned as the leader in its industry to help raise awareness and facilitate the adoption of sustainable business.  The success of ESA will be largely dependent on creating a ‘big picture’ understanding of what it is their services will offer.  Intermec seems heavily focused on selling the financial benefits of a floor covering services contract rather than the environmental benefits that reclaiming used carpet tile would provide.  As a result, potential customers perceive the service as more of a premium based product than one that promises environmental impact reduction as well as a cost savings opportunity.  Much like the EnergyStar program did for appliances, a simplified framework to help illustrate the benefits to consumers would serve as a valuable tool in promoting the success of ESA.  This approach to raising awareness is ultimately what will help ESA and services like it in other industries get off the ground.

 

Negative Perceptions

One common perception surrounding green products is that they underperform their traditional predecessors.  Consumers become uninterested when they learn that they will experience a loss in utility by switching to the newer, greener product.  In the case of ESA, the fundamental product remains exactly the same, however the means by which the value is delivered is completely different.  Normally this would not be an immediate deterrent, however for ESA there are a number of unnecessary, complex layers being added to the service that confuse consumers and generate a negative perception of the service.

Interface seems have exceeded customer’s needs by bundling services into ESA that clouded the perception of the real underlying value.  For example, the cost of the lease included both periodic tile replacement and regular vacuuming.  Was vacuuming really required within the scope of what Interface was offering?  Probably not, and the choice to bundle that service simply added cost into the pricing equation and effectively devalued perception of the service since customers are not considering vacuuming costs when valuing carpeting options.  Instead, Interface should structure the service to compete directly with the features of the existing product, adding in only those features (such as worn tile replacement) that provide additional value over alternatives.

 

Higher Prices

In some cases, higher prices are inevitable for green products.  While this isn’t always the case, organizations looking to promote these products must ensure that customers understand the value they are receiving.  ESA provides customers with the same carpet tile solutions that they could purchase traditionally, however carries the added benefits of a long-term maintenance service that will selectively replace worn tiles to keep the floor covering always looking brand new.  While this added service relative to the traditional purchasing model would undoubtedly add cost, the value far exceeds the alternative when considering the price to prematurely replace an entire floor covering or outsource the repair work to independent contractors.

To help customers understand these benefits and to promote a more rapid adoption of ESA, Interface needs to reevaluate the organization’s sales incentive structure.  At the time of case, the existing sales force within Interface has no incentive to promote sales of the ESA ahead of any other traditional product, and in fact feels the service is too difficult to sell.  To leverage these sales resources and to help customers see the value in the ESA, there must be adequate training resources dedicated to building knowledge among the sales force and sales incentives  developed that translate that knowledge into sales momentum.

 

Low Availability

The final barrier impeding Interface’s ability to gain traction in the market for ESA is failing to make the service widely available.  Although Interface pitched the service to a variety of organizations, it set a minimum threshold for its floor covering services to businesses with orders of at least 5,000 square yards.  While there may be financial implications to taking orders below this threshold, it creates undue restrictions on the ability for smaller, but perhaps more engaged businesses to purchase the service.  After all, there are only so many organizations interested in purchasing new floor coverings for facilities larger than the size of a football field, and those that do exist are likely unwilling to try a relatively untested business model.

To make the service attractive and widely visible, ESA should be available to any client interested in Interface’s traditional products.  Along with the increased knowledge and incentives within the sales force, ESA would quickly be viewed as a viable option for many businesses interested in reducing capital expenditures, increase cash flow, and provide quality floor coverings all while contributing toward their own social responsibility.

 

For organizations trying to push their socially responsible products and services into the mainstream, one of the key issues to attack is the existence of several common barriers preventing widespread adoption of green practices.  For Interface, the four most prevalent barriers are a lack of product awareness, negative perceptions about the products, a fear of higher prices, and low product availability.  As Bonini & Oppenheim state in their article, “Consumers want to act green, but they expect businesses to lead the way.”  Just as Walmart had started to do in the retail sector, Interface must use its position as the industry’s sustainability leader to promote adoption throughout the entire industry and breakdown the barriers to a sustainable future.

 

 

 

 

 

 

 

 

 

 

 

 

 

Works Cited

Bonini, S., & Oppenheim, J. (2008). Cultivating the Green Consumer. Stanford Social Innovation Review .

Schell, O. (2012). How Walmart is Changing China. The Atlantic .

Oliva, Rogelio & Quinn, James, 2003.  Interface’s Evergreen Services Agreement.  HBS Case 9-603-112

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Sustainable Business Models ESA

Hunter Maloumian November 6, 2012 at 12:49 PM 

Corporations in the past two decades have begun to take on a new identity. Corporations have realized the competitive advantage they gain by implementing sustainable business models into their everyday practice. These sustainable business models are a reflection of the change in attitudes of the consumers they serve. As the world’s population becomes more environmentally aware, corporations stand to profit by catering to this segment. These corporations will not only be in a position to have a significant impact on the earth but will also be able to increase their own bottom line.

According to Wendy Stubs “organizations will only be sustainable if the dominant neoclassical model of the firm is transformed, rather than supplemented, by social and environmental priorities” (1) Organizations need to embrace a sustainable business model and it needs to be implemented from the top down in order for it to penetrate the company’s culture.  In order to achieve a sustainable business model these organizations needs to systematically address their shortcomings in addition to influence key stakeholders to join them in their efforts. Wal-Mart has been influencing their stakeholders to join them in their efforts to categorize the environmental impact of their products. Wal-Mart issued a statement to its suppliers asking them to fill out a questionnaire detailing how their products are made and what sustainable actions they take.

Sustainable Business Models can only be successful if consumers “buy into it”.  According to a Deloitte study, sustainable consumption in developed countries still remained a niche with most consumer behavior still being dictated by price, quality, and convenience. (2) In order to achieve a sustainable business model it is therefore necessary to overcome these consumer tendencies. It is important that the products being offered not only have a positive transparent impact on the environment but also have the same quality, features, and price point of their “browner” counterparts.

Ray Anderson the Company Chairman of Interface Evergreen implemented seven goals that would eventually yield the company a sustainable business model. The efforts implemented by Ray Anderson had a tremendous positive effect on the organizations triple bottom line. Traditionally, Interface sold carpets to its consumers that consisted of nylon, PVC, and an adhesive. When the useful life of these carpets was exhausted they would be sent to a landfall where they would remain for approximately 20,000 years. According to the HBR case study, the carpet industry contributed 4.6 billion pounds to landfills annually. (3) In order to tackle the problem of excess waste in the carpet industry, Interface establish a program called QUEST whose goal was to transform Interface into a zero waste company. Waste was defined as any measurable output that did not create customer value. Interfaces sustainable business model was taken a step further by upgrading the different factories across the world to utilize renewable energy sources. By focusing on renewable energy such as solar power, Interface severed their ties to the whims of oil bearing nations and would be able to better focus on strengthening their own company moving forward.

Anderson wanted to introduce a revolutionary way of providing “floor” coverings for his customers in a way that would protect the environment while simultaneously adding to both Interfaces and the customer’s bottom line.  The idea proposed by Anderson was that companies would lease the carpet from Interface instead of purchasing it. At the end of the leasing term which was designated at seven years Interface would reclaim the carpet. This carpet would then be recycled and become an input for future carpet installations, effectively “closing the loop”. The company leasing the carpet would benefit because the capital necessary for the lease would not affect the balance sheet because it would be an operating expense instead of a capital expenditure.  In addition, Interface would be responsible for the maintenance of the carpet and after the second year they would replace 5% of the carpet on an annual basis. Due to the innovative carpet tiles the damaged sections of the carpet could be easily replaced at a minimal cost. By only replacing the damaged section, Interface would be able to significantly reduce its impact on the environment because they now only needed to produce a fraction of what they use to. From this perspective, Anderson has created a sustainable business model because it has a positive impact on the triple bottom line. Through the leasing program, Interface will receive monthly payments that will result in additional cash flow as well as limiting the amount of new carpet in landfills. The final step of the leasing process, reclamation, allows Interface to personally ensure that the carpet is being disposed of in the most environmentally friendly manner and if able to it will be reused as an input further cutting costs.

The model that Anderson had developed is sustainable but the complexities of leasing versus buying are confusing the customers. The result has been that customers are interested in leasing carpet from Interface but often end up deciding to purchase the carpet out right due to these complexities. The leasing model was introduced in 1995 and as of 2001 only a half dozen clients chose the option to lease over purchase. From this data it can be concluded that the leasing model needs to be revamped in order to better satisfy the needs of the customers.  The carpet leasing program proposed by Interface is revolutionary as far as creating a sustainable business model but it is something that our society may not yet be ready for.

1. http://oae.sagepub.com/content/21/2/103.abstract 2. Deloitte: A Road Map for Sustainable Consumption (2010) 3. HBR. Interfaces Evergreen Service Agreement (2003) 4. Cultivating the Green Consumer. Bonini and Oppenheim. (2008)

Case Analysis of Interface Inc.

Lidan Li

11/06/2012

Interface Inc. made their sustainability commitment in 1994, applied ESA model and created a seven-point plan to fulfill their commitment of being a sustainable enterprise. The company’s progress toward becoming a sustainable corporation is due to some key aspects, including successful leadership, innovation, employee training, outside input, financial scrutiny. Their experience shows how an innovative and incentive program could influence consumers’ changing behavior of sustainable consumption. Though a long way from their goals, they have made some achievements through this ESA model and seven-point plan.

Interface aims to be the first company that, by its deeds, shows the entire industrial world what sustainability is in all its dimensions – people, process, product, place and profits – by 2020. Interface’s vision and mission statements refer to cherishing nature, restoring the environment, maximizing all stakeholders’ satisfaction and making the world a better place. This perspective aligns with Dee’s definition of social entrepreneur which the social mission looks for long-term social return and investment. Ray Anderson, the CEO of Interface is an entrepreneur full of social responsibility, innovation, and persistence. He kept on pursuing opportunities and continuous innovation of fulfilling his commitment and realizing his goal of changing Interface into fully sustainable with zero negative impact enterprise. His innovation and faith led Interface’s growth.

To generate a consumer behavior of sustainable consumption, Interface faces five barrier – lack of awareness, negative perceptions, distrust, high prices, and low availability. (Bonini & Oppenheim, 2008) While dedicated to break down these obstacles, Interface has made quite a few achievements in cultivating sustainable consumption.

In order to break down the barrier of consumers’ lack of awareness, Interface has its goal called “sensitivity hookup”, which is educating all stakeholders and competitors to raise their awareness of environmental sustainability. To most effectively communicate with consumers, Interface build dialogues with both internal and external stakeholders. Mr. Anderson dedicated his effort to his promotion of his vision of sustainability through his inspiring speeches, which arouse a broad attention from the public. Interface also tied its strategic commitment to sustainability to the employee incentive plan to embed sustainability in facility operations. As engaging employees and their families on sustainability helps drive change within business and direct impact on society, educating employees not only influences other consumers, but also generates insights about translating abstract sustainable strategies into concrete employee action and innovation. Interface developed a set of dialogue processes with different stakeholder groups. However, their influence was still relatively limited. In my opinion, what they could do first is to more engaged the whole industry in this education program. When the carpet industry — many carpet companies are involved in this sustainable movement, broader range of consumers would be influenced, the awareness of sustainable consumption would grow much faster. Furthermore, searching for support from government policy could also help increase consumers’ awareness.

To dismiss consumers’ negative perception of environment-friendly products, Interface began to build better products. As Interface was originally made of  high-quality material, after it is transforming its linear take-make-waste industrial model to a circular closed loop system, that is all waste material is designed to be a valuable input into other processes. The fourth goal of their seven-point plan is “closing the loop”, which intended to use cyclical material from used carpet. In 1995, Interface has diverted over 1 billion pounds of material from landfill. The GUEST Program also began in 1995, which aimed at driving waste reduction efforts inside the company. It is an employee-led system fulfills the goal of elimination of waste, limiting toxic emissions and measurement of the achievements. This program is an enlightened transformation of company’s culture that lead their future progress. Their goal of providing better products and services to customers and making customers have a faith in their products would be more effective if government were to institute enabling policies and regulations at true cost and measure sustainable progress. (Hutter, 2010)

To build public trust, Interface is committed and consistent to being transparent about their progress toward Mission Zero. To achieve consistency, Interface positioned sustainability at the heart of business and build it into long-term vision rather than instant profit. Transparency is a way they inform the public their true environmental impact and achievement on sustainability, also a way they build brand trust and share their knowledge and experience. They periodically published data reveal their progress on turning sustainability: using renewable energy sources, water consumption, and raw material. Their cumulative savings from global waste elimination activities raised from $10 million in 1995, to $185 million in 2001. EPDs are leading-edge methodology for both consumers and companies make life cycle assessment which details the resource use and environmental impacts of products. In 2011, Interface developed EPDs for more than 90% of its products globally. This method is simple and easy to be understood, which will be more acceptable by the consumers. Inside the company, to encourage all facilities to track and compile date in a similar format, Interface created a format for reporting and monitoring. By administering employee-environmental-awareness survey, Interface monitored and revealed the effectiveness of its training efforts. By transparency, they hope to achieve the bigger goal they have set for themselves: to become a restorative company by the power of their influence. Interface opened their innovation to the public, attempted to be a catalyst for change rather than only be a green company.

Facing the barrier of high price of their high-end carpet, Interface changed their concept from product-based to service-based to satisfy customer’s demand and expectations. Interface introduced Evergreen Lease model in 1995, whereby a floor-covering service is provided for a monthly fee. This innovative business model not only consistent with their mission of sustainability, but also attempt to shift consumers’ concept of purchase. However, to date, limited success has been achieved with this service. One of the reasons may be most customers do not value the new concept. It requires a change of value that consumers value sustainability enough to purchase a leasing service rather than a product. Though Interface tried hard to educate and communicate their visions with the stakeholders, changing the concept and behavior to make decisions based on environmental aspects more than financial imperatives still needs a long-term effort and a broader influence.

Interface is gradually reaching their goals, but also facing several problems to solve: The lack of acceptance of its leasing product by customers; the existing regulations governing commerce; the preoccupation criteria of valuing financial performance more than social and environmental impacts; the current infrastructure subsidises unsustainable industrial processes. As Interface has already stepped in the right direction of cultivating green consumption and built a reputation of eco-friendly enterprise, it has the potential to attract more loyalty from customers as long as Interface removes the obstacles between consumers’ desire to buy green and the action of buying green.

References

  1. Lawrence Hutter, Peter Capozucca, & Sarita Nayyar, A Roadmap for Sustainable Consumption, Deloitte Review, 2010.
  2. Sheila Bonini & Jeremy Oppenheim, Cultivating the Green Consumer, 2008.
  3. Rogelio Oliva & James Quinn, Interface’s EvergeenTM Services Agreement, 2003.
  4. Jennifer Dubose, Sustainability and Performance at Inteface, Inc., 2000.
  5. “Five Questions Businesses Must Answer to Advance Toward Sustainability According to Interface, Inc.” Internet Wire 2 Aug. 2012.
  6. Interface case study http://www.pp4sd.org.uk/downloads/pdf/2Case%20Study%20Interface.pdf

http://www.interfaceglobal.com/Sustainability/Our-Progress/Waste.aspx

Interface’s ESA Initiative

Brian McCabe

Organizations face a number of challenges when attempting to communicate the value of their products to customers.  For those with social missions, this task only becomes exponentially more complex.  At Interface, the world’s leading producer of carpet tile, this realization manifested itself when the organization pursued the strategy of licensing products as services under the initiative known as The Evergreen Services Agreement (ESA).  The new business model that ESA proposed would help to fulfill Interface’s social mission by creating a closed loop product lifecycle that transformed the business from a flooring product supplier to a floor covering services provider.

The new model involved leasing out the flooring solutions that Interface manufactured and then eventually reclaiming carpet tiles as raw material inputs for new products.  In doing so, the model provides for a cyclical life cycle that eliminates waste, and fulfills one of the seven goals the organization laid out in its plan for sustainability.  While the business plan was set and the organization primed to roll out the initiative, the challenge was to gain acceptance in the marketplace and make customers realize the value of sustainable business.  In order to better understand these challenges, it is important to consider the potential barriers that the organization faced in gaining widespread support for the service.  To do this, let’s consider four of the five barriers discussed in Bonini & Oppenheim’s article, Cultivating the Green Consumer(Bonini & Oppenheim, 2008).

Lack of Awareness

One of the largest hurdles for green organizations is their ability to make their product offerings well known among customers and the general public.  Despite a growing demand for green products among consumers, as Bonini & Oppenheim point out, fully two-thirds of American and British consumers cannot name a green brand.  Much of this is due not to the ignorance of the consumer, but rather to the failure of businesses to educate the market.  Easier said than done, this requires leading organizations to step up and set the example for the industry in which they operate.  Nowhere is this behavior more prevalent than in the bold global action taken by Walmart in 2005.

As the largest retailer in the world, Walmart is uniquely positioned to make sustainability a shared value with its customers and a key priority for its suppliers and manufacturers.  Trying to recover from a lingering poor image related to unfair labor practices and discriminatory pay among other issues, Walmart needed a brand-bolstering campaign that would help transform the business while also creating value for the organization.  With some key guidance from environmental consultant Jib Ellison, then CEO of Walmart Lee Scott undertook a massive campaign to position the company as a leader of global social responsibility in the 21st century.

This move was critical not only for Walmart to recreate its corporate image in the eyes of customers, but also in creating a major breakthrough toward greater awareness of sustainable products and practices.  Walmart began by reengineering product packaging to eliminate wasteful use of excess cardboard and plastic.  Their fleet of tractors was modified to reduce engine idle and fresh foods were beginning to be sourced locally to ensure quality and reduce transportation costs.  These breakthroughs, on behalf of the world’s largest retailer, are paramount to advancing the adoption of consumer sustainability practices.  The global reach of Walmart’s stores facilitates both the education and fulfillment of consumer demands for creating positive change in the environment.

Much like Walmart, Interface is strategically positioned as the leader in its industry to help raise awareness and facilitate the adoption of sustainable business.  The success of ESA will be largely dependent on creating a ‘big picture’ understanding of what it is their services will offer.  Intermec seems heavily focused on selling the financial benefits of a floor covering services contract rather than the environmental benefits that reclaiming used carpet tile would provide.  As a result, potential customers perceive the service as more of a premium based product than one that promises environmental impact reduction as well as a cost savings opportunity.  Much like the EnergyStar program did for appliances, a simplified framework to help illustrate the benefits to consumers would serve as a valuable tool in promoting the success of ESA.  This approach to raising awareness is ultimately what will help ESA and services like it in other industries get off the ground.

Negative Perceptions

One common perception surrounding green products is that they underperform their traditional predecessors.  Consumers become uninterested when they learn that they will experience a loss in utility by switching to the newer, greener product.  In the case of ESA, the fundamental product remains exactly the same, however the means by which the value is delivered is completely different.  Normally this would not be an immediate deterrent, however for ESA there are a number of unnecessary, complex layers being added to the service that confuse consumers and generate a negative perception of the service.

Interface seems have exceeded customer’s needs by bundling services into ESA that clouded the perception of the real underlying value.  For example, the cost of the lease included both periodic tile replacement and regular vacuuming.  Was vacuuming really required within the scope of what Interface was offering?  Probably not, and the choice to bundle that service simply added cost into the pricing equation and effectively devalued perception of the service since customers are not considering vacuuming costs when valuing carpeting options.  Instead, Interface should structure the service to compete directly with the features of the existing product, adding in only those features (such as worn tile replacement) that provide additional value over alternatives.

Higher Prices

In some cases, higher prices are inevitable for green products.  While this isn’t always the case, organizations looking to promote these products must ensure that customers understand the value they are receiving.  ESA provides customers with the same carpet tile solutions that they could purchase traditionally, however carries the added benefits of a long-term maintenance service that will selectively replace worn tiles to keep the floor covering always looking brand new.  While this added service relative to the traditional purchasing model would undoubtedly add cost, the value far exceeds the alternative when considering the price to prematurely replace an entire floor covering or outsource the repair work to independent contractors.

To help customers understand these benefits and to promote a more rapid adoption of ESA, Interface needs to reevaluate the organization’s sales incentive structure.  At the time of case, the existing sales force within Interface has no incentive to promote sales of the ESA ahead of any other traditional product, and in fact feels the service is too difficult to sell.  To leverage these sales resources and to help customers see the value in the ESA, there must be adequate training resources dedicated to building knowledge among the sales force and sales incentives  developed that translate that knowledge into sales momentum.

Low Availability

The final barrier impeding Interface’s ability to gain traction in the market for ESA is failing to make the service widely available.  Although Interface pitched the service to a variety of organizations, it set a minimum threshold for its floor covering services to businesses with orders of at least 5,000 square yards.  While there may be financial implications to taking orders below this threshold, it creates undue restrictions on the ability for smaller, but perhaps more engaged businesses to purchase the service.  After all, there are only so many organizations interested in purchasing new floor coverings for facilities larger than the size of a football field, and those that do exist are likely unwilling to try a relatively untested business model.

To make the service attractive and widely visible, ESA should be available to any client interested in Interface’s traditional products.  Along with the increased knowledge and incentives within the sales force, ESA would quickly be viewed as a viable option for many businesses interested in reducing capital expenditures, increase cash flow, and provide quality floor coverings all while contributing toward their own social responsibility.

For organizations trying to push their socially responsible products and services into the mainstream, one of the key issues to attack is the existence of several common barriers preventing widespread adoption of green practices.  For Interface, the four most prevalent barriers are a lack of product awareness, negative perceptions about the products, a fear of higher prices, and low product availability.  As Bonini & Oppenheim state in their article, “Consumers want to act green, but they expect businesses to lead the way.”  Just as Walmart had started to do in the retail sector, Interface must use its position as the industry’s sustainability leader to promote adoption throughout the entire industry and breakdown the barriers to a sustainable future.

Works Cited

Bonini, S., & Oppenheim, J. (2008). Cultivating the Green Consumer. Stanford Social Innovation Review .

Schell, O. (2012). How Walmart is Changing China. The Atlantic .

Oliva, Rogelio & Quinn, James, 2003.  Interface’s Evergreen Services Agreement.  HBS Case 9-603-112

Carbon Trust

from Scott Bork

Case Example: Carbon Trust

One after another, multination firms catch on to the profit proposition associated with driving sustainability initiatives within their overall “Going Green” strategies.  It is quite obvious that the shift can remedy a company’s poor public relations profile, but innovation is bringing real cost savings and in many cases bringing new products and services to market.  Large industrial and retail firms are hiring independent and reliable organizations to measure supply chains for carbon dioxide levels.  The value added is the branding of organizations commitment to reduce its carbon footprint.   In order for the carbon conscious movement to generate its greatest potential, independent organizations are relied upon to innovate in the sustainable services sector.

In the UK, the Carbon Trust Company is doing just that, “advising businesses, governments and the public sector on opportunities in the sustainable low carbon world.”[1]  They provide training, benchmarking, and verification services for carbon conscious firms.  Notable clients include GE, Coca Cola, Dyson, and Heinz.  Carbon Trust has a product labeling service that looks at emissions up and down the supply chain and specifies the carbon impact of a product or service.  Companies leverage the metric for period over period analysis.  In June 2008 the Carbon Trust Standard was launched to recognize organizations for real carbon reduction.[2]  Coupled with product labeling, the Carbon Trust Standard methodology is a first of its kind offering for universal standardized benchmarking.

While the standard is complementary to other initiatives, it separates itself by only rewarding organizations that achieve emissions reductions through their own actions.  In essence the standard is a stamp of approval held for a two year period, after which a reapplication for the award is required.  The Carbon Trust Logo lets firms communicate carbon credentials to regulators, distributors, customers and citizens for products delivered to market.  Because a company has to commit to lowering its footprint in order to use the label, it demonstrates their sustainable commitment.  As larger retailers demand products branded with the logo, suppliers are adapting to the request for fear of being blacklisted.

In that same sense, the credential helps firms leverage their comparable advantage in sustainable operations.  Firms undoubtedly reduce their reputational risk, but what’s more, they are building robust carbon management systems and promoting energy and carbon management cultures ahead of impending regulations.  In some cases the Carbon Trust Standard elevates employee pride, increasingly the likelihood that inefficiencies are identified by personal and targeted for carbon improvement.

Most of the services provided by Carbon Trust are deployed within UK boundaries, though recent reports do show strong and compelling evidence that the standard is catching fire.  Over 50% of UK retailers are now certified to the Carbon Trust Standard.  Bob Gordon from the British Retail Consortium, “This result demonstrates that the retail sector is taking the lead on reducing its carbon emissions.”[3] Selfridges, Harrods, and the John Lewis Partnerships are top end luxury retailers branding the standard.  Since managing their carbon emissions, the three retailers realized a cumulative cost savings of nearly £1 million[4].

 

References:

[1] http://www.carbontrust.com/home

2 http://www.carbontruststandard.com/pages/About-us

3 http://www.carbontruststandard.com/EntryView?id=a0QD000000555oDMAQ

4 http://www.carbontruststandard.com/EntryView?id=a0QD000000555oDMAQ

 

Interface Case Analysis

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.

Works Cited

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.

 

Motown and the Holy Grail of Sustainability

Just like me,you might feel the need to occasionally pop on some Motown while reading HBR or the Economist. No need to explain, I get it. Sometimes it’s just comforting to pretend that Smokey Robinson is your homie, gently guiding me through life’s quandaries as you simultaneously imagine trekking the slopes of your Peruvian co-op. It’s a passive form of support, but once in a blue moon, the spirit of James Brown delivers unto us insight. For me, that moment was last week while I was reading about our society’s growing trash problem and listening to Barry White. Specifically, while reading an article from the Economist which dealt with trying to change our pattern of consumption, Barry spoke to me.

What Barry said to me was this 

Want to, but I can’t help it
I love the way it feels,
It’s got me stuck between my fantasy and what is real
I need it when I want it, I want it when I don’t
Tell myself I’ll stop everyday, knowin’ that I won’t

I think what Barry was trying to remind me was that people are people. It’s in our nature to want the double cheeseburger instead of the single, to want the iPad 3 (the New iPad?) even though we just dropped $300 for the iPad 2 6 months ago, to throw that can of soda away instead of lugging the trash around for an hour until we can recycle it at home. We, being rational actors, go about our business every day seeking to maximize benefits and minimize costs.

Alright Barry, cool, but what does that have to do with sustainability? Well, the problem with being rational actors and striving for sustainability, is that people aren’t particularly good at calculating the true cost of our choices. These are the so-called negative externalities, costs incurred by a third party that aren’t taken into account during the transaction. Ex. the price of the new iPad doesn’t include the cost that is incurred when that iPad is land-filled and it’s batteries leach into the water-table. It is really hard to convince the human race to recycle more / consume less when such behavior doesn’t produce tangible benefits for the actors. As one author put it, “Although collective behavior can cause major damage, an individual’s behavior normally will have no visible environmental effects.”  That being said, although we can’t often see the effects of our “unsustainable” behavior, social pressure is still an important motivator. When this social pressure is weak or absent though, the rational actor doesn’t care much about sustainability for all the reasons that Sheila Bonini & Jeremy Oppenheim describe.

This brings us to the what TL and others would describe as the holy grail of not just sustainability, but social entrepreneurship generally. Instead of tackling the nearly impossible task of making people change, can we achieve our end goals by utilizing the habits and systems already in place in our society. This is what I interpret to be the meat of Lovins, Lovins, and Hawken’s HBR article.

Sounds easy enough, but for a lot of the problems we’re facing with regard to dwindling resources, technological barriers still exist and/or the problem hasn’t gotten big enough to sufficiently incentivize a solution (generally speaking). What I wanted to do is look and see what I could dig up as proof that profitable, sustainable, competitive businesses can be exist in an arena where people previously saw only waste.

The first thing that came to mind was the information business. If you look up the global market size of the information industry there is quite a bit of difference in opinion, but let’s say that its somewhere around .5 trillion dollars (probably a gross underestimate given that Google’s annual revenue alone was $37B in 2011). Impressive, given that we’ve been generating data for as long as we’ve been a species and yet until the digital revolution, there hasn’t been much thought given to harvesting it. For our purposes of course isn’t a great analogy because even though we might not have thought much of shoppers GPS coordinates before cell-phones, I doubt marketers ever saw it as waste and even then, data generation was never an unsustainable habit of ours.

Thinking a little smaller, a few examples were raised of upcycling businesses. These are businesses which take resources that others perceive as having either negative, zero, or negligible value and then transform them into something of greater value. Ex. the Oregon-based clothing company Looptworks which uses scrap clothing material as its consumable. Whether you’re making new duds or using old wood pallets for your hipster table, these ideas fit squarely into what Hawken and the Lovins’ would call “dramatically [increasing] the productivity of natural resources.” The businesses aren’t revolutionary in the sense that they’re implementing new business models, but rather that they are reconnecting waste products into the cycle of commerce in much the same way that firms are trying to harvest resources from landfills.

As our society progresses the cost-benefit scale will constantly be moving in reaction to factors such as resource scarcity, social pressure, and our understanding of externalities. Want to, but I can’t help it
I love the way it feels. Rather than fight this, we should try to be a little more like Barry and accept that it is in our nature to act as we do. The holy grail of sustainability isn’t radical, its a innovative normal.