Introduction for Sustainable Innovation
Introduction
Sustainable innovation takes on a challenge confronting increasing numbers of corporate leaders today—responding to the emerging opportunities and threats collectively called “sustainability.” Whether it’s climate change, water scarcity, environmental destruction, toxic waste or toxic raw materials, famine in developing (and even developed) economies, obesity in developed (and even developing) economies, or the social inequities that amplify all these threats, the first questions to come up are usually strategic. If the effects of climate change are real and imminent (and they are), what should we do to remain competitive? If capital markets begin accounting for the true costs and risks of unsustainable environmental and social practices (and they have), what should we do? If customers and entire markets start shifting preferences toward more sustainable goods and services (and they are), what should we do? And if federal, state, and even local policies change what my company, my suppliers, and my customers may do (and they are), what should we do? Nobody wants to chase after every fad or jump at the sight of his or her own (carbon) shadow, but at the same time, nobody wants to miss a significant strategic opportunity or be blindsided by sudden transitions.
This book is written for the many executives who recognize their company’s need for sustainable innovation—the ability to see the changing conditions of their market, define the emerging opportunities and threats, and develop bold new strategies in response. To the question “What should we do?” the most important answer is that there is no single, simple answer. There is not even a short list. Every company, in every sector, will feel the effects of sustainability differently and, for the most part, indirectly—not through melting ice caps or distant famines but through the shifting market preferences, newly competitive technologies, and bolder regulatory policies of its customers, suppliers, competitors, and other market forces. Leaders need to determine their best path given their own circumstances. They need to stop looking for the right answer and start building organizations capable of recognizing and responding to their own emerging opportunities and threats through innovation and capable of maintaining the pace of change needed over the long term.
To be clear, sustainable innovation means two things. First, from the Bruntland Commission’s formal definition, it means generating, developing, and launching new products and processes that “meet the needs of the present without compromising the ability of future generations to meet their own needs.”1 But as true sustainability remains a virtual impossibility in today’s industrial society, I amend this definition to mean introducing new products and processes that are more sustainable than current alternatives—that consume fewer environmental resources, foster the health of individuals and communities, and are affordable for consumers and producers alike. Second, because a single innovation will neither support an organization nor drive fundamental change across an industry, it is also about building an organization capable of sustaining the pace of innovation over a decade or more. Companies that can do this will thrive; those that can’t won’t.
In conversations with company executives about sustainability, I find that few feel prepared to set bold new strategies let alone commit to the major innovations required to achieve them. Just a decade ago, that was fine—after all, the need to address sustainability affected only a handful of industries. For energy producers, carmakers, and chemical, seed, and pesticide companies, it was a threat to their core business models. For niche grocers and food and clothing companies, it was an opportunity for differentiation and growth. And almost everyone else could ignore it. Now, nobody’s safe. The opportunities and threats of sustainability are reshaping every industry, yet few leaders and companies are prepared to make the strategic investments necessary to respond through innovation—whether that means developing new products and services, new raw materials and manufacturing processes, new suppliers and distribution channels, or even new customers.
In part, that’s because it’s not clear what you’re dealing with. Sometimes sustainability looks like shifting market preferences: high-mileage cars, energy efficient appliances, wholesome foods, or organic cotton (or conversely, boycotts, investor activism, or increased insurance rates). Sometimes it looks like competing technologies: rooftop solar, hybrid cars, biopesticides, and LED bulbs. Sometimes it looks like changing policies: mileage standards, Energy Star ratings, carbon cap-and-trade programs, or increases in the minimum wage. And sometimes it just looks like a quagmire of all three.
Three obstacles stand in the way of setting bold new strategies. First, when facing the uncertainties associated with sustainability, most companies (like most people) avoid taking action, preferring to wait for something to happen that will reduce the uncertainties for them. Unfortunately, that something tends to be someone else’s innovation, at which point the die is cast. Second, when companies are moved to action, it most often means copying what others are doing. Organizational researchers call this “mimesis,” and it means, essentially, seeking safety in the herd. Those who copy others often turn to the off-the-shelf solutions highlighted in the pages of the business press: hire a guru, appoint a chief sustainability officer, put solar on rooftops, and declare victory—all without changing your core businesses. Think of Ford Motor Company’s much publicized $15 million, ten-acre grass roof installed over the iconic River Rouge factory that was once the very icon of innovation and is still churning out trucks getting twelve miles per gallon.2 For a car company whose industry’s products generate roughly a third of the carbon emissions in the United States, few actions could have generated more visibility with less impact. Ask anyone on Wall Street how that went. Third, companies develop a new line of green products that compete with their existing offerings, confuse their customers, burden their suppliers, and strain the knowledge of their sales reps. Burned, these companies retreat to business as usual. Recall British Petroleum’s $200-million-plus investment in solar and promises of moving “beyond petroleum,” only to scuttle its BP Solar business in 2011, citing the lack of market growth and profitability—just as the industry was entering a phase of phenomenal growth.3 These obstacles reflect an underlying issue in pursuing sustainable innovation: without the right capabilities—the right tools—companies cannot expect to see, let alone respond effectively to, the new opportunities and threats reshaping every market. This book outlines this set of capabilities and describes how to identify, assess, and develop those that fit your strategic goals.
The Journey
Sustainable Innovation summarizes five years of research into the capabilities companies need to drive this type of innovation. In 2010, the Pew Center on Climate Change (now the Center for Climate and Energy Solutions) approached me to study successful low-carbon innovations that were developed and introduced into the market by large companies. I said no. I was concerned it would mean just greenwashing the same old advice for managing “regular old innovation.” But after talking with executives, entrepreneurs, and policy makers, trying to figure out whether there was a difference between low-carbon innovation and regular old innovation, I found something that was both surprising and, in hindsight, obvious. Surprising in that, despite fifty years of research into the management of innovation, little if any effort has been spent exploring how best practices differed depending on the sector and situation of a company and its particular strategy. Obvious in that, once you accept that the challenges of innovation differ depending on where and when it takes place, there is no such thing as regular old innovation. The challenges you’ll face and the capabilities you’ll need to overcome them will differ dramatically depending on whether you’re pursuing innovation in the early days of a new technology and market (such as the rapidly evolving landscape of smartphones today or the Internet in the 1990s) or a century later, when the technologies, competitors, and market infrastructure are mature and deeply entrenched (such as the factories of the automotive industry or the fields of modern industrialized agriculture).
With this in mind, I changed my answer and agreed to investigate those contemporary companies and companies from earlier centuries that had succeeded in their sustainable innovations and those that had failed. These cases included new high-speed rail projects from across the globe; an innovative school lunch program launched in Oakland, California; the reinvention of the diesel engine; the development of gigabit virtual conferencing solutions; the first electric grids built over a century ago; and the smart grids of today. For contemporary companies, I spoke with the corporate leadership who oversaw these innovation projects, the development teams in the trenches working to make them realities, the scientists and engineers in research and development who supported them, and the sales and marketing teams who brought them to market. For historic cases, I dug deep into the archives and technical artifacts that documented the early days of the new ventures, new technologies, and new industries. I wanted to understand what made the development of sustainable innovations different. Were there common challenges facing corporate leaders and managers pursuing sustainable innovation, and if so, was there a common set of capabilities that enabled these companies to recognize and overcome them?
While the findings and recommendations that follow come from this intensive research program, they also come from working alongside many entrepreneurs, corporate leaders, scientist-inventors, policy makers, and investors who have successfully (and sometimes unsuccessfully) pursued sustainable innovations. In 2004, I founded what would become the Child Family Institute for Innovation and Entrepreneurship at the University of California, Davis. For ten years, the institute has been helping university scientists and engineers identify and develop the commercial potential of their research. That meant working with large companies as well as angel and venture capital investors looking to benefit from the almost $1 billion in research conducted at UC Davis in areas such as clean energy, sustainable agriculture, food, transportation, and energy efficiency. In 2006, on the basis of the success of the original program, I helped found the country’s first Energy Efficiency Center, dedicated to the identification, development, and effective commercialization of energy efficient technologies. Energy efficiency offers the most cost-effective way to reduce the carbon emissions that are contributing to global warming, and yet thirty years of energy efficiency technologies were sitting unused. The center’s focus was again on bringing those technologies into the marketplace. The Energy Efficiency Center represented a groundbreaking public-private partnership—a true collaboration between industry, government, and university partners with the goal of meeting the demands for innovation in energy efficiency.
Working with inventors and entrepreneurs, emerging ventures and established firms, suppliers and customers, and state and federal regulators and nongovernmental organizations, I saw firsthand the challenges that stood in the way of even the most promising of opportunities. No matter what the technology, the need, or the regulatory goals, the same obstacles kept cropping up. While everyone knew the right thing to do—the right technologies to pursue, the right market opportunities to develop, the right policies to follow (or better yet, lead with)—few had what it took to get there. At the institute and the center it became clear early on that the most pressing need in commercializing university research was building the right set of capabilities around the core research and researchers, and “right” differed depending on the core technology, the target market, and the most promising business models. Roughly sixty companies and over $100 million in venture funding later (as well as valuable technologies now licensed to established corporations and significant changes to state and federal policies), the lessons of these innovation efforts have greatly informed the research and its findings presented in this book.
Finally, these findings come from two decades of research in the field of innovation management. My academic career has been focused on understanding the challenges and effective practices involved in innovation in general and entrepreneurship in particular. In that time, I have studied not only the detailed technical and social histories of some of the most profound technology revolutions but also the everyday work of modern engineers, scientists, marketers, entrepreneurs, and corporate leaders as they struggle to create revolutions. The histories provide a powerful perspective—they show how these remarkable events unfolded in a particular time and place, and they help us see how the current context similarly shapes the opportunities and threats of today’s efforts. The modern cases demonstrate that innovation is a process pursued by real, really talented but still mortal people working in moments when their actions may shape history.
One Size Does Not Fit All
A major theme of this book is that generic models of innovation—which recommend best practices promised to work in any and all organizations—provide less practical value than models that account for the differences between industrial sectors, market conditions, and corporate strategies and that recommend approaches and capabilities based on those differences. Think about it: imposing Google’s innovation practices on anything other than a large (and obscenely profitable) Internet search advertising company is tantamount to malpractice. Lean methodologies may work well for new Internet ventures but not for building new hardware companies, let alone raising organic pigs or running community banks. Focusing on common best practices does little for the management of innovation. After twenty years of practicing, researching, teaching, and consulting in innovation and ten years of working with entrepreneurs and large companies to pursue sustainable innovations, it is clear to me that the most effective innovation strategies fit the landscape in which they’re pursued.
The disconnect between a company’s innovation strategy and its competitive landscape occurs because there is a lack of vocabulary, misleading (and misguided) approaches, and hubris. With respect to the first, lack of vocabulary, the distinction is not between regular old innovation and sustainable innovation; it’s between sustainable innovation (innovation focused on displacing incumbent and less sustainable practices) and other types of innovation. Unfortunately, we lack a good vocabulary for distinguishing between these different types of innovation. Such differences do appear in practice. For example, the National Venture Capital Association defines the investment focus of funds in terms of seventeen specific industry sectors, including software, biotechnology, industrial and energy, media and entertainment, and financial services. The venture capitalists managing these funds typically have sector-specific backgrounds (in terms of both their relevant knowledge and social networks) that give them a competitive advantage when investing in and building new ventures in these sectors. The variation in practice of what’s treated as a single process in theory has the same implications for innovating in other contexts, too, like consumer products, transportation and logistics, health care, education, fashion, manufacturing, packaging, e-commerce, mobile computing, big data, or financial markets. Each is characterized by its own set of challenges, and to innovate effectively in each requires its own blend of capabilities. To complicate matters, these contexts overlap—pursuing sustainable innovation in consumer products will present challenges different from those in transportation. Without a clear vocabulary, entrepreneurs, corporate leaders, investors, and policy makers fail to recognize how the capabilities that enabled innovation in one sector or one moment in time may not be as effective elsewhere or, worse, may undermine efforts.
The second difficulty comes from mistaking invention for innovation, a misguided approach that has challenged many recent efforts to pursue innovations in clean energy. As the public became aware of the dramatic implications of climate change, there were increasing calls for the moon shot or Manhattan project of clean energy and a subsequent and bold investment in new, science-driven inventions. These models are dangerously misleading, first, because these were not inventions. As J. Robert Oppenheimer, who directed the Los Alamos Scientific Laboratory, once said, these projects did not generate breakthrough science or technology—instead, they integrated knowledge and technologies that already existed: “The real things were learned in 1890 and 1905 and 1920, in every year leading up to the war, and we took this tree with a lot of ripe fruit on it and shook it hard and out came radar and atomic bombs. . . . [T]he whole spirit was one of frantic and rather ruthless exploitation of the known.”4 Second, they did not require broad market adoption—the government was the sole customer of these projects (and paid in advance). And finally, the research and development activities of these programs were highly centralized and the solutions relatively independent of external networks of researchers, suppliers, investors, distributors, customers, and consumers. By contrast, today’s clean energy solutions often attempt to scale up new scientific breakthroughs that will, in practice, require a broad network of market partners and depend on rapid adoption by millions of customers. Their development processes need to reflect these differences.
The third difficulty is hubris. Entrepreneurs and innovators alike, having found success in one context, credit themselves over their circumstances. After posting tremendous returns investing in early Internet companies in the 1990s, the venture capital community turned its sights on clean technology as the next sector vulnerable for disruption (and not coincidentally, ripe for raising new funds). The Department of Energy saw the same opportunities, and soon everyone was talking about how, if we turned Silicon Valley’s brainpower and entrepreneurial talents on the problems of climate change, we would soon solve all our problems. My colleague Martin Kenney and I studied the failure of the venture capital model as an investment vehicle—and as federal policy—for clean technology ventures.5 After Solyndra, Fisker Automotive, A123, and other expensive, highly visible, and ultimately failed startups, it became clear that innovating in clean technology would be no easier for the same talent (and money) that brought us eBay, Facebook, and Google than it was for others. The capabilities needed for the Internet revolution were not the same ones needed to disrupt the centuries-old industries of energy, agriculture, and transportation.
Sustainable innovation poses a set of challenges different from those of many recent models of innovation—Google, Apple, and Facebook being dominant models. In some cases, these differences are categorical—it is fundamentally different to innovate with particular social or environmental objectives in mind than it is to innovate within the flow of an industry’s technologies and consumers. Innovation follows the path of least resistance, and developing new consumer behaviors in new markets faces less resistance than attempting to replace old behaviors in old markets. The Apollo moon shot met with less resistance than the entrenched oil and gas companies have put in front of federal policies advancing fuel efficiency. In other cases, these differences are more relative. For example, all innovation requires some integration with science and policy, but sustainable innovation requires significantly more—and more-effective—capabilities for integrating with science and policy; all innovation benefits from strong networks spanning the value chain, but sustainable innovation requires building and coordinating these networks. In short, innovating in response to the emerging threats and opportunities collectively called sustainability is hard, but more importantly, it’s different. Understanding the different nature of the challenge offers a valuable perspective on what capabilities will be necessary to pursue sustainable innovation in your company and market.
In the end, all innovation—developing and delivering something new—requires developing different capabilities than you had before. The unique challenges of pursuing sustainable innovation require particular strengths, often different from the ones in companies focused on innovating in e-commerce, social media, health care, education, or other sectors. Business has been a major promoter of unsustainable practices and can play an equally disproportionate role in reducing their impacts. As this book discusses, this is a significant opportunity as well as a responsibility, but the capabilities responsible for our past successes will not be the ones to drive the next generation of changes.
Notes
1. Great Britain and World Commission on Environment and Development, Our Common Future: A Perspective by the United Kingdom on the Report of the World Commission on Environment and Development (London: Department of the Environment, 1988), 41.
2. Phil Patton, “For Ford, a Green Roof That Springs Eternal,” New York Times, December 29, 2010, http://wheels.blogs.nytimes.com/2010/12/29/for-ford-a-green-roof-that-springs-eternal/.
3. Marc Roca and Ehren Goossens, “BP Solar Business Exit Counters Trend by Google, Buffett, Total.” Bloomberg, December 21, 2011, http://www.bloomberg.com/news/2011-12-20/bp-to-shut-down-solar-power-unit-exit-business-spokesman-says.html; Kevin Bullis, “Why BP Solar Failed,” MIT Technology Review, December 21, 2011, http://www.technologyreview.com/view/426461/why-bp-solar-failed/.
4. Donald E. Stokes, Pasteur’s Quadrant: Basic Science and Technological Innovation (Washington, DC: Brookings Institution Press, 1997), 16.
5. See Andrew B. Hargadon and Martin Kenney, “Misguided Policy? Following Venture Capital into Clean Technology,” California Management Review 54, no. 2 (2012): 118–139; Martin Kenney and Andrew Hargadon, “Venture Capital and Clean Technology,” in Can Green Sustain Growth? From the Religion to the Reality of Sustainable Prosperity, ed. John Zysman and Mark Huberty, 59–76 (Stanford, CA: Stanford University Press, 2014).