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The Innovation Bottom LineHow Sustainability is Paying OffFebruary 2013

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1Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.PresentersDavid Kiron Ph.D. is executive editor ofMIT Sloan Management Review’s BigIdeas InitiativesDavid Kiron Eugene GohEugene Goh is a Principal in the Oslooffice of The Boston Consulting Group,and a core member of its Strategypractice

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2Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.Introduction to the BCG-MIT SMR Sustainability partnershipThe BCG-MIT SMR PartnershipThe BCG-MITSMR Sustainability &Innovation Partnership is a jointundertaking with the objective ofdetermining how the challenges andopportunities presented bysustainability will transformmanagement in the twenty-first century2012 Study fourth in the series2011201020092012

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3Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.We found a core of companies combining profitability andsustainability through innovation......we call them Sustainability-Driven Innovators37% say they have profitedfrom sustainability activities......and of those:9% dont know28% have notchanged theirbusiness model63% havechanged theirbusiness model

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4Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.Four key elements driving profitability of sustainabilityBusiness model innovationBusiness caseCustomer collaboration and focusTop management attention1234Best practiceKey driver

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5Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved....and customercollaborationand focus87 %...that also havea businesscase73 %Companies with3 or 4 businessmodel changes159 %Companies withbusiness modelinnovation (average)46 %Companies withno businessmodel innovation26 %40200...and topmanagementattentionShare of companies who say sustainability adds profits100806090 %Companies combining four key elements more likely to profitfrom sustainability1. Including both "target segments" and "value chain processes"Source: 2012 BCG-MIT SMR Sustainability and Innovation Survey1 2 3 4

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6Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.Six elements of business model1Value propositionOperating modelBusiness modelTargetsegment(s)Product/serviceofferingRevenuemodelValue chainCostModelOrganization

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7Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.Business model innovators more likely to profit fromsustainability-47%+74%10 %Do not know impactSustainabilitybreaks even29 %46 %26 %200Sustainabilityreduces profit11 %Companies evaluation of financial impact of sustainability8014 %27 %6040 37 %Sustainabilityadds profitCompanies with business model innovationCompanies with no business model innovationIncreasedawarenessIncreasedprofitSource: 2012 BCG-MIT SMR Sustainability and Innovation Survey1

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8Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.Changing 3+ business model elements increase profitsSource: 2012 BCG-MIT SMR Sustainability and Innovation Survey050 %240 %137 %406080Share of companies who say sustainability adds profits20059 %3 or 4(average)26 %3 or 4 including"value chainprocesses" and"target segments"1Number of business model elements changed

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9Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.Kraft example: Pioneering in sustainable sourcingopening for new consumer segments and double-digit growth1Rainforest Alliance CertifiedSeal generating double-digitgrowthSales of instant and espressocoffee doubled whenintroducing 100% sustainablesourcingCommitted to only usingsustainable raw materials inEuropean coffees from 201315% of brands carry FairTrade or Rainforest AlliancelabelsValue chain innovationwith sustainable sourcing... ...opening for new consumer segments

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10Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.Dell example: Packaging innovation to satisfy customerneeds leading to a sustainable solution• Clients want strong packaging to avoid damage• Dell wants lighter packaging to reduce shippingcost• Fast-growing and sustainable bamboo assubstitute for paper• 70% of notebooks shipped in bambooCustomer dialogue on packaging... ...leading to packaging innovation1

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11Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.Business model innovators more likely to have business case...thus better able to demonstrate that sustainability adds to profits1. Of which both "target segments" and "value chain processes" are changedSource: 2012 BCG-MIT SMR Sustainability and Innovation Survey20Share of companies with business case806040026 %Companieswith nobusiness modelinnovation38%+99%58 %Companieswith businessmodelinnovation(average)51 %2011201030 %32 %6040201220+25%80Share of companies with business case038 %Companieswith 3 or 4businessmodelchanges12More companies establish abusiness case for sustainabilityTwice as many business modelinnovators have business case

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12Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.Marks & Spencer example: Plan A outliningsustainability commitments in 7 areas2Source: Marks & Spencer - How We Do Business Report 2012

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13Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.Marks & Spencer example: Plan A outliningsustainability commitments in 7 areas2Source: Marks & Spencer - How We Do Business Report 2012

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14Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.Sprint example: Focus on hard numbersand intangible values from sustainability2• Sprint accepts lower hurdle rates insustainability business cases– E.g. when investing in making phoneseasy to take apart to recycle waste• Sprint recognizes that many sustainabilityactivities are difficult to measure, but have aninherent strategic logic– E.g. value of achieving high positions inglobal sustainability rankingsHard numbers in business cases Intangible values for the brand

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15Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.For the innovators, customer collaboration & focus and topmanagement attention are additional contributors to profitsNote: Only respondents replying that they have changed their business model are includedSource: 2012 BCG-MIT SMR Sustainability and Innovation Survey3/48055 %36 %NocustomerinfluenceCustomerinfluenceNotpermanenton agendaPermanenton agenda20406053 %Share of companies who say sustainability adds profitsNotincreasedcollaborationIncreasedcollaboration39 %061 %38 %100Customercollaboration onsustainability issuesCustomer influenceon sustainabilityagendaTop mgmt attentionon sustainabilityagenda

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16Copyright©2012byTheBostonConsultingGroup,Inc.Allrightsreserved.Five recommendations for profitable sustainabilityLead from the top and integrate the effortMeasure and track sustainability goals and performanceCollaborate beyond the boundaries of your organizationUnderstand your customers and their willingness to pay forsustainabilityBe prepared to change your business model