This case is part of your Harvard Business Coursepack on the IKEA Group attached
Imagine that you are Steve Howard, the IKEA Group’s Chief Sustainability Officer (CSO). What are your recommendations for the next steps for the company’s sustainable wood procurement initiatives? Consider this, given IKEA’s aggressive growth plan to double its sales by 2020 with the focus on emerging markets, especially China and Russia.
- Evaluate whether wood procurement is a sensible place for the IKEA Group to be focusing its sustainability efforts.
- Considering the four alternative approaches IKEA Group can pursue to improve the sustainability of its wood procurement practices–(1) owning or leasing more timber forests, (2) driving higher FSC-certified wood procurement targets, (3) using more particleboard, and (4) using more recycled wood in particleboard manufacturing–what are advantages and disadvantages of each option?
- Considering the IKEA Group’s approaches to post-contract supplier management, what is your recommendation for improvement to enable sustainable wood procurement initiatives moving forward?
Your case assignment should be
no longer than 2 single-spaced pages, supported by no more than 2 pages of figures and/or charts.
This case is part of your Harvard Business Coursepack on the IKEA Group attached Imagine that you are Steve Howard, the IKEA Group’s Chief Sustainability Officer (CSO). What are your recommendations
9-515-033 R E V : N O V E M B E R 2 0 , 2 0 1 7 V . K A S T U R I R A N G A N M I C H A E L W . T O F F E L V I N C E N T D E S S A I N J E R O M E L E N H A R D T Sustainability at IKEA Group In 2014, the IKEA Group was pursuing an aggressive growth strategy, initiated in late 2012 to double sales to €50 billion by 2020. The Group Management (GM) planned to achieve this growth by increasing the market share of their 303 existing stores and by opening nearly 200 more stores, many of which would tap into the billions of new customers entering the middle class in emerging markets, especially China and Russia. The market share of IKEA Group in emerging markets was far lower than its conventional markets in Europe and North America, where demand was expected to grow much more slowly. Steve Howard, IKEA Group’s Chief Sustainability Officer (CSO), saw major opportunities from this planned growth: “Growth is the priority. If you’re growing as a company, everything becomes possible.” But he also viewed the implications of such aggressive growth through the lens of the company’s equally ambitious sustainability plans, noting: “Worldwide economic activity, if left unchecked, is already on track to consuming 150% of planet earth’s resources, and on top of that we will have 3 billion extra consumers by 2030, mostly from the emerging market countries. If we’re growing as a company, we have to balance how we use resources to be sustainable. We can grow and be sustainable.” In late 2012, IKEA Group launched a comprehensive sustainability strategy called “People & Planet Positive” that focused on the company’s entire value chain, from its raw materials sourcing to the lifestyle of its consumers. Sustainability had become integral to IKEA Group’s core business strategy. As Howard put it, “We are transforming our material base, becoming an independent power producer, lifting working conditions through the supply chain, and accelerating change in product sectors by becoming one of the world’s largest retailers of energy-efficient LED lighting. Sustainability is a driver of growth and is now a fundamental part of our decision making—we have changed the mindset across the business.” Peter Agnefjäll, IKEA Group’s president and CEO since September 2013, was confident that the company’s growth strategy would not conflict in any way with the company’s sustainability targets. Sustainability issues in the IKEA Group wood supply chain were especially challenging because the company sought to procure wood and wood products close to its consumer markets to minimize Sustainability at IKEA Group transportation costs, but the growth plans focused on emerging markets in which wood supply chains lacked well-developed markets for wood that met the company’s stringent sustainability standards. IKEA Group’s global lumber purchase volume trailed only The Home Depot and Lowe’s among global retailers1 and represented 60% of IKEA Group’s total raw material procurement by volume and 40% by value (followed by plastic, steel, and cotton). The enormous scale of IKEA Group’s wood procurement made the company’s management of its wood supply chain an especially salient issue to the company’s bottom line, environmental activist groups, and many ecosystems. Company Overview IKEA was founded in Sweden in 1943 by Ingvar Kamprad when he was 17 years old. He named the company with an acronym for his initials and the village in which he grew up, Elmtaryd, Agunnaryd. Initially selling small items and then furniture through a mail-order catalog, by 1974 the company had grown from one showroom in Älmhult to more than a dozen stores throughout Europe. Kamprad sought to sell affordable, quality furniture to mass-market consumers around the world. He believed his company would succeed if it operated according to a particular set of values: “Our enthusiasm, our constant will to renew, on our cost consciousness, on our willingness to assume responsibility and to help, on our humbleness before the task, and on the simplicity of our behavior.” By 2013, the company had grown to earn €3.3 billion in net income on €28.5 billion in salesa (see Exhibit 1 for IKEA Group’s financial performance in 2010–2013). IKEA Group Organizational structure In 2013, IKEA Group employed 135,000 people, of whom 75% worked in retail and 70% were in Europe. IKEA Group was organized into three operating units (see Exhibit 2 for IKEA Group’s organization chart). Range and Supply was responsible for all new product design and development, and for supply chain management. Production operated and managed several company-owned furniture and particleboard factories that produced roughly 15% of the furniture sold at IKEA stores. Retail and Expansion managed the company’s owned and operated IKEA stores. IKEA Group franchised the IKEA retail system from Inter IKEA Systems B.V., which was the owner of the IKEA concept and was the worldwide IKEA franchisor. Stores There were 345 IKEA stores in 42 countries by the end of 2013, most of which were located at the outskirts of large cities. IKEA Group owned and operated 303 IKEA stores and franchised the remaining 42 stores. IKEA Group store sales were predominately in Europe (69%), followed by Asia and Australia (16%), North America (8%), and Russia (7%) (see Exhibit 3 for the geographic distribution of IKEA Group stores). IKEA Group stores averaged 28,700 square meters (309,000 square feet) and €85 million in annual sales. The largest store, in Shanghai, was twice the average size. IKEA stores were designed to maximize customer time in the store, with a meandering pathway laying out a designated route to guide customers through all departments. The store layouts had been described as “effectively IKEA’s catalogue in physical form, with furniture placed in different settings, which is meant to show you how adaptable it is.”2 Home furnishing market Home furnishing was IKEA Group’s main market. The €331 billion global home furnishing market was highly fragmented, with the top five companies accounting for less than 8% of sales value in 2011. The market was characterized by a large number of category specialists with limited geographic scope. As a whole, IKEA stores were the world leader in the home furnishing a This equates to USD 4.5 billion in net income on USD 39.2 billion in sales, using a USD 1.376 to €1 exchange rate as of December 31, 2013. 2 T For the exclusive use of B. Kanneh, 2023. Sustainability at IKEA Group 515-033 market, capturing 4.9% of the global home furnishings market in 2011, and faced no comparable global competitor. The world’s second-largest furniture retailer was Ashley Furniture Inc., whose €4 billion sales spanned just three countries (the U.S., Canada, and Mexico), constituting a 1.2% share of the global furniture market. Sealy, the world’s third-largest furniture retailer, recorded sales of €1.7 billion, mainly in North America and Europe, achieving a 0.5% share of the global furniture market.3 Products The company’s Scandinavian roots were key to the IKEA brand identity and was manifest in its product designs and Swedish product names (see Exhibit 4 for a sampling of IKEA Group furniture). IKEA produced a range of 9,500 products that spanned home furnishing, indoor furniture, home improvement, housewares, and gardening supplies. Roughly 60% of its sales were in furniture (of which 80% was indoor furniture4) and 40% in non-furniture items in 2011. Much of the company’s furniture was designed and sold in unassembled flat packaging, which the company introduced in 1953 to help keep costs and prices low by minimizing transportation costs and transferring assembly costs to customers. The company had retained Kamprad’s founding principles of maintaining very low prices without compromising on functionality or technical quality. For example, its LACK coffee table was priced at less than €10, “cheaper than the coffee itself,” as one IKEA designer joked. IKEA’s continuous efforts to reduce costs had enabled it to reduce prices every year since 2000. On the revenue side, the company had experienced a compound annual growth rate (CAGR) of 5% between 2010 and 2013. Supply chain IKEA Group managed 1,046 home furnishing suppliers in 52 countries. Nearly 60% of production, including third-party suppliers and wholly owned suppliers, took place in Europe, followed by Asia and Australia (33%), North America (3%), Russia (3%), and South America (1%). (See Exhibit 3 for the geographic distribution of IKEA production units.) While it relied heavily on third-party manufacturers, the IKEA Group furniture and particleboard factories manufactured 25% of its own particleboard and nearly 15% of its furniture (representing 27% of its total volume of sourced wood). IKEA Group had already invested €550 million in 2013 to expand its own board manufacturing capacity by 66%, increasing the number of plants from two to six. The company also owned and operated 38 furniture manufacturing plants worldwide by the end of 2013 (see Exhibit 3). IKEA Group’s Growth Strategy We have a strong foundation for future growth. Our company structure is built to last over time, and fortunately we also have the financial strength to grow in a balanced and sustainable way. By creating better products at lower prices, being more inspiring, improving our existing stores, opening new stores and expanding our e-commerce offer, we plan to double sales by 2020. — President and CEO Peter Agnefjäll, IKEA Group Annual Report 2013 IKEA Group’s ambitious growth strategy to double worldwide sales to €50 billion by 2020 required increasing revenue by 10% each year. IKEA Group planned to achieve this by growing sales at their existing stores and by opening new stores, which would increase the number of stores from 303 in 2013 to 500 in 2020. Nearly 90% of IKEA Group sales in 2013 were in OECD countries, and 70% in Europe, but IKEA Group management expected to open few new stores in those markets. Instead, senior management planned to achieve roughly half of its growth targets from expanding sales at their existing stores and the rest from opening 200 new stores primarily in emerging markets, where the company had much lower penetration. The rapidly growing markets in China and Russia were key (see Exhibit 5 for the world’s fastest-growing home furniture markets and IKEA Group’s market share in each).5 3 For the exclusive use of B. Kanneh, 2023. 515-033 Sustainability at IKEA Group Since IKEA Group had entered Russia in 2000, it had built a network of 14 stores that generated sales of €1.96 billion in 2013. In China, the company had opened 16 stores over a similar period, recording sales of €740 million in 2013,6 and sought to triple its pace of store openings by 2020.7 IKEA Group entered India in April 2013 with a planned US$2 billion investment to open 25 stores, under an agreement with the Indian government to locally source 30% of the products sold in those stores.8 To successfully expand in emerging markets, IKEA Group anticipated that it might need to depart from its conventional approach of designing a common product range for all of its stores. Instead, it would have to offer different subsets of its product range to different regions. In addition, as it had done when it entered Japan in 2005 by designing new products to suit local tastes, the company expected that its designers would create new products and services targeted to specific regional needs including, perhaps, furniture designed to suit smaller living spaces in China and offering in-home furniture assembly services in India.9 Sustainability at IKEA Group To meet future customer needs and address the higher price of raw materials and energy, while driving down emissions and maintaining our low prices, we need to transform our business. Simply working towards being less bad will not get us where we need to be—we need transformational change—which means changing old ways and embracing the new, being bold, innovative, and committed to taking action. — IKEA Group 2012 Sustainability Report IKEA Group’s CEO created the role of Chief Sustainability Officer (CSO) in 2011 to be the seventh member of the company’s Group Management (GM), which was responsible for formulating and implementing the company’s strategy. Before being hired as the first CSO, Howard had founded and led The Climate Group, a nongovernmental organization (NGO) that advised business and government leaders on how to address climate change. Hiring Howard and including him in the GM was an indication that IKEA’s leadership was seeking transformational change to enable the company to better anticipate and address sustainability issues. After numerous discussions during Howard’s initial six months with the company, the GM announced its People & Planet Positive strategy, which focused on three areas: (1) a more sustainable life at home for consumers; (2) resource and energy independence for the company; and (3) a better life for people and the communities touched by IKEA (see Exhibit 6 for highlights). The strategy sought to transform all aspects of the company’s value chain, including designing products to minimize the use of raw materials, selecting sustainably sourced materials to reduce the environmental impacts and improve labor conditions within its supply chains, improving efficiency in production and logistics, and developing programs to ensure that its products could be reused or recycled at their end of life. At the consumer level, for example, the company planned to convert its entire range of lighting products by 2016 to LEDs, which were nearly 10 times more efficient than incandescent lighting and twice as efficient as compact fluorescents. In its production, distribution, and store operations, IKEA Group was investing substantially to reduce energy consumption. Its €21 million investments in energy efficiency measures during 2011– 2013 had yielded cost savings of around €40 million over that period. IKEA Group was seeking by 2020 to produce as much renewable energy as the total energy it consumed in its operations, and was a third of the way toward its goal by 2012. The company had already begun investing in wind farms, using biomass to power its production facilities, and installing solar panels at its stores. Howard led a 22-person corporate Sustainability Group consisting of four teams: (1) Communication developed IKEA Group’s sustainability communication strategy; (2) Innovation 4 Sustainability at IKEA Group 515-033 developed sustainable innovative solutions; (3) Policy improved guidelines throughout IKEA Group; and (4) Retail worked to inculcate sustainable practices at the stores. These teams worked with the operating units to implement the People & Planet Positive strategy. In total, nearly 500 people at IKEA Group were directly accountable for implementing various aspects of the company’s sustainability objectives. Howard explained, “95% of actions will happen through leadership and sustainability being embedded in the organization.” Howard believed that communicating the new strategy’s goals to NGOs was critical to gaining their support and building trust. IKEA Group’s Head of Sustainability Communications, Olivia Ross, pointed out, “We have values, which mean we are less likely to find ourselves in greenwash territory.b Everything we do must be rooted in humility and facts, and must communicate the journey.” Howard also initiated a People & Planet Positive advisory group, which included board-level representatives from key environmental and development NGOs such as the World Resource Institute and Oxfam Great Britain. The advisory board was charged with holding IKEA Group accountable, and challenging and inspiring the company on strategic sustainability issues. Moreover, Ross added, “Customers, coworkers, and the general public also hold IKEA Group accountable.” Sourcing Sustainable Wood Wood Supply Chain Raw material often constituted the largest cost item for wood-based products. IKEA Group worked with 384 wood suppliers in 50 countries in 2013. Its wood supply chain began in forests or with recovered wood. Nearly all of these forests were owned and operated by third parties, although IKEA Group leased nearly 500,000 hectares (1.24 million acres) of forest land in Russia’s Leningrad Oblast and Republic of Karelia and leased a smaller forest in Slovakia. Timber harvested from forests provided the raw material to primary processers, including sawmills, board manufacturers, and the pulp and paper industry. By-products from sawmills and plywood mills were often shipped to board mills, which produced board material. Lumber and board material were converted to components in factories. Furniture manufacturers then assembled solid wood and particleboard components into finished (but unassembled) furniture pieces, and shipped nearly half of these boxed components directly to IKEA stores and the rest to IKEA Group’s distribution centers, which ultimately delivered them to stores. IKEA Group’s revenue from particleboard furniture was about three times as much as from solid wood furniture. (See Exhibit 7 for data on IKEA Group’s wood supply chain.) Some of these supply chains were fully owned by IKEA’s suppliers, and others by independent chains of sub- suppliers. IKEA Group was one of the largest lumber consumers in the global retail and consumer goods industry. IKEA Group sourced most of its wood from countries in Eastern Europe, and sold most of its products in Western and Northern Europe (see Exhibit 8 for IKEA Group’s wood procurement value by region).10 The 14 million cubic meters of round wood equivalent it sourced in 2013c amounted to 1% of all industrial wood sourced on the planet (see Exhibit 9 for IKEA Group’s wood procurement volume). b “Greenwash” referred to environmental claims that exaggerated a company’s overall environmental performance. c Round-wood equivalent (RWE) volume is a measure of the volume of logs (round wood) used in the manufacture of wood- based products (including wood pulp, paper, wooden furniture, joinery, and plywood). 5 For the exclusive use of B. Kanneh, 2023. 515-033 Sustainability at IKEA Group IKEA Group sourced 21 wood species, primarily pine (nearly 50% of its procured volume), birch (27%), and beech (12%). Sustainability Concerns Sourcing wood posed several sustainability concerns. First, 1.6 billion people worldwide relied on local forests for their livelihoods—including food, clothing, or shelter—many in regions where their rights were not adequately protected by governments. As such, harvesting virgin forests and clearing wood for plantations risked substantially disrupting many people’s lives. Second, managing natural forests inevitably affected biodiversity and ecological processes, and converting natural habitats to timber plantations substantially reduced biodiversity. Third, deforestation—often sparked by the desire to convert forests to cropland and pasture—was a leading contributor to global climate change by preventing photosynthesis from sequestering atmospheric carbon into the soil. Deforestation also reduced long-term wood availability, a particular concern in China, whose timber trade deficit was already acute.11 Wood Sourcing Standards IKEA Group had already invested a great deal of time and effort to assess and improve the sustainability of its wood procurement practices. In 2000, IKEA Group developed its code of conduct— the IKEA Way on Purchasing Products, Materials and Services (IWAY)—to specify minimum acceptable standards for working conditions and environmental protection at its manufacturing suppliers. In 2013, IKEA Group’s 90 auditors conducted 917 audits and approved 100% of the company’s home furnishing suppliers, up from 54% in 2008. As Lin Wang, Sustainability Manager at IKEA Group China noted, “IWAY is not only an auditing framework, but a business discipline. If suppliers choose not to maintain compliance, they can no longer supply IKEA Group. By having internal auditors in all business areas, we integrate IWAY in the business and enforce suppliers’ compliance.” Suppliers in high-risk locations were audited annually, and others were audited at least every two years. Suppliers that did not comply with IWAY were phased out. In 2002, IKEA Group introduced an IWAY standard for forestry practices spanning its entire supply chain, from forests to furniture. As IKEA Group Range and Supply Forestry manager Anders Hildeman noted, “By engaging with suppliers on IWAY Forestry Standard, we were able to take a step-wise approach that has led to higher standards across the supply chain—creating a new base level of what we consider to be more sustainable wood.” By 2013, the IWAY Forestry Standard prohibitted sourcing wood: • from forests that had been illegally harvested; • from forestry operations engaged in forest-related social conflicts; • harvested in geographically identified Intact Natural Forests or High-Conservation Value Forests d, unless they were certified as responsibly managed; • harvested from natural forests in the tropical and subtropical regions being converted to plantations or non-forest use; d High Conservation Value Forests is a designation of the Forest Stewardship Council that refers to forest areas that contain significant concentrations of rare, threatened or endangered species, or that provide to local communities critically important services (e.g., preventing landslides), products, or traditional cultural identity. 6 Sustainability at IKEA Group 515-033 • from officially recognized and geographically identified commercial genetically modified tree plantations. Beyond these minimum requirements, the IWAY Forestry Standard also specified conditions under which wood would qualify as coming from “More Sustainable Sources” to be either: • wood certified to the Forest Stewardship Council’s “Forest Management” and “Chain of Custody” standards; or • pre- and post-consumer reclaimed wood (recycled). The Forest Stewardship Council (FSC) was created in 1993, in the wake of the failure of governments and NGOs at the 1992 Earth Summit to achieve a consensus on measures to fight deforestation. The FSC embodied a consultative approach to solving deforestation and was governed by its multi-sector stakeholder members, which included environmental NGOs, the timber trade, community forest groups, and forest certification organizations. IKEA Group was one of the founding members. FSC governance was based on the principles of participation, democracy, and equity. These principles influenced the structure of the FSC’s General Assembly—composed of delegates from national FSC initiatives, FSC members, NGOs, FSC certification bodies, FSC certificate holders, trade unionists, NGOs, and others—and subdivided into three chambers (environmental, social, and economic) that were further split into sub-chambers of global North and South. Any major decision—national or international—required a majority vote from these chambers. The FSC Forest Management standard referred to timber management practices that were based on a set of 10 principles, including to respect indigenous peoples’ rights; to maintain or restore forest ecosystems, including their biodiversity and landscape; to implement a documented management plan; and to comply with all laws, regulations, treaties, conventions, and agreements. The FSC Forest Management standard was adapted to local conditions to reflect the diverse legal, social, and geographical conditions of forests. The FSC Chain of Custody standard provided an information trail for wood products as they flowed through every stage of the supply chain—including timber harvesting, processing, manufacturing, and distribution—to verify that FSC-certified material was identified or kept separated from non-certified material. Howard estimated that wood certified under the FSC Forest Management and Chain of Custody schemes often commanded a 5% price premium. IKEA Group favored FSC over alternative standards such as the Programme for the Endorsement of Forest Certification (PEFC) because of FSC’s distinctive governance process that emphasized balance across various stakeholders. FSC certification was the most widely available commercially within its key sourcing regions, and had the greatest consumer recognition among various standards. (See Exhibit 10 for a comparison of the certifications and Exhibits 11a and 11b for the area of FSC certified forest land.) Hildeman explained, “IKEA Group’s contracts with suppliers include action plans that specify the production level and the type of articles or products expected in the future, and typically range from 1–5 years, and therefore lock in sustainability standards, yield, quality, and cost.” IKEA Group only accounted for solid wood in the volume of wood coming from More Sustainable Sources until 2010, when the company decided to also include particleboard. IKEA Group had committed to reach 50% of wood from More Sustainable Sources by 2017 and 100% by 2020. By the end of 2013, the company’s sourcing had reached 32.4% from More Sustainable Sources composed of 28.4% FSC-certified wood and 4% recycled material (see Exhibit 9). 7 515-033 Sustainability at IKEA Group Achieving a Sustainable Wood Supply Chain: Next Steps As CSO, Howard was proud of the progress being made on implementing the People & Planet Positive strategy and the integration of sustainability concerns into core business decisions. This was certainly true with the company’s sustainable wood initiatives, which spanned its design, procurement, and supply chain functions. But Howard wanted to construct a framework for how these interrelated tactics might be integrated into a coherent strategy. IKEA’s managers faced a substantial challenge as they attempted to decide how to meet the goals laid out in the company’s ambitious sustainability plan. Among the four potential options described below, it was unclear which was preferable in terms of risks, profits, and growth. What were the tradeoffs, and what were the potential synergies among them? Option 1: Owning More Forests Per Berggren, IKEA Group Industrial Strategy Manager, noted, “We could possibly replicate what we do in Russia and Slovakia and lease more forest land.” This would have IKEA Group employees directly managing timberland and being responsible for ensuring that it was managed according to its More Sustainable Source terms. Currently, IKEA Group could not tell customers what forest a particular piece of wood in a product came from, and directly managing forest land could improve IKEA Group’s ability to trace wood from the forest to the end consumer. By 2013, IKEA Group was sourcing 20% of its wood from leased forests in Russia. Hildeman explained, “In Russia there is limited regulatory oversight of illegal logging and low protection of high conservation value. Integrating vertically can considerably strengthen the control of the origin and the sustainability aspects of the wood. What’s more, Russian forestry legislation mandates clear-cutting, which means uniformly cutting all trees in an entire square of forest, which is contrary to sustainable forestry practices.” He added, “In Russia, there are also a lot of small-scale sawmills, so wood availability, quality, and prices can fluctuate a lot. In these conditions, it makes sense to vertically integrate our supply chain.” He therefore wondered if IKEA Group could increase its share of wood sourced from direct timber management in the coming years, maybe up to 80%. Vertically integrating the supply chain could also help IKEA Group secure access to more FSC-certified wood in the future. IKEA Group had started in 2012 to import wood from Russia into China to overcome the wood shortage in China. IKEA Group contracted with an exclusive supplier, a Russian and Chinese joint-venture firm that built the entire supply chain to meet IKEA Group’s specifications. The advantage for IKEA Group was twofold. First, it allowed the company to diversify procurements away from China’s costly wood market for the logging of birch and pine, which, together represented 60% of the wood used by IKEA Group in the country. As a result, 25% of the wood sourced in Russia was used in furniture sold in China. Second, it allowed IKEA Group to closely monitor every step of the supply of wood from Russia to China. IKEA Group China’s Forestry Manager, Mikhael Tarasov, commented, “Backward integration allows IKEA Group to control the entire supply chain and push for a sustainable change.” While there were many advantages to owning or leasing more timber forests, there were some downsides too. To manage more forest land, IKEA Group would need to deploy more capital to cover the high fixed costs of lease holds. It would also divert management attention to leasing and managing timberland, which would require developing forestry planning. Berggren explained, “Managing a forest in essence makes you a wood trader, which means you need to sell most of the wood you produce, including residual material that can be hard to sell.” Furthermore, reaping the benefits of sustainably managing forest lands could be uncertain because the forest rotation period—the time it takes the forest to grow again after being harvested—could exceed the lease term. Hildeman explained, 8 Sustainability at IKEA Group 515-033 “The forests we have in Russia produce birch and pine, which have rotation periods of 70–80 years and 50–60 years, respectively. Meanwhile, our lease period is only 49 years, which means that we cannot be sure to reap the benefits from the investments made in better forest management. In Sweden, owning the forest has been key in incentivizing better forestry management.” In Slovakia, however, the forest land that IKEA Group leased had a shorter rotation period, which allowed the company to manage the forest from planting to harvesting. Leasing and managing land directly would enable IKEA Group to be fully responsible for forest practices, but made it directly accountable when problems arose. In May 2012, Swedish NGO Protect the Forest and the Russian Karelia Regional Nature Conservancy SPOK publicly condemned IKEA Group for logging old-growth forests and other High Conservation Value Forest areas in the two forests the company leased in Russia.12 IKEA Group publicly responded that both forests had been certified by the FSC in 2007, and that it had respected the Russian FSC standard that more narrowly defined old-growth forests than the FSC standards deployed in the West.13 The FSC standard in Russia was adapted to reflect that country’s context, which featured vast hectares of old-growth forest land that would be eligible for protection in many European countries. Protecting all such forests in Russia was not viewed as necessary to protect vulnerable species, as it was in Western Europe, where old- growth forest land was much scarcer. IKEA Group indicated it would increase dialogue with SPOK and other NGOs in Russia to better ensure future common understanding of the local standards.14 Option 2: Driving Higher Procurement Targets and Standards IKEA Group followed a risk-based approach to determine the amount of FSC-certified wood it would include in its 50% target for More Sustainable Sources by 2017. For example, this meant its target was 100% in the regions it deemed to be high risk: Southeast Asia, Greater China, Northeastern Europe, and Southeastern Europe. These regions totaled 20% of the wood sourced by IKEA Group worldwide. Hildeman believed that FSC was a good fit in the IKEA Group global supply chain. He explained, “IKEA Group is three or four steps away from the forest; it usually concentrates on the front end, on design and production, so to exercise forestry management control through FSC certification makes sense to us.“ Ross added, “Setting a target for using more FSC-certified and recycled wood is a simple and efficient message to our customers: they see we are clearly committed to sustainability.” Furthermore, Hildeman noted, “It is not enough if we just ask for FSC-certified materials; we need to increase the availability of such materials.” In 2002, IKEA Group partnered with World Wide Fund for Nature (WWF) to work on responsible forest management. As part of that effort, WWF and IKEA Group collaborated to increase FSC-certified forest areas. Overall, IKEA Group supported 11 WWF projects in 13 countries that focused on four themes: improved forest governance, responsible forest management, responsible and transparent trade, and improved production efficiency. By the end of 2013, the partnership had contributed to the certification of nearly 28 million hectares of forest in Russia (of a total of 200 million hectares of managed forest land in Russia), and around 2 million hectares in China (of a total of 107 million hectares of managed forest land in China). By the end of 2013, only 7% of the world’s forests were FSC-certified, but IKEA Group strived to increase that rate, announcing it would contribute to the FSC certification of 15 million additional hectares of forest in high-risk areas by 2020. Option 3: Using More Particleboard IKEA Group sourced solid wood and particleboard, also known as engineered wood (or board material), that was made of wood particles or fibers bound with glue, often topped with wood veneer, a thin layer of solid wood. Particleboard was often used for furniture’s less visible structural framing elements, but could not be used for some components such as round surfaces that required solid wood. 9 515-033 Sustainability at IKEA Group In 2013, particleboard and solid wood represented 55% and 45%, respectively, of all wood sourced by IKEA Group. Berggren explained that particleboard more efficiently used wood, noting, “The yield from log to lumber is a lot higher for particleboard than it is for solid wood, meaning that we can get more particleboard than solid wood from one log of wood. By shifting from solid wood to particleboard, we can reduce the global amount of wood we use.” He cited an example: “IKEA has, for instance, developed a new lightweight particleboard which is 30% less dense than standard particleboard. This means less wood and resin is used and the product is lighter to transport, so trucks can be filled up to 30% more efficiently.” He also noted economic benefits: “A product made of particleboard is around 20% cheaper than a product made of solid wood.” IKEA Group could redesign its products to increasingly shift from relying on solid wood to particleboard. Berggren believed that the current replacement rate of solid wood by particleboard was around 5% per year, and that it would be technically possible to accelerate this to increase the share of particleboard to 80% by 2022. Design and commercial concerns prevented all solid wood from being replaced by particleboard, however. Berggren noted that consumers perceived solid wood to be worth more than particleboard, and particle board could diminish consumers’ willingness to pay. As a result, Berggren estimated that around half of IKEA Group’s procurement of solid wood could realistically be substituted by particleboard in the coming years. However, limited demand for particleboard in markets like China and India resulted in little or no particleboard production capacity that met IKEA’s quality specifications. This meant that developing particleboard production capacity in these regions would require significant up-front investment from IKEA Group. Option 4: Using More Recycled Wood To increase the share of wood coming from More Sustainable Sources, IKEA Group could also focus on increasing the share of recycled wood from 4% of all wood sourced by IKEA Group in 2013 to 10% by 2020. Recycled wood was cheaper than virgin particleboard in countries (such as France and Germany) that had an ample supply of recycled wood due to landfilling regulations and bioenergy subsidies and in countries (such as Italy) that had limited access to virgin wood-based board. To increase the share of recycled wood, IKEA Group would need to adapt its board manufacturing plants to accept recycled wood, which required heavy investment. To minimize the cost of collecting recycled wood from individuals, only board plants located near urban areas could be used for recycled wood. Furthermore, the availability of used wood could prove problematic in many regions where there was no incentive to collect wood for recycling. For example, used wood in Russia was mainly sent to landfills, and used wood in Sweden was mainly combusted to produce energy. Countries like India lacked the logistical infrastructure to transport and process used furniture into recycled wood. Conclusion The wood supply chain was just one of many strategic dimensions that IKEA Group would have to address in going forward with its ambitious growth plan to double sales to €50 billion by 2020. Howard believed that IKEA Group would continue to refer to the multifaceted People & Planet Positive strategy (see Exhibit 6) over the next few years, using it to help guide the business and each department’s business strategy. Wood sourcing nevertheless constituted a key lever that IKEA Group could use to increase its positive impact on sustainability. Worldwide consumers and employees throughout the entire IKEA Group organization would therefore look to how the company would develop a transformative wood sustainability strategy, especially with respect to the company’s aggressive growth plan in emerging markets. 10 Sustainability at IKEA Group 515-033 Exhibit 1 IKEA Group Financial Figures from 2010 to 2013 ( in euro million) Income Statement 2010 2011 2012 2013 Revenue 23,539 25,173 27,628 28,506 Cost of sales 12,454 13,773 15,723 15,786 Gross profit 11,085 11,400 11,905 12,720 Operating cost 7,888 7,808 8,423 8,709 Operating income 3,197 3,592 3,482 4,011 Total financial income and expense 76 165 427 81 Income before minority interests and taxes 3,273 3,757 3,909 4,092 Tax 577 781 695 775 Income before minority interests 2,696 2,976 3,214 3,317 Minority interests -8 -10 -12 -15 Net income 2,688 2,966 3,202 3,302 Balance Sheet 2010 2011 2012 2013 Property, plant, and equipment 15,982 16,173 17,264 17,036 Other fixed assets 2,683 2,416 2,672 2,493 Total fixed assets 18,665 18,589 19,936 19,529 Inventory 3,415 4,387 4,664 4,257 Receivables 2,238 2,077 2,270 2,193 Cash and securities 16,955 16,828 17,878 16,000 Total current assets 22,608 23,292 24,812 22,450 Total assets 41,273 41,881 44,748 41,979 Group equity 22,841 25,411 29,072 29,202 Long-term liabilities 4,296 3,123 2,523 1,898 Other non-current liabilities 1,325 1,469 1,625 1,567 Total non-current liabilities 5,621 4,592 4,148 3,465 Short-term liabilities 7,724 7,107 6,814 4,763 Other payables 5,087 4,771 4,714 4,549 Total current liabilities 12,811 11,878 11,528 9,312 Total equity and liabilities 41,273 41,881 44,748 41,979 2023 taught by EVELYN THOMCHICK, The Pennsylvania State University from Dec 2022 to Jun 2023. 515-033 Sustainability at IKEA Group Exhibit 2 IKEA Group Management and Sustainability Group Torbjörn Lööf, Chief Executive Officer, Inter IKEA Systems* Franchise agreement Peter Agnefjäll, Chief Executive Officer and President, IKEA Group of Companies Martin Hansson, Retail and Expansion Leif Hultman, IKEA Industry Petra Hesser, Human Resources Jesper Brodin, Range and Supply Steve Howard, Chief Sustainability Officer Helen Duphorn, Corporate Communications Alistair Davidson, Head of Staff Pia Heidenmark Cook, Retail Sustainability Manager Cooperation** Olivia Ross, Communications Manager Hakan Nordkvist, Innovation Manager Greg Priest, Policy & Compliance Manager Pia Heidenmark Cook, Retail Sustainability Manager Source: Compiled by casewriters from company documents. Note: * Inter IKEA Systems B.V. was the franchisor of the IKEA Retail System. IKEA Group was one of 12 independent groups of companies that owned and operated IKEA stores under franchise agreements with Inter IKEA Systems B.V. Franchisees paid a franchise fee of 3% of net sales. 12 For the exclusive use of B. Kanneh, 2023. 515-033 -13- Exhibit 3 All IKEA Group Retail and Production Units at the End of 2013 North America: 50 stores 3% Purchasing Value 6 Distribution Centers 1 Trading Office 1 IKEA Production Unit Europe: 215 stores 60% Purchasing Value 19 Distribution Centers 11 Trading Offices 36 IKEA Production Units Russia: 14 stores 3% Purchasing Value 1 Distribution Center 3 Trading Offices 5 IKEA Production Units Asia: 19 stores 33% Purchasing Value 5 Distribution Centers 12 Trading Offices 2 IKEA Production Units South America: 1% Purchasing Value 1 Trading Office Globally: 303 IKEA Group stores 32 Distribution Centers 60% of production takes place in Europe Australia: 5 stores 1 Distribution Center Source: Casewriters, based on IKEA Group 2013 facts and figures, 2014, accessed July 2014. 515-033 Sustainability at IKEA Group Exhibit 4 Sample of IKEA Group Furniture Sold in the United States, with Indicated Retail Prices (in USD) Source: IKEA 2014 U.S. Online Catalog, http://onlinecatalog.ikea-usa.com/US/en/IKEA_Catalog/, p. 84, accessed August 2014. Exhibit 5 World’s 10 Fastest-Growing Home Furnishing Markets and IKEA Group’s Market Share Country IKEA Group’s Market Share in 2011 Market Size in 2011 in USD million % Market Growth, 2006–2011 China 0.8 % 61,363 15.3 South-Africa 0 % 28,999 7.8 Brazil 0 % 20,271 8.4 Russia 10.5 % 13,527 8.0 Turkey 5.0 % 11,411 7.6 Indonesia 0 % 3,491 11.1 India 0 % 3,176 15.3 Argentina 0 % 2,126 19.4 Ukraine 0 % 1,470 8.7 Thailand 1.1 % 683 8.3 Source: Casewriters, compiled from company data and Euromonitor report, “Passport: Company Profile on IKEA Group,” 2012, accessed June 2013. Note: A 0 market share indicates that IKEA Group was not present in that country in 2011. Market growth is expressed as compound annual growth rate (CAGR). 14 Sustainability at IKEA Group 515-033 Exhibit 6 Highlights from IKEA Group’s People & Planet Positive Strategic Plan Principles and Goals, as of 2014 1. A more sustainable life at home • Take the lead in developing and promoting products and solutions that enable customers to live a more sustainable life at home. • By August 2020, achieve more than a fourfold increase in sales from products and solutions, inspiring and enabling customers to live a more sustainable life at home. • Engage and involve people and communities around our stores, our suppliers and co-workers through impactful, relevant and unique communication. • By August 2020, IKEA seen as number one home furnishing retailer for operating in a way that is better for people and the environment on each market. Observe, on a country basis, a minimum 3% increase in awareness annually on two strategic areas related to People & Planet Positive topics. 2. Resource and energy independence • Strive for resource independence by using resources within the limits of the planet and by encouraging all waste to be turned into resources. • By August 2016, 50% of projected wood volumes will come from More Sustainable Sources (these sources are currently defined as FSC certified or recycled wood. Once the 2017 More Sustainable Sources goal has been met, we will re-evaluate this criteria). • By August 2020, we aim to source 100% of our wood, paper and cardboard from More Sustainable Sources. • By August 2015, all cotton used will be sourced from More Sustainable Sources, such as Better Cotton. • By August 2015, all main home furnishing materials, including packaging, will be either made from renewable, recyclable, or recycled materials. • By August 2020, 90% of our home furnishing products will be more sustainable with documented environmental improvements, covering both resource use and product functionality according to our sustainability product score card. • Develop our business through investing in renewable energy sources, energy efficiency, store expansion and refurbishment, low carbon transportation and range development. • We will maintain or exceed current investment levels and publicly report on progress. • Every new IKEA Group store, distribution centre, or industrial group factory will be located, designed, equipped, and operated to be the most sustainable IKEA Group facility at that point in time. • Strive towards energy independence through being a leader in renewable energy, and becoming more energy efficient throughout our operations and supply chain. • By August 2015, we will produce renewable energy equivalent to at least 70% of our energy consumption. • By August 2020, IKEA Group will produce as much renewable energy as we consume in our operations. 15 515-033 Sustainability at IKEA Group Exhibit 6 (continued) 3. A better life for people and communities • Take a lead in contributing to a better life for people and communities impacted by our business. • Maintain 100% IWAY approval of all suppliers of home furnishing and other key products and services. • By August 2015 secure 100% IWAY approval for all national IKEA Food, Indirect Material and Services and retail suppliers within the scope of IWAY. • By August 2017 secure compliance to IWAY Musts at all sub-suppliers of critical material and processes. • By August 2017 develop and implement a transparent and reliable system for the responsible recruitment of migrant workers at first tier suppliers in identified critical areas. • Continuously identify and develop setups for home based workers to improve working conditions, protect labour rights and prevent child labour. By August 2020, all home based workers are transitioned into improved setups and part of our handmade development programme. Source: Compiled by casewriters from company documents. 16 Sustainability at IKEA Group 515-033 Exhibit 7 IKEA Group’s Supply Chain Wood Volume Forest Sawmill/ Boardmill Component Manufacturer Furniture Manufacturer Volume of wood Volume of wood after Volume of wood after Volume of wood harvested (in RWE sawmill (in million manufacturing (in after manufacturing million) cubic meters) million cubic meters) (in million cubic meters) Solid Wood 6.3 3.2 1.6 1.5 Particleboard 7.7 5.5 5.0 Source: Compiled by casewriters from company documents. Exhibit 8 IKEA Group’s Wood Procurement in 2013, by Region (% of Total Value) Region Wood Procurement East Europe 44 West and North Europe 27 South Europe 13 Asia and Australia 12 North America 4 Source: Compiled by casewriters from company documents. 17 515-033 -18- Exhibit 9 Selected Sourcing and Certification Volumes for Wood at IKEA Group, 2005–2017 (expected) Metric 2007 2008 2009 2010 2011 2012 2013 2017 (expected) World wood market Total wood reserve in forests 214,700,000 214,300,000 213,900,000 213,500,000 212,700,000 213,100,000 213,500,000 (in 000 m3 except %) – Total wood harvested 1,694,000 1,573,000 1,429,000 1,528,000 1,578,000 1,742,000 1,645,000 – FSC-certified wood reserve in forests 14,400,000 14,720,000 16,320,000 19,200,000 21,440,000 23,680,000 25,860,000 – % FSC-certified 6.7% 6.9% 7.6% 9.0% 10.1% 11.1% 12.1% – IKEA Group All wood sourced – – – 13,320 13,780 13,560 13,970 – procurement (in 000 m3 except %) All wood FSC-certified – – – 2,105 2,232 3,065 3,967 – % FSC-certified – – – 15.80% 16.20% 22.60% 28.40% 50%* Solid wood 7,080 7,223 5,800 5,320 5,920 5,690 6,287 – Solid wood FSC-certified 425 506 928 1,256 1,356 1,337 1,421 % FSC-certified 6% 7% 16% 23.60% 22.90% 23.50% 22.00% 35% Particleboard – – – 8,000 7,860 7,870 7,683 – Recycled wood** – – – – – – 0,560 – Particleboard FSC-certified – – – 848 880 1,723 2,188 % FSC-certified – – – 10.60% 11.20% 21.90% 28.00% – Source: Compiled by casewriters from company documents. Notes: * The 2017 figure indicates a target of 50% of wood from More Sustainable Sources by 2017, mainly coming from FSC-certified wood. ** Recycled wood amount is included in Particleboard amount. – Indicates not available. IKEA Group did not disclose particleboard procurement prior to 2010. Wood reserve in forests indicates the amount of wood estimated to be present and available for commerce in forests around the world. Wood harvested per year indicates the amount of that wood harvested per year. FSC-certified wood reserve in forests indicates the amount of certified wood present in forests around the world. 515-033 -19- Exhibit 10 Selected Standards on Forestry and Chain of Custody, as of 2013 Forest Stewardship Program for Russian National Forest Forestry Law of the Council (FSC) Endorsement of Code People’s Republic of Forestry Certification China (PEFC) Creation date 1993 1999 2011 1984 Forest Management (FM) Global superficies of forests FM certified (in 000 hectares) 180,000 (including 14,275 in the US) 245,000 (including 24,600 in the US) 1,184,000 (including 35,000 FSC FM certified) 17,000 (including 3,133 FSC FM certified) Number of countries using FM certification 79 36 Russia China FM Geographical footprint Europe: 43%, North America: 40%, South America: 7%, Africa: 4%, Asia: 4.5%, Oceania: 1.5% Europe: 32%, North America: 61%, South America: 1%, Asia: 2%, Oceania: 4% Russia China Three main countries using FM certification Canada: 32%, Russia: 19%, USA: 8% Canada: 46%, USA: 14%, Finland: 9% NA NA Chain of Custody (CoC) Number of CoC certificates 26,000 (including 3,400 in the US) 15000 (including 2,500 SFI* certificates in the US) 215 2,966 Number of countries using CoC certification 107 64 Russia China CoC Geographical footprint Europe: 52% North America: 17% South America: 5% Asia: 24.5% Oceania: 1.5% Europe: 84% North America: 5% South America: 1% Asia: 7% Oceania: 3% Russia China Governance Producers Yes Yes No No NGOs Yes Yes No No Local Communities Yes Yes No No Government Agencies No No Yes Yes Source: Compiled by casewriters, based on data from Forest Stewardship Council (FSC), the Program for Endorsement of Forestry Certification (PEFC), and Russian and Chinese Forestry Standards organizations. Note: * The Sustainable Forestry Initiative (SFI) is a forestry program endorsed by the Program for Endorsement of Forestry Certification (PEFC). 515-033 Sustainability at IKEA Group Exhibit 11a Forests Certified to Forest Stewardship Council Standards (in million hectares) 2011 2012 2013 Europe 64.0 72.9 80.9 of which Russia 28.8 33.1 38.2 Asia 5.0 5.6 7.7 of which China 2.7 2.5 2.6 North America 60.5 69.0 74.9 Latin America & Caribbean 9.5 12.2 13.8 Africa 7.4 7.2 6.7 Oceania 2.2 2.4 2.7 Total 149 169 187 Source: Compiled by casewriters, based on data from the Forest Stewardship Council. Exhibit 11b Annual Forest Land Certified to Forest Stewardship Council Standards (in million hectares) Source: Compiled by casewriters, based on data from the Forest Stewardship Council. 20 Sustainability at IKEA Group 515-033 Endnotes 1 Kiera Butler, “Earth to IKEA Group,” Mother Jones, May 2009, http://www.motherjones.com/environment/2009/05/earth- ikea, accessed August 2013. 2 James Tozer, “Why customers find it so hard to escape an IKEA Group store,” Daily Mail, January 24, 2011, http://www.dailymail.co.uk/femail/article-1349831/Ikea-design-stores-mazes-stop-shoppers-leaving-end-buying-more.html, accessed July 2013. 3 Euromonitor, “Passport Home and Garden IKEA Group BV profile,” June 2012, p. 12, accessed July 2013. 4 Euromonitor, “Passport Home and Garden IKEA Group BV profile,” p. 5. 5 Euromonitor, “Passport Home and Garden IKEA Group BV profile,” p. 18. 6Anna Molin, “IKEA Group sales jumped 21% in 2012,” MarketWatch, November 7, 2012, http://www.marketwatch.com/story/ikea-chinese-sales-jumped-21-in-fiscal-2012-2012-11-07, via Factiva, accessed July 2013. 7 Anna Ringstrom, “One size doesn’t fit all: IKEA Group goes local for India, China,” Financial Times, March 7, 2013, via Factiva, accessed June 2013. 8 Rajesh Roy, “India clears IKEA Group’s Investment Plan,” Dow Jones Top News, May 2, 2013, via Factiva, accessed June 2013. 9 Ringstrom, “One size doesn’t fit all.” 10 Euromonitor, “Passport Home and Garden IKEA Group BV profile,” p. 33. 11 Don Roberts, “Three reasons the demand for timber is rising (and why you will be managing a more valuable resource,” Canadian Imperial Bank of Commerce (CIBC) World Markets Inc., October 2012, http://www.rightsandresources.org/documents/files/doc_5554.pdf, accessed July 2013. 12 Ida Karlsson, “IKEA Group Products made from 600 year-old trees,” Press Inter Service, May 29, 2012, via Factiva, accessed July 2013. 13 Protect the Forest Sweden, “Expert Confirms the Criticism of IKEA Group’s Russian Logging,” May 30, 2012, http://www.scoop.co.nz/stories/PO1205/S00503/expert-confirms-the-criticism-of-ikeas-russian-logging.htm, accessed March 2015. 14 Dean Kuipers, “Ikea responds to reports of old-growth logging,” The Los Angeles Times, June 12, 2012, http://articles.latimes.com/2012/jun/12/local/la-me-gs-ikea-responds-to-reports-of-oldgrowth-logging-20120612, accessed August 2013. 21
This case is part of your Harvard Business Coursepack on the IKEA Group attached Imagine that you are Steve Howard, the IKEA Group’s Chief Sustainability Officer (CSO). What are your recommendations
SUSTAINABILITY AT IKEA CASE ASSIGNMENT Imagine that you are Steve Howard, the IKEA Group’s Chief Sustainability Officer (CSO). What are your recommendations for the next steps for the company’s sustainable wood procurement initiatives? Consider this, given IKEA’s aggressive growth plan to double its sales by 2020 with the focus on emerging markets, especially China and Russia. Specifically: Evaluate whether wood procurement is a sensible place for the IKEA Group to be focusing its sustainability efforts. Considering the four alternative approaches IKEA Group can pursue to improve the sustainability of its wood procurement practices–(1) owning or leasing more timber forests, (2) driving higher FSC-certified wood procurement targets, (3) using more particleboard, and (4) using more recycled wood in particleboard manufacturing–what are advantages and disadvantages of each option? Considering the IKEA Group’s approaches to post-contract supplier management, what is your recommendation for improvement to enable sustainable wood procurement initiatives moving forward? Assignment Guidelines: Your case assignment should be no longer than 2 single-spaced pages, supported by no more than 2 pages of figures and/or charts. Please review the grading rubric (provided below) before beginning your case assignment. The rubric will be used in the grading of this assignment. Case Single Point Rubric Criteria Ratings Points Main Case Solution: Responsiveness to the Questions Asked. Submission should thoroughly address all of the assignment questions or requirements. 25 pts Main Case Solution: Quality of Answer: The answer should demonstrate evaluation, synthesis, and analysis of readings and other material used for the case solution; assumptions should be explicitly stated and justified 40 pts Main Case Solution: Incorporation of Course Reading Material .Course reading material should be included and integrated into the assignment; citations should be provided for all sources. 20 pts Written Communication: Organization, Written work should be well organized and easy to understand. 5 pts Written Communication: Grammar, The work should be thoroughly spell-checked and proofread by everyone on the team. 5 pts Written Communication: Integration of Writing Styles The team should develop a writing style that is uniform throughout the assignment. There should be no indication that the report involved multiple authors 5 pts
This case is part of your Harvard Business Coursepack on the IKEA Group attached Imagine that you are Steve Howard, the IKEA Group’s Chief Sustainability Officer (CSO). What are your recommendations
W I N T E R 2 0 0 7 V O L . 4 8 N O . 2 SMR239 Sandra Rothenberg Sustainability Through Ser vicizing P le a s e n o te th a t g ra y a re a s re fle c t a r tw o rk th a t h a s b e e n in te n tio n a lly re m o v e d . T h e s u b s ta n tiv e c o n te n t R E P R I N T N U M B E R 4 8 2 1 6 o f th e a r tic le a p p e a rs a s o rig in a lly p u b lis h e d . S T R AT E G Y Sustainability Through Servicizing A to discount, enlightened companies have begun embracing the vision of “sustainable development,” defined by the World Commission on Environ- s the scientific evidence for environmental degradation becomes harder ment and Development as “the ability of current generations to meet their needs without compromising the ability of future generations to meet theirs.”1 But while sustainable development is a desirable goal for society, critics sug- gest that significant, if not radical, changes in the basic assumptions behind current business models are needed to achieve it. Contemporary management scholars suggest that sustainability can be ad- dressed by focusing on increased operational efficiency or more environmentally benign products and processes.2 Some argue, however, that while these changes are necessary, they are not sufficient because they do not address consumption levels. Gains in operational efficiency and environ- ment-friendlier technology may even eventually be counteracted by increases in consumption.3 Thus, in order to be a truly sustainable society, developed nations must consume less.4 This is no small challenge to industrial societies, where consumption has In an increasingly traditionally been an end in itself. Ye t companies are often in the best position to help customers reduce consumption — even of their own products. By environmentally conscious “servicizing,” suppliers may change the focus of their business models from selling products to providing services, thereby turning demand for reduced and cost-conscious world, material use into a strategic opportunity. This new approach is part of the larger move throughout industry to the pro- suppliers can make their vision of services, which, evidence has shown, is linked to higher and more stable business both more profits.5 In addition, some argue that because services are more difficult to imitate than products, they are a source of competitive advantage.6 Thus many tradi- sustainable and more profitable by focusing on services that extend the efficiency and value of tional manufacturing companies, especially those faced with shrinking markets and increased commoditization of their products, are adopting service provision as a new path toward profits, growth and increased market share.7 Hewlett-Packard Co., for example, has defined “tomorrow’s sustainable business” as one in which it shifts from selling disposable products to selling a range of services around fewer products.8 Another company embracing this approach is Interface Inc., a commercial carpeting company based in Atlanta, their products. Sandra Rothenberg is an associate professor of management, marketing and interna- Sandra Rothenberg tional business at the Rochester Institute of Technology’s E. Philip Saunders College of Business. She can be reached at [email protected] Georgia, whose seven-point model of sustainability includes pro- viding “the services their products provide, in lieu of the products themselves.” A study by the Tellus Institute found that in business- About the Research to-business markets, companies such as Coro, DuPont, IBM and This article is part of a cross-industry research program that Xerox have turned to replacing products with services as an inte- looks at how companies develop and implement strategies for gral part of their environmental strategy.9 more environmentally sustainable business practices. The pro- While some researchers have identified companies that are tak- ing this servicizing approach, little has been documented about the process of executing the strategic change.10 Shifting business mod- els so profoundly is not easy, as it challenges the traditional gram is supported by the International Motor Vehicle Program at Massachusetts Institute of Technology, the RIT Printing In- dustry Center, and the Alfred P. Sloan Foundation. The article draws from the experiences of three companies: Gage Prod- ucts, PPG Industries and Xerox. For each of the companies, organizational assumption that selling more of a product is good access occurred through different parts of the organization, as and selling less of it is bad. But for those companies willing to ac- it was important that data come from multiple perspectives. cept the challenge, the result can be even greater financial success. Therefore, semistructured interviews were arranged with at Case Studies in Servicizing least one high-level strategic manager, a company employee involved in the actual provision of services and products, and a Drawing from the experiences of three companies — Gage Prod- customer representative. When possible, multiple interviews ucts, PPG Industries and Xerox — whose present business models in each of these categories were conducted. A total of 24 peo- help customers purchase less of their traditional products, I dis- ple were interviewed, as detailed below. cuss a few of the obstacles these companies faced and the ways in which they were able to overcome them. (See “About the Re- Summary of People Interviewed Level of Interview Gage PPG Xerox search.”) Each company offers a different set of products, yet they all profitably shifted to providing services that help customers High-Level Manager 1 3 3 meet their goals while using less of these products. Moreover, in all three cases, environmental benefits resulted as well. (See Line-Level Employee 1 2 4 “Three Cases in Servicizing,” p. 86.) Customer Representative 4 4 2 Gage Based in Ferndale, Michigan, Gage Products Co. started out Interviews were coded, and coded segments were then as a distributor of specialty chemicals for Shell Oil Co., but over time it shifted to making combination chemical blends for auto- motive paint applications. Because of the specialized nature of its products, Gage has long needed to take a more active role in the management of customers’ paint shop operations. Its employees separated from the field notes and placed in a matrix in order to explore how the cases differed from one another.i In this matrix, a mixture of direct quotes and summary phrases was used. An iterative analysis of the data revealed underlying patterns. would routinely work at assembly plants to consult on color changes, adoption of new application equipment or the use of specialty paint blends. Eventually, Gage was looked at by most i. This method is suggested by R. Yin, “Case Study Research: Design and Methods” (Thousand Oaks, California: Sage Publications, 1994); and M.B. Miles and A.M. Huberman, “An Expanded Sourcebook: Qualitative Data Analysis” (Thousand Oaks, California: Sage Publications, 1994). customers not just as a supplier of solvents but also as a color change expert. A turning point in Gage’s business model came when it intro- tion in the volume of cleaning solvents that Gage supplied to duced a new product called Cobra,which cleaned paint circulation Chrysler paint shops. systems in an environmentally friendlier manner than did its For example, early in 1996, one assembly plant was concerned predecessor. Gage quickly learned that it could not sell this new that it was going to exceed the Environmental Protection Agency material, which had some unique characteristics, as it had sold its emission limits on volatile organic compounds by the end of the traditional products; the company needed to be even more active year. With Gage’s help, it was able to cut VOC emissions by ap- in managing product use at the customer’s site. proximately one-half, thereby avoiding the installation of costly This new service role was evolving just as one of Gage’s cus- abatement equipment. tomers, Chrysler Corp., was facing more stringent environmental regulations. To help Chrysler meet these regulatory demands, PPG Industries In the late 1990s, PPG Industries Inc. of Pitts- Gage started to take greater responsibility not only for introduc- burgh, Pennsylvania, a coatings manufacturer, was also faced ing new materials but also for ensuring their proper use, which with Chrysler’s demand for reductions in product use as a result included more efficient use, and that meant an ultimate reduc- of two main drivers: high costs and environmental regulations. 84 MIT SLOAN MANAGEMENT REVIEW WINTER 2007 from Dec 2022 to Jun 2023. The strategic response for PPG was to help its customer reduce paint use. As one PPG manager explained: “The automotive companies were going to move down a path of trying to decrease usage, whether we participated in that relationship or not. So what PPG decided pretty early in the game was that participating in that transition and helping to manage it was more beneficial than waiting for it to be thrust upon us. We tried to structure a pro- gram that created a win-win scenario.” With this new arrangement, PPG on-site representatives started to take over new management tasks at the plant, including material ordering, inventory tracking, inventory maintenance and even some regulatory-response duties. Through this increased service role, the company has helped Chrysler reduce material use. Inter- estingly, the new business model developed by PPG and Chrysler has started to become the norm for the industry. Chrysler even asked PPG to teach the model to its competitors, such as DuPont Coatings & Color Technologies and BASF Corp., and PPG agreed. First, it did not want to lose Chrysler as a customer in the relatively small automotive paint market, and second, PPG considered such teaching a part of its service offerings. Xerox Corp. Xerox’s move toward servicizing was part of a larger move that developed during the 1990s as its core products were becoming commoditized. In 1994, Xerox started calling itself “the Document Company,” marking a change in strategy that focused less on devices that create printed materials and more on the infor- mation that flows within a business. To drive this strategy forward, the company launched Xerox Global Services, its Paris-based con- sulting division, in late 2001 to help customers improve efficiencies in their document-intensive business processes. A key component of Xerox Global Services is its focus on the office. To help improve the productivity of the office environment, Xerox introduced the Office Document Assessment tool, which analyzes the total costs associated with alternative document- making processes. A typical ODA report offers a range of suggestions for increasing office efficiency, improving worker pro- ductivity and reducing costs. Often central to such suggestions is reducing the number of devices through consolidation, which leads to reductions in the use of toner, paper and other consum- ables, all of which Xerox sells. The reduction in total devices can be substantial, moving from a ratio of more than one device per employee to a ratio of one device per 10 or more employees. For one of Xerox’s clients, United Health Services Hospitals of Binghamton, New York, the opportunity to benefit from these ser- vices persuaded it to stay with Xerox, which had been providing UHSH with office equipment for more than 10 years. In 2001, UHSH was tempted by offers from Xerox’s competitors. But after Xerox completed an ODA, the hospital organization was impressed enough with the potential savings that it entered into a new part- WINTER 2007 MIT SLOAN MANAGEMENT REVIEW 85 S T R AT E G Y nership with the company. While some of the initial estimates for to even look at somebody [other than Xerox] would require savings were high, Xerox eventually helped UHSH reduce costs by something pretty significant to change.” about $60,000 annually. That was done, in part, through reductions Second, through these closer relationships, suppliers can ex- in the number of printers being used, the use of related materials pand the range of products they sell within the company. A Gage and the amount of overall print produced. on-site representative at Chrysler, for example, discussed how he As was the case with UHSH, Xerox sells this set of services has found other opportunities for his company’s products there. primarily as a way to increase its clients’ productivity and lower At UHSH, Xerox provides a greater portion of the printers that its costs. But environmentally aware customers recognize and remain. As one Xerox manager explains, “When you concentrate value the benefits that accompany reductions in material use. As on what is right for the client, it is inherently going to give you one Xerox customer commented: “Not only is our printing sys- more business and more revenue, which is an offset to the declin- tem a massive expense, but it also impacts our rubbish disposal. ing product element of any one transaction.” We can save a small forest each year!” Third, companies can use this business model to attract new Multiple Advantages customers impressed by the company’s social consciousness, manifested in its array of environmentally friendly services and One major concern with the servicizing business model is that products. The first words you see rolling across Gage’s Web site companies could suffer loss of revenue, and maybe even put are “Sustainable solutions, cost reduction, environmental effi- themselves out of business, if reduced demand for their products ciency,”12 and Gage has indeed won several environmental awards goes to the limit. That has certainly not been the case for the for its programs. These alone, according to one top manager, have companies profiled or for numerous others. With PPG and been leveraged into significant market-share gains. Chrysler, for example, PPG saw that its customer was already moving toward decreased paint use. By helping Chrysler sustain Challenges in the Move to Servicizing this shift, the servicizing strategy not only generated good will As with any large-scale initiative for change, the move to servicizing but was also a way to extract revenue from a new source. For its is not easy. It is no small task to reframe the company credo from part, Xerox was able to keep UHSH from defecting to a competi- “sell more product” to “help our customers do X and use less of our tor by offering an attractive combination of services and products product in the process.” A manager at PPG reflected on this chal- that reduced costs. Meanwhile, all three companies believe they lenge:“One of the things we stress most is that this is a cultural shift. have attracted new customers with their new business strategy. It is very difficult as a supplier to get the people on your staff used The benefits of servicizing extend beyond customer attraction to the idea that they want to help take product out of the system.” and retention, however. For Xerox, this strategy moved the com- The people most resistant to such change are often the sales panyfrom focusingonproductsthatwerebecomingcommoditized staff. At Gage, salespeople who worked on commission opposed to a mix of products and services that increased Three Cases in Servicizing revenue. In 2005, approxi- mately 22% of Xerox’s The transition to a service-based business model is not an easy one. Three companies that have profitably shifted to providing services — Gage Products, PPG Industries and Xerox — all still revenue was driven by Xerox Global Services; future ser- vice provision represents a offer a set of products, but they actually help customers to use less of those products, creating an environmental benefit. $20 billion market oppor- Gage PPG Xerox tunity for Xerox, the company estimates.11 Additionally, all three Old Business Model of Maximizing Product Sales Selling chemical blends for automotive paint application Selling paint for automotive paint application Selling printers, copiers and support- ing products companies note that as a result of a servicizing strat- egy, they are able to build New “Servicizing” Business Model Providing an effective paint shop operation Managing efficient and quality paint shop operations Managing efficient document-manage- ment processes closer customer relations, which has three main Material Goods Reduced Solvents and cleaners Paint Printers, copiers, paper and toner advantages. First, the cus- tomer is less likely to change suppliers. As the UHSH representative says, “For us Other Environmental Benefits Lower VOC emissions, lower paint use Lower VOC emissions, improved health and safety protection Reduced energy use and solid-waste generation the new business model, seeing it as directly conflicting with their one that states a cost per gallon of own financial interests. The transition was not a simple matter product to one that often sets a for Xerox either. As one top manager said: “While traditionally a “cost per unit,” whereby the cus- product company, Xerox has certainly recognized the need to tomer pays a set amount lead our clients in finding ways to better leverage their assets, and — including both products and in some cases that leads to a cannibalization of our own installed services— foreveryvehiclepainted. base, which can cause angst within a culture formally dependent “Under this relationship,” explains mainly on product sales.” one top manager,“contracts are ar- Resistance is not limited to the suppliers’ staffs. Within the customer’s organization too, higher-level managers may not have PPG and Chrysler ranged so that profits are not 100% dependent on the quantity of ma- a clear idea of what this new relationship will look like and how it will ultimately be implemented. At UHSH, it took the purchas- ing manager some time to understand the new relationship with reformulated their traditional terial sold to plants.” Thus, there is no incentive on the part of the sup- plier to increase material use. In Xerox and the value it would provide to his organization. Moreover, reductions in the use of various materials are likely contract so that some cases, these contracts even in- clude specific targets for cost to mean changes in customers’ work patterns and assumptions at the operational level. And the concerns of workers there can pre- sent issues for suppliers as well. Gage and PPG employees on the both parties could share in the reduction or solvent reduction as part of the service provision. Using a slightly different ap- plant floor were sometimes challenged by disgruntled paint shop employees tied to long-held routines. Xerox found that some savings realized proach, PPG and Chrysler reformulated their traditional con- customers faced employee resistance to new modes of managing information and, perhaps something most people can relate to, from annual reductions in tract so that both parties could share in the savings realized from reduc- the removal of their own personal printing devices. tions in material usage. Before, the Managing the Change material usage. customer would pay per gallon of material; now, it pays a preset Given these challenges, how can companies manage the shift to amount, negotiated yearly, based on servicizing? In analyzing the three cases, I observed that strategies the prior year’s record of efficiency. to facilitate such change fell into six general categories: In this way, both PPG and Chrysler have an incentive to reduce paint use, which not only benefits the bottom lines of both companies but Building on Existing Strengths At all the companies, managers en- also improves Chrysler’s environmental performance — and image. couraged employees to think of the shift as an extension of the When developing contracts, uncertainties emerged about how companies’ existing service orientations. This new thinking was the new relationship would actually play out. What, for example, least difficult for on-site representatives, who already had a would be the supplier’s role in the customer’s operations, the extent strong, direct customer-service focus. The companies also built to which operational changes could be made (particularly if they on the technical knowledge of their staffs. At Gage, for example, involved new technologies or high levels of resistance), and the ac- employees used their expertise in cleaning materials and paint shop color changes to offer innovative ways to reduce solvent use. And PPG employees used their expertise in paint material prop- erties, material tracking and data analysis, all of which are critical in analyzing opportunities for material use reduction. Redefining the Basis for Profit in Contractual Agreements All three cases involved changing contracts so that they would (1) encourage sup- pliers to look for opportunities to reduce product use, and (2) tual amounts of material and money that could be saved? Mutual trust and a willingness to experiment, observe and adjust were criti- cal factors in facing such uncertainties. It was likely, for example, that there would be variances from the contracted numbers based on projections. In fact, for UHSH and Xerox, the first year actually saw increased costs. But because of the strong relationship between the partners, UHSH understood the reasons for this transient increase and stuck with the partnership to see savings in the following year. create a win-win situation by which both parties would benefit Communicating the New Business Model In order to reduce resis- from the relationship. Perhaps the simplest contract specifies a set tance to change — and, on a more positive note, elicit active profit for a predetermined bundle of services and products. The cooperation — it is important for management to communicate contract between Xerox and UHSH, for example, outlines a cost per continually to employees the new business model and the reason printed impression, which includes estimated service and new- it is making this change. In all three cases, managers needed to product costs. Gage also changed its contract with Chrysler from explain how a program that was seemingly eroding the sales of its S T R AT E G Y products would actually benefit as training in “value selling,” in which they are taught to show the the company. customer that their services — such as managing a more efficient Suppliers must also help to paint process — are worth something. In fact, they are taught how educate staff at the customer or- to estimate the actual dollar value of their services. ganizations,where managers often At Xerox, the new business model required information tech- are confused about their new re- nology skills and industry-specific process knowledge. Some of sponsibilities and employees at these skills were already available in-house, but the company also the operational level are being had to hire additional staff to augment its knowledge base. In one asked to alter processes and do their work with fewer material in- “If you pay sales- case, Xerox purchased an entire company in order to obtain ex- pertise in a particular information technology field. puts. For example, Gage spends a great deal of time explaining to sometimes-resistant paint shop people based on overall revenue as Highlighting Environmental Advantage To varying degrees, interest has been generated in this new business model’s positive envi- workers why they need to change customary work practices and re- opposed to per- ronmental impacts. For Gage and PPG, their customer (Chrysler) was already motivated to reduce material use. Gage also actively strict their solvent use. Changing Incentives Traditionally, device transaction,” explains a Xerox educates some of its customers about the connections between environmental performance and cost reduction. “For many years, to be ‘green’ — that is, to be environmentally friendly — salespeople are paid more when they sell more product, but this manager, “they are meant to be expensive,” says Gage’s in-plant representative. “But we try to tell people that you can have your cake and eat it, too. incentive structure is inconsis- tent with the goals of servicizing. more inclined to You can put together these very beautiful environmental pro- grams and it can also save you money.” Providing this concentrate on the Therefore, in all three cases, sales overarching view and the data that back it up, he adds, is a valu- incentives were changed to be able service to a customer. bigger picture.” more aligned with the new busi- Similarly, Xerox finds that framing its services as a means to ness model. help both the environmental and financial bottom lines makes an Gage, seeing that compensat- attractive proposition for many customers. ing employees on a transaction-by-transaction basis was working in opposition to the company’s objectives, eliminated sales com- The Future of Servicizing missions. Similarly, Xerox has started paying sales staff on the To date, most management literature on sustainability has not basis of total year-over-year revenue increase from their customer questioned the basic assumption of the typical business model base or their targeted geographic area. — that a primary goal of a product manufacturer is to sell more Still, explains a Xerox manager, “not a lot of the salespeople product. But as society faces environmental limits to material will make the journey easily. It is a tough transition because you consumption, that belief must be questioned. This article out- are now selling an intangible alongside a tangible, and the intan- lined the experiences of three suppliers operating under a gible (services and optimization) is often the more important business model that allows economic growth to occur while also component of the transaction. But if you pay them based on helping society to step away from the spiral of increasing con- overall revenue as opposed to per-device transaction, they are sumption. In the servicizing approach, material goods are not more inclined to concentrate on the bigger picture and you tran- seen as ends in themselves; instead, companies make money by scend those boundaries of traditional compensation.” helping customers achieve their goals while using less product. Because of the correlation between reduced material use and Acquiring New Skills While companies should of course build on reduced cost, it is tempting to sell these programs based on their their staff’s existing skills, each supplier we studied had to acquire potential cost savings alone. But companies may also use serviciz- new skills as well. These included technical skills that involve a ing as an integral part of their environmental strategies. In fact, deep understanding of the customer’s processes, as well as new for each of the cases in this article, some customers expressed customer relations skills. At Gage, engineers have been retrained interest in reducing their environmental impacts — often for improved customer service, and new hires are being selected prompted by external (that is, regulatory) pressures. As these for personality traits and experience that fit with roles they might pressures increase, so too might the customer’s desire to reduce play in customers’ plants. At PPG, employees who will be working product use. Instead of being threatened by this phenomenon, on-site are given the traditional technical-service training as well suppliers can take an active role in the reduction. By redefining their business model, they can turn a potential problem into a World,”Harvard Business Review 75 (January/February 1997):67-76. strategic opportunity. Many questions remain to be answered about servicizing. The three case studies are encouraging, but given the universe of dif- ferent companies it is not clear under what conditions a company adopting the servicizing model will be rewarded with increased revenue or indeed put itself out of business. Notable, however, is the experience of Xerox, which suggests that companies with a 3.C.Sanne, “Are We Chasing Our Tail in the Pursuit of Sustainability?”In- ternational Journal of Sustainable Development 4, no. 1 (2001):120-133. 4. Ibid.; P. Dobers and L.Strannegard, “Design, Lifestyles and Sustain- ability: Aesthetic Consumption in a World of Abundance,” Business Strategy and the Environment 14 (2005): 324-336; A.Schaefer and A.Crane, “Addressing Sustainability and Consumption,” Journal of Macromarketing 25, no. 1 (2005): 76-92; and E.F.Schumacher, “Small Is Beautiful: Economics as If People Mattered” (Vancouver, British Co- lumbia: Hartley & Marks, 1999). broader product base and a strong research and development department may be best placed to benefit from the servicizing approach. They have the potential to offer more innovative solu- tions and to take better advantage of new market opportunities that may develop with a particular customer. 5. M. Sawhney, S.Balasubramanian and V. Krishnan, “Creating Growth with Services,” MIT Sloan Management Review 45, no. 2 (winter 2004): 34-43. 6. R. Oliva and R.Kallenberg, “Managing the Transition from Products to Services,” International Journal of Service Industry Management 14, no. 2, (2003): 160-172. Another question is whether this model can also be applied in a business-to-consumer setting. It certainly worked for Patagonia, based in Ventura, California, which sells clothing and equipment to practitioners of “silent sports” (which use no motors), such as fly fishing, paddling and trail running. This company, which made a strategic decision to reduce growth and instead focus on providing value through product quality13 to its unique consumer base, may well be atypical. The challenges of selling services that replace ma- 7. Ibid.; K.Bates, H.Bates and R.Johnston, “Linking Service to Profit: The Business Case for Service Excellence,” International Journal of Service Industry Management 14, no. 2 (2003): 173-183; and G. All- mendinger and R.Lombreglia, “Four Strategies for the Age of Smart Services,” Harvard Business Review 83 (October 2005): 131-145.Inter- face, for example, claims that replacing products with services has increased market share at the expense of competitors.The Interface model can be found at www.interfacesustainability.com/model.html. 8.See L.Preston, “Sustainability at Hewlett-Packard:FromTheory to Practice,”California Management Review 43, no. 3 (spring 2001):26-37. terial use are likely to be far greater for the average company trying to cater to the average consumer. 9. A.White, M.Stoughton and L.Feng, “Servicizing:The QuietTransition to Extended Product Responsibility,” report by Tellus Institute (1999). Future research may therefore include exploring whether or not the application of this model is as promising for consumer markets as it is for business-to-business ones, and whether the process of change differs. Answering these and other questions may help diverse companies move toward business models that do not rest on the assumption that selling more is better but in- stead emphasize sustainable levels of consumption. ACKNOWLEDGMENTS The author would like to thank the participants in this research study for their time and knowledge, as well as the Alfred P. Sloan Foundation, the International Motor Vehicle Program at MIT, and the RIT Printing Industry Center for their financial support. The author would also like to acknowledge those who have pro- vided feedback on this and earlier versions of this article. REFERENCES 1. The World Commission on Environment and Development, “Our Common Future” (New York: Oxford University Press, 1987). 10. As noted by Oliva,“Managing the Transition” and Sawhney, “Creat- ing Growth,” very little has been published on the actual transition process for companies moving from selling products to services.The same holds for transitions that involve reducing material consumption on the part of the consumer.The environmental benefits of servicizing are discussed by White, “Servicizing.” Other articles that mention the environmental benefits of servicizing include: I. Ropke, “Is Consump- tion Becoming Less Material:The Case of Services,” International Journal of Sustainable Development 4, no. 1 (2001): 33-47; Preston, “Sustainability and Hewlett-Packard”; M.W.Toffel, “Contracting for Ser- vicizing,” working paper, Haas School of Business, Berkeley, California, May 15, 2002; E.D. Reiskin, A.L.White, J.K. Johnson and T.J.Votta, “Servicizing the Chemical Supply Chain,” Journal of Industrial Ecology 3, no. 2 and 3 (2000):19-31; K. Hockerts, “Eco-efficient Services Innova- tion, Increasing Business-Ecological Efficiency of Products and Services,” in “Greener Marketing” 2nd. ed. M. Charter and M.J. Polon- sky (Sheffield, United Kingdom: Greenleaf Publishing, 1999), 95-108 and other articles focusing on “product service systems” and “chemical management. Some additional references can be found at the Web site of the Chemical Strategies Partnership, www.chemicalstrategies.org. Some articles that mention this type of strategic approach, although not all focusing on the environmental benefits, include K. Funk, “Sustain- ability and Performance,” MIT Sloan Management Review 44, no. 2 (winter 2003): 65-70; and Sawhney, “Creating Growth.” 11.More information can be found at J.Firestone, “Growth Opportunities: Services,”http://a1851.g.akamaitech.net/f/1851/2996/24h/cacheB.xerox. com/downloads/usa/en/i/ir_2005InvestorConference_JFirestone.pdf. 2. See, for example, R.S.Marshall and D. Brown, “The Strategy of Sus- tainability: A Systems Perspective on Environmental Initiatives,” California Management Review 46, no. 1 (fall 2003): 101-126; J. Hall and H.Vredenburg, “The Challenges of Innovating for Sustainable De- velopment,” MIT Sloan Management Review 45, no. 1 (fall 2003): 61-68; F.L.Reinhardt,“Environmental Product Differentiation:Implications for Cor- porate Strategy,”California Management Review 40, no. 4 (summer 1998): 43-73;and S.L.Hart,“Beyond Greening:Strategies for a Sustainable 12. The Gage Web site is www.gageproducts.com. 13. D.H.Meadows, D.L.Meadows and J.Randers, “Beyond the Limits: Confronting Global Collapse, Envisioning a Sustainable Future” (Post Mills, Vermont: Chelsea Green Publishing, 1992). Reprint 48216. For ordering information, see page 1. Copyright © Massachusetts Institute of Technology, 2007. All rights reserved. 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