Global Sustainability and the Creative Destruction of Industries

1. Global Sustainability and the Creative Destruction of Industries Innovation and Technology Transfer -Nuno David -Pedro Nazareth Hart, S. and Milstein, M.B. (1999), “Global Sustainability and the Creative Destruction of Industries”, Sloan Management Review, vol. 41 (1), pp. 23-33. 8th of February 2002

2. Presentation Framework • Introduction • Continuous Improvement and Creative Destruction • The Global Market and Economies • New Metrics • The author´s general conclusion • Our opinion • A contribution to the course: Eco-Innovation and the “S” curve

3. A key solution: Foresight; perceive trends and weak signals before starters become a threat Introduction Shumpeter: dynamic pattern in which innovative upstarts unseat established firms through a process he called “creative destruction” “Disequilibrium” is the driving force of capitalism rather than the competition under equilibrium conditions The problem: Survival of incumbent firms to an unavoidable episode of “creative destruction” The reason: incumbent firms tends to held hostage by their current technology or market position The premise of the article: Global sustainability is a catalyst for the new round of creative destruction

4. Continuous Improvement and Creative Destruction Global Sustainability = Creative Destruction Greening = Continuous Improvement Improving incrementally the performance of existing products or processes Most existing products and processes fail to meet the “sustainable” criterion The challenge of global sustainability must be viewed as a major discontinuity Fosters continuous improvement rather than fundamental innovation Major business opportunity for fundamental innovation The dynamics of creative destruction will work against firms that rely on incremental improvements

5. Global Market • Consumer Economy (1 billion people) • Purchasing power • Rapid Manufacturing & Distribution of P&S • High levels of consumption • Emerging Economy (2 billion people) • Minimal purchasing power • Rapid Industrialization and Urban Migration • Basic consumer needs / Increasing demand for additional P&S • Survival Economy (3 billion people) • Subsistent oriented • Largely rural and poor • Unnoticed, unmet basic needs

6. Life-cycle cost Price Consumer Economy • Large Individual Footprints • Each American “uses” 80 metric tons of materials per year • Very Large Corporate Footprints • Resource and Energy Intensive IndustriesChemicals, automobiles, oil and mining • Result of the use of Mature Technologies The challenge: Reducing Corporate Footprint The Questions: • How Large is the Gap? • Where can we dematerialize? • What processes can we add our waste products to? The Gap

7. Emerging Economy Less than 1/3 world’s population live now in Urban areas. This is estimated to, at least, double in the next few decades • Intensive Industry threatens to jeopardize public health • Repeating performance of the consumer economy is almost certain to lead to environmental meltdown The challenge: Avoiding a collision between growing demand and a stable or diminishing stock of material supply The Questions: • Is it environmentally feasible to double or triple our Industry size? • Can we use emerging economies to develop “leapfrog” technologies? • How can we meet growing needs without exacerbating urban problems?

8. Survival Economy • Currently constitutes half the world’s population. • Fast growing demand for basic needs fulfillment. • View as lesser market (“the poor do not make good customers”) • Unprecedented business opportunities for visionaries. • Stabilization of the survival economy is key to sustainable development. The challenge: To meet basic needs Applying State-of-the-art technologies is fundamental. The Questions: • Can our products meet the basic needs of the poor? • Have we overlooked market “vacuums”? • How can we build a customer base that can become more sophisticated over time?

9. New Metrics Without a clear understanding of how sustainability-driven creative destruction can improve a firm’s economic payoff, it is unlikely that senior managers will commit resources. Emerging Consumer Survival % sales to survival economy Breadth of product availability Social investment vs. Wages Small vs. Large scale Apps Community enhancing vs degrading Tons of Materials / sale Tons of Toxics / sale GHG emissions / sale Public acceptance level Corporate reputation Emissions / sale Water use / sale Land used / Land conserved % Assets in developing Countries Number of jobs created Metrics P/E ratio Share of New Wealth Earnings Growth Increased EVA/SVA Sales Growth Stock Preference Payoffs

10. Independently, managers who treat sustainable development as an opportunity will drive the creative destruction process These managers to capture sustainable opportunities, must rethink their prevailing views about strategy, technology and markets. The three economies and the metrics will help to identify these opportunities The Author´s General Conclusion Paradoxal Schumpeter´s vision: -Doubtful about the ability and motivation of incumbent corporations to drive the creative destruction; but aware that large corporations are the ones that have financial, technical and organizational resources

11. Our Opinion Global Sustainability = Creative Destruction ? Social value: -Social inequalities -Demographics Sustainability is not only Economy and Environment, there are other sustainability values... The dynamics of creative destruction will work against firms that rely on incremental improvements ? -On a pure business perspective, yes. -On an environmental, or even an integrated business environmental approach is not so clear (an example is Eco-design)

12. A contribution to the course: Eco-Innovation and the “S” curve So, Continuous Improvement or Radical Innovation ? -Long view is needed: Technologies take years or decades to travel from initial idea to commercially viable products -Assimilating the environment in the business is a slow and continuous process.