2. Worlds in Collision

Nearly three decades ago, environmentalists made this simple but powerful observation. The total environmental impact (I) created by human activity on the planet is a function of three factors: population (P); affluence (A), which is a proxy for consumption; and technology (T), which is how wealth is created. The total environmental impact of human activity can thus be expressed as a formula: I = P × A × T.¹

Achieving sustainability will require stabilizing and ultimately reducing the human impact on the planet. We can do that by drastically decreasing the human population, lowering the level of affluence (consumption), or fundamentally changing the technology used to create wealth—effectively moving technology (T) into the denominator of the formula. The first option, decreasing population, is not feasible short of draconian political measures unless we experience a major public health crisis that causes mass mortality (such as a global pandemic created by a new disease). Indeed, while the rate of population growth is slowing, it is not expected to stabilize until midcentury, at somewhere between 8 billion and 10 billion.

The second option, decreasing the level of affluence, is also not viable; it would only make sustainability harder to achieve because poverty and population growth go hand in hand. Demographers have long known that birth rates are inversely correlated with the standard of living and level of education. Thus, stabilizing the human population will require improving the education and economic standing of the world’s four billion desperately poor, particularly women of childbearing age.

Some believe that the problems of poverty can be addressed through the redistribution of existing wealth. Closer examination, however, reveals the folly of this approach: Even if all the assets of the world’s seven million millionaires (totaling about $25 trillion), were divided among the world’s four billion poorest, that would still give only about $6,000 to each in the form of a one-time payment—clearly not a viable solution to the problem.² In the end, elevating the standing of the poorest can be accomplished only by creating new wealth on a massive scale. Indeed, it might be necessary to increase world economic activity tenfold to support a population of 8 billion to 10 billion.

That leaves the third option: changing the technology used to create the goods and services that constitute the world’s wealth. Although population and consumption are societal issues, technology is the business of business. If economic activity must increase tenfold over what it is today to support a population nearly double its current size, then technology will have to reduce its impact twenty-fold merely to keep the planet at its current levels of environmental impact. Thus, for those who believe that ecological disaster will somehow be averted, it must also be clear that, over the next decade or so, sustainable development will constitute one of the biggest opportunities in the history of commerce. And innovation will be the name of the game.

For example, bio- and nanotechnology create products and services at the molecular level, holding the potential to completely eliminate waste and pollution.³ Biomimicry emulates nature’s processes to create novel products and services without relying on brute force to hammer out goods from large stocks of virgin raw materials.⁴ Wireless information technology and renewable energy are distributed in character, meaning that they can be applied in the most remote and small-scale settings imaginable, eliminating the need for centralized infrastructure and wireline distribution, both of which are environmentally destructive. Such technologies thus hold the potential to meet the needs of the billions of rural poor (who have thus far been largely ignored by global business) in a way that dramatically reduces environmental impact.⁵

The Three Economies

It should be clear from this that transformation toward global sustainability will mean the creation of trillions of dollars in products, services, and technologies that barely exist today. Whereas yesterday’s businesses were often oblivious to their negative impacts and today’s responsible businesses strive to reduce their impacts, tomorrow’s businesses will learn to make a positive contribution. Increasingly, companies will be selling solutions to the world’s social and environmental problems, and doing so in a way that respects diversity and cultural differences. Envisioning tomorrow’s businesses, therefore, requires that we gain a fuller appreciation of a complex set of global interdependencies.⁶ In fact, the global economy is really composed of three different, overlapping economies: the money economy, the traditional economy, and nature’s economy.

The Money Economy

The money economy is the familiar world of industry and commerce comprising both the developed economies and the so-called emerging economies. Roughly two billion people participate in the money economy, with less than half of those living in the wealthy countries of the developed world. Those affluent 800 million, however, account for more than 75 percent of the world’s energy and resource consumption, and also create the bulk of its industrial, toxic, and consumer waste.

Although industrialization has produced tremendous economic benefits, it has also generated significant pollution burdens and continues to consume virgin materials, resources, and fossil fuels at an increasing rate.⁷ In fact, with its rapid growth in emerging economies, industrial activity has reached the point that it might now be having irreversible effects on the global environment, including impacts on climate, biodiversity, and ecosystem function.⁸ The money economy thus leaves a large ecological footprint, defined as the amount of land and resources required to meet a typical consumer’s needs. For example, with only about 4 percent of the world’s population, the United States, the largest money economy, consumes in excess of one-quarter of the world’s energy and materials.⁹

Despite such intense use of energy and materials, levels of conventional industrial pollutants have declined in the developed economies over the past 30 years. Three factors account for this seeming paradox: stringent environmental regulation, the greening of industry, and the relocation of the most polluting activities (such as commodity processing and heavy manufacturing) to the emerging market economies. Thus, to some extent, the greening of the developed world has come at the expense of the environments in emerging economies. Given the much larger population base in those countries, their rapid industrialization could easily offset the environmental gains made in developed countries.

With industrialization in emerging economies comes urbanization—people leaving the countryside in search of wage employment. Today, about one of every three people in the world lives in a city. By 2025, if trends continue, it will be two out of three.¹⁰ Demographers predict that by that year, there will be more than 30 megacities with populations exceeding eight million, and more than 500 cities with populations exceeding one million. Urbanization on this scale presents enormous infrastructural challenges because the major portion of such growth is in the form of urban slums, shantytowns, and squatter communities. Consider, for example, that over the next 20 years, given current trends, more than 300 million people in China alone will migrate from rural areas to cities. This is the equivalent of the entire current population of North America moving to cities in the next two decades.¹¹

Because industrialization has focused initially on commodities and heavy manufacturing, cities in many emerging economies suffer from oppressive levels of pollution. Acid rain is a growing problem, especially in places where coal combustion is unregulated. The World Bank estimates that, by 2010, there will be more than one billion motor vehicles in the world. Concentrated in cities, they will double current levels of energy use, smog precursors, and emissions of greenhouse gas. The result is that, although environmental conditions have improved on some dimensions in the developed world, rapid industrialization in emerging economies is a mounting problem, with an associated explosion of urban slums and shantytowns in the developing world. Another part of the price to be paid for a cleaner environment in the developed world has been large-scale outsourcing of manufacturing industries, with associated job loss and dislocation. Indeed, in the United States, only the wealthiest quintile has seen real income increase over the past two decades. For the vast majority of Americans, real income has actually decreased during this time.¹²

The Traditional Economy

The second economy is the traditional economy: the village-based way of life found in the rural parts of most developing countries. It is made up of roughly four billion people—fully two-thirds of humanity—mainly Indians, Chinese, Latin Americans, and Africans who are subsistence-oriented and meet their basic needs directly from nature, while participating only sparingly in the cash or money economy. Demographers generally agree that the world’s population, currently growing by about 100 million people per year, will continue to increase until it levels off at somewhere between 8 billion and 10 billion after midcentury. Developing countries will account for 90 percent of that growth, and most of it will occur in the traditional economy.¹³

Owing in part to the rapid expansion of the money economy, existence in the traditional economy is becoming increasingly precarious. Indigenous cultures, once able to live in a self-sufficient manner based upon the principles of community, frugality, and sufficiency, have been irreversibly changed by the introduction of cash and wage employment.¹⁴ Structural adjustment, privatization, and free trade have accelerated this trend over the past two decades. Indeed, massive poverty appeared only when the spread of the money economy eroded community ties and traditional cultures. Extractive industries and the development of infrastructure have also, in many cases, degraded the ecosystems upon which the traditional economy depends.

Rural populations are driven further into poverty as they compete for natural resources often made scarce through expansion of the money economy. Women and children in rural areas spend most of their day searching for fuel wood and drawing and carrying water. Ironically, these conditions encourage high fertility rates because, in the short run, children help the family to garner needed resources. But in the long run, population growth in the traditional economy only reinforces a vicious cycle of resource depletion and poverty. Indeed, survival pressures often force these rapidly growing rural populations into practices that cause damage to forests, soil, and water. When wood becomes scarce, people burn dung for fuel, one of the greatest—and least known—environmental hazards in the world today. Contaminated drinking water is an equally grave problem. The World Health Organization estimates that burning dung and drinking contaminated water together cause eight million deaths per year.

As it becomes more difficult to live off the land, millions of desperate people migrate to already overcrowded cities in search of wage employment, often splitting up families and fracturing village communities. Increasingly, the young are migrating to foreign countries in search of wage jobs. It is estimated, for example, that repatriation of income by migrant Mexicans working in the United States has now approached $30 billion per year.¹⁵

Although some find employment in the formal sector, others fall prey to the vicissitudes of the criminal sector: prostitution, drug trafficking, and child labor. Most never find full-time wage employment and instead join the burgeoning informal or extralegal sector of the economy, working in literally millions of small, unregistered enterprises. In fact, Hernando de Soto, the well-known Peruvian economist, estimates that the informal sector accounts for 40–70 percent of total economic activity in developing countries. Because corrupt governments and bureaucratic red tape make official registration of small businesses by the poor prohibitively expensive, the informal economy has become the fastest-growing sector in much of the developing world.¹⁶

A growing number in the traditional economy have simply become permanent refugees. In China, for example, an estimated 120 million people roam from city to city, landless and jobless, driven from their villages by deforestation, soil erosion, droughts, and floods. Worldwide, the number of such environmental refugees from the traditional economy could be as high as 500 million people, and the figure is growing.¹⁷

The result is that, although humanity as a whole is clearly better off than it was a hundred years ago (even the poorest of the poor have better access to education, health care, and food than they did back then), inequity has grown, and the poor—particularly those in the traditional economy—generally face a bleak future. Either they can leave their families in search of potential wage employment in the cities, or they can remain to face an increasingly difficult economic and environmental situation at home. In the Middle East, the situation is particularly explosive: As we have seen, when religious extremism and a growing sense of humiliation are combined with widespread joblessness and hopelessness, the result is terrorism.

Nature’s Economy

The third economy is nature’s economy, which consists of the natural systems and resources that support the money and the traditional economies. In fact, the money and traditional economies are actually embedded in nature’s economy because the former could not exist without the latter. Nonrenewable resources such as oil, metals, and other minerals are finite. Renewable resources such as soils, fisheries, and forests will replenish themselves—as long as their use does not exceed critical thresholds.

Technological innovations have created substitutes for many commonly used nonrenewable resources; for example, optical fiber now replaces copper wire. And in the developed economies, demand for some nonrenewable materials might actually diminish in the decades ahead because of reuse and recycling. Ironically, the greatest threat to sustainable development today is depletion of the world’s renewable resources.

Indeed, as we begin the twenty-first century, the money and traditional economies are slowly destroying their own support system.¹⁸ Increasing demands of the two economies are surpassing the sustainable yields of the ecosystems that underpin them. For example, one-third of the world’s cropland is losing topsoil at a rate that is undermining its long-term productivity, fully half of the world’s rangeland is overgrazed and deteriorating into desert, and the world’s forests have shrunk by about half since the dawn of agriculture and are continuing to shrink. Water tables are falling under large expanses of the three leading food-producing countries—China, India, and the U.S. In China, for example, the combination of land clearing, overplowing, and overgrazing to satisfy rapidly expanding food demand is creating a dust bowl like the U.S. Dust Bowl of the 1930s, but on a much larger scale. Insufficient fresh water may prove to be the most vexing problem in the developing world over the next decade, as agricultural, commercial, and residential uses increase.¹⁹

Existing crop varieties are no longer responding to increased use of pesticides and fertilizer. As a consequence, per capita world production of both grain and meat peaked and began to decline during the 1980s.²⁰ Meanwhile, the world’s 18 major oceanic fisheries have reached or exceeded their maximum sustainable yields. Some even believe that the great North Atlantic Cod fishery could go extinct within the decade. Furthermore, there is now international scientific consensus that human activity, driven by carbon emissions from fossil fuel use, is having a direct effect on the Earth’s climate system.²¹ For the past two decades, natural disasters have been on the increase, with property damage worldwide rising roughly 10 percent per year. And in the year 2000, open water was discovered at the North Pole, stunning many in the scientific community.²²

By some estimates, humankind now uses more than 40 percent of the planet’s net primary productivity, the total amount of the sun’s energy fixed by green plants. As a result, loss of biodiversity is already a significant problem, especially in the tropics where the vast majority of life forms exist.²³ This biological impoverishment is the result of habitat destruction, pollution, climate alteration, and hunting. If, as projected, the human population increases from 6.5 billion to perhaps 10 billion over the next 50 years, we may ultimately drive the majority of remaining species into extinction. In short, nature’s economy is in retreat on a global scale.

Collision Course

The interdependence of the three economic spheres is plain. In fact, the three economies have become worlds in collision, creating the major social and environmental challenges facing the planet, but also opening up business opportunities of vast proportions (see Exhibit 2.1). Consider, for example, that the average American today consumes 17 times more than his or her Mexican counterpart and hundreds of times more than the average Ethiopian.²⁴ The levels of material and energy used in the United States require massive quantities of raw materials and commodities, sourced increasingly from the traditional economy and produced in emerging economies.

Exhibit 2.1. Worlds in Collision: The Business Opportunity

Source: Adapted from S. Hart, 1997. “Beyond Greening: Strategies for a Sustainable World.” Harvard Business Review, January-February (1997): 66-76.

In the traditional economy, massive infrastructure development projects (dams, irrigation projects, mining operations, highways, and power stations), often aided by agencies, banks, and corporations in the developed countries, have provided access to raw materials. Unfortunately, such development has often had devastating consequences for nature’s economy and has tended to strengthen existing, often corrupt, political and economic elites, with little benefit to those in the traditional economy. At the same time, such development projects have contributed to a global glut of raw materials and, hence, to a long-term fall in commodity prices. And as commodity prices have fallen relative to the prices of manufactured goods, the currencies of developing countries have weakened and their terms of trade have become less favorable. Their purchasing power declines while their already substantial debt load becomes even larger. The net effect of this dynamic has been the transfer of vast amounts of wealth (an estimated $40 billion per year since 1985) from developing to developed countries, producing a vicious cycle of resource exploitation and pollution to service mounting debt.²⁵

In the past, ignorance and isolation meant that those in the traditional and emerging economies were largely unaware of their plight. Today, however, the digital revolution is bringing information—and ideas—to growing numbers of the world’s poor. Such knowledge is potentially empowering, as we will see, creating the potential to reform corrupt regimes, solve environmental problems, and spur more equitable forms of development.²⁶ However, the global information economy also possesses a dark side: It facilitates the efforts of nihilists, anarchists, terrorists, and others bent on derailing the evolution of a planetary civilization.

New Lenses on the Global Market

The growing interdependence among the three economies has defined the major social and environmental challenges of our time. But as Exhibit 2.1 also makes clear, the worlds in collision have also created new opportunities for those companies with the capacity to understand and address these challenges. Indeed, there are business opportunities in each of the three economies, as well as at the intersection points. In the money economy, there is significant need for lower material and energy consumption and the development of clean products and technologies. In the traditional economy, the ability to foster village-based businesses to understand and serve the needs of those at the base of the economic pyramid is of paramount importance. In nature’s economy, ensuring sustainable use of natural capital offers significant opportunities for the future. The collision points are also pregnant with opportunity: Reducing waste and pollution, replenishing depleted resources, and building the skills of the poor and the dispossessed are all crucial for achieving a more sustainable world. They also represent significant business opportunities.

As my colleague Mark Milstein and I have argued, however, managers, particularly in multinational corporations, are more accustomed to viewing the global market as a single monolithic entity.²⁷ They focus almost exclusively on the money economy and customers who have achieved a certain level of affluence. They consider markets to be of value only to the extent that consumers have purchasing power comparable to that found in the United States, Western Europe, or Japan. Throughout human history, however, wherever there have been people, there have been markets. Indeed, markets are ubiquitous—they are not unique to the wealthy.²⁸ Thus, within any country or region, even the United States, there are three types of markets: developed, emerging, and traditional. The developed and emerging markets make up the money economy; traditional markets correspond to the traditional economy. All three are embedded in nature’s economy. Not surprisingly, the sustainability challenges—and business opportunities—associated with each are dramatically different (see Exhibit 2.2).

Exhibit 2.2. Major Challenges to Sustainability

Source: Adapted from S. Hart, 1997. “Beyond Greening: Strategies for a Sustainable World.” Harvard Business Review, January-February (1997): 66-76.

In the developed, or consumer, market, about 800 million global customers have the purchasing power to afford virtually anything they want. A global supply chain and well-developed infrastructure allow for the rapid production and distribution of products and services, and consumption occurs at high levels. In the emerging market (well more than one billion people), rapid industrialization and urban migration are increasing demand for basic products and services. However, inadequate infrastructure and distribution hamper the ability of companies to effectively serve this rapidly growing market. Finally, in the traditional market, consisting of more than two-thirds of humanity, more than four billion people have been adversely affected by globalization, ignored by the world of commerce, and victimized by corruption. In most rural areas, there is virtually no infrastructure, credit and collateral are lacking, and legal protections are nonexistent; few companies, as a result, have dared to invest in what they perceive as a risky and potentially dangerous long-term proposition.

Given their distinctive characters, each market requires a different strategy to achieve a more sustainable form of development. To succeed in the developed (consumer) market, managers must focus on reducing the ecological footprint of their firms by reinventing products and processes. To meet the long-term needs of the emerging market, managers must avoid the collision between rapidly growing demand for products and the physical basis for supply or waste disposal. Finally, in the traditional market, managers must recognize the opportunity presented by a massive group of potential customers whose real needs remain poorly understood. Each of these is addressed in more detail in the rest of the chapter.

Developed Markets: Reducing Corporate Footprint

In the consumer economy, many of the resource- and energy-intensive industries—chemicals, automobiles, energy, and mining, to name a few—leave very large corporate footprints. Product systems with large footprints are usually based on mature technologies. As technologies mature, they reach a point at which even large additional investments in technical development yield only small gains in performance. The combination of large footprint and technological maturity creates openings for innovation. To identify sustainability-related opportunities in the developed (consumer) economy, managers should therefore ask these questions:

• Are most of our technological advances incremental instead of breakthrough?

• Does our core technology hold us back from making significant reductions in footprint?

• Where can we remove material content from our products?

• How can our service content be dramatically increased?

• Can our waste be utilized productively in other processes?

DuPont CEO Chad Holliday recently commented: “The objective for our industry ought to be sustainable growth. In the [twenty-first] century, we are going to have to find ways to create value while decreasing our environmental footprint.”²⁹ In the late 1990s, I worked with DuPont Vice President Paul Tebo and others to create a tool for analyzing the corporate footprint by comparing the total pounds of materials consumed per annum in each business with shareholder value added (SVA) per pound. The analysis highlighted three distinct groups of businesses for DuPont (see Exhibit 2.3).

Exhibit 2.3. Reducing the Corporate Footprint at DuPont

Source: S. Hart and M. Milstein, 1999. “Global Sustainability and the Creative Destruction of Industries.” Sloan Management Review, 41(1) (1999): 23-33.

Small-footprint businesses, those using fewer materials and having a high SVA per pound, were seen as “differentiated” businesses; these included photopolymers, electronic materials, agricultural biotech, Lycra™, Tyvek™, Corian™, and auto finishes. Businesses with medium footprints and medium SVA per pound—Nylon and Polyester—were seen as “foundation” enterprises because they represented the traditional core of the company’s business. Businesses with large footprints and low SVA per pound, such as the petroleum subsidiary Conoco, represented the company’s least desired enterprises. DuPont sees the high earnings, cash flow, and intellectual content (R&D/capital) of the differentiated businesses as the models for the future. As a result, over the past few years, large-footprint businesses such as Conoco and even foundation (core) enterprises such as Nylon and Polyester have been divested or spun off in an effort to fuel future growth in the differentiated businesses and to reduce corporate footprint.

Collins & Aikman Floorcovering (now part of the Tandus Group) is another company that has premised its entire competitive strategy on footprint reduction. In the mid-1990s, the company became the first commercial carpet manufacturer in the world to convert old carpet and post-industrial PVC waste into carpet backing for a new product line.³⁰ Called ER3 (which stands for Environmentally Redesigned, Restructured, and Reused), this product actually possesses superior functionality (it is more stable and “cushy” than conventional backing made from virgin material) and is cheaper to produce (at least in part because much of the raw material is available in the form of “waste” from customer sites). The combination of lower cost and higher functionality has fueled the company’s double-digit growth in both revenues and profits in an industry that is growing at only about 4 percent per year. Today the company no longer sells a virgin product in the carpet tile segment. Appropriately, the company’s motto is “Mining buildings rather than resources.”

Finally, Wisconsin-based SC Johnson Company, makers of Raid^®, Glade^®, and Windex^®, among other household brands, has dramatically reduced its footprint—and realized substantial savings in the process.³¹ As part of its campaign to reduce fossil fuel use and greenhouse gas emissions, the company partnered with a nearby landfill operator to access its methane potential. The company invested in a gas turbine unit and piped the methane gas from the nearby landfill to help power its Waxdale manufacturing facility, one of the company’s major production sites. The 3200-kilowatt turbine with cogeneration capability (which utilizes the waste heat to make process steam) cut fossil fuel use in half at the facility while simultaneously saving the company more than $2 million per year. A second turbine together with the first would supply 100 percent of the average daily power needs at Waxdale. These two landfill gas projects alone have enabled the company to more than meet its aggressive goals for reduction in greenhouse gas emissions worldwide through 2005, a total of more than 50,000 tons of carbon dioxide per year.

Emerging Markets: Avoiding the Collision

Rapid urbanization and industrialization, together with increasing demand for products and services, are placing intense pressure on ecological and social systems in the emerging economies of the developing world. Technologies that previously fueled the development of the consumer market will be inadequate for meeting those future demands without exceeding nature’s capacity for replenishment. Avoiding a collision between rapidly growing demand and a diminishing stock of material supply will, therefore, be the biggest challenge in emerging markets. To identify sustainability-related opportunities in emerging markets, managers should ask these questions:

• Is it environmentally feasible to triple or quadruple the size of our industry?

• What factors prevent our industry from achieving such growth?

• Can we meet growing consumer needs without depleting the natural systems on which we depend?

• Can we use emerging markets to develop “leapfrog” technologies?

• How can we meet growing needs without exacerbating urban problems?

More than one billion people have joined the ranks of the emerging market during the past 20 years. Paradoxically, this rapid “development” has resulted in burgeoning shantytowns, mountains of garbage, dead rivers, noxious air, and cesspools of toxic waste. These problems seriously jeopardize the public health and future growth prospects in many developing countries. Nonetheless, demand for products and services continues to rise.

In meeting growing demand, firms have replicated the strategies, products, and processes that were successful in the developed, consumer market. Given the scale and speed of development in the emerging market, however, a repeat performance of the consumer market is almost certain to lead to environmental and social meltdown. For example, if China came to consume oil at the current U.S. rate, it would need more than 80 million barrels per day—slightly more than the 74 million barrels per day the world now produces.³² Sustainable development in the emerging market will, therefore, depend on firms’ ability to meet rapidly growing demands without repeating the wasteful, outdated practices used in the consumer economy.

Because of the high rate of manufacturing growth in the emerging market, the capital stock in manufacturing is being rapidly replaced. In Asia, for example, the equipment stock of manufacturing plants doubles every six years.³³ Thus, firms can leapfrog to clean (closed-loop, zero-discharge) manufacturing technologies much more easily in the emerging market than in the developed market, where growth in demand is much slower. Technological leapfrogging will be essential if economic development is to occur at the rates required to lift people out of poverty.

Achieving sustainability in the emerging market is particularly challenging for industries that depend on renewable resources. For example, the global forest products industry must meet worldwide demand that is forecasted to grow 1 to 2 percent per year for the next several decades, even as the overall global supply of available timber declines. The industry, built primarily on the rapid harvesting of standing native forests, must find an alternative approach. Recognizing the collision course they are on, some companies have embarked on intensive agroforestry practices to ensure increased fiber supplies. Through high-yield practices, which rely on selective breeding, cloning, and careful site management, companies such as Aracruz Celulose have realized high returns while minimizing and containing environmental impact by producing high-quality wood and fiber on fewer continuously regenerated acres.

Similarly, the agricultural industry must supply the world’s burgeoning population with food while water resources become more scarce, croplands less arable, climate less stable, and crops more homogenized and susceptible to mass failure. The existing model of commercial agriculture, heavily dependent on the intensive use of water, chemical pesticides, and fertilizers, is experiencing diminishing returns. Despite its controversial nature, the use of biotechnology to design crops that are resistant to pests, require less water and fertilizer, and are more nutritious may hold one of the keys to sustainable agriculture in the emerging markets.³⁴

Fingerlakes Aquaculture, a startup company in Upstate New York, has based its entire strategy on avoiding the collision course.³⁵ Overfishing, combined with pressures from development and pollution, has strained wild fish stocks, leading to irregular supply, higher prices, and decreasing quality. As the limits of rangelands and fisheries are reached, there are only three options for increasing the supply of protein in the world: improve the efficiency of grain conversion into animal protein; shift from the less efficient forms of conversion, such as beef or pork, to more efficient ones, such as farmed fish; or rely on ruminants to convert more roughage into either meat or milk.³⁶

Fingerlakes Aquaculture incorporates the first two of these options directly into its strategy. The company has perfected a proprietary water filtration and recirculation technology that enables it to cost-effectively grow fish in a controlled indoor setting, which avoids the pollution problems associated with pond-based fish-farming operations. The company has focused its attention on the production of tilapia, a fish species from the tropics with a firm, mild-tasting white meat reminiscent of cod, haddock, flounder, and other species that are under stress in the wild. Given their omnivorous nature, tilapia can be raised on an inexpensive grain-fed diet (soymeal). Tilapia are also highly efficient converters of grain to protein: 1.2 pounds of feed produce a pound of fish (compare this to beef, which requires 6 pounds of feed for every pound of meat). Furthermore, the company, which is about to launch its first commercial-scale production operation, believes that it can produce tilapia on a cost per pound basis competitive with the cost of Central and South American producers. If successful, this approach could revolutionize the industry—and help to reinvent the protein economy in the process.

Traditional Markets: Understanding Real Needs

Unlike either the developed or the emerging markets, the traditional market is dominated by the poverty and isolation found in the rural villages of the developing world, particularly those ravaged by resource extraction, cultural disruption, and attendant population growth. As we have seen, more than four billion people at the base of the economic pyramid are subsistence oriented and satisfy their basic needs directly from nature: They participate only sparingly in the money or formal economy. Demographers generally agree that as the world’s population approaches 8 billion to 10 billion during the next few decades, most of the growth will occur in the traditional markets. Because vibrant small communities in rural areas stem the pressures for mass migration and accompanying social, political, and environmental breakdown, focusing on the traditional market is both the key to sustainable development and an unprecedented business opportunity for visionary firms. Managers can identify sustainability-related opportunities in the traditional market by asking these questions:

• Can our existing products and services be modified to meet the needs of the poor?

• Can we apply state-of-the-art sustainable technology to meet the needs of those at the base of the economic pyramid?

• Have we overlooked market vacuums, where needs are fundamentally unmet?

• Are we blinded by our current business model?

• Can we build a customer base that can become more substantial over time?

Companies need to focus on developing technologies, products, and services geared specifically to the needs of those in the traditional market. Managers must understand four factors:

• Deep listening and mutual learning are necessary if products and services are to meet real needs.

• Significant profits can be realized by meeting the needs of the poor and disenfranchised. Conventional wisdom holds that the poor do not make good customers, given their lack of money and education.

• Meeting those needs offers the opportunity to apply state-of-the-art (sustainable) technology in fundamentally new and disruptive ways. Simply transplanting business models from the consumer or even emerging markets will not work.

• Business models for the traditional market must leverage local talent, create employment opportunities, and build capacity in the local community.

Companies that recognize the business opportunity of the traditional market clearly understand and cater to the real needs of the poor. For example, more than one billion people worldwide still lack access to safe drinking water. Another 2.4 billion have no access to proper sanitation. As a result, approximately four billion cases of diarrheal illness associated with contaminated water cause nearly three million deaths annually, mostly among poor children under the age of five.³⁷ This is the equivalent of 20 loaded jumbo jets plunging to Earth each day—an unprecedented human tragedy. For the traditional market, then, access to clean water and improved sanitation are crucial elements of development and poverty alleviation. No one argues this point. The question is how to make the availability of clean water a reality.

Centralized water treatment and distribution systems are expensive and take years to complete. With population growing most rapidly in poor rural areas, providing water to the masses through infrastructure becomes increasingly untenable. Fortunately, other approaches exist: In-home (point-of-use) treatment of water allows individuals to control their own drinking water supply. Several companies have begun to focus commercial attention on this exciting—and sorely needed—opportunity. For example, Procter & Gamble is pioneering the development of a combined chemical treatment technology called PuR. This technology, which is equivalent to a water treatment plant in an affordable sachet packet, has been field tested in Nicaragua and the Philippines by the U.S. Centers for Disease Control. The product, specifically designed for the low-income market, has demonstrated significant reductions in diarrheal disease and is being rolled out in test markets in cooperation with CDC and several NGOs.

Perhaps even more significant, KX Industries, using nanotechnology, has created a revolutionary new water filter that cheaply and effectively produces microbiologically and chemically purified water from virtually any water source, regardless of its contamination level.³⁸ Using an easy-to-use gravity flow system consisting of a dispenser with upper and lower reservoirs separated by a replaceable filter “ticket,” the microbiological (MB) filter can quickly transform contaminated water into pure drinking water at a cost of less than $10 per family per year. The MB dispenser can be easily produced at local manufacturing plants, creating much needed wage employment. Village-based distribution of replacement filter “tickets” can also help to create thousands of microentrepreneurs. KX estimates that even at a price of $8 per family per year, the market for the MB filter in the developing world is still in excess of $5 billion annually. Indeed, for about $500 million, a fraction of the billions of dollars earmarked for relief from AIDS, one could substantially solve the water-borne disease problem in Africa by providing the dispenser and filter tickets to the entire at-risk population.

As the P&G and KX Industries examples make clear, companies that look at poorer areas as dumping grounds for outdated technologies or dirty manufacturing facilities fail to identify market vacuums with minimal competition. Increasing numbers of telecommunication companies, for example, have recognized the benefit of avoiding prohibitively expensive landlines. Through satellite, cellular, and radio systems, they are reaching previously unserved rural areas with telecommunications comparable to those found in urban areas. Such wireless systems erase differences among regions and nations in their access to information, allowing smaller-scale economic development that reduces pressures on people to migrate to cities.

Firms succeed in the traditional market because their managers recognize the benefits of developing markets and building future customer bases. Daewoo, for example, realizing the limits of competing head on with U.S., Japanese, and European firms in overcrowded, technology-intensive markets in the consumer market, is relocating much of its industrial base to Burma, Iran, Uzbekistan, Russia, China, Vietnam, Brazil, and Tatarstan, where it can make long-term investments in economic infrastructure. Daewoo enters poor regions as a long-term development partner, offering skills in infrastructure planning, environmental management, and manufacturing. When hard currency is scarce, the company accepts barter. Uzbekistan, for example, is paying for its half of a joint venture factory with cotton, which Daewoo’s trading arm sells on the world market. By using first mover advantage to build relationships, Daewoo is implementing a long-range growth strategy that caters to the world’s poorest regions.

The Value Proposition

Recognizing global sustainability as a catalyst for new business development will prove increasingly important to corporate survival in the twenty-first century—the proverbial crossroads to the future. Understanding the broad global dynamics associated with the three economies outlined in this chapter is an important first step in identifying potentially innovative new strategies. To capture sustainable opportunities, however, managers must rethink their prevailing views about strategy, technology, and markets. Attention focused through the three lenses—developed, emerging, and traditional markets—should help in this regard.

Along with having such awareness and foresight, however, it is crucial to understand how sustainability-related business strategies can benefit a firm’s economic and competitive position. Indeed, unless they see an avenue for value creation, it is unlikely that senior managers will commit the resources necessary to pursue such strategies. In the next chapter, a framework is developed showing how the challenges associated with global sustainability can help to identify distinctive strategies that contribute to a more sustainable world while simultaneously driving shareholder value.

Notes

¹ See, for example, Paul Ehrlich, The Population Bomb (New York: Ballantine, 1968).

² This example is borrowed from John McMillan, Reinventing the Bazaar (New York: W.W. Norton, 2002).

³ Erik Drexler, Engines of Creation (Garden City, NY: Anchor Press, 1986).

⁴ See Janine Benyus, Biomimicry: Innovation Inspired by Nature (New York: Morrow, 1997).

⁵ Diane Coyle, Paradoxes of Prosperity (New York: Texere Publishing, 2001).

⁶ This section draws from Stuart Hart, “Beyond Greening: Strategies for a Sustainable World,” Harvard Business Review 75(1) (1997): 66–76.

⁷ See Paul Hawken, Amory Lovins, and Hunter Lovins, Natural Capitalism: Creating the Next Industrial Revolution (Boston: Little Brown & Company, 1999).

⁸ G. Daily, Nature’s Services (Washington, D.C.: Island Press, 1997).

⁹ Mathis Wackernagel and William Rees, Our Ecological Footprint (Gabriola Island, B.C.: New Society Publishers, 1996).

¹⁰ Allen Hammond, Which World? (Washington, D.C.: Island Press, 1998).

¹¹ Allen Hammond, Which World? (Washington, D.C.: Island Press, 1998).

¹² Allen Hammond, Which World? (Washington, D.C.: Island Press, 1998).

¹³ Donella Meadows, Dennis Meadows, and Jorgen Randers, Beyond the Limits (Post Mills, VT: Chelsea Green Publishing, 1992).

¹⁴ See Helena Norberg-Hodge, Ancient Futures (San Francisco: Sierra Club Books, 1991), for a compelling description of how an ancient culture in the Himalayas (the Ladakh) was disrupted fundamentally by the forces of “development.”

¹⁵ Personal communication, Professor Nicholas Guttierez, EGADE Business School, Tec de Monterrey, Mexico.

¹⁶ Hernando De Soto, The Mystery of Capital (New York: Basic Books, 2000).

¹⁷ Allen Hammond, Which World?

¹⁸ This section is drawn from Lester Brown, Eco-Economy (New York: W.W. Norton, 2001).

¹⁹ Jennifer Reck and Stuart Hart, Water for the Masses (Chapel Hill, NC: Center for Sustainable Enterprise, 2004).

²⁰ Erik Simanis and Stuart Hart, Monsanto Company (A): Quest for Sustainability (Washington, D.C.: World Resources Institute, 2000).

²¹ National Research Council, Our Common Journey (Washington, D.C.: National Academy Press, 1999).

²² Lester Brown, Eco-Economy.

²³ National Research Council, Our Common Journey.

²⁴ Peter Menzel, Material World: A Global Family Portrait (San Francisco: Sierra Club Books, 1999).

²⁵ Wouter Van Dieren, Taking Nature into Account (New York: Springer-Verlag, 1995).

²⁶ Diane Coyle, Paradoxes of Prosperity.

²⁷ This section is excerpted from Stuart Hart and Mark Milstein, “Global Sustainability and the Creative Destruction of Industries,” Sloan Management Review 41(1) (1999): 23–33.

²⁸ John McMillan, Reinventing the Bazaar.

²⁹ Remarks by Chad Holliday, Chemical Industry Conference, Washington, D.C., 9 November 1998.

³⁰ John Buffington, Stuart Hart, and Mark Milstein, Tandus 2010: Race to Sustainability (Chapel Hill, NC: Center for Sustainable Enterprise, 2003).

³¹ This description is based upon a presentation made by Scott Johnson of SC Johnson in April 2004 at Cornell’s Society of Engineering Conference.

³² Lester Brown, Eco-Economy.

³³ U.S. Asia Environmental Partnership, personal communication, April 1998.

³⁴ Erik Simanis and Stuart Hart, Monsanto Company (A): Quest for Sustainability.

³⁵ Personal communication with Paul Sellow, CEO of Fingerlakes Aquaculture, May 2004.

³⁶ Lester Brown, Eco-Economy.

³⁷ Jennifer Reck and Stuart Hart, Water for the Masses.

³⁸ The description of this technology is excepted from Kevin McGovern, Microbiological Water Filtration Technology (MB) Can Defeat One of the World’s Greatest Killers: Water-Born Diseases (Orange CT: KX Industries, 2004).