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Innovation And Materiality

Drive Competitive Advantage through Purpose and ESG Initiatives

18Dec

I’m doing it. Now what?

You’ve made the commitment. You’ve discovered your purpose and you’ve committed to being a leader on Environmental, Social and Governance (ESG) issues. For your followers passion and excitement runs high. On the other side, cynicism and skepticism pervades. You 'can’t make money that way.' Sound familiar?

I’m lost before I got started! How do I insure Purpose and a focus on Environmental, Social and Governance issues will benefit the business?

I recently took a call from an executive facing that daunting challenge. He’d found his passion and wanted to gain buy-in for shifting his business focus to solving global challenges and emphasize ESG related issues—the old way of doing things simply didn’t cut it. But, how do you gain buy-in to an 'ethereal, visionary concept?' How do you determine what will move the needle so it becomes a sustainable effort—one that can make money at the rate of return desired by shareholders over the long-term?

There’s a simple answer that boils down to three words. Materiality, discipline and commitment.

Those who find their organization’s true purpose and connect it to their Vision and Mission rarely have trouble with commitment. But swept up by the enthusiasm for the Purpose and Sustainability, two important things are often lacking: materiality and discipline.

In simple terms, materiality can be boiled down to doing things that matter. As a business, particularly a publicly-traded one, profit matters. Anyone who has run a business knows that achieving a profit requires discipline. But finding purpose and sustainability, well, they can be a lot like the early stages of falling in love. You bubble with enthusiasm and energy, but if that doesn’t get focused and aligned around issues that really matter to you, the passion fades and the deep relationship that is possible can slowly vanish since it wasn’t focused on material issues.

There are Roadmaps, Processes and Systems to turn purpose and sustainability initiatives into Competitive Advantage.

It took some time, but pioneers have blazed the way. They’ve shown purpose, sustainability and profits are not mutually exclusive. In fact, multiple studies from reputable places like the Harvard Business Review and MIT, have shown they can drive competitive advantage and stock price appreciation. Detractors will tell you, yes, but look at all the failures. To which I say, yes, of course, some efforts have not worked. But give me a management practice, process, technique or initiative and I’ll show you where execution has faltered and the outcome wasn’t achieved. In the case of sustainability and purpose-driven initiatives, my experience is that outcome wavers because they lack a disciplined commitment to materiality.

How to overcome the pitfalls and build materiality into your Purpose and ESG efforts for Competitive Advantage.

Every great initiative, transformation or effort starts with three simple things: Purpose (mission), Vision and Principles (values). From there it is about culture and process and disciplined commitment to creating those within your organizations. From your redefined purpose, vision and principles, you now have a new lens. This causes you to look at and reimagine your jobs to be done, how you will serve your customers. If you take famed competitive advantage guru Clay Christensen’s words to heart, you look at customers differently, segment them differently and truly look at their needs and their 'job to be done,' rather than simply their demo or psychographic characteristics. You're solving problems and meeting needs rather than just finding more people who want to buy what you already have. As you do this, your new lens allows you to see new innovation opportunities across products, processes and business models. You have new ways to serve. But how do you decide which to pursue? Disciplined materiality.

Materiality provides the gateway

Materiality brings ESG and purpose-driven companies full circle, back to where it began - with disciplined business principles. There is no one-size-fits-all definition of what is material for each company. In fact it varies by industry and company, although certain industries are predisposed for certain issues to be more meaningful. Therein lies the opportunity. Just as businesses model innovation and competitive advantage arises from combining things in new ways others haven’t thought of, so too does competitive advantage arise from ESG and Purpose - when you focus them on materiality. The key, like with other innovations, is developing a vetting and valuation roadmap for which issues are most pertinent. I follow a simple initial roadmap for vetting new ideas.

Notice stage one isn’t about anything ethereal, it’s about what is relevant and actionable. If an issue passes that screen, it’s time for a second screen.

Does it align with mission and does it achieve a business objective? If the answer is yes, then it is time for an in-depth materiality analysis. This is where the rubber hits the road and where the rhetoric becomes substance. Does the initiative or effort show a return that makes sense to your stakeholders? In my experience, valuing purpose-driven initiatives and ESG efforts requires a different kind of thinking, a different lens from which to view value creation. You need to move from narrowly defined value creation such as profit maximization excluding externalities to, as Michael Porter would call it, shared-value creation which incorporates in the costs and benefits of both the status quo and moving towards ESG and purpose-driven efforts. It also requires moving from a short-term view to a long-term view. Last but not least, it needs to show the benefit of the newly created innovation and what it will produce for the business. My experience is people are typically pleasantly surprised with the outcomes when they focus on materiality and follow a disciplined approach, see their Purpose and ESG efforts are core to the business and incorporate some new expertise and thinking, which leads to a new, more powerful lens.

You’ve found it, don’t forget the keys to success!

For those that have found their purpose and begun a focus on ESG issues, I offer my thanks. I also offer you my encouragement to keep your commitment through discipline, commitment and a focus on materiality. Business fundamentals got you where you are. Those fundamentals are not mutually exclusive to ESG and purpose-driven efforts. In fact, they’re the lever you need to help drive success and gain competitive advantage. Smart companies, companies like Costco, The Men’s Wearhouse and Unilever have shown the way. It’s hard to argue with their success over time.

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