1 posts categorized "Innovation"

10/17/2012

The Sustainability - Innovation Connection

It’s hard to be a top innovator.  In fact, of the many companies considered for popular lists of the “most innovative company,”  fewer than 4% are chosen.  However, our recent research demonstrates that being a sustainability leader can significantly raise your company’s chances of being a top innovator.

Drawing on a number of lists ranking both sustainability and innovation leaders, we analyzed the relationship between the two and came to the following conclusion: sustainability drives innovation, and it does so in a big way.  When we averaged across multiple lists (to confirm the consistency of the the results), the outcome was the same - sustainability leaders are more than 400% more likely to be considered innovation leaders.

To substantiate these results, we looked at two common (and legimate) questions:

  • How do we know the results were causation, not just correlation?
  • How do we know that sustainability leads to innovation, not the other way around?

To address the first question, we considered what we would likely see if something else were causing both sustainability and innovation to be correlated. (The most common suggestion for the “something else” was highly effective corporate management, but there are other possibilities as well.) Then we considered how the scenario would differ if sustainability leadership was directly causing innovation leadership.

Based on our analysis, if sustainability leadership were causing the increase in innovation leadership, we would likely see a longitudinal effect – that is, the likelihood of innovation leadership should change over time. This is because a sustainability leader’s use of sustainability as a lens tends to/has been shown to create innovative ideas, some of which take time to become visible from the outside.

Based on these assumptions/findings, a company should see part of the innovation effect from sustainability in the same year that it becomes a sustainability leader and part of it in the following year. As a result, if a company were a sustainability leader in, say, 2009, we should expect to see an increase in the likelihood of innovation leadership in 2009 and a further increase in 2010, as more of the innovative ideas caused by sustainability come to fruition.

This is different from what we would expect if something else, such as effective/highly effective management, were causing both sustainability and innovation leadership. In that case, sustainability leadership and innovation leadership should move together over time, as whatever causes them both (e.g., effective management) changes.

For example, if a company were a sustainability leader in, say, 2009, we would expect to see that the innovation leadership benefit would be about the same in 2009 and 2010. This means that if a sustainability leader in 2009 were 400% more likely to be an innovation leader that same year, we would not expect that to increase in 2010. (To take the example of effective management, we would expect that to be relatively consistent from year to year, because the same management team is in place or because a tested succession plan has left the organization with a strong management team.)

What this means is that the two competing hypotheses – sustainability leadership causes the increase in innovation leadership, versus sustainability is not the cause – indicate very different things, which means looking at the longitudinal data can enable us to tell which hypothesis is supported by the data and which is not. When we compare the longitudinal data, we find that, as the chart below shows, there is a very significant further increase in innovation leadership the year after sustainability leadership. (To use our examples above, a 2009 sustainability leader is 400% more likely to be an innovation leader in 2009 and 600% more likely to be one in 2010.)

This is exactly what we would expect if the hypothesis that sustainability leadership causes the increase in innovation leadership were true. But it is not at all what we would expect if the hypothesis that they are correlated but not causally related were true.

Another possible alternative explanation for the results (other than sustainability leadership causing innovation leadership) is that the causality is in fact the reverse – innovation leadership causes sustainability leadership. To test this hypothesis, we looked for two things:

  • Is the relationship between innovation and sustainability stronger (or less strong) than the relationship between sustainability and innovation?
  • Does innovation show the same longitudinal relationship with sustainability that sustainability does with innovation?

As seen in the chart below, the answer to both questions is no. The sustainability-innovation relationship does go both ways (which makes sense, as an innovative company may be more open to more sustainable technology and ideas), but the connection from sustainability to innovation is much stronger. In addition, the connection from innovation to sustainability does not show the longitudinal increase that the connection from sustainability to innovation does.

This means that the evidence supports the idea that sustainability leadership causes innovation leadership and does not support either of the alternative hypotheses: that they are correlated but not causually related or that the causation is from innovation to sustainability.

Picture1
"The Sustainability-Innovation Connection: Making it work", Deloitte Dbriefs Sustainability series, May 1, 2012.


Why Sustainability Drives Innovation

Why are we seeing such a strong link from sustainability to innovation? We believe that sustainability can provide a different “lens” for thinking: it helps companies to think differently, either thinking about different subjects (e.g., emissions) or thinking differently about existing subjects (e.g., thinking about supply chain from the perspective of making suppliers more sustainable).  Thinking differently can unlock companies’ innovative potential—they may see situations differently, they may reexamine their perspective of what’s important, and they can tap into new ideas.


Making It Happen

The next step is turning these new ways of thinking into concrete improvements in innovative output – improved focus, ideas and decisions about which ones to pursue. At Deloitte, we have a tested methodology for injecting sustainability into clients’ existing innovation processes: from the early steps of deciding what to focus on (where sustainability can bring to light new possibilities) to generating ideas (where sustainability-specific techniques can lead to ideas that may otherwise not have been developed) to the final ranking and execution process (where sustainability can help identify risks and growth potential that could otherwise have gone unnoticed). But whether you use our process or not – even if you don’t have a formal innovation process at all – just the act of including sustainability in your thinking can create real value. 


Sustainability and innovation can be essential to companies that want to continue to grow and thrive and now that we can address them both together – to help generate better/improved results – how will you start?


Daniel Aronson
Director
Deloitte Consulting LLP



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