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What if companies used information systems more broadly — not just to measure profits but also to account for the needs of people and the environment?

The 2012 Sustainability Report by MIT Sloan Management Review and BCG sees more companies reporting profits from sustainability practices.

Despite the economic downturn and tenuous recovery, more than two-thirds of businesses are strengthening their commitment to sustainability, according to a new global study by MIT Sloan Management Review and the Boston Consulting Group, as reported in this article. The study found that 69% of companies surveyed plan to step up their investment in and management of sustainability this year. Just over one-quarter (26%) plan no change, and only 2% intend to cut back on their commitment. The study also found that a two-speed landscape is emerging, with a gap between sustainability "embracers"--those who place sustainability high on their agenda--and nonembracers or "cautious adopters," who have yet to focus on more than energy cost savings, material efficiency and risk mitigation. Embracers are significantly more confident about their competitive position than nonembracers are. Seventy percent of embracers said they believe their organizations outperform industry peers. By contrast, only 53% of cautious adopters described themselves as outperformers, and 14% admitted to lagging behind peers--more than twice the percentage of embracers who made the same claim (6%). In addition, nearly three times as many embracers (two-thirds of them) as cautious adopters said that their organization's sustainability actions and decisions have increased their profits. "What's fascinating is that these findings depict a business landscape in general that's tilting hard toward where the embracers already are," says Michael Hopkins, editor-in-chief of MIT SMR and a coauthor of the report. "So the embracers have handed us a kind of crystal ball. Their insights and behaviors suggest a blueprint for how management practice and competitive strategy will evolve." The report identifies seven specific practices exhibited by embracer companies, which together begin to define sustainability-driven management.

Despite the economic downturn and tenuous recovery, more than two-thirds of businesses are strengthening their commitment to sustainability, according to a new global study by MIT Sloan Management Review and the Boston Consulting Group, as reported in this article. The study found that 69% of companies surveyed plan to step up their investment in and management of sustainability this year. Just over one-quarter (26%) plan no change, and only 2% intend to cut back on their commitment. The study also found that a two-speed landscape is emerging, with a gap between sustainability "embracers"--those who place sustainability high on their agenda--and nonembracers or "cautious adopters," who have yet to focus on more than energy cost savings, material efficiency and risk mitigation. Embracers are significantly more confident about their competitive position than nonembracers are. Seventy percent of embracers said they believe their organizations outperform industry peers. By contrast, only 53% of cautious adopters described themselves as outperformers, and 14% admitted to lagging behind peers--more than twice the percentage of embracers who made the same claim (6%). In addition, nearly three times as many embracers (two-thirds of them) as cautious adopters said that their organization's sustainability actions and decisions have increased their profits. "What's fascinating is that these findings depict a business landscape in general that's tilting hard toward where the embracers already are," says Michael Hopkins, editor-in-chief of MIT SMR and a coauthor of the report. "So the embracers have handed us a kind of crystal ball. Their insights and behaviors suggest a blueprint for how management practice and competitive strategy will evolve." The report identifies seven specific practices exhibited by embracer companies, which together begin to define sustainability-driven management.

Organizations can pick price points that provide both profits and long-term value to suppliers.

MIT Sloan Management Review's Business of Sustainability survey and thought leaders interview project identified numerous management challenges presented by the new competitive landscape that sustainability pressures is creating. Perhaps the biggest challenge, though, is how to build the "business case" for investing in a sustainability-related project--even when you believe that the project addresses a significant opportunity. What do executives need to know about sustainability as a business proposition? Interviewee Amory Lovins, co-founder of Rocky Mountain Institute, co-author of Natural Capitalism Creating the Next Industrial Revolution and recipient of a MacArthur Foundation "genius grant," argues that executives labor under several pernicious misunderstandings about how sustainability affects business--the worst being that sustainability efforts have to cost a company, when in fact, says Lovins, they nearly always increase profits. How does one begin to build a persuasive business case for undertaking sustainability-related initiatives? Map your flows and costs of materials and energy, says Lovins; you will find fiscal "leaks" that can be fixed, with direct bottom-line benefits. He also points out numerous side benefits of sustainability-related efforts: gains in innovation, labor productivity and appeal as a collaboration partner. Those benefits, he argues, will exceed the direct ones.

Successful innovation--the kind that leads to customer engagement and profits--is rare and hard to achieve, or so one might conclude from observing the results of many companies' innovation efforts. Some have tried investing intensively in research and development. But the author recently studied public companies representing almost 60% of global R&;D expenditures and found that above a certain minimal level, there is generally no correlation between R&;D spending and financial metrics such as sales or profit growth. For many companies, developing new products is hit-or-miss. But according to the author's research, successful innovation is not magical. It comes from careful attention to a small number of important criteria. The key question isn't how much to spend, but how to spend. The author introduces a "return on innovation investment," or ROI2, methodology that correlates directly with organic growth and links innovation spending with financial performance in ways that can lead decision makers to generate higher, more reliable returns on innovation and R&;D. The ROI2 approach is based on a series of innovation studies conducted during the past seven years with companies in the consumer products, health care and chemical industries. To become more effective, a company needs to diagnose its innovation practices and capabilities. The diagnosis can be quite different from one company to the next, and that is why adopting industry benchmarks doesn't work. The individual innovation profile represents the value and quality of a company's innovation portfolio and can be clearly expressed as an "innovation effectiveness curve." This curve lets companies plot annual spending on innovation projects against the financial returns from those projects--and "solve for growth."

As we sift though the debris of today's crisis, economists and policy makers alike are trying to assess why risk management systems and regulatory constraints didn't kick in before the global economy became engulfed in a tsunami of red ink. But economist Andrew W. Lo, the Harris & Harris Group Professor at MIT's Sloan School of Management, director of the school's Laboratory of Financial Engineering and founder and chief scientific officer of AlphaSimplex Group LLC, an investment adviser in Cambridge, Massachusetts, is less surprised than most seasoned observers. Lo has studied the connections between financial decision making, neuroscience and evolutionary psychology for over a decade. Among his findings are that professional traders, far from being cool-headed and rational, can become transfixed by extreme price movements, their decision-making capabilities temporarily hijacked by emotions such as fear and anxiety. In Lo's view, "behavioral blind spots" (which he defines as evolutionarily hard-wired reactions to perceived risks and rewards) are particularly dangerous during periods of economic extreme: bubbles and crashes. During these times, he says, "market forces cannot be trusted to yield the most sensible outcomes." In an interview with SMR editors, Lo says that balance sheets and income statements are adequate for measuring a company's profits and losses, but provide no information about future risk. He discusses a number of topics relevant to the financial crisis, including the inadequacies of corporate governance, the weakness of standard accounting practices to assess corporate risk and the need for better information and frameworks to inform risk-based decisions. In Lo's view, the financial crisis of 2008-2009 has tested two core ideas: the belief that corporate governance systems are designed to maximize shareholder wealth, and the assumption that markets and businesses will always react rationally to environmental change. If the latter were true, he says, Bear Stearns, Lehman Brothers and other financial institutions would have seen different outcomes.

Product reconstruction, which covers a continuum of activities from recycling to refurbishing to remanufacturing, allows companies to sell high-performance goods at lower prices than equivalent new products while also realizing higher profits. Product reconstruction may open new markets for companies in meeting the needs of one or more of six kinds of customers: those who need to retain a specific product because it has a technically defined role in their current processes; end-users who want to avoid the need to respecify, reapprove or recertify a product; customers who make low utilization of new equipment; those who wish to continue using a product that has been discontinued by the original manufacturer; people who simply want to extend the service lives of used products, whether discontinued or not; and customers who are interested in environmentally friendly products. Beyond serving a particular market, the company must also possess certain kinds of expertise. To succeed at recycling, for example, it must be intimately familiar with the manufacturing process that initially created the product, be able to make extensive and time-consuming sales efforts (to help compete effectively against the many other companies in this low-barriers-to-entry industry) and be willing to specialize, given that particular materials vary greatly in complexity, time requirements, predictability, capital and labor characteristics and expense.

How can companies design products and product lines to maximize profits? Out of all the potential configurations available to them, how should they decide which ones to offer? The authors have developed a framework for balancing the costs of developing and offering a rich line of products and services against customer demand for additional choice. Their methodology helps managers make informed decisions about which features to include in the product; which variations to include in a product line; and how the offerings should evolve with technology and competition. Using examples from the music, software and media industries and citing companies including Apple, Dell, Microsoft, The New York Times, and ESPN, the authors describe five basic types of product offerings: the _ la carte offering, the specialization offering, the all-in-one offering, the basic/premium offering, and the have-it-your-way offering. By highlighting how costs influence product design, they depart from the standard product-success metrics, such as revenue and market share, which are the main focus of most of the work on product bundling. The authors note that the decision to offer a product and how it is designed generally affects both the fixed costs and the marginal costs. They argue that product architects need to expand their definition of fixed and marginal costs beyond those that they typically track and account for to cover costs across the entire supply chain. Although some of these costs may be hard to quantify, they are often too significant to ignore.