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Published: October 23, 2007

 
 

How Green Is My Value Chain?

Transforming the value chain into a value loop can save natural resources and enhance a business’s long-term prospects.

We seem all too willing to accept that waste, pollution, and the overexploitation of natural resources are inevitable by-products of the business cycle. Consider the typical, vaunted “value chain”: Suppliers extract raw materials from nature, the manufacturing sector turns them into products, and retailers sell them to consumers, who throw away the packaging, and often eventually the products, as waste. In each link, companies and consumers — consciously or not — despoil the environment. Nonetheless, businesses generally concentrate solely on their own place in the chain, making sure to add at least enough value to generate a profit while using whatever materials and energy are needed to create that value. For their part, consumers are by and large just as cavalier about the consequences of their actions.

But disturbing statistics are beginning to serve as an indirect indictment of the value chain. One stands out. In 2003, our overall consumption of natural resources exceeded the earth’s ability to renew those resources by a whopping 25 percent, according to the World Wildlife Fund. Given that we’ve reached such a troubling point, we must ask: can the world’s economy thrive without damaging or depleting natural resources?

One possible solution is what I call a “value loop.” Under this approach, the beginning and end of the value chain are linked together so that materials, products, and waste can flow among suppliers, manufacturers, and customers in a sustained cycle. The goal: to promote technologies and business models that have minimum impact on nature throughout the loop — or that incorporate it in a beneficial way.

The forward half of the loop — from raw materials to manufactured product to trash — is already in place. The challenge now is to create the return half of the loop, collecting waste material and reprocessing it into new “raw” material. This requires a sequence of steps, including “product take-back,” product demanufacture (breaking down an item into its basic elements), and materials reprocessing. The business challenge of the return path is to create value with each of these steps — just as value is created during the forward half. This could be accomplished through regulation-based or through innovation-based business models.

A recent example of the former has already been introduced in Europe, in the form of so-called product take-back legislation, which mandates the recycling of consumer products at the end of their useful life and requires that new products contain a minimum percentage of recycled materials. The European Union’s End-of-Life Vehicles Directive of 2000, for instance, requires automakers to pay for the cost of taking back and recycling old cars, starting with vehicles sold in 2001, while setting a date of 2015 for 85 percent of the metal in cars to be recycled and banning the use of hazardous heavy metals.

As a result of this directive, European car manufacturers such as BMW and Volkswagen are beginning to develop environment-friendly strategies that include targets for recycled content, the redesign of cars to make them easier to demanufacture, and the use of materials that are easier to reprocess into a reusable form, thus keeping down the costs of the return loop and making it economically viable for third-party reprocessors to take part in the value loop.

As critical as legislation will be in promoting the creation of value loops, companies need not wait until laws are passed; instead, they could devise innovation-based business models that protect natural resources. For example, as existing environmental regulations continue to drive up the cost of routine waste disposal, recycling businesses will be able to charge higher fees for picking up recyclable trash. This disposal fee can subsidize both the cost of collection and the expense of breaking down the material so it can be reused. That would make the price of recycled goods competitive with non-recycled products.

 
 
 
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Resources

  1. Amy Bernstein, “Janine Benyus: The Thought Leader Interview,” s+b, Autumn 2006: The biomimicry pioneer is teaching executives that the solutions to their most challenging problems lie in nature. Click here.
  2. Suzanne Charlé, “When Addressing Climate Change Is Good Business,” s+b Leading Idea, 2/20/07: Building the case for gaining first-mover competitive advantage through being green. Click here.
  3. Molly Finn, Gary M. Rahl, and William Rowe Jr., “Unrecognized Assets,” s+b, Autumn 2006: Hidden sources of value can be found in environmental liabilities. Click here.
  4. William McDonough and Michael Braungart, Cradle to Cradle: Remaking the Way We Make Things (North Point Press, 2002): How to promote eco-effectiveness in design and product innovation. Click here.
  5. Peter Parry, Joseph Martha, and Georgina Grenon, “The Energy-Efficient Supply Chain,” s+b, Summer 2007: As concerns mount about fuel prices, long-term energy availability, and climate change, companies’ attention is finally turning toward one of the most pervasive places where energy can be conserved: the industrial supply chain. Click here.
  6. Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (Free Press, 1985): Where the phrase “value chain” began, in what some describe as the most influential strategy book of the last quarter of the 20th century. Click here.
  7. R. James Woolsey, “Gentlemen, Start Your Plug-Ins,” Wall Street Journal, January 1, 2007: This op-ed by a vice president of Booz Allen Hamilton and former director of the CIA argues for the use of plug-in cars as a replacement for fossil fuels. Click here.
 
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