By: Frode Lundsten / Jens Frøslev Christensen
”Climate change is a result of the greatest market failure the world has seen. The evidence on the seriousness of the risks from inaction or delayed action is now overwhelming. We risk damage on a scale larger than the two world wars of the last century. The problem is global and the response must be a collaboration on a global scale.” (Professor Lord Nicholas Stern, London School of Economics, at Royal Economic Society Manchester, November 2007, guardian.co.uk)
Most citizens and companies had hoped for clear message from COP15 to guide future investments. Climate change poses a threat to the long-term competitiveness of companies and is too complex to be solved by any one organization alone. We believe Open Innovation is the way ahead and, if strategically well-aligned to proactive strategies for sustainable innovation, can give first mover advantage and contribute to making business models robust and climate-proof.
Climate change is a result of the greatest market failure the world has seen, Professor Lord Stern, LSE
In retrospect, climate change is – as Sir Nicholas Stern convincingly argues – the result of the greatest market failure in history. Like most citizens, companies had hoped for a clear message from the December 2009 COP15 meeting in Copenhagen, indicating the determination of governments around the world to jointly establish new rules for a sustainable future. This was not forthcoming, and especially disappointed were those companies that for long have known that progressive investments and continuous innovation provide the only way not only to save the planet but also to secure long-term competitive advantage and – eventually – protect business.
Despite the outcome of COP15, climate change constitutes the greatest global challenge and greatest opportunity for innovative investments and business development. There are huge competitive advantages to be gained from a proactive stance – and much to lose from a ‘wait and see’ approach. If, 10 or 15 years ago, GM, Ford and Chrysler had been proactive and made comprehensive and enduring commitments towards sustainable fuel platforms and emission standards, they would now have been at the forefront of the competition and been leading the way to sustainable technologies and transportation solutions that eventually would replace gasoline-based modes.
Climate innovation tends to go beyond the capabilities and capacities of any single company in the industry sector
However, progressive climate innovation tends to go beyond the capabilities and capacities of any single company in the industry sector. A firm’s climate footprint is based both on its own production, products, services and operational processes, as well as the entire value chain in which it is positioned and over which it generally has little control. In order to respond proactively, companies need to embrace Open Innovation practices that link clusters of firms and other institutions (e.g. universities and authorities), within collaborative efforts, designed to create the necessary transformations across industries and along value chains. Those companies that are among the first to manage the integration of sustainable and open innovation strategies stand to acquire the competencies required to render their technologies and business models robust and climate-proof and, hence, to gain substantial first-mover advantage.
The wait-and-see strategy and the vicious circle scenario
Climate change has become an issue for the masses, who are engaging and connecting at levels previously unimagined. The phenomenal global expansion of 350.org, an Internet-based NGO community, exemplifies these dynamics. Also, 350.org and other knowledge-based NGO communities are increasingly aligning with other leading climate-focused research communities – in the natural sciences (e.g. the Intergovernmental Panel on Climate Change established by the UNEP and the WMO), and in economics (e.g. the Stern Review on the Economics of Climate Change, or the analyses from Sustainable Development Commission, the UK government’s watchdog on sustainable development).
350.org is pushing for targets to be set by the global scientific community based on increasingly well-substantiated evidence, to meet the scope and urgency of human-induced climate impacts. Although most governments so far have not faced up to what the scientific community considers necessary if we are to avoid devastating climatic effects, in recent decades there has been an underlying tendency towards increasingly strict environmental regulation in most sectors of the economy, a tendency that is likely to become even more pronounced in the future.
The dangers of wait-and-see
Lack of strong government commitment at COP15 greatly increased the dilemma for companies with regard to investing in reducing their carbon footprints and also increased the temptation to pursue a ‘wait and see’ strategy rather than to adopt a proactive one. Although the latter option is not risk-free, we would argue vigorously that the former would expose companies to a vicious circle scenario and increase the threats of extinction in the long term. A reluctance to tackle the problem head one might provide companies with short term cost advantages, but will lock them into technologies and business models that eventually will prove unsustainable – in business as well as in climate terms. And as external pressure for change mounts, they will be unable to respond effectively, and the farsighted first-movers will take over.
The vicious circle scenario could have different consequences in different industries. If all of an industry’s players assume the same wait and see attitude, the industry may become subject to externally imposed regulatory requirements, and taxes on emissions which most likely will reduce the sector’s overall competitive edge – and on an international scale. If individual companies are reluctant to be proactive, they will forego the opportunity to gain experience in and build competencies in progressive climate innovation and will lose market share if, or rather when, public opinion and regulatory requirements prove insurmountable in a context where other firms are able to offer more sustainable alternatives.
The virtuous circle scenario: Aligning sustainable and open innovation strategies
Expectations and demands for progressive efforts to counter climate change from external stakeholders, e.g. customers, NGOs, expert communities and public authorities, are often not confined to the operations, products and services developed within the boundaries of individual companies. Hence, innovative responses to pressures for sustainable innovation require knowledge and insights that may be outside the comfort zones of firms, and may call for complex coordination with several external stakeholders.
For example, Apple’s iPod Video contains 450 parts that are all produced by suppliers and sub-suppliers located primarily in Asia. While sustainable innovation increasingly is being assisted by managerial and analytical tools, such as life cycle analysis and cradle-to-cradle design methods, the systemic and boundary-crossing nature of sustainable innovation means that it cannot be realized successfully without strong competencies in managing Open Innovation.
This does not mean that companies should try to solve all of the problems involved, but rather that companies should identify particular areas where they can make really important contributions (be it to product design, recyclability, production processes, services and consulting, etc.) and link up with other firms that can make complementary contributions or assist in areas that are beyond the central focus of the original company. Such partnerships could include other companies and/or public authorities, critical customers, NGO communities and universities.
Having identified appropriate stakeholders in the sustainable innovation process, the real challenge will be to draft an innovation charter and agree on a common vision
Having identified appropriate stakeholders in the sustainable innovation process, the real challenge will be to draft an innovation charter and agree on a common vision. It is not necessary for all stakeholders to pursue the same goal, but they must agree on the overall direction of the innovation process in order to gain experience and learning from the Open Innovation process. One important issue that will arise is how to handle intellectual property (IP) rights. In Open Innovation, IP is not primarily a defensive means of protection but can often be a strategic asset that signals opportunities for partnerships, licensing and knowledge-sharing. Other important issues associated with Open Innovation are modularity and interface standards. In order to promote the rapid development and diffusion of climate-improving technologies and components, modular systems and open standards must be encouraged.
The impact of new technologies
The rapid commercial development and diffusion of the Internet, GPS technologies and GSM standards in mobile communication, to a large extent, can be ascribed to the fact that upfront consensus was established on open and modular architectures. To promote open and modular platforms in areas such as ‘smart grids’, electric cars, new sustainable energy technologies, and environmentally friendly agribusiness systems, governments and inter-governmental institutions (e.g. the EU) can play central roles in orchestrating the alignment of diverse and relevant stakeholders in standards-setting organizations. And those companies that embrace proactive climate-progressive strategies will be influential in setting the standards for future business development.
Everybody talks about the weather, but nobody does anything about it. (often attributed to Mark Twain)
In parallel with COP15 were many smaller events, in which companies participated to show off their latest inventions and their ideas for reducing CO2 emissions. Amidst the financial crisis there appears to be resilience, willingness and commitment from a large group of companies around the world, to confront the challenges being posed by climate change. And, those companies that are relying on a green strategy primarily oriented to marketing gimmicks will be exposed to increasingly critical scrutiny from NGOs, the media, customer communities and governments, who will show such strategies to be merely ‘green-washing’, a verdict that could potentially be extremely damaging to brands.
The state of the world’s climate is calling for all of us to take action in order to silence those who make the accusation that ‘nobody does anything about it’.
By Jens Frøslev Christensen and Frode Lundsten
About the authors
Jens Frøslev Christensen is Professor of Management of Innovation at Copenhagen Business School. His research interests focus on issues related to Open Innovation, business convergence, the challenges of sustainable innovation, and the strategic and industrial dynamics of sectors such as consumer electronics, Internet services and IT security. He has published numerous books and articles on these issues and authored a book chapter in Open Innovation – Researching a New Paradigm edited by Henry Chesbrough and others, published in 2006 by Oxford University Press. He was guest lecturer in Chesbrough’s Open Innovation Seminar Series at UC Berkeley.
Frode Lundsten has more than 20 years of experience in helping companies to sustain or revitalize their growth. He has worked both in national and international contexts of business development and change management, where strategy implementation and applied innovation management has been the focus. Frode also has experience from publishing and media industry, both as a publisher and a columnist. Frode holds a MBA degree from Henley Management College, UK, where his dissertation focused on the adoption of open innovation in Danish companies. Frode is also founder and partner of Strategy2Tactics.dk.