A New Business Logic

Kevin Kelly, editor at large of Wired, observes that the "emerging new economic order… has three distinguishing characteristics. It is global. It favors intangibles— ideas, information, and relationships. And it is intensely interlinked". Kelly sees electronic networks generating new patterns of "organic behavior in a technological matrix". But he suggests that the real changes are not ultimately about technology but communication. According to Kelly, in the world that is emerging, "Communication is the economy".^[13]

Today, perhaps the earth as a living system is communicating to us through increasingly turbulent weather patterns. Perhaps our frayed social structures are communicating to us through increasing acts of child violence. Are we listening? If the New Economy is revolutionizing communication, can it enable deeper listening? If so, we may discern a new business logic emerging, one that starts with rethinking how firms create value and continues by redefining "customers", "employees", "suppliers"—and ultimately the company itself.

From Things to the Value Provided by Things

"Production is increasingly not where value is created", says Ting Ho, vice president of strategy for global-logistics Internet startup Zoho."The traditional company produced something that it then had to sell. Today, we must understand a customer and serve a genuine need".

At the heart of the industrial-age growth machine was a kind of mass hypnosis— convincing consumers that happiness meant owning a new thing. A new washing machine. A new computer. A new car. However, people do not want a hunk of steel in the driveway. They want the benefits it provides—whether they are tangible benefits like transport or intangible benefits like freedom or fun.

What does it mean to create new business models on the basis of that understanding? For Interface, it means shifting from selling carpets to providing floorcovering services, automatically taking back worn carpet tiles or replacing entire sections if a customer wants a different color. For Dow Chemical, it means leasing "dissolving services", then reusing the solvents. For Carrier, the world's leading manufacturer of air-conditioning equipment, it means renting cooling services rather than selling air conditioners. For IKEA, according to its published mission statement, it means providing services to help people "make a house or apartment into a home" rather than selling furniture. All these firms believe that "higher profits will come from providing better solutions rather than selling more equipment", in the words of "Natural Capitalism" authors Amory and Hunter Lovins and Paul Hawken.

From the standpoint of sustainability, providing services rather than just selling products creates a potential new alignment between what is sound economically and what is sound environmentally. A company's business model no longer requires designed-in obsolescence to push customers into buying new products. Instead, producers have an incentive to design for longevity, efficient servicing, improved functioning, and product take-back. Such design allows for maintaining relationships with customers by continually ensuring that products are providing the services that people desire—at the lowest cost to the provider.

The shift from "the value is in the stuff" to "the value is in the service the stuff provides" also may lead to a radical shift in the concept of ownership. Swiss industry analyst Walter Stahel and chemist Braungart have proposed that, in the future, producers will own what they produce forever and therefore will have strong incentives to design products to be disassembled and remanufactured or recycled, whichever is more economical. Owning products forever would represent a powerful step toward changing companies' attitudes about product discard.

Such ideas signal a radical shift in business models, one that will not come easily. It starts with how a company thinks of itself in relation to its customers: as a producer of things people buy or a provider of services through products made and remade? Marketing strategist Sandra Vandermerwe argues that such a view is essential to true customer focus, providing value for customers as well as obtaining value from customers.^[14] It also shifts producers' time horizons. As Volvo discovered years ago, when a company is only selling cars, its relationship with the customer ends with the purchase. When it is providing customer satisfaction, it just begins.

From Producers and Consumers to Cocreators of Value

Focusing on the services provided by products also shifts the very meaning of "customer". Customers are no longer passive; they are cocreators of value. Thirty years ago, futurist Alvin Toffler coined the term "prosumer", people who actively participate in generating the value they derive from any product.^[15] "Today, prosumers are everywhere", says Kelly, "from restaurants where you assemble your own dinner to medical self-care arenas, where you serve as doctor and patient".As Kelly says, the essence of prosumerism today is that "customers have a hand in the creation of the product".^[16]

Prosumerism is infiltrating diverse marketplaces, especially those where Internet technology is strong. One of Amazon.com's most popular Web-site features is customer reviews of books, CDs, and other products. The five-year-old magazine Fast Company now rivals Business Week, Fortune, and Forbes, partly because of its "Company of Friends", a Web-site feature that allows subscribers to get together to discuss common concerns, form support networks for projects, or tell the magazine their interests. "I can go to our Web site and determine which are the 10 most frequently forwarded articles", says editor Alan Webber. "Our readers are no longer just an audience but cocreators of product".

How does that shift to prosumers relate to sustainability? It starts with activist customers who think for themselves. And activist customers are organizing themselves. "Thanks largely to the Internet", say C. K. Prahalad and V. Ramaswamy, "consumers have increasingly been engaging themselves in an active and explicit dialogue with manufacturers of products and services".^[17] They add, "The market has become a forum". Or, as the popular "Cluetrain Manifesto" puts it, the market is becoming "a community of discourse".^[18] With the inmates running the asylum, will they start to change the rules? What if people start talking to one another? What if they talk about the state of the world and how different types of products affect the quality of people's lives?

Leading Web-based companies, because they relate to their customers differently, also gain a different sense of what truly concerns customers. "Without a doubt, sustainability of our current lifestyle—personally and environmentally—matters to a lot of our readers", says Webber. "These were among the concerns that motivated us to start the magazine, and we've seen nothing to persuade us otherwise".

At this stage, it is speculation whether self-organizing networks of customers will unearth the deeper values essential to building sustainable societies. But it is no speculation that shifts in consumer behavior will be essential in creating such societies. One of the most significant concentrations of power in the industrial era has been the growth of a massive advertising industry applying psychological savvy to manipulate consumer preferences."Soap operas" acquired their name because they were devised by Procter & Gamble and other consumer-goods companies to market soap. Could this be another form of centralized control that becomes history, the victim of the freer flow of information and interaction that allows people to know more and learn faster?

Homo sapiens has been around longer than Homo consumer. People still care deeply about the world their children will live in. Building sustainable enterprises will require tapping and harnessing that caring.

Many market-oriented companies sense just such a shift emerging in consumer preferences. For example, Nike has a host of recycled and recyclable products coming to market. For a company that sells the image of fitness, it is not surprising that Darcy Winslow, general manager of sustainable products and services, says: "Corporations in the twenty-first century cannot be fit if we don't prioritize and neutralize our impact on the environment".

From Compliant Employees to Committed Members of Social Networks

There are few companies today that do not struggle with the implications of the free-agent work force. The traditional employment contract based on good pay and benefits in exchange for loyalty is vanishing in many industries. Entrepreneurial opportunities are enticing, especially to young people. Most companies respond by trying to rework the old contract. They increase salary and benefits. They offer stock. They invent creative new perks. But in so doing, they miss entirely the change that might make the greatest difference: a mission worthy of people's commitment.

In 1991, IKEA faced the daunting challenge of extending its European business success to North America, the "graveyard of European retailers". It was clear from the outset that IKEA managers could not say, "Here's how we do it in Sweden", and expect much enthusiasm. Achieving strong returns for a distant corporate office was not enough. Being part of a proud and widely imitated European firm had limited meaning. It became clear that IKEA's North American management team had to find ways to truly engage people.

It turned out that North Americans, like Europeans, were concerned about the environment. Eventually, some 20,000 IKEA employees in North America and Europe participated voluntarily in a two-day training session on "The Natural Step", an intuitive introduction to the system conditions that must be met by a sustainable society. Not only did that engage people in selling the company's environmentally oriented products and creating related product and service ideas, it engaged them in working for IKEA. From 1990 through 1994, North American sales increased 300%.

The free-agent image connotes to many employers lack of commitment, people seeking a purely transactional relationship with a company. Perhaps the opposite is true. It may be a unique opportunity for organizations that truly value commitment. If we actually thought of people as free, we would have to approach them with respect, knowing that they can choose where to work. "It is amazing the commitment that people feel toward our focus on sustainability and the environment", says Vivienne Cox, BP vice president for marketing. "In a very tough business environment, it really matters to people who have many options in their lives".

Most industrial-age companies wanted what they regarded as committed employees. Today, the definition of commitment is changing, and paternalism is giving way to more adult relationships. "People stay with a firm, in many instances, because they see an alignment between their personal values and those they perceive the firm to be committed to", says Ged Davis, who is Shell's vice president for global business environment. If enterprises are not committed to anything beyond making money, why should managers be surprised that workers make transactional commitments?

Kelly also notes that in the competitive labor markets found in fast-growing industries, people change companies but maintain their loyalty "to advancing technology or to the region".^[19] And to trusted colleagues. One key person may take groups of people from employer to employer like the Pied Piper.^[20] Project teams form, un-form and then re-form like the teams of writers, actors, and technical specialists that make movies. Yet larger social networks remain intact. Increasingly, such networks are the keepers of values, commitments, and the subtle know-how that makes winners and losers. Longer-term relationships embedded in fluid but enduring social networks are a new phenomenon that most companies have not yet understood.

"Companies have felt that workers needed them more than they needed workers", says Peter Drucker. "This is changing in ways that most companies still do not seem to grasp".^[21]

From Separate Businesses to Ecological Communities

"The great benefits reaped by the New Economy in the coming decades", says Kelly, "will be due in large part to exploring and exploiting the power of decentralized and autonomous networks", which in many ways now resemble "an ecology of organisms, interlinked and coevolving, constantly in flux, deeply entangled, everexpanding at its edges".

"In traditional businesses, everything was piecework", says Zoho's Ho. "Now we are all part of larger systems, and our success depends on understanding those systems". For example, the traditional relationship between producer and supplier was neat and tidy. Producers wanted reliable supply at the lowest possible cost. Today, cost may be only one of several criteria that shape successful producersupplier relationships. "Both as a supplier and with our suppliers, we are continually codesigning and co-innovating", says Ho. "There is no other way to keep pace with rapid changes and expanding knowledge".

Paradoxically, the realization that all enterprises are part of complex, evolving systems imparts new meaning to relationships and trust. As Webber has said, "The New Economy starts with technology and ends with trust".^[22] People who are co-innovating must know each other and trust each other—in ways unnecessary in traditional relationships between providers and customers. That leads to the question: Can partners in complex supply networks co-innovate more-sustainable practices?

For example, Nike has programs in place with six of its material suppliers to collect 100% of their scrap and recycle it into the next round of products. The goal is to scale this up to all material suppliers. Similarly, all the big steps in design for remanufacture require intense cooperation up and down supply chains. "If you don't have suppliers hooked in, the whole thing will fail", says former Lakes chief engineer John Elter. The Xerox team hosted "supplier symposiums" where "we taught suppliers what remanufacturing means and gave them the basic tools for remanufacture", says Elter. Even more important, they assured suppliers that they would share in the cost savings—because used parts would go back to the suppliers for remanufacture. "The key is that suppliers participate in the economic benefit of remanufacturing because they don't have to make everything new. This is a big deal. Plus, they are developing new expertise they can apply with other customers".

Building the necessary alignment for product take-back among networks of wholesalers, retailers, and customers is equally daunting."Without doubt, one of the biggest challenges with our ‘Evergreen Service Contract’ [Interface's model for selling floor-covering services rather than carpeting]", says chairman Ray Anderson, "is transforming mental models built up over generations"—such as those of purchasing departments in big companies whose incentives are based purely on cost of purchase, rather than on lifetime costs and aesthetic benefits.

Intense cooperative learning will never occur unless companies view their fates as linked. That is why the shift from seeing a world of suppliers and customers to one in which "we are all part of larger systems" is essential. Companies that do not recognize their interdependence with suppliers, distributors, and customers will never build the trust needed to shift established mental models.

"Tennyson had it only half right when he said nature was ‘red in tooth and claw,’" writes Janine Benyus. "In mature ecosystems, cooperation seems as important as competition. [Species cooperate] in order to diversify and…to fully use the habitat". Companies that see one another only as competitors may likewise find their habitat disappearing as the world around them changes.

From Closed Doors to Transparency

The world in which key corporate decisions could be made behind closed doors is disappearing. In 1995, Shell encountered a dramatic and unexpected reaction to its plans to sink in the North Sea its Brent Spar oil platform, which was approaching the end of its productive lifetime. Despite the fact that the company had gone through a three-year process to identify the best environmental option and had the concurrence of the U.K. government, the situation became a public-relations nightmare when other governments objected to the plan. Shell had failed to realize that its private decision had become a public one, a harsh lesson learned by many other companies, from Nike to Ford to Microsoft, in recent years.

There is an old saying in the field of ecology: "There is no ‘away.’" The old world of corporate inner sanctums isolated managers from many of their decisions' social and environmental consequences, distant in time and space from those who made the decisions. As transparency increases, these feedback loops are closing, and consequences must be faced. In this sense, transparency is a powerful ally to naturalism, and may drive many of the changes needed to implement more-naturalistic, circular business processes and models.

Growing transparency already has led to the inclusion of voices traditionally outside the inner circle. Several years ago, Greenpeace objected to the chlorides IKEA used in the printing of catalogs. Few in the industry thought there was any cost-effective alternative. But working together, Greenpeace and IKEA found a Finnish printing company that could produce catalogs without chlorides. IKEA presented its chloride-free catalog at an environmental conference in Washington and set a new industry standard. This experience showed that Greenpeace and IKEA could work together productively by focusing on tangible problems and by believing that breakthroughs were possible. Such trust can only be built over time.

Growing transparency is also leading to new accounting and performancemanagement practices. Shell and others are moving toward "triple-bottom-line" accounting—assessing economic, environmental, and social performance in a balanced way. The Global Reporting Initiative provides practical guidelines for such changes. "Adopting GRI guidelines and triple-bottom-line practices is an enormously difficult step", says consultant John Elkington. "But companies like Shell, Ford, and many others feel they must do this if they want to lead, rather than just react to change".

The path toward broader accountability is fraught with perils. Last spring, Ford's first "Corporate Citizenship Report", based loosely on GRI guidelines, was greeted with as much cynicism as appreciation. The New York Times ignored most of the report (which included lengthy sections on reducing emissions and radical redesign of manufacturing processes) to announce that "Ford Is Conceding SUV Drawbacks".^[23] The article focused on a three-page section of the 98-page report that discussed the dilemma of having a profitable product line that had environmental and safety problems. The Wall Street Journal was more personal, suggesting that chairman William Clay Ford was a hypocrite for both making and criticizing SUVs, a "guilt-ridden rich kid" who should either embrace his customers' preferences or leave the business to those who do.^[24]

Ultimately, transparency is about awareness. With increasing awareness will come pressures for greater accountability for social and natural capital as well as financial capital. Gradually, this will lead to innovations in the larger social context as well.

It is impossible to predict the range of social innovations that growing transparency will ultimately foster. Perhaps new collaborative action-research networks will create the right climate of objectivity and compassion, tough standards and fair reporting combined with a spirit of learning together. (See "The New Competencies") Perhaps more-participative media, building on successful experiments such as those of Fast Company, will enable new levels of collaborative innovation. It may even be time to question the traditional limited-liability status of corporations, which uniquely favors owners of financial capital. Today's world of abundant financial capital and limited natural and social capital differs profoundly from the world of a century ago, when there was a need to protect individual investors. "In a world where learning and knowledge generation are the basis for corporate survival and wealth creation, managers must see a company as a living being, a human community", says writer and former Shell executive Arie de Geus. "Yet, today's managers inherit a very different worldview, focused on the optimism of financial capital. Is it not inconsistent to emphasize knowledge creation, on the one hand, and then treat a company as a machine for producing money, which is owned by its financial investors on the other?"

The New Competencies

The challenges of building sustainable enterprises describe a strange new world few firms are equipped to understand, let alone navigate. The members of the SoL Sustainability Consortium came together believing that their preceding work with organizational-learning principles and tools might make a difference in meeting these challenges.

Today, Consortium members are engaged in projects on sustainability frameworks (from which the ideas on naturalism and humanism came), new energy sources, implementing new business models, and nurturing new leadership networks embodying competencies that build upon the leadership skills for learning organizations (published in the Sloan Management Review 10 years ago^[*]):

• building shared vision,

• surfacing and testing mental models, and

• systems thinking.

Research on mental models and dialogue^[†] needs to be scaled up to allow strategic conversations that involve hundreds and even thousands of people. As Juanita Brown, founder of Whole Systems Associates, says, "The questions we are facing will require members of organizations to learn together at an unprecedented rate, often on a global scale". Starting in 1999, Brown's colleagues Bo Gyllenpalm and David Isaacs helped several large Swedish organizations convene conversations on "Infocom (information and communications services) and the Environment". Convening and hosting such large-scale conversations require particular methodologies. But Brown believes that the key lies in "questions that challenge current experiences and assumptions, while evoking new possibilities for collective discovery". For example, "How can infocom technology and services support the evolution of a sustainable and renewable environment?"

Figure 19.4: Core Learning Competencies for Building Sustainable Enterprises

Most attempts at large-scale change fail because otherwise competent leaders do not understand the complex forces maintaining the status quo. Getting a CEO to support sustainability is not enough. Bottom-up environmental innovations also often fail. Leaders at all levels must understand the multiple "balancing processes" that, on the one hand, make any complex organization viable, but on the other, consistently defeat large-scale change. Leadership strategies must address these balancing forces. For example: relevance (people asking, "What does sustainability have to do with my job?"), believers vs. nonbelievers (the polarization that passionate advocates for social and environmental causes can create), the tyranny of established metrics (most current metrics reflect take-make-waste mental models, and new metrics aimed at life-cycle costs are useless without changes in mental models), and purpose (if the company's core purpose is perceived as making money, people's commitment may be below the threshold required to lead significant change).^{[† †]}

All meaningful work on shared vision rests on distinguishing "creating" from "problem solving". Problem solving seeks to make things we don't like go away. Creating seeks to make things we care about come into being. This is a vital distinction for innovation. When problem solving dominates an organizational culture, life is about survival rather than about bringing into reality things that people care about. Recent research on leadership among entrepreneurs and scientists reveals a particular creative capacity—sensing and actualizing emerging futures. Successful leaders see the world as "open, dynamic, interconnected, and full of possibilities".^{[ ]} They are both committed and "in a state of surrender", as cognitive scientist Francisco Varela expresses it. Economist W. Brian Arthur adds that "cognizing" in business today follows three stages:

• "Observe, observe, observe: become one with the world".

• "Reflect and retreat: listen from the inner place where knowing comes to the surface".

• "Act in an instant: incubate and bring forth the new into reality".

Perhaps when we are able to rediscover "company" (from the Latin companis, sharing of bread) as "living community", we will also rediscover its place within the larger community of living systems where it rightfully resides.

^[13]Kelly 1999, 2, 5, 31.

^[14]Vandermerwe 2000, 28.

^[15]Toffler 1980.

^[16]Kelly 1999, 121–122.

^[17]Prahalad and Ramaswamy 2000, xiv.

^[18]Levine et al. 2000.

^[19]Kelly 1999, 28.

^[20]Wysocki 2000.

^[21]Drucker and Senge forthcoming.

^[22]Webber 1993.

^[23]Bradsher 2000.

^[24]Yates 2000.

^[*]Senge 1990.

^[†]Isaacs 1999.

^{[† †]}These are four of ten basic challenges to sustaining deep change addressed in Senge et al. 1999.

^{[ ]}Jaworski and Scharmer 2000.