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4.2 Systems Thinking

Learning Objectives

  1. Understand the elements of sustainability innovation.
  2. Explain how they can apply to existing companies and new ventures.

In this section, we discuss the ways in which entrepreneurial organizations integrate sustainability ideas into their ventures. Five core elements are necessary—systems thinking, molecular thinking, leveraging weak ties, collaborative adaptation, and radical incrementalism. Each contributes to innovation by opening up new vistas for creativity. For example, systems thinking allows participants to see previously hidden linkages and opportunities within a broader context. Molecular thinking initiates possibilities for innovation through substitution of more benign materials. The use of outside ties contributes novel perspectives and information to the decision process. Collaboration across functional and organizational boundaries helps generate new solutions. Radical incrementalism leads to system-wide innovation. Each of the core elements will be discussed and illustrated with examples.

Systems Thinking

Perhaps the most fundamentally distinctive feature of those engaged with sustainability innovation is the notion of systems thinkingAn approach to entrepreneurial innovation that views business ventures as interdependent with complex living and nonliving systems including the natural world as well as conventional business ties to markets, customers, and vendors.. Systems thinking does not mean “systems analysis,” which implies a more formal, mathematical tool. Nor is systems thinking one-dimensional, as we shall see. Systems thinking is best illustrated by contrasting it to linear thinking, the approach historically associated with business decision making. Linear thinking assumes businesses create and sell, each business focusing on its own operations. Supplier or customer activities are relevant only to the extent that understanding them can generate greater sales and profitability. This linear approach frames business activity as making and selling products that customers use and throw away. Therefore, conventional linear thinking in business ignores consideration of the product’s origins; the raw materials and labor input to make it; and the chemical, engineering, and energy-consuming processes required to convert raw materials into constituent components and the ultimate finished product. In addition, it does not consider the effects of the product’s use and the impacts when it is discarded at the end of its useful life.

In contrast, systems thinking applied to new ventures reminds us that companies operate in complex sets of interlocking living and nonliving systems, including markets and supply chains as well as natural systems. These natural systems can range from the atmosphere, to a wetlands area, to a child’s immune system. Bear in mind that systems thinking can be applied to new ventures whether the firm sells products or provides services. If the venture is a service business, conventional business thinking can obscure the fact that service delivery involves information technology including hardware, software, servers, and energy use (heating and cooling). Service businesses may use office buildings and have employees who travel daily to the office and deliver services using truck fleets. Thus service businesses and their related supply chains also can benefit from the application of sustainability thinking and systems thinking. In sum, every venture rests within and is increasingly buffeted by shifts in natural and commercial systems that may be influenced through the direct or indirect reach of its activities.

Taking a systems perspective reminds us that we are accustomed to thinking of businesses in terms of discrete units with clear boundaries between them. We forget that these boundaries exist primarily in our minds or as legal constructs. For example, we may view a venture or company as a discrete entity. By extension we perceive a boundary between the firm and its suppliers and customers. Yet research suggests that the most successful business innovations arise from activities that cross category boundaries. Thus if one’s mental map imposes boundaries, options may be unnecessarily constrained. In fact, given the dominance of linear thinking in business, systems thinking can give you an advantage over your more narrowly focused competitor. Your linear-oriented competitor may target incremental improvements to existing processes and shortchange research and development investments in longer-term goals—and then be surprised by unanticipated innovations in the industry. However, because you perceive the larger systems in which the venture is embedded, you can anticipate opportunities and be poised to act. Not only does the broader systems view lead to more opportunities, enabling you to adapt your competencies, it also holds the potential of producing outcomes that better serve the needs of customers and employees, your community, and your shareholders.

In other words, systems thinking asks you to see the larger picture, which, in turn, opens up new opportunity space. Let’s look more closely at the systems view through an analogy. When you imagine a river, what do you see? A winding line on a map? A favorite fishing spot? Or the tumbling, rushing water itself? Do you include the wetlands and its wildlife, visible and microscopic? Do you see the human communities along the water? Do you see the ultimate end points of the water flows—the estuaries, deltas, and the sea? Do you include the water cycle from the ocean, through evaporation raining in the mountains regenerating the headwaters of the river? In other words, do you see the river as its component parts or as an integrated living system?

Sustainability applied to new ventures incorporates systems thinking. If you think only about the fish or the single stream, you miss what makes the river alive; you miss what it feeds and what feeds it. Similarly, your venture is part of a set of interlocking and interdependent systems characterized by suppliers and buyers as well as by energy and material flows. The more you are aware of these systems and their relationships to your company, the more rigor you bring to product design and strategy development and the more sophisticated your analysis of how to move forward.

Another advantage of systems thinking is its invitation to jettison outdated ideas about the environment. The environment has, in the past, been considered “out there” somewhere, separate and apart from people and businesses. In reality, the environment is not external to business. Indeed, it is coming to comprise an integral new set of competitive factors that shape options and opportunities for entrepreneurs and firms. For ventures to successfully launch and grow in the twenty-first century, it is essential to understand this more expansive systems definition of the new competitive conditions.

When systems thinking guides strategy and action, the collision between business and natural systems becomes a frontier of opportunity. Systems thinking can encourage and institutionalize the natural ability of companies to evolve—not through small adaptations but through creative leaps. The companies discussed in this section demonstrate these tactics in action. For example, AT&T shows how a company can work from a systems view to optimize benefits across multiple systems. Shaw Industries underwent a profound strategic reorientation when it redesigned its products—carpets—not in the traditional linear make-use-waste model but in a new circular strategy. Shaw now takes back carpets at the end of their use life, disassembles them, and remanufactures them as new carpets. This is a radical rethinking of the value of a product. Coastwide Lab offers an example of a systems view that helped a smaller company generate systems solutions for customers, not just products. All three sustainability-inspired strategies indicate a stepped-up understanding of the broader systems in which the business operates. Systems thinking allowed each company to recognize new opportunities in its competitive terrain and to act on them in innovative ways that greatly improved its competitive position.

AT&T

In hindsight, it seems obvious that AT&T, a telecommunications company, should be an early advocate of its employees telecommuting to work. At the outset, however, there was more doubt than confidence in the telecommuting arrangement. Yet it was soon shown that AT&T’s innovative policy—grounded in systems and sustainability thinking—resulted in productivity growth, lower overhead costs, greater employee retention, reduced air pollution, lower gasoline and thus oil consumption, and more satisfied employees.

Was telecommuting an environmental policy because it reduced pollution, a cost-cutting measure because overhead and real estate costs dropped, or a national security measure because it lowered oil consumption? Perhaps it was a human resources initiative since it resulted in more satisfied employees. All of these descriptions are accurate, yet no single measure fully captures the systemic nature and benefits of this sustainability approach to rethinking work. AT&T’s telecommuting policy is an example of systems thinking. Between 1998 and 2004, then AT&T vice president Braden Allenby led the telecommuting initiative.Braden R. Allenby is currently professor of civil and environmental engineering and professor of law at Arizona State University and moved from his position as the environment, health, and safety vice president for AT&T in 2004. His systems thinking comes naturally as author of multiple publications on industrial ecology, design for the environment, and earth systems engineering and management. His coediting of The Greening of Industrial Ecosystems, published by the National Academy Press in 1994, and his authorship of Environmental Threats and National Security: An International Challenge to Science and Technology, published by Lawrence Livermore National Laboratory in 1994, and Information Systems and the Environment, published by the National Academy Press in 2001, also enhanced his ability to see natural systems as integral to corporate strategy. With his systems focus on linkages and interdependencies rather than emphasis on discrete units, Allenby looked to inputs and outputs, processes, and feedback, taking into consideration multiple viewpoints within and outside AT&T. Over time, analysis pinpointed a cross-cutting convergence of factors that, when targeted for optimization, produced positive benefits across the system of AT&T’s financial performance, employees, communities, and air pollution emissions.

New questions were asked. What is the relationship among working at home, spending hours in a car, spending time at a remote AT&T site, and productivity? What gasoline volumes, carbon dioxide (CO2) levels, greenhouse gas emissions, and dollar savings for AT&T are involved when telecommuting is an option for managers? If there are benefits for certain employees and the company, what about extending the policy to other employees? What is AT&T’s contribution to urban vehicle congestion, and can a telecommuting program help reduce gasoline use in a way that reduces oil dependency while benefiting towns, employees, and the firm? We know intuitively that these factors are interrelated, but it is unusual for a senior corporate executive to examine them from a strategic perspective. In this case, the telecommuting policy saved the company millions of dollars while raising productivity and enhancing AT&T’s reputation. Sustainability strategies will always be tailored to a venture’s unique competencies and circumstances; it will grow organically from the business you are in, the products you make, and the employees you hire.

Braden Allenby is a trained systems thinker and has contributed extensive writings on industrial ecology. Allenby saw the opportunity for telecommuting to reduce costs for AT&T and reduce pollution while raising employee productivity and satisfaction. As the environment, health, and safety vice president at AT&T, Allenby took the strategic view as opposed to the compliance perspective proscribed for many environment, health, and safety office heads. By the late 1990s AT&T had moved out of manufacturing. The key to the company’s success became service, and the key to high-quality service was application of in-house technology know-how by productive, satisfied employees.

Allenby quietly and successfully promoted telecommuting within the firm for over ten years, despite opposition. It helped that the program was not seen as a conventional “environmental” one that some might have assumed imposed irretrievable overhead costs. Inevitable resistance included the usual institutional inertia against change but also managers’ and employees’ discomfort with unfamiliar telecommuting job structures and loss of easy metrics for productivity. “Time at desk” was still equated with individual productivity as though the assembly line mentality of “if I don’t see you working, you probably aren’t working” held firm in the twenty-first-century information-age economy. In addition, many questioned how telecommuting relates to environment, health, and safety. Furthermore, weak technology, such as limited home computer bandwidth and an insufficient number of individuals willing to lead, slowed the process.

Despite obstacles, over time significant benefits were returned to AT&T as well as to its employees, their families, and their communities. Real estate overhead costs decreased (offices could be closed down) while productivity and job satisfaction increased according to the company’s Telework Center of Excellence studies.Joseph Roitz, Binny Nanavati, and George Levy, Lessons Learned from the Network-Centric Organization: 2004 AT&T Employee Telework Results (Bedminster, NJ: AT&T Telework Center of Excellence, 2005). Brad Allenby provided me with this source. Survey results showed that not having to commute and gaining uninterrupted time to concentrate increased each telecommuter’s workday by one additional productive hour, translating to an approximate 12.5 percent productivity increase. Upgrades to communication technology enabled easier phone messaging through personal computers and saved about one hour per week, an approximate 2.5 percent increase in telecommuters’ productivity.

The program expanded rapidly as financial and other advantages proved the efficacy of telecommuting. About 35,000 AT&T management employees were full-time telecommuters in 2002 representing 10 percent of the workforce. By 2004 that number had expanded to 30 percent. Another 41 percent worked from home one to two days a week. Detailed records were kept on the telecommuting program’s benefits and costs. Records included the number of employees who telecommuted and how many days they telecommuted per month, whether on the road, at home, or in a telecenter or satellite office. An annual survey provided the quantitative data and subjective elements of participation, such as employee perceptions of the personal and professional benefits.

Important results relevant for other companies were described in the AT&T report: “Work/family balance and improved productivity remain the top-tier benefits. Typically, these two things are seen as mutually exclusive—spending more time with one’s family while simultaneously getting more work done would seem to be impossible—but teleworkers are able to have their cake and eat it, too.”Joseph Roitz, Binny Nanavati, and George Levy, Lessons Learned from the Network-Centric Organization: 2004 AT&T Employee Telework Results (Bedminster, NJ: AT&T Telework Center of Excellence, 2005). Brad Allenby provided me with this source. Feedback on disadvantages of telework was recorded and used to adjust the program optimally.

The positive externalities reported were reduced use of fossil fuel resources, reduced vehicular air pollution, reduced contribution to greenhouse gases and global climate change, reduced runoff of automobile fluids, and decreased air deposition of nitrogen oxides (NOx) that lead to water pollution. AT&T estimated that “since one gallon of gasoline produces 19 lbs. of carbon dioxide (CO2), the 5.1 million gallons of gas our employee teleworkers didn’t use in 2000 (by avoiding 110 million miles of driving by telecommuting) equate to almost 50,000 tons of CO2. Similar benefits result from reductions in NOx and hydrocarbons.”Braden Allenby, “Telework: The AT&T Experience” (testimony before the House Subcommittee on Technology and Procurement Policy, Washington, DC, March 22, 2001), accessed December 2, 2010, http://www.fluxx.net/toronto/soc4.html. Reduced emissions may provide AT&T with assets in the form of emission credits to be used as internal offsets or sold at market price.

Results of the telecommuting policy included the following:

  • Reduced costs for real estate and overhead.AT&T estimated savings of $75 million a year when it first changed its policies to make salespeople and consultants mobile. Jennifer Bresnahan, “Why Telework?,” CIO Enterprise 11, no. 7 (January 15, 1998): 28–34.
  • Employee productivity gains: AT&T estimated that increased productivity due to telework was worth $100 million a year. Eighty percent of employees surveyed said the change had improved their productivity.
  • Improved employee quality of life and morale: Eliminating the stress and wasted time of commuting contributed to productivity.
  • Employee retention and related cost savings: AT&T employees turned down other job offers in part because of the telecommuting options they enjoyed.
  • Appropriate management metrics: AT&T accelerated a transition from time-at-desk management to management by results and, more broadly, learned how to effectively manage knowledge workers in a rapidly changing, increasingly knowledge-based economy (seen as a competitive advantage).
  • Security: After the 9/11 attacks on the World Trade Center and the Pentagon, a more dispersed workforce was viewed as a way to increase institutional resiliency and limit the impact of an attack (or for that matter any disaster, natural or otherwise).

As the AT&T example shows, when systems thinking guides strategy and action, the collision between business and natural systems can become a frontier of opportunity. Systems thinking can encourage and institutionalize the natural ability of companies to evolve, not through small adaptations but through creative leaps.

Shaw Industries

Shaw Industries underwent a profound strategic reorientation and redesigned its products—carpets—not in the traditional linear make-use-waste model but in a sustainability-inspired circular strategy. Shaw now takes back products at the end of their useful life, disassembles them, and remanufactures them as new carpets. This is a radical rethinking of the value of a product using systems terms.

In 2003, Shaw’s EcoWorx product won the US Green Chemistry Institute’s Green Chemistry Award for Designing Safer Products. The company combined application of green chemistry principles with a cradle-to-cradle design approach to create new environmentally benign carpet tile.Shaw Industries worked with William McDonough and Michael Braungart, an architect and chemist who conceived the cradle-to-cradle design approach that considers the ultimate end of products from the very beginning of their design in order to reduce waste and toxicity. The product met the rising demand for sustainable products, helping define a new market space that emerged in the late 1990s and 2000s as buyers became more cognizant of health hazards associated with building materials and furnishings. EcoWorx also educated the marketplace on the desirability of sustainable products as qualitatively, economically, and environmentally superior substitutes, in this case for a product that had been in place for thirty years.See Jeffrey W. Segard, Steven Bradfield, Jeffrey J. White, and Mathew J. Realff, “EcoWorx, Green Engineering Principles in Practice,” Environmental Science and Technology 37, no. 23 (2003): 5269–77.

Carpeting is big business. In 2004, the global market for carpeting was about $26 billion, and it was expected to grow to $73 billion in 2007. Carpeting and rugs sectors expect a combined growth rate of 17 percent that year. Shaw Industries of Dalton, Georgia, was the world’s largest carpet manufacturer in 2004. Its carpet brand names include Cabin Crafts, Queen, Designweave, Philadelphia, and ShawMark. The company sells residential products to distributors and retailers and offers commercial products directly to customers through Shaw Contract Flooring. The company also sells laminate, ceramic tile, and hardwood flooring. In 2003, Shaw recorded $4.7 billion in sales.

Now acknowledged as an innovator in sustainable product design and business strategy, by early 2005, Shaw had completed a successful transformation to an environmentally benign carpet tile system design. Customers self-selected EcoWorx over tiles containing polyvinyl chloride (PVC), driving the new technology to over 80 percent of Shaw’s total carpet tile production. In retrospect, selecting carpet tiles as a key part of its sustainability strategy looks like a smart decision. In 2005, carpet tile was the fastest growing product category in the commercial carpet market.

In hindsight, Shaw’s decision seems the only way forward in the highly competitive floor covering business. However, in 1999, Shaw Industries Vice President Steve Bradfield described the carpet industry as “a marketing landscape that looked increasingly like a quagmire of greenwash.” Waste issues were putting pressure on the industry to clean up its act. Carpet took up considerable space in municipal landfills, took a long time to decompose, and was notoriously difficult to recycle. Moreover, carpet was coming under increasing scrutiny for its association with health problems.

In the late 1990s, companies vied to project the best image of environmental responsibility. However, Shaw Industries moved beyond marketing hype to a strategy that eliminated hazardous materials and recovered and reused carpet in a closed materials cycle. Shaw had to differentiate itself and create new capabilities and even new markets. EcoWorx, designed with cradle-to-cradle logic, required more innovation than simply the product. To implement its strategy, the company had to think in systems and design products not in the linear make-use-waste model but in cycles. For Shaw, this meant it must collect, disassemble, and reuse the old carpet tile material in new products. Moreover, the materials used in its products needed to be environmentally superior to anything used before.

Shaw was not the first company to think of this approach. In 1994, Ray Anderson of Interface Flooring Systems set the bar high for the industry by declaring sustainability as a corporate (and industry) goal.Ray Anderson, Mid Course Correction: Toward a Sustainable Enterprise: The Interface Model (Atlanta, GA: Peregrinzilla, 1998). While smaller in scale than Shaw Industries, Interface succeeded in changing the terms of the debate. For Shaw, the biggest player in the field, to not only rise to the challenge but to champion the way forward was not something one could necessarily predict.

Shaw’s EcoWorx, the replacement system for the PVC-nylon incumbent system, drove double-digit growth for carpet tile after its introduction in 1999. The system made it possible to recycle both the nylon face and the backing components into next-generation face and backing materials for future EcoWorx carpet tile. Shaw used its own EcoSolution Q nylon 6 branded fiber that would be recycled as a technical nutrient through a recovery agreement with Honeywell’s Arnprior depolymerization facility in Canada. The nylon experienced no loss of performance or quality reduction and cost the same or less.

Seeking every way possible to reduce materials use, remove hazardous inputs, and maintain or improve product performance, Shaw made the following changes:

  • Replacement of PVC and phthalate plasticizer with an inert and nonhazardous mix of polymers ensuring material safety throughout the system. (PVC-contaminated nylon facing cannot be used for noncarpet applications of recycled materials.)
  • Elimination of antimony trioxide flame retardant associated with harm to aquatic organisms.
  • Dramatic reduction of waste during the processing phases by immediate recovery and use of the technical nutrients. (The production waste goal is zero.)
  • A life-cycle inventory and mass flow analysis that captures systems impacts and material efficiencies compared with PVC backing.
  • Efficiencies (energy and material reductions) in production, packaging, and distribution—40 percent lighter weight of EcoWorx tiles over PVC-backed tiles yields transport and handling (installation and removal/demolition) cost savings.
  • Use of a minimum number of raw materials, none of which lose value, as all can be continuously disassembled and remanufactured.
  • Use of a closed-loop, integrated plant-wide cooling water system providing chilled water for the extrusion process as well as the heating and cooling system.
  • Provision of a toll-free phone number on every EcoWorx tile for the buyer to contact Shaw for removal of the material for recycling.

Models assessing comparative costs of the conventional versus the new system indicated the recycled components would be less costly to process than virgin materials. Essentially, EcoWorx tile remains a raw material indefinitely.

Moreover, as is typical of companies actively applying a systems-oriented innovation to product lines, Shaw has found other opportunities for cost reduction and new revenue. For example, Shaw projects $2.5 million in overall savings per year from a Dalton, Georgia, steam energy plant designed collaboratively with Siemens Building Technologies. Manufacturing waste by-products are converted into gas that fuels a boiler to produce fifty thousand pounds of steam per hour that will be used on-site for manufacturing. The facility lowers corporate plant emissions, eliminates postmanufacturing carpet waste, and provides the Dalton manufacturing site with a fixed-cost reliable energy source, which is no small benefit in a time of high and fluctuating energy prices.

Once the power of systems thinking becomes clear, returning to a compartmentalized or linear view becomes an irrational abandonment of essential knowledge. Systems thinking illuminates how the world actually works and how actions far beyond what we can see influence our decisions and choices. It frees us to imagine alternative future products and services and create positive outcomes for more stakeholders. For Shaw, the benefits of thinking in systems were clear. The takeaway is that breaking out of the traditional linear approach to products and designing from a systems perspective can lead to differentiation, new competitive advantage, and tangible results.

Coastwide Labs

Systems thinking encourages systems solutions for your customers. Once you see the broader systems context and tightly coupled interdependencies, you have the opportunity to simultaneously solve multiple customer problems and provide a comprehensive “answer” for which they could not even form the right question.

Coastwide Laboratories, when it was a stand-alone company before being acquired by Express and then Staples, sold systems solutions to its customers. Coastwide’s approach was developed over several years and culminated in a complete strategic transformation in 2006. The change separated the firm from its competitors and enabled it to shape a regional market to its advantage. Rewards included customer retention, increased sales to existing customers, new customers, dominant market share in a seven-state region, and brand visibility. By selling systems solutions, Coastwide Labs reduced regulatory burdens for itself and its customers, reduced costs for both, and removed human health and environmental threats across the supply chain. The company tracked an array of trends and systems that influenced its market and customers. The resulting perspective put senior management in the driver’s seat to benefit from and shape those trends in ways that also meet customers’ latent needs.

Context is important. For decades, Coastwide’s product formulations, typical for the industry, were consistent with expectations for old-style janitorial products. The company made or bought cleaners, disinfectants, floor finishes and sealers, and degreasers and provided a full line of sanitary maintenance equipment and supplies. Performing the cleaning function was the primary requirement; other health and ecosystem impact considerations did not emerge until years later.

Serving the US Pacific Northwest region, Coastwide competed in a growing market in the 1990s, driven by expanding high-tech firms that emerged or grew rapidly in the 1980s and 1990s (e.g., Microsoft, Intel, Amgen, and Boeing). By the 1990s, the growth of overall demand for cleaning products had tapered off and the products were essentially commodities. This meant that growth, improved sales, and profitability depended on either increasing market share or offering value-added services. The commercial and industrial cleaning products industry remained fragmented in 2000 with many small companies with less than $5 million in revenue competing as producers, distributors, or both.

However, this sleepy, traditional industry was about to wake up. In August 2002, Coastwide—by then a commercial and industrial cleaning product formulator and distributor—introduced the Sustainable Earth line of products. This experimental line was designed for performance efficacy, easy use, and low to zero toxicity. By 2006, the line had grown to dominate the company’s strategy, positioning Coastwide as the largest provider of safe and “clean” cleaning products, janitorial supplies, and related services in the region. The market extended from southern Canada to central California and west to Idaho.

The Sustainable Earth line enabled Coastwide to lower its customers’ costs for maintenance by offering system solutions. Higher dilution rates for chemicals, dispensing units that eliminate overuse, improved safety for the end user, and less employee lost-work time because of health problems associated with chemical exposure were reported. Higher dilutions also reduced the packaging waste stream, thereby reducing customer waste disposal fees. TriMet, the Portland, Oregon, metropolitan area’s municipal bus and light rail system, reduced its number of cleaning products from twenty-two to four by switching to Sustainable Earth products. Initial cleaning chemical cost savings to the municipality amounted to 70 percent, not including training cost savings associated with the inventory simplification. In 2006, the Sustainable Earth line performed as well or better than the category leaders while realizing a gross margin over 40 percent higher than on its conventional cleaners.

Perhaps most telling, Coastwide’s overall corporate strategy changed in 2006 to implement a corporate transformation to what the company terms “sustainability” products. All cleaning product lines were replaced with sustainably designed formulations and designs. It is important to keep in mind that health benefits and improved water quality in the region’s cities were not the reasons to design this strategy; they characterized opportunities for innovation that drove lower costs for buyers and higher revenues for Coastwide. Through carefully crafted positioning, this company has become a major player creating and shaping the market to its advantage.

Coastwide’s strategic roots were in its early systems approach to meet customers’ full-service needs, long before environmental and sustainability vocabulary entered the business mainstream. The corporate vision evolved from simply selling cleaning products to offering unique, nonhazardous cleaning formulations at the lowest “total cost” to the buyer. Eventually, Coastwide addressed its customers’ comprehensive maintenance and cleaning needs—in other words, their system’s needs—which only later included sustainability features.

The cleaning product markets are more complicated than one might suspect. Several factors shaped industry selling strategies. Customers needed multiple cleaning products and equipment for different applications. However, buyers had more than cleaning needs. Fast-growing and large electronics manufacturers with clean rooms had to protect their production processes from contaminants or suffer major financial losses from downtime, as much as a million dollars a day. In addition, a barrage of intensifying local, state, and federal regulatory requirements demanded safe handling, storage, and disposal of all toxic and hazardous materials. These legal mandates imposed additional costs such as protective clothing, training, and hazardous waste disposal fees. Adding complexity, historic buying patterns fragmented purchase decisions. One facility maintenance manager ordered a set of products from one supplier; a second ordered different products from another supplier. As a result, companies with geographically dispersed sites made nonoptimal choices from both a price and a systems sense. As in many compartmentalized companies, jobs were divided with people working against each other, sometimes under the same roof. Maintenance bought the products; the environment, health, and safety group was responsible for knowing what was in the products as well as for workers’ safety and health; and manufacturing had to ensure pristine production.

Furthermore, all buyers contended with wastewater disposal regulations that forbade contaminated water from leaving the premises and entering the water supply system, but the requirements were different depending on the local or state regulations. Typically, minimal or no training was given maintenance staff members who actually used the hazardous cleaning chemicals. High janitorial employee turnover and low literacy rates made it expensive to hire and train employees. A 150 to 200 percent annual turnover rate was typical with this employee group, imposing its own unique costs and health risks to the employer. The low status of the maintenance and janitorial function didn’t help. The job was delegated in the organization to the staff that did the cleaning work, or one supervisory level above. In other words, despite many small areas needing the customer’s attention as a complex set of interrelated factors (a system), responsibility was either nonexistent or fragmented across different departments that traditionally had no incentive to communicate.

More history magnifies the systems thinking in action. In the late 1990s, buyers wanted stockless systems with just-in-time delivery and single source purchasing to avoid dealing with seven or eight companies for ninety cleaning items. Coastwide had designed its first system-solution contract in the late 1980s when it contracted with Tektronix, a test, measurement, and monitoring computer equipment producer, then the largest Oregon employer and a high-tech company with a dozen operating locations. Coastwide offered to supply all Tektronix maintenance needs, including training personnel to use cleaning products safely. Getting Tektronix’s business required knowing the company’s different facilities, various manufacturing operations requirements, and maintenance standards. It also meant that Coastwide presented an analysis showing Tektronix the economics of why it made sense to outsource the company’s system needs. Coastwide had to understand the buyer’s internal use and purchasing systems, including its costs and chemical vulnerabilities.

Roger McFadden, Coastwide’s chemist and senior product development person—the internal entrepreneur, or intrapreneur—took on the additional job of keeping a list of chemicals the buyer wanted kept out of its facilities due to clean room contamination risks. McFadden saw this change as an opportunity to look at a variety of suspect chemicals on various health, safety, and environmental lists. The lists were growing for the customer and regulatory agencies. Eventually Coastwide was asked to handle the complete health and safety functions for this customer and eventually for others because it could do so at a lower cost with customized analyses presented to each buyer, and with a systems perspective that optimized efficiencies across linked system parts with tagged areas for continuous improvement. Important interrelated issues for Roger McFadden included product contamination, regulations, customers’ workers’ compensation and injury liability, and chemical compound toxicity thresholds and cancer rates.

To compete with foresight Coastwide also had to stay current on and continuously adapt its solutions services to larger and increasingly more relevant trends. McFadden served on the Governor’s Community Sustainability Taskforce for Oregon and in the process gained more information about the science of toxicity, state regulatory intentions, and changing governmental agency purchasing practices. This led to expanded sales to the state and city governments and to Nike, Hewlett-Packard, and Intel. Coastwide’s involvement with broader community issues translated into flows of information to senior management that helped the firm position itself and learn despite constantly moving terrain.

McFadden’s first step was to rethink the cleaning product formulations. The products had to work as well as not pose a risk or threat. The second step was to expand the product line so that customers would source a range of products solely from Coastwide, a step that provided customers with insurance that all cleaning products met uniform “clean” and low- or zero-toxicity specifications. Coastwide extended its “cleaner cleaners” criteria to auxiliary products. For example, PVC-containing buckets were rejected in favor of those made from safely reusable polyethylene. Used buckets were picked up by Coastwide’s distribution arm, with the containers color coded to ensure no other containers (for which the company would not know the materials inside) would inadvertently be brought back.

Understanding the interconnections across systems continued to bring Coastwide financial and competitive benefits. By 2005 the major trade organization for the industrial cleaning industry, the International Sanitary Supply Association (ISSA), began highlighting members’ green cleaning products and programs. Grant Watkinson, president of Coastwide, was featured on the organization’s website. The American Association of Architects’ US Green Building Council developed its Leadership in Energy and Environmental Design (LEED) program that set voluntary national standards for high-performance sustainable buildings. LEED assigned points that could be earned by organizations requesting certification if they integrated system-designed cleaning practices. Since many major corporations and organizations gain productivity and reputation advantages for having their buildings certified by LEED, Coastwide was positioned with more knowledge and media visibility as this market driver accelerated a transition to lower toxicity and more benign materials.

In addition, Coastwide was in a far better position than its competition when Executive Order 13148, Greening the Government Through Leadership in Environmental Management, appeared. This order set strict requirements for all federal agencies to “reduce [their] use of selected toxic chemicals, hazardous substances, and pollutants…at [their] facilities by 50 percent by December 31, 2006.”National Environmental Policy Act, “Executive Order 13148,” accessed March 7, 2011, http://ceq.hss.doe.gov/nepa/regs/eos/eo13148.html.

By 2006 most of the major institutional cleaning-products companies across the country had “green” product offerings of some sort, but Coastwide already was well ahead of them. Building service contractor and property manager customers told Coastwide they were awarded new business because of the “green” package Coastwide offers. Some buyers use the Sustainable Earth line as part of their marketing program to differentiate and enhance the value of their services. The city of San Francisco specified Coastwide’s line even though the company did not have sales representatives in that market (sales are through distributors). Inquiries from the US Midwest, South, and East Coast increased in 2006, and Roger McFadden and the firm’s corporate director of sustainability were frequently invited to speak in various US and Canadian cities outside Coastwide’s market area. In sum, by making sure it understood the dynamics of the relevant systems for its success and its customers’ benefit, Coastwide created a successful strategy because, in the current competitive environment, it was just good business.

Results for Coastwide included the following:

  • The industry average net operating income was 2 percent; Coastwide averaged double or triple that level.
  • Sales in 2005 increased by 8 percent, driven by market share increases in segments where the most Sustainable Earth products were sold; operating profits rose by an even larger percentage.
  • The number of new customers rose over 35 percent in 2005, largely attributable to Sustainable Earth product lines.

Coastwide’s solution for buyers went further than any other firm’s to blend problem solving around a company’s unique needs with changing regulatory system requirements and emerging human health and ecosystem trends. Coastwide, through McFadden’s entrepreneurial innovation, saw an opportunity in the complex corporate, regulatory, and ecological systems and in its customers’ need for a sustainable response. By understanding the systems in which you operate, higher level solutions can emerge that will give you competitive advantage. By 2010 McFadden had become Stapless’ senior scientist, advising the $27 billion office products company on its sustainability strategy.

In each instance of these instances, entrepreneurial (or intrapreneurial) leaders made decisions from a systems perspective. The individuals came to this understanding in different ways, but this way of seeing their companies’ interdependencies with both living and nonliving systems allowed them to introduce innovative ways of doing business, create new product designs and operating structures, and generate new revenues. Systems analysis is an effective problem-solving tool in dynamic, complex circumstances where economic opportunities are not easily apparent. A systems perspective accommodates the constant changes that characterize the competitive terrain.

To recap, we provide the following tactics to help you think in systems terms:

  • Design products in “circles,” not lines.
  • Optimize across multiple systems.
  • Sell systems solutions.

This kind of broader systems-oriented strategy will be increasingly important for claiming market share in the new sustainability market space. Increasingly, senior management, and eventually everyone within firms and their supply chains, will understand that the future lies on a path toward benign products (no harm to existing natural systems) or products that—at the end of use—are returned so that their component parts can be used to make equal or better quality new products.The point is not the goal but the continuous effort. Systems thinking applied to entrepreneurial innovation is not merely a tool or theory—it is increasingly a mind-set, a survival skill, and key to strategic advantage.

Key Takeaways

  • A systems approach to business is a reminder that companies operate in complex sets of interlocking living and nonliving systems, including markets and supply chains as well as natural systems.
  • Systems thinking can open up new opportunities for product and process redesign and lead to innovative business models.
  • Individuals with a creative bent can lead sustainability innovation changes inside small or large firms.

Exercise

  1. In teams, identify a commonly used product. Try to name all the component parts and material inputs involved in bringing the product to market. List the ways in which producing that item likely depended on, drew from, and impacted natural systems over the product’s life.