Sustainability and Low Cost Leadership

In the business strategy course, we teach that one of the ways that firms can gain a competitive advantage is by becoming the low cost producer in the industry.  Since the firm's costs are lower than any of its competitors, the firm is able to either gain more sales by passing these savings on to customers or enjoy a higher profit margin than others in the industry. 

How does a low cost strategy align with sustainable business practice?  One can see that by conserving natural resources, firms may significantly reduce costs--both real costs and external costs.  By developing resource efficiencies through using  more energy efficient machinery or adapting manufacturing processes to minimize raw material inputs or reduce waste, companies can reduce production costs.  Sustainability
practices also enable firms to avoid negative consequences such as fines for pollution, lawsuits, and potential impact on sales due to poor corporate image.  By voluntarily adopting sustainable practices, firms may be able to avoid onerous and costly governmental regulations in the future.  A sustainable business strategy is a proactive approach that may result in lower costs than a passive compliance-oriented strategy.

Let's look at some examples.  Nike has made signficiant strides in improving wages and worker conditions to distance itself from the "sweatshop" issues that negatively impacted the firm in the past.  Although Nike is not utilizing a low cost strategy, they are reaping significant cost savings through sustainability efforts in shoe design and manufacturing processes.  Nike has worked on cutting layouts to reduce the amount of  fabric and leather that is wasted when making shoes.  Natural resources are conserved and manufacturing costs are reduced.

Wal-Mart changed its store recycling programs to recycle plastics and other packaging materials in addition to cardboard.  Instead of paying someone to haul off the compacted trash, Wal-Mart now gets paid $350 per ton for plastics and other materials that can be recycled.  Wal-Mart employees use the same cardboard baler that was used to make bundles of cardboard for recycling to bundle other sorted materials.  Trash hauling costs are reduced and the firm gets a postiive cash inflow from plastics and other recycled materials.

An Omaha craft brewery, Lucky Bucket has found similar savings by selling their spent hops to a local farmer.  The farmer uses the grain to feed his livestock.  Lucky Bucket doesn't have to pay anyone to haul these "wastes" to the landfill, the farmer gains a good food source for the pigs, (the pigs are pretty happy with their lot--at least in the short run) and as a society, we keep more stuff out of the landfill. 

There are many more examples that demonstrate that a sustainability strategy can produce significant savings for firms and this can be an important complement to the low cost leadership strategy.