Business

How do companies create value? There really are only so many ways. Borrowing from strategy guru Michael Porter's work and tweaking it a bit for the environmental age, there are four big buckets of value creation from thinking green: cutting costs, reducing risk, driving revenues, and enhancing brand value.

Within those buckets, companies find many tactics that work. But after years of pursuing environmental wins, some of the trend-setters have a good sense of the most productive paths. So clearly there's real value in green. But where should companies start and what kind of value should they pursue? Before you can tackle these tougher questions, you need to start with some basic ones: what's the environmental impact or "footprint" for the company and for key products up and down the value chain? How do environmental issues affect us, our suppliers, and our customers?

Even these seemingly simple questions can be hard to answer, and even if the analysis is done, companies that understand their footprint along the value chain are often surprised in two related ways:

Look at electronics or transportation companies, for example. For both these industries, energy use - often a good proxy for total footprint - is large in two key areas of the value chain: upstream (mining metals) and manufacturing. But the full value-chain footprint is dominated by impacts during the customer use phase (a fancy way of describing when we drive our cars or use our computers). Picture a wedge of impact growing through the value chain, with the smaller (though still considerable) impact upstream and the larger end with customers.

At the other end of the spectrum, take the food or packaged goods industries. The customer use impact is negligible; aside from packaging, the product disappears. But the upstream energy and water use in agriculture dwarfs the operational footprint. As one dairy company executive told me, "Our risk is the cow." So reverse the wedge and put the big end in the back of the chain.

If you understand these wedges, track where the big environmental impacts are, and then reduce them, you'll create the most value, right? Not quite. First, getting everyone used to the idea of looking at the full value-chain impact is a big hurdle. Second, much of the value from reducing impacts elsewhere in the chain is not easily measured (or even captured). Finally, when you try to choose the best strategy for creating value, you may stumble on a second surprise.

The best bang for your buck - especially with hard-to-measure intangible value - may not come from the big part of the wedge of impacts. When impacts line up well with business value, everybody's happy. But reality is often more complicated.

Let's look at Mattel and toy makers again. These companies make many products that use energy and are made of plastic you can't recycle. They could probably reduce their measurable footprint the most by designing toys that use less or no energy (a downstream issue) and less plastic (a downstream issue with waste and a big upstream issue in petrochemical production).

But look at intangible value, and the picture is different. Think of the damage to both brand and revenues when lack of knowledge about the supply chain causes a scare about toxic lead. When your brand is a majority of total company value, avoiding a reputational hit is the critical environmental priority. Look, lead is a serious problem, but for many products the exposure is small. So it may not be the biggest environmental footprint issue in the value chain. But handling a lead problem well will still create the most value for the company.

So what's the answer to these challenges? In short, hedge your bets and develop a portfolio approach. Big companies have built portfolios of brands and businesses for years. Why not portfolios of strategies and approaches?

Click here for more on Andrew Winston's "portfolio approach" to green strategies.

Andrew Winston helps forward-thinking companies use environmental thinking to drive growth. He is the co-author of Green to Gold, which explores what works-and what doesn't-when companies go green.