In recent years, a growing number of companies around the world have voluntarily adopted and implemented a broad range of sustainability practices. The accelerating rate of adoption of these practices has also provoked a debate about the nature of sustainability and its long-term implications for organizations. Is the adoption of sustainability practices a form of strategic differentiation that can lead to superior financial performance? Or, is it a strategic necessity that can ensure corporate survival but not necessarily outperformance?
On one hand, there are those who argue that sustainability is spreading as a “common practice” and, as such, it may be a necessary condition for survival but that it cannot be a sufficient condition for building a competitive advantage. For example, some companies adopt environmental, or water, or waste-management systems to exploit cost efficiencies and thus improve their bottom line. Although such systems would typically be considered as adoption of sustainability practices—and so would be included in environmental, social, and governance ratings—arguably few, if any, companies would expect to establish a competitive advantage simply by adopting them. Typically, competitors can easily acquire such systems directly from third parties. In this spirit, Michael Porter and Mark Kramer explicitly note in their Harvard Business Review article on shared value that sustainability, like philanthropy, is “at the margin” of what companies do rather than at the center and, therefore, these are not practices through which they can achieve economic success. Yet, by adopting common practices (i.e., by being the same as peers), a firm can benefit by being recognized as legitimate.
On the other hand, there are those who argue that sustainability can be a strategy that generates a competitive advantage and, therefore, results in above-average performance (i.e., doing well by doing good). For example, companies that adopt innovative circular-economy-based business models or adopt practices that enhance employee recruitment, engagement, and retention do so to differentiate themselves and, therefore, occupy an unexploited or underexploited position through developing a unique and difficult-to-imitate strategy.
The arguments on both sides conceptually relate to Porter’s seminal 1996 article “What Is Strategy?” in which he draws a sharp distinction between operational effectiveness and strategy. He argues that strategy “is about being different” and that “the essence of strategy is choosing a unique and valuable position rooted in systems of activities that are much more difficult to match.” Is sustainability then a differentiating strategy or a practice that is bound to spread through imitation and, thus, has limited potential to be a basis for a competitive advantage? To what extent have firms in recent years converged in their adoption of sustainability practices? Why have some industries converged faster than others? And, importantly, what are the implications for corporate performance accounting for the industry-level trends in terms of overall convergence on sustainability practices?
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