MIT Sloan Management Review-Fall 2021

WHAT’S WRONG WITH DIGITAL TWINS MAKING STRATEGY SMALL STAKE,
GREEN PREMIUMS? GROW UP WITH SOUL BIG VOICE

PAGE 25 PAGE 15 PAGE 56 PAGE 77

sloanreview.mit.edu

MIT SloanFALL2021•VOL.63•NO.1
Management Review

SUSTAINABLE
BUSINESS

Creating value
while doing right
by people and
the planet

PAGE 22



FROM THE EDITOR

ToughChallengesDemand
LeadersWithHeart

W hen we planned a special report on sustainability
for this issue, it was too early to know that it would
follow closely on the heels of the latest — and most
alarming — assessment report yet from the UN-
sponsored Intergovernmental Panel on Climate
Change (IPCC). The news from the IPCC includes
the unequivocal scientific consensus that human
activity has caused the observed increase in green-
house gas concentrations in Earth’s atmosphere.
The extreme weather and wildfires wreaking havoc on communities all over the planet
are among the effects of surface temperature increases that will be irreversible for centu-
ries, if not millennia — and that’s if we act with urgency to reduce greenhouse gas
emissions by half within this decade, and to net zero by 2050. Not doing so will unleash
even greater catastrophe.

Humanity has never needed as much creativity courageous hearts and wise souls, and a new
and innovation as it does now — nor as much col- approach to strategy that is rooted in deeply held
laboration across all spheres of endeavor. Making values. Exactly such a new prescription for strategy-
headway on this existential crisis will require the making is offered in our lead feature article by
majority of business leaders to join governments, Ikujiro Nonaka and Hirotaka Takeuchi,“Strategy
policy makers, nonprofits, and ordinary people as a Way of Life.” Over the course of their long
in contributing to a dramatic reduction in green- careers, these authors’ groundbreaking work on
house gas emissions. knowledge creation, innovation, and product
development has had wide-reaching influence, in-
When I think of MIT Sloan Management cluding laying the foundation for the Scrum agile
Review’s readers, I think of leaders who thrive on software development framework. We hope their
difficult challenges, drive innovation, and hope article will inspire leaders to think deeply about
to make a positive impact on their businesses, how to guide organizations that can profit while
the people they serve, and the planet. The articles making a positive difference in the world.
in our special report on sustainability lay out
opportunities where others might see intractable Elizabeth Heichler // @eheichler
problems and suggest ways to leverage creativity Executive Editor
to thrive, not merely survive. MIT Sloan Management Review

But we will need more than energy, initiative,
and new ideas in order to lead efforts to salvage a
planet we’ve pushed out of balance. We will need

SLOANREVIEW.MIT.EDU FALL 2021 MIT SLOAN MANAGEMENT REVIEW 1

FALL 2021 • VOLUME 63 • NUMBER 1

MITSloan Management Review

22 SPECIAL REPORT FEATURES

SUSTAINABILITY STRATEGIES: RETHINKING COSTS PURPOSE

25 Can We Afford Sustainable Business? 56 Strategy as a Way of Life

Taking a creative approach to pricing can benefit society, Businesses must root strategy in moral purpose to thrive
the environment — and your company. in a complex, rapidly changing world.

BY MARCO BERTINI, JOHN PINEDA, AMADEUS PETZKE, BY IKUJIRO NONAKA AND HIROTAKA TAKEUCHI
AND JEAN-MANUEL IZARET
STRATEGY
SUSTAINABILITY STRATEGIES: SOCIAL RESPONSIBILITY
64 Three Ways to Sell Value
34 How Supply Chain Transparency in B2B Markets
Boosts Business Value
Value-based selling can boost margins and competitiveness, but
Increasing visibility into suppliers’ practices takes work vendors must first advance beyond the prevailing one-size-fits-all
but can lead to new market opportunities. approach.

BY TIM KRAFT AND YANCHONG ZHENG BY JOONA KERÄNEN, HARRI TERHO, AND ANTTI SAURAMA

SUSTAINABILITY STRATEGIES: SUPPLY CHAIN TRANSPARENCY FAIR PAY

41 Four Myths About 71 Job-Hopping Toward Equity
Unauthorized Subcontracting
Changing employers can help narrow the gender gap in
Organizations that want to improve supply chain executive compensation.
visibility — and reduce diverted orders — must
use analytics and think beyond price. BY BORIS GROYSBERG, PAUL HEALY, AND ERIC LIN

BY FELIPE CARO, LEONARD LANE, AND JOINT VENTURES
ANNA SÁEZ DE TEJADA CUENCA
77 Small Stake, Big Voice
SUSTAINABILITY STRATEGIES: ENERGY FUTURES
Minority partners in joint ventures can still negotiate substantial
46 Decarbonizing rights to have a say in business decisions.
Our Toughest
Sectors — BY LOIS FERNANDES D’COSTA, TRACY BRANDING PYLE,
Profitably AND JAMES BAMFORD

Cutting carbon emissions
from harder-to-abate sectors
like heavy transport and
industrial heat will create
new strategic opportunities
for business.

BY AMORY LOVINS

46 56

Editor’s note: Some articles in this issue were originally published online. They have been adapted for print. COVER ILLUSTRATION: DANIEL HERTZBERG

2 MIT SLOAN MANAGEMENT REVIEW FALL 2021

Contents

FRONTIERS

7

WHY COMPANIES MUST EMBRACE MICROSERVICES
AND MODULAR THINKING
Organizations can reduce coordination complexity with modular
thinking, microservices, and APIs.

BY MARK J. GREEVEN, HOWARD YU, AND JIALU SHAN

96 10

FEATURES WORKPLACE HIERARCHIES
MATTER IN SKILL
RELATIONSHIPS TRANSFORMATION
While new research suggests
85 The Outsider Edge that workplace hierarchies can
impede learning efforts, there
The success of managers hired for temporary roles shows are strategies to bolster the
that sometimes loose ties and cultural distance can help a success of training initiatives.
leader be effective.
BY KATHERINE C. KELLOGG
BY TRACY ANDERSON AND PETER CAPPELLI
12 10
FUTURE OF SHOPPING
ONLINE SHOPPERS DON’T
91 The Brand Advantage That Will ALWAYS CARE ABOUT
Lure Shoppers Back to Stores FASTER DELIVERY
Analyzing online customer data
New research finds that when consumers value a brand’s may reveal that other delivery
cultural richness, they prefer in-store shopping to online. attributes matter more than
how quickly an order is
BY JONATHAN Z. ZHANG received.

BY PEDRO AMORIM AND
NICOLE DEHORATIUS

COLUMN 5 15

96 REMAKING THE THE 2021 THE DIGITAL TWIN OPPORTUNITY
RICHARD Developments in enabling technology are opening up more use
WORKSPACE TO BOOST BECKHARD cases for virtual models of real-world objects.
SOCIAL CONNECTION MEMORIAL
PRIZE BY PUSHKAR P. APTE AND COSTAS J. SPANOS
BY MARTHA BIRD
BY THE MIT SMR EDITORS 18
SLOANREVIEW.MIT.EDU
HOW IN-STORE TECH WILL TRANSFORM RETAIL
Automation and sensors promise a better customer
experience — and fuel for improved analytics.

BY SELENA ZHU, MAXIME C. COHEN, AND SAIBAL RAY

FALL 2021 MIT SLOAN MANAGEMENT REVIEW 3

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MIT Sloan Management Review Stuart L. Hart
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practice, especially those shaped MIT Sloan School of Management Michael Schrage
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SMR disseminates new management MIT Sloan School of Management Noel M. Tichy
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on the opportunities generated by George Washington University
rapid organizational, technological, School of Business N. Venkatraman
and societal change. Boston University Questrom
Alan Kantrow School of Business
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Georg F. von Krogh
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Keen Innovations
Eleanor Westney
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Harvard Business School York University

Hau L. Lee George S. Yip
Stanford University Graduate School Imperial College Business School
of Business

Opinions expressed in MIT Sloan Management Review articles are those of the authors. The MIT Sloan School of Management does not endorse trademarked
products mentioned in the journal; their inclusion is solely at the discretion of the authors.

4 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

The 2021 Richard Beckhard
Memorial Prize

The editors of MIT Sloan Management Review are pleased to announce the winner
of this year’s Richard Beckhard Memorial Prize,awarded to the most outstanding
MIT SMR article on planned change and organizational development published in
our winter 2020 through fall 2020 issues.

THIS YEAR’S AWARD goes to Erin L. Kelly and Phyllis Moen for their summer 2020 MIT Sloan Manage-

ment Review article “Fixing the Overload Problem at Work,” which tackles an issue that leads to significantly

higher levels of employee stress, dissatisfaction, turnover, and burnout — and potentially lower work quality.

RICHARD Kelly, Distinguished Professor of Work and Organization Studies at the MIT Sloan School, and Moen,
BECKHARD
who holds the McKnight Endowed Presidential Chair in Sociology at the University of Minnesota, under-
One of the founders and
architects of the field of or- took a five-year study at a Fortune 500 company.
ganizational development,
professor Richard Beckhard Half of the 56 teams and their managers chosen
was a member of the MIT
Sloan School of Manage- for the study were coached and then allowed to
ment faculty for more than
20 years. A longtime friend redesign their work collectively — without
of MIT Sloan Management
Review, Beckhard was supervisory oversight. The other half, matched
known for his efforts to
help organizations function with the experimental group in terms of jobs
in a more humane and high-
performing manner and to and demographics, continued to work as they
empower people to be
agents of change. had in the past.

His books include The results over a three-year period were
Organizational Develop-
ment: Strategies and compelling: The redesign teams reported that
Models; Organizational
Transitions: Managing they felt they had more control over when and
Complex Change; Chang-
ing the Essence: The Art where they worked and that their managers The Winners:
of Creating and Leading were more supportive of their personal and
Fundamental Change in family lives. In addition, they reported getting Erin L. Kelly and Phyllis Moen
Organizations; and his more exercise, sleep, and social time — and they
autobiography, Agent of were significantly less likely than their control Authors of:
Change: My Life, My group counterparts to leave the organization.
Practice. “Fixing the Overload Problem at Work,”
The authors identified three actions that man-
The prize was estab- MIT Sloan Management Review,
lished in 1984 by the faculty Volume 61, No. 4 (summer 2020): 48-54
of the MIT Sloan School of Reprint 61404
Management upon profes-
sor Beckhard’s retirement, agers must take to overcome the problem: Provide
and it was renamed the
Richard Beckhard Memorial employees with greater control over their work; give employees clear direction on their work goals; and, criti-
Prize after his death on
Dec. 28, 1999. cally, develop managers who genuinely care and support their employees in their personal lives and priorities.

“Such rethinking about work is particularly timely as we slowly emerge from the COVID-19 pandemic

with new learning about when, where, and how our work can be accomplished,” the judges say. “Moreover,

Dick Beckhard would surely approve of this participatory group initiative to work redesign as it played out

in Tomo. He was a strong advocate of self-organized work teams as a key component of productive organi-

zation change; Dick held that we are not solitary creatures but members of shared communities, accountable

to and dependent on one another. Erin Kelly and Phyllis Moen’s approach to the overload problem at work

takes this powerful principle to heart.”

Our panel of judges consisted of the following distinguished members of the MIT Sloan School of

Management faculty: retired senior lecturer Cyrus Gibson, David J. McGrath Jr. Professor of Management

and Innovation Kate Kellogg, and Erwin H. Schell Professor of Management John Van Maanen.

SLOANREVIEW.MIT.EDU FALL 2021 MIT SLOAN MANAGEMENT REVIEW 5

Climate change.
Is not a choice.
It’s billions of them.

Reducing the world’s carbon emissions requires everyone to
commit, innovate and take action. That’s why Deloitte’s goal
is net-zero emissions by 2030. And why we are engaging our
330,000 professionals and collaborating with our clients and
networks to address this crisis.

Connect at deloitte.com/worldclimate.

Copyright © 2021 Deloitte Development LLC. All rights reserved.

FRONTIERS

Workplace Hierarchies Online Shoppers The Digital Twin How In-Store Tech
Matter in Skill Don’t Always Care Opportunity Will Transform Retail
Transformation About Faster Delivery
15 18
10 12

[AGILE ORGANIZATIONS]

Why Companies Must Embrace
Microservices and Modular Thinking

Organizations can reduce coordination complexity
with modular thinking, microservices, and APIs.

BY MARK J. GREEVEN, HOWARD YU, AND JIALU SHAN

C ompanies that embrace remote work — which is FALL 2021 MIT SLOAN MANAGEMENT REVIEW 7
here to stay — can also drastically reduce their
coordination costs through modular organization.
Spotify announced earlier this year that it would completely
shift to remote work. Salesforce expects its workers to be in
the office just one to three days a week. Last fall, Apple CEO
Tim Cook said he believed the company would not return to
the way people worked pre-pandemic, noting, “There are
some things that actually work really well virtually.” Ping
An — China’s largest insurer — took its remote work one
step further: It developed a suite of tools that lets its 1.4 mil-
lion employees and agents work remotely. It’s now offering
those same tools to other financial service companies.

These companies have one thing in common: They are
all moving toward or have already achieved a modular setup.
Whereas modular organizations were challenging to imple-
ment in the past, they are becoming commonplace today
thanks to microservices and application programming
interfaces (APIs).

The concept of modular organization is not new. What’s
new today is the ability to achieve such architectures with rel-
ative ease. APIs help codify interactions among departments,
which in turn reduces ad hoc communication and minimizes
coordination complexity. As a result, traditional business pro-
cesses — whether financial, legal, or HR-related — can turn

PIETARI POSTI/THEISPOT.COM

FRONTIERS

Why Companies Must Embrace everything else. As a result, managers rewarded companies that minimized the
Microservices and Modular Thinking working in such a company need a lot of high cost of coordination. For instance,
(Continued from page 7) face-to-face meetings to coordinate and Qingdao-based Haier Group, one of the
strategize. world’s biggest home appliance manufac-
into microservices. That’s how a mono- turers, had returned to full-capacity
lithic, highly interdependent organization Relying on a slew of meetings or production within a month after the
turns into a modular one. exchanges across communication plat- COVID-19 outbreak, mainly due to the
forms — whether Zoom, Microsoft company’s widespread use of intelligent
Note that the converse is also true: Teams, Slack, or email — to connect the manufacturing and remote-working
A lack of microservices can prevent a dots among your team members quickly solutions.
company from achieving a modular ar- becomes overwhelming. Connecting the
chitecture and keep it stuck in widespread dots across the organization as a whole But every fast-moving giant you see
complexity. These types of organizations becomes nearly impossible. It’s this sort of today has had a near-death experience at
face no choice but to order their head- organizational complexity that prevents some point. They thrive only because they
quarters staff to return to their physical companies from optimizing remote work. have simplified. They took pains to re-
offices. build themselves from the ground up to
The solution: a modular and distrib- avoid collapsing under the weight of their
Our findings are based on a research uted organizational design. own complexity.
program at IMD Business School that
aims to understand how organizations How Microservices Power Amazon started in 1996 as a single-
become future-ready. We have conducted Modular Organization application entity. It ran a web server that
extensive interviews with dozens of for- talked to a database on the back end.
ward-looking organizations and have A business that is separated into inde- Over time, the single-application entity
built a database that tracks over 40 ecosys- pendent operations can be described as sprawled into a monolithic architecture
tems. We’ve also ranked companies’ having a modular organizational struc- of a million lines of code. Observing that
readiness based on publicly available ture. In the late 1970s, Tom Peters of Amazon’s application developers were in
information. Our executive education McKinsey pronounced that we should a constant struggle with the hardware
programs essentially serve as a laboratory, move beyond the matrix organization, a server team, CEO Jeff Bezos instructed
allowing us to test out hypotheses with structure he viewed as too slow-moving the developers to create some standard
senior executives. to cope with the accelerating pace of the APIs for accessing and allocating com-
business environment. In the 1990s, puting resources.
Organizational Complexity James Moore discussed the death of
Demands Constant competition due to emerging ecosys- Bezos was adamant about reducing co-
Coordination tems. More recently, Gary Hamel ordination complexity. The new directive
declared that bureaucracy needs to allowed for vastly fewer face-to-face
Consider a task that depends on the input be eliminated to attain a more agile meetings and emails. Instead, the big
of others. An executive at an established way of organizing. These influential functional system — in this case, IT —
fashion manufacturer explained that every thinkers all sensed the importance of was broken down into smaller service
time his company prepared to launch a reducing internal coordination. modules called microservices. Each
new product, he would have to dial into a microservice communicated with others
briefing from headquarters, after which he Speed is an advantage. The pandemic
would call his team to parcel out the re-
sponsibilities. Each team member, in turn, Every fast-moving giant you see today has had
would communicate with their external a near-death experience at some point. They thrive
counterpart — the freight forwarders, the only because they have simplified to avoid collaps-
retail stores, the advertising agents — all ing under the weight of their own complexity.
the while keeping headquarters updated on
every milestone. With Excel spreadsheets
flying, everything was done manually —
and this was early in 2020, right before the
onset of the global pandemic.

This is complexity — a sprawling
operation where anything can affect

8 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

through the APIs. Because the format of Haier’s Access financing for distributors of Haier’s prod-
the requests sent between app developers Control Solution ucts. Haier’s sales and distribution
and IT operations was made consistent, channels are given extra support, and
routine coordination became automated. Since the interfaces among these MEs are DBS gets the additional business.
highly standardized, it’s possible to auto-
The end result is that a small team of mate information exchanges. One Ping An was also an early adopter of
software programmers can now launch concrete example is the solution Haier financial API technology and has been
an additional feature on Amazon.com developed for access control. using it since 2013. At first the company
independently, in a way that’s similar to focused on automated retrieval of real-
how a small merchant runs a Facebook At a large business with many employ- time balance information. Gradually but
campaign. These sellers don’t call up ees, people are constantly joining, leaving, surely, however, Ping An evolved from
Facebook customer service to schedule a and moving, which makes it difficult to being an API receiver into a producer.
campaign by phone. It’s all self-service, control who has access to which enter- By 2018, Ping An’s OneConnect fintech
and the execution is automatic. prise applications. Under the framework subsidiary had developed hundreds of
of microservices, Haier designed its adap- interfaces, similar to what DBS had done.
For the Amazon engineers, launching a tive identity governance solution, which
new product offering is not so much like frees IT staff members from the repetitive From Remote Work
coordinating across departments. Rather, manual tasks of authorizing and de- to Business Growth
it’s like assembling Lego bricks, mixing authorizing business users.
and matching capabilities for new offer- The urgency of remote work has under-
ings that fit the changing marketplace. Instead, HR personnel can track all of scored the advantage of modular
That’s the complex made simple. an employee’s access rights from a single organizations. Our research shows that com-
platform and modify access with the push panies that leverage microservices and APIs
Expanding Microservices of a button. Because identity management not only find themselves able to reduce com-
Beyond IT is also centralized in one database, Haier plexity and manual coordination but are
enjoys substantial savings on maintenance better suited to a geographically dispersed
Amazon is turning its entire IT infrastruc- costs. Individual departments no longer workforce that interacts asynchronously.
ture into tens of thousands of microservices need to run their own management plat-
by standardizing the input and output of forms. This centralization is an important From a process perspective, executives
each function. These microservices can feature. For microservices to be effective, must embrace these key principles in de-
then exist as independent, decentralized data needs to reside in the cloud rather signing a remote-first organization.
modules that interact with other modules. than on local servers. That way, there will
be only one “true” version of the data. Build a cloud-first operation.
But the idea of microservices doesn’t Executives may hesitate about bringing
need to stay within IT. For years, Haier has Using Externally their company’s valuable data into the
organized itself as a swarm of self-manag- Created APIs cloud, and some view it merely as a tool to
ing business units. store more data efficiently. But a cloud-first
Smart companies also choose not to write operation serves as the basic infrastructure
Haier has some 4,000 microenter- up their own APIs every time and instead for becoming a modular organization.
prises (MEs). Each one comprises just deploy some externally developed open
10 to 15 employees and has full auton- source applications that can be found in Digitize critical business processes.
omy to deliver offerings to other MEs the cloud. Examples of open repositories Almost every company these days is in the
and, oftentimes, the final products to end include Google Cloud APIs and process of digital transformation. No
consumers. Instead of being centrally OpenStack. These APIs are essentially doubt this has been accelerated by the
orchestrated, these MEs independently software components that provide com- COVID-19 crisis, but digitizing business
interact with one another. Certain MEs mon services for cloud infrastructures. processes is necessary anyway. Only with
provide services like HR or product widespread digitization can a company
design; others manufacture specific com- With all of its internal microservices es- break up interdependent operations into
ponent parts. Coordination is managed tablished, Haier found it easier to leverage small pieces, thus creating microservices,
through internal platforms in the cloud, the open APIs developed by others, includ- in an efficient manner.
as in an app store. Because each team is ing those initially designed by the financial
small and self-contained, an isolated fail- sector. Today, an application developed by Develop digital interfaces among
ure won’t cause global disruption. Singapore bank DBS is providing digital microservices. While much focus goes into
hiring top talent in areas such as data science

SLOANREVIEW.MIT.EDU FALL 2021 MIT SLOAN MANAGEMENT REVIEW 9

FRONTIERS

Why Companies Must Embrace [SKILLS DEVELOPMENT]
Microservices and Modular Thinking
(Continued from page 9) Workplace Hierarchies
Matter in Skill
and machine learning, it’s also critical to Transformation
build up API interfaces. The value of the API
exchanges is massive, and no company can While new research suggests that workplace hierarchies
afford to ignore it. As the Haier example can impede learning efforts, there are strategies to bolster
shows, once you acquire API development the success of training initiatives.
capability, you can further leverage other
existing, open source APIs. BY KATHERINE C. KELLOGG

Embrace the strategic value of W ith the increasing availability of sophisticated analytics, AI, and robotics,
microservices beyond IT. The real corporate leaders are reconfiguring their workforces to meet changing
power of microservices is in reducing technical demands. Indeed, by 2022, 54% of all employees will require
coordination and communication costs significant upskilling, according to the World Economic Forum.
throughout the organization. Look be-
yond the IT functions through the lens But leaders engaged in workforce transformation are running into unexpected road-
of broader business operations. blocks as they attempt to keep their employees’ skills in sync with rapid digitization and
automation. The introduction of new technologies into the workplace often upsets
Complexity is independent of the size existing status hierarchies based on tenure, role, or expertise — factors that dictate the
and scope of a company. Amazon, Apple, amount of respect, assumed competence, and deference an employee receives from
and Google are enormous organizations others in the organization.
but are elegantly simple in their setups. Upsetting fundamental
Haier is an incumbent manufacturer with status hierarchies can im-
massive operations around the world, but pede learning, particularly
its organizational setup is remarkably when senior employees
simple. Ping An is organized as a full stack perceive that those junior
of interdependent businesses with high to them are benefiting the
autonomy. most from a workforce
transformation.
Each of these modular businesses le-
verages a wide variety of microservices to With co-researchers
create advantages. What was once an aspi- Jenna Myers from the
rational concept of organizational design MIT Sloan School of
is today an achievable reality, accelerated Management, Lindsay
by a global crisis. Gainer from Mass General
Brigham, and professor
Mark J. Greeven is a professor of innova- Sara Singer from Stanford
tion and strategy at IMD Business School University School of Medicine, I studied corporate leaders’ efforts to transform the tech-
in Switzerland and the author of Pioneers, nical skills of employees at five different primary care sites over the course of nearly two
Hidden Champions, Changemakers, and years. Frictions between digital natives at the junior level and their more senior cowork-
Underdogs (MIT Press, 2019). Howard Yu ers initially led employees to struggle to pick up the skills they needed and slowed digital
is the author of Leap: How to Thrive in a transformation efforts. When junior employees benefited more from transformation
World Where Everything Can Be Copied than did senior employees, this created backlash, especially among more senior employ-
(PublicAffairs, 2018), the Lego Professor of ees who saw their status undermined. But at sites where leaders systematically attended
Management and Innovation at IMD Busi- to existing workplace hierarchies during skill transformation, employees were more suc-
ness School in Switzerland, and director of cessful in learning digital, critical thinking, and communication skills.
IMD’s Advanced Management Program.
Jialu Shan is a research fellow at the Global
Center for Digital Business Transformation,
a joint initiative of IMD Business School
and Cisco. Comment on this article at
https://sloanreview.mit.edu/x/63109.

Reprint 63109. For ordering information, see page 4.
Copyright © Massachusetts Institute of Technology,
2021. All rights reserved.

10 MIT SLOAN MANAGEMENT REVIEW FALL 2021 BRIAN STAUFFER/THEISPOT.COM

Our new study found that corporate At sites where leaders systematically attended
leaders who are engaged in skill transfor- to existing workplace hierarchies during skill
mation need to be mindful of workplace transformation, employees were more
hierarchies during three types of skill successful in learning digital, critical thinking,
transformation: upskilling, reskilling, and and communication skills.
“newskilling.” Here’s how.
were employees who had recently joined employees perceive new roles as threaten-
1. UPSKILLING. Upskilling initiatives the organization. The more junior-level ing to the relevance of their hard-won
target employees who need additional employees often saw reskilling initiatives as expertise, their desire to maintain their
technical training to remain relevant and opportunities to learn valuable technical high-status positions may outweigh their
continue to deliver value. Leaders can per- skills while keeping their day jobs, rather acceptance of role redesign.
sonalize learning for these employees by than as a threat to their authority and
providing peer-to-peer training in new control over key resources. Leaders can most effectively introduce
technologies and related work processes. new roles by establishing separate meeting
Leaders can more effectively accom- spaces for supporters of change across
Most leaders’ first inclination is to plish reskilling when they speak to these status positions to develop new role expec-
choose as trainers those employees who different interests and concerns — secu- tations. Separate meeting spaces can play a
seem best able to grasp new ways of work- rity versus advancement — when selling critical role in facilitating the experimen-
ing. Often, these employees are those who employees on the training. Leaders may tation needed for role redesign. When
have grown up using digital technologies also need to emphasize to front-line man- defenders of the status quo are present,
and are on the lower end of the organiza- agers how to handle such concerns while supporters of change are often uncomfort-
tion’s hierarchy — which can ultimately encouraging their front-line employees to able trying out new tasks, discussing
result in senior employees feeling slighted. stretch beyond their comfort zones in nontraditional ideas, or challenging the
This trainer-selection strategy might seem order to stay current and competitive in existing order for fear of retaliation, as de-
to be the most efficient, but it can in fact the job market. fenders of the status quo may try to quash
hinder learning. experimental efforts before they get off the
3. NEWSKILLING. When corporate leaders ground. Spaces that allow for interaction
Instead, leaders should create peer adopt new technologies that automate vari- among less-powerful group members,
training programs that rotate both senior ous kinds of work, some jobs and tasks are apart from everyday activities, can better
and junior employees through the role of eliminated while others emerge. Many new support transformation by facilitating the
trainer. While this may not seem to be the roles involve technologies that require questioning of traditional activities and
most efficient training method, the alter- considerable work to develop, implement, the development of new ones.
native is likely a recipe for failure. maintain, and change over time. For in-
stance, digital marketing firms have By attending to existing workplace
2. RESKILLING. As sophisticated analyt- introduced the role of search engine optimi- hierarchies during skill transformation,
ics, AI, and robotics automate many zation manager, high-tech companies have leaders can best ensure that their organi-
existing jobs, the workers who formerly introduced the role of data scientist, and zations and employees gain the skills they
did those jobs will need to learn entirely professional services firms have introduced need to compete amidst rapid digitization
new skills rather than merely add to their the role of AI translator to communicate and automation.
current skill sets. Many employers are the value of predictive analytics tools to
thus attempting to rapidly retrain various groups in the organization. Katherine C. Kellogg is the David
employees to enter new roles such as J. McGrath Jr. Professor of Management
technical customer support or IT support However, the introduction of new roles and Innovation and a professor of business
rather than trying to hire new talent in a that help with technology development administration at the MIT Sloan School
tight labor market for technical skills. and implementation often requires a rede- of Management. Comment on this article
sign of existing roles that more experienced at https://sloanreview.mit.edu/x/63124.
We found that employees who have held employees currently fill. If experienced
their positions for many years — and have Reprint 63124. For ordering information, see page 4.
been well rewarded for their efforts — were Copyright © Massachusetts Institute of Technology,
more concerned about uncertainty around 2021. All rights reserved.
jobs, skills, and future qualifications than

SLOANREVIEW.MIT.EDU FALL 2021 MIT SLOAN MANAGEMENT REVIEW 11

FRONTIERS

[RETAIL ANALYTICS]

Online Shoppers Don’t Always

Care About Faster Delivery

Analyzing online customer data may reveal that other delivery attributes
matter more than how quickly an order is received.

BY PEDRO AMORIM AND NICOLE DEHORATIUS

T he COVID-19 pandemic changed how we shop. Soon after Identifying Customer
the onset of the global pandemic, retailers reported a rapid Preferences
shift from in-store to online purchases. Online buying
accounted for 18% of worldwide retail sales in 2020, up from about Today’s retailers have a tremendous
half that in 2018. Grocery shoppers stampeded to the web: As of May amount of data that can yield important
2020, 41% of U.S. online grocery shoppers were first-time users of insights about customer preferences. To
such services. The expectation is that the online shift will persist well assess how online customers value differ-
beyond the pandemic across most retail subsectors. ent attributes, such as delivery speed,
delivery precision, and delivery day
Adapting to these changes is no small feat, and doing so profit- choice, we analyzed the preferences of on-
ably — well, that’s even harder. In response to the shift in consumer line customers of a grocery chain across
purchasing behavior since the beginning of the pandemic, many hundreds of thousands of purchasing in-
of the retail executives with whom we work are rethinking their stances. For each instance, we knew what
existing omnichannel strategies. Our conversations with the the customer ordered. More important,
e-commerce director of a leading European grocery retailer offered we knew the available home-delivery time
evidence of how difficult it is to shift operations to support the slots that were shown to the customer and
online shopper. This director was reexamining where to locate the time slot the customer selected.
inventory and whether to own or outsource home-delivery capabil-
ities in order to minimize the time between the placement of an By analyzing customers’ choices, we
online order and its receipt by the customer at home. Each of the discovered that online shoppers do not
proposed changes aimed at shortening the time between order and delivery was going to
require investment. He wanted to make the appropriate choice.

We asked this director to question his long-held assumption that speed was the most
important online delivery factor. How important is it for a customer to receive the goods
fast? Isn’t it plausible that some customers prioritize being able to choose the delivery
day over speed, and that others might be willing to forgo speed in return for a precise
delivery-time window?

Obtaining the answers to these questions is an essential first step toward designing
the optimal delivery network for online orders. To succeed, this director needed to know
more about customers’ delivery preferences. Our research into retailers that offer at-
tended home deliveries (in which a customer is present to receive their goods) suggests
that focusing on speed alone may cause a company to overlook opportunities to acquire
and retain online customers who prefer delivery attributes other than speed. In fact, we
found that customers exhibit differences in their willingness to pay for delivery speed,
delivery precision, and delivery day choice. Thus, retailers that can deliver not only on
their product promise but also on the delivery attributes that matter most to customers
have a competitive advantage. These are the retailers that will convert shoppers new to
the channel into loyal, frequent customers.

12 MIT SLOAN MANAGEMENT REVIEW FALL 2021 JING JING TSONG/THEISPOT.COM

focus solely on speed. Instead, delivery at- Next Level Leadership
tributes such as time slot precision (the
duration of the delivery time window) Today’s leaders are assessing their priorities in an effort to do
and day choice (the availability of time right by their employees, the planet, and their bottom line. While
slots across days of the week) also matter. there is no one-size-fits-all manual for managing organizations
In fact, we observed many situations in of the future, MIT Sloan Executive Education can help. Learn how
which customers preferred precision or you can lead with impact, achieve equity in your organization,
flexibility over speed. We found that a and build a sustainable business in these upcoming courses:
customer is, on average, willing to wait
10.8 hours longer for a delivery if the de- Impactful Leadership: Operationalizing Purpose
livery window is one hour shorter, and Leading a Diverse Workforce
will wait an additional 7.5 hours longer if Leading People at Work: Strategies for Talent Analytics
the delivery can be received on a preferred Navigating Transitions During Disruptive Change
day of the week, all else being equal. The Nimble Leadership: Driving Customer Innovation and
data also showed that customers tend to Elevating Employee Engagement
prefer to receive orders at the end of the Owning Impact: Creating a Positive Legacy for Families
week rather than on weekends. and Society
Strategies for Sustainable Business
Customer loyalty and basket sizes are Unlocking the Power of Perspectives: Problem Solving
also factors in shoppers’ delivery prefer- with Clarity, Creativity, and Collaboration
ences. We found that customers who
exhibit different levels of loyalty to the 6KRUW FRXUVHV H[HFXWLYH FHUWLğFDWHV DQG FXVWRP SURJUDPV IRU RUJDQL]DWLRQV
retailer exhibit different delivery prefer- executive.mit.edu/smr
ences. For example, repeat customers are
willing to pay more for the same delivery FALL 2021 MIT SLOAN MANAGEMENT REVIEW 13
attributes compared with other shoppers.
Moreover, customers with very large bas-
kets are willing to pay double the delivery
fee to improve delivery-window precision
by one hour. Leveraging customers’ will-
ingness to pay for the three core home
delivery attributes of speed, precision, and
day choice will require omnichannel re-
tailers to consider preferences beyond
simply delivery speed.

While these findings emerged from re-
search we conducted in partnership with
a grocery chain offering attended home
delivery, they are likely applicable to other
retailers offering that service, such as sell-
ers of furniture, home goods, appliances,
and other durable goods. However, the
approach we developed for understanding
the preferences of customers is relevant to
any retailer rethinking its distribution
networks. Amazon, Target, and Walmart
are three among many assessing objectives
other than solely speed and seeking to
determine the “right” logistics needed

SLOANREVIEW.MIT.EDU

FRONTIERS

Online Shoppers Don’t Always Care About Faster Delivery (Continued from page 13)

to tailor delivery to the customer — same-day option. This recent experience — different customer segments prefer one
delivery attribute over another.
a more nuanced strategy. and the popular press that accompanied
4. Work across teams to roll out new
Precision Instead of Speed these challenges — resulted in even more delivery strategies. To capitalize on their
retailers focusing on speed as the crucial newfound understanding of customer pref-
erences, operations and marketing teams
Executing a strategy dedicated to speed delivery attribute. We caution retailers, must collaborate closely. Operations can de-
sign the fulfillment strategy that best meets
alone can be expensive, particularly for however, that this focus on speed may be customers’ needs. Marketing can promote
the improved service and communicate how
grocery retailers, whose margins are noto- too myopic once the pandemic ends. Why? it differs from competitors’ delivery options.

riously thin. Retailers competing on speed As many consumers emerge from the pan- Retailers need to support this new data-
driven approach to decision-making by
tend to redesign their networks to bring demic, they will be more attuned to the hiring the right talent, including operating
and marketing professionals who are
inventory closer to the customers. This trade-offs between speed and their avail- analytic and strategic systems thinkers.

entails using stores as fulfillment centers ability to receive a delivery. In our experience, businesses that were
founded as online retailers find this easier
or acquiring additional warehouse space Interpreting Delivery to execute than legacy retailers do, but the
closer to consumers. Some retailers invest Preferences shift is still possible. Successful retailers
in automatic picking systems to reduce the tend to have an analytical champion who is
willing to develop the capability internally
time required to pick and pack orders, Instead of competing on delivery speed to build the data collection infrastructure
and attract the needed talent.
whereas others expand their delivery fleets alone, retailers can assess the preferences
Retailers spend an inordinate amount
to shorten routes and decrease transporta- of their customers and their correspond- of time focusing on personalizing their
product assortments to meet customers’
tion lead times. Alternatively, they may ing willingness to pay for multiple needs. Focusing on meeting their delivery
preferences could be the key differentiator
partner with delivery providers. Embedded delivery attributes, such as speed, in the extremely competitive retail busi-
ness. Analytically minded retailers can
in each of these approaches is the belief precision, and flexibility. We have four craft delivery time slots that are unique to
each customer based on revealed prefer-
that delivery speed drives value. recommendations for those who are ences. Based on our research, we strongly
encourage retailers to rethink their opera-
These moves may indirectly enable the in charge of designing their business’s tions to optimize not only on speed but
also on the most appropriate combination
retailer to improve its delivery precision and omnichannel strategy. of speed, precision, and flexibility.

offer customers more choice across delivery 1. Invest in data and analytics infra- Pedro Amorim is an assistant professor
of industrial engineering at Universidade
days. But there is a less costly option worth structure. This includes tools that collect do Porto and a cofounder of LTPlabs.
Nicole DeHoratius is an adjunct professor
considering: analyzing operational data and manage data on customer behavior, of operations management at the University
of Chicago Booth School of Business. Com-
about delivery patterns. For example, retail- such as how they navigate through a site. ment on this article at https://sloanreview
.mit.edu/x/63120.
ers could improve their routing capabilities It is also essential to track purchases
Reprint 63120. For ordering information, see page 4.
by capturing and utilizing data about typical across both online and offline channels. Copyright © Massachusetts Institute of Technology,
2021. All rights reserved.
traffic patterns or tracking service times at That, in turn, often requires changes in

customer delivery points. Based on these data management to give cross-functional

analyses, retailers can offer more precise teams access to data from both channels.

time slots to their delivery customers. 2. Collect and analyze customer-

In addition, retailers using third-party lo- specific time-slot selection data. Retailers

gistics providers could review their contracts just beginning this effort can focus on basic

and use their operational data to negotiate descriptive analytics that highlight what

delivery services that better meet customers’ attributes customers prefer, on average,

needs (such as requiring that they schedule given the options chosen by customers at

services throughout the evening and week- the moment of checkout. More advanced

end). These efforts are less expensive than teams can deploy discrete choice models, as

those inventory and warehousing invest- we have done, to understand willingness-

ments designed to improve mainly speed. to-pay characteristics across customer

Committing to a speedy delivery seemed segments and various order types.

particularly important during the early 3. Understand what delivery

COVID-19 lockdowns, when consumers attributes drive loyalty and repeat

were panic-buying. Nonetheless, many re- purchases. This requires the retailer to

tailers were unable to offer consumers even have some capability in predictive analyt-

a one-week delivery lead time, let alone a ics. Questions of interest include whether

14 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

[EMERGING TECH]

The Digital Twin Opportunity

Developments in enabling technology are opening up more use cases for virtual models
of real-world objects.

BY PUSHKAR P. APTE AND COSTAS J. SPANOS

H alf a century ago, NASA’s moon shot landed Neil Armstrong and Buzz Aldrin DT deployments were tactical, mainly for
on the moon and set fire to our imaginations. Technology innovations from data visualization and product life cycle
the program went on to seed entire industries, including microelectronics, management. But now, thanks to a con-
software, and communications, which now form the backbone of our digital century. fluence of technological advances, DTs are
Another innovation was that NASA built and maintained a physical twin of the space- at an intriguing inflection point — transi-
craft on the ground so that it could troubleshoot problems without risk to the mission. tioning from that specialized, tactical
This proved crucial during the troubled Apollo 13 mission and helped NASA bring the domain to becoming strategic tools with
astronauts home safely. This basic concept has now evolved into the use of digital twins, diverse applications.
or DTs — still twins, but built and maintained in the digital rather than physical realm.
Fundamentally, a DT is a dynamic model of a physical system that enables fast and Leaders now have an inspiring oppor-
creative experimentation at very low cost and risk. tunity to harness DTs for today’s moon
shot: achieving business success while
DTs have already been used in specialized, complex applications like observing and helping our planet and humanity. They
modeling the operation of an aircraft engine or manufacturing equipment. These initial can use DTs to strategize new cross-
disciplinary opportunities and drive
smart digital transformation. And they
can use DTs to achieve aggressive sustain-
ability goals and enhance the health and
safety of their employees and communities.

How Digital Twins
Are Advancing

What makes a DT special is that it is dy-
namic — it must always mirror the exact
state of the physical system. This requires
two key parts to work in tandem: a model
describing the behavior of its physical
twin, and sensors that provide the real-
time “coupling” to the model. For
example, a DT created to capture the oc-
cupant experience inside a building must
reflect the temperature, humidity, air
quality, and several other attributes of
every room. Buildings, like all physical
systems, are notoriously difficult to model
because they change over time: Pipes rust,
heating coils degrade, and beams weaken.
Biological systems such as forests, fields,
and humans change even more unpre-
dictably. For aircraft or manufacturing
operations, such changes are easier to

CARLO GIAMBARRESI/THEISPOT.COM FALL 2021 MIT SLOAN MANAGEMENT REVIEW 15

FRONTIERS

The Digital Twin Opportunity high-level priorities common among busi- DTs can improve equipment efficiency
(Continued from page 15) ness leaders where there is strong potential and reduce emissions significantly. These
for harnessing DTs: sustainability, smart innovations also help larger global sus-
monitor with ubiquitous sensors, and the innovation, and health and safety. tainability goals, because ironically, even
cost is justifiable due to the large capital “green”alternatives require more mining —
investments already at stake. For most Sustainability. Sustainability is an in- electric vehicle batteries need lithium,
other systems, modeling and measure- creasingly high-priority strategy for many high-efficiency electric motors need rare
ment have been difficult and unaffordable global corporations and organizations, earth elements, solar panels need alumi-
until recently. and many have set aggressive goals to num, and so forth.
achieve carbon neutrality in the next 10 to
What has changed is that multiple 20 years. DTs can be invaluable in achiev- Smart innovation. Much current innova-
technologies have come of age and can ing these sustainability goals by helping to tion focuses on adding “intelligence” to
now be combined in unique ways. The reduce energy consumption drastically things: Cars, homes, energy, agriculture,
internet of things (IoT) has matured, so and supporting more efficient develop- infrastructure, and cities, for instance, are
we have ever-cheaper sensors to measure ment of green alternatives. all being made “smart.” DTs can support
many new physical parameters accurately. the innovation necessary for this digital
5G communications networks allow Buildings account for almost 40% of transformation to smart systems.
wide-bandwidth data transmission at the world’s energy consumption and a
almost real-time speeds. Advances in aug- proportionate level of greenhouse gas For example, we have created DTs to
mented reality (AR) and virtual reality emissions. In our work, we find that DTs make wind turbines smart by combining
(VR) allow us to see a realistic 3D visual- can help lower the energy consumption fiber-optic sensing techniques with AI and
ization, whether of a bridge, a building, or in commercial buildings by almost half. machine learning models. By measuring
a human organ. Artificial intelligence (AI) and modeling every detail of the turbine,
and machine learning techniques help us It is difficult to experiment on an we created a DT that reflects the turbine’s
model how a system functions and some- actual building without disrupting opera- state at all times. It even predicts when a
times even predict how it might work in tions, incurring much expense, and specific bolt, out of thousands that secure
future scenarios. Coupling to real-time adding risk to the occupants. So as a pilot the turbine, is coming loose. This reduces
IoT data anchors these models in reality project through our partner program maintenance costs, prevents catastrophic
and transforms the DT into a powerful with the Berkeley Educational Alliance failure, and enhances the reliability of re-
tool. Now we can do far more than just for Research in Singapore, we created newable energy. Using similar innovations
observe — we can diagnose, control, and and applied a DT to a primary school in in sensing and modeling, we are adding
sometimes even provide a prognosis for Singapore, with the goal of minimizing smarts to dams so that they can warn of an
diverse physical systems. So how do we energy consumption while ensuring a imminent breach, and to roads so that they
use this new capability? healthy and comfortable environment for can help traffic flow more smoothly. Our
the children. To create this DT, we devel- DTs for smart agriculture use aerial drones
Where DTs Can Help Target oped a portable, easy-to-install sensor and ground-based agricultural robots to
Strategic Priorities suite to measure the actual “state” of the determine the exact requirements of each
building and coupled this with models plant or tree. This ensures the precise deliv-
At the Center for Information Technology based on AI and machine learning to vi- ery of water, fertilizer, and pesticides, with
Research in the Interest of Society (CITRIS) sualize occupancy, air quality, lighting, minimal waste. These DT-driven innova-
and the Banatao Institute, one of the and ventilation. We could then experi- tions enhance food security and also
University of California’s research and inno- ment safely and swiftly with the DT to mitigate the water crisis in drought-prone
vation centers, we are working with partners find an optimal solution. This basic ap- regions like California.
in industry, government, and academia to proach can be expanded to any building,
develop accurate DTs for diverse applica- and we are now working with Siemens Health and safety. The pandemic shone a
tions such as buildings, mines, vehicles, on an advanced implementation. spotlight on remote health care as tele-
renewable energy assets, dams, forests, health visits increased dramatically. This
and even human tissues and organs. We also find that DTs can benefit in- trend will likely endure for reasons of
dustries like construction, quarrying, and safety and convenience — and in remote
Based on our experience with Siemens, mining, whose basic operations generate
Komatsu, Kajima, Enel Foundation, Lam greenhouse gases. We have shown that
Research, SEMI, and the National Research
Foundation of Singapore, we see three

16 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

locations, where local medical expertise into a business case was straightforward, least as much a business challenge as it is
may be limited. However, the quality of a because these energy savings correlate a technical one and cannot be an after-
telehealth visit must improve beyond basic directly with cost savings and a reduction thought. Leaders must ensure that there is
audio or video. In two large pilot programs in emissions. a top-down strategy to provide access to
for underserved rural communities, we are the right data, and to guarantee its quality,
exploring real-time sensors to monitor pa- 2. Blend physics and AI optimally provenance, and security.
tients, AI to analyze patient data, and AR/ when designing a DT model. Both AI-
VR for better visualization. These DT ele- based models and physical models have FROM THEIR EARLIER applications in
ments provide physicians with timely data limitations. AI models depend on large the tactical monitoring of specialized ma-
and fast analytical tools so that they can amounts of data, and it’s not always possible chinery, DTs are now becoming strategic
diagnose and treat illnesses quickly. to collect or generate enough for the level tools for diverse applications because they
of accuracy required. Further, such models can increasingly diagnose, control, and
DTs can also improve workplace safety. lack physical insight. An autonomous car even predict the behavior of complex
We have shown that they can accurately does not “understand” that it is in hilly San physical systems. The time is ripe for
model and predict the spread of viral Francisco and not flat Dallas — and an AI business leaders to consider how they
pathogens through droplets inside chip model may not know what it does not can harness DTs to pursue new growth
production environments. These clean know, which could lead to a catastrophic opportunities. DTs are particularly useful
rooms are vital to the $3 trillion electronics accident. Meanwhile, pure physics-based in exploring strategic cross-disciplinary
ecosystem, and any shutdowns can result in models offer great intuitive insight but are opportunities, where it is risky to experi-
the loss of billions of dollars. The DTs guide limited by what we can measure. ment on the real thing, whether it is a
facility managers to develop safer practices building, an earthmover, or a person.
for workers to operate productively while We have determined that a hybrid ap- Especially exciting is the potential to
minimizing the risk of infection. proach blending physics and AI works use DTs to create business value while
best, because it leverages the best of both also meeting sustainability targets and
Best Practices for worlds and overcomes the limitations of improving people’s lives.
Implementing DTs each. In our quarrying DT, we use AI to
model the autonomous operation of an What if we could stop the next pan-
DTs have exciting potential but are earthmover but blend it with a physical demic in its tracks? What if we could cut
challenging to implement because they model of the soil and rocks it is digging. global energy consumption and green-
integrate multiple technology platforms Similarly, for our health DT, we use the house gas emissions by a third? What if
and require significant funding, talent, technology to model a dexterous robotic pediatricians could better treat ill or in-
and expertise. If these technology and hand but blend it with physical models of jured children in remote rural clinics?
organizational elements are not planned the skin and tissue it is operating upon. DTs may be able to help us address such
and executed effectively, DT projects can grand challenges successfully.
end in frustration and disappointment. 3. Build cross-disciplinary expertise.
To help leaders and teams succeed, we Cross-disciplinary opportunities require Pushkar P. Apte, Ph.D., is director of strategic
offer four succinct recommendations synergy between technology platforms initiatives at the Center for Information Tech-
for increasing the probability of success and application domains. Experts in nology Research in the Interest of Society
in DT projects. health, agriculture, mining, and construc- (CITRIS) and the Banatao Institute at the
tion must work with AI, IoT, software, and University of California, Berkeley. Costas
1. Inspire with a clear goal and solid hardware professionals. This is easier said J. Spanos, Ph.D., is director at CITRIS and the
business case. We find it critical to start than done, given that any single organiza- Banatao Institute and a distinguished profes-
with a well-articulated goal that inspires tion may not have all of this expertise. sor at UC, Berkeley. Comment on this article
people and translates into an actionable Leaders must be proactive in forging at https://sloanreview.mit.edu/x/63126.
business case for a DT project. For exam- thoughtful partnerships to ensure that
ple, in our smart-buildings project, we their teams have the right talent mix of ACKNOWLEDGMENT
motivated a global cross-disciplinary technology and domain knowledge. The authors wish to acknowledge all CITRIS and
team of 200 researchers with a simple partner researchers whose work is mentioned
but compelling goal: to reduce building 4. Drive a data strategy from the top in the article.
energy consumption by half without com- down. DTs live or die by the relevance
promising its performance. Translating this and accuracy of the data being measured Reprint 63126. For ordering information, see page 4.
and modeled. Data acquisition is often at Copyright © Massachusetts Institute of Technology,
2021. All rights reserved.

SLOANREVIEW.MIT.EDU FALL 2021 MIT SLOAN MANAGEMENT REVIEW 17

FRONTIERS

[MANAGING TECHNOLOGY]

How In-Store Tech Will Transform Retail

Automation and sensors promise a better customer experience —
and fuel for improved analytics.

BY SELENA ZHU, MAXIME C. COHEN, AND SAIBAL RAY

R etail stores are being challenged like never before. Not only are consumers buy- helping customers. This human touch
ing more goods online (a trend accelerated by the pandemic), but digital-first can provide a competitive advantage
companies like Amazon are attacking brick-and-mortar retailers’ home turf by over e-commerce.
opening their own physical stores that combine online and offline attributes. To stay
competitive, traditional retailers need to consider how adopting digital technology can However, the frictionless store is
improve the in-store customer experience, provide access to more data on customer not without potential pitfalls and risks.
preferences and habits, and potentially improve omnichannel operations. Privacy is among the biggest. Consumers
are concerned about how retailers might
The so-called frictionless store has become the new gold standard in the retail world. track them, as well as how much and
However, the term is a bit of a misnomer. The goal is to use digital technology to meet what kind of data companies collect. A
consumer expectations of flexibility, instant gratification, convenience, immersive shop- data breach, a regulatory fine, or even
ping, safety, and speed. But early adopters aren’t removing all points of friction. Rather, headlines about a company using data
their strategies vary substantially
depending on which friction improperly can significantly
points they want to remove. damage a company’s reputa-
tion. Similar reputational
Adopting digital technologies damage might come if
that remove friction from the automation displaces large
traditional retail model can pro- numbers of a retailer’s
duce several advantages. The first employees. Finally, adopting
is an improved customer experi- and deploying digital tech-
ence. Customers today expect the nology is expensive and time-
same speed and convenience in consuming, and it won’t
person that they get online. necessarily work as promised.
Stores that can deliver that expe- Time and cost can be signifi-
rience will strengthen customer cant barriers, especially for
loyalty, making them more com- midsize and small companies.
petitive with online sellers and
creating an advantage over physi- At the least, large retailers
cal retail competitors that don’t need to consider frictionless
offer comparable speed and convenience. The pandemic, which forced social distancing, stores simply as a defensive
also led customers to expect more space and less physical contact in stores. strategy — to protect against encroach-
ing competition from digital natives.
Second, digitizing gives retailers a chance to collect and analyze more — and more The pandemic highlighted the advan-
granular — data on customer preferences and behavior, leveling the playing field with tages of online shopping and accelerated
online sellers and enabling personalized recommendations and promotions. In addition, its adoption while decimating foot traffic
physical retailers can capture what customers do in stores: the paths they traverse, which and physical sales in retail stores. While
products they pick up and put back down, and even how long they hesitate while trying retailers may be drawn to the benefits
to choose between two products. Stores can use this data to improve operations, includ- listed above, the most compelling reason
ing inventory management, pricing, and physical product placement. to adopt these technologies may be to
help them hold their own against new
Finally, stores can make better use of human capital: By automating routine work competitors.
like stocking shelves, companies free their employees to do the higher-value work of

18 MIT SLOAN MANAGEMENT REVIEW FALL 2021 ALEX NABAUM/THEISPOT.COM

The Industry Landscape to identify customers through their body to pay off, retailers’ strategies must be
of Frictionless Retail positioning and detect the products cus- tuned to their particular business goals.
tomers pick up and put down. Customers Grab and go might work well in conve-
The earliest implementers of frictionless enter the store using a QR code from a nience stores. Luxury stores might use
stores are Chinese and U.S. retail giants, mobile phone app, grab their goods augmented reality to show clients how
specifically Alibaba and JD.com (China) (while being tracked), and just walk out. they would look in a custom suit, but
and Amazon and Walmart (United The items are automatically charged to high-touch personal service will remain
States). They aim to improve the cus- their Amazon Prime accounts. key to their value proposition.
tomer experience in significant ways but
also have strategic objectives to improve In contrast, Alibaba’s Hema focuses on Here are three important questions
the operation of the business. ultrafast order fulfillment and delivery. It retail executives should consider when
does not use cameras or sensors. Customers developing a plan to adopt in-store
• In 2015, Alibaba introduced Hema in place orders from their mobile phones, and technology.
China. The strategic goal is to integrate then store associates pick and pack orders
digital, online operations with physical in shopping bags traveling on overhead 1. What do you most want to accom-
stores. Hema stores serve as both physical conveyor belts. Scooter drivers pick up the plish? A retailer can reduce friction in
supermarkets where people can shop and bags and deliver them to customers. any number of areas to increase customer
online order fulfillment centers. Hema convenience, improve back-end opera-
promises to deliver online orders within Three Key Strategic tions, integrate online and physical
30 minutes within a radius of 3 kilometers. Considerations operations, or collect more data. It’s cru-
cial to know which is the primary goal,
• In 2018, Amazon introduced Amazon Frictionless retail is poised to become however. You can have secondary objec-
Go, which uses a cashierless grab-and-go more widespread. CB Insights recently tives, but be crystal clear about which one
model, in Seattle. The company’s strat- reported that funding for in-store tech- is most important. A driving priority is
egy enables it to gather data on its nology quadrupled from the first quarter critical because it determines the type of
Amazon Prime members’ physical shop- of 2020 to the first quarter of 2021, reach- technology to use, how to deploy it, and
ping activities while making shopping ing $2.2 billion. But for these investments the return on investment to expect.
experiences quick and easy for them.
Amazon expanded the concept with STATEMENT OF OWNERSHIP, MANAGEMENT, AND CIRCULATION
Amazon Go Grocery in February 2020.
(Required by U.S.C. 3685). (1) Publication title: MIT Sloan Management Review. (2) Publication No.1532-9194. (3) Filing Date: 10/1/2021. (4) Issue Frequency:
• In 2018, JD.com launched its frictionless Quarterly. (5) No of Issues Published Annually: 4. (6) Annual Subscription Price: $96.00. (7) Complete Mailing Address of Known Office of Publication: MIT, E90-
grocery store, 7Fresh, in China. Similar 9200, 77 Massachusetts Avenue, Cambridge MA 02139-4307. Contact Person: Mackenzie Wise. Telephone: (617) 253-7170. (8) Complete Mailing Address of
to Hema, 7Fresh stores operate as both Headquarters or General Business Office of Publisher: MIT, E90-9200, 77 Massachusetts Avenue, Cambridge, MA 02139-4307. (9) Full Names and Complete
physical supermarkets and online order Mailing Addresses of Publisher, Editor, and Managing Editor: Publisher: Robert W. Holland Jr., MIT E90-9178, 77 Massachusetts Avenue, Cambridge, MA
distribution centers and pledge to deliver 02139-4307. Editor: Abbie Lundberg, MIT E90-9191, 77 Massachusetts Avenue, Cambridge MA 02139-4307. Managing Editor: Cheryl Asselin, MIT E90-9201,
online orders within 30 minutes. 77 Massachusetts Avenue, Cambridge MA 02139-4307. (10) Owner: Massachusetts Institute of Technology, Sloan School of Management, 77 Massachusetts
Avenue, Cambridge MA 02139-4307. (11) Known Bondholders, Mortgagees, and Other Security Holders Owning or Holding 1 Percent or More of Total Amount
• In 2019, Walmart created a 50,000-square- of Bonds, Mortgages, or Other Securities: None. (12) Tax Status: The purpose, function, and nonprofit status of this organization and the exempt status for federal
foot store in Levittown, New York, that income tax purposes has not changed during the preceding 12 months. (13) Publication Name: MIT Sloan Management Review. (14) Issue Date for Circulation
serves as a retail innovation lab. Walmart’s Data Below: Summer 2021. (15) Extent and Nature of Circulation: (a.) Total No. Copies (net press run): Average No. Copies Each Issue During Preceding 12
strategy is to improve inventory manage- Months: 16,419; No. Copies of Single Issue Published Nearest to Filing Date: 17,423; (b.) Paid and/or Requested Circulation (1) Mailed Outside-County Paid/
ment and product freshness. Requested Subscriptions Stated on Form 3541: Average No. Copies Each Issue During Preceding 12 Months: 4,803; Actual No. Copies of Single Issue Published
Nearest to Filing Date: 4,967. (2) Mailed In-County Paid Subscriptions Stated on Form 3541: Average No. Copies Each Issue During Preceding 12 Months: 0;
Each of these companies uses technol- Actual No. Copies of Single Issue Published Nearest to Filing Date: 0. (3) Sales Through Dealers and Carriers, Street Vendors, Counter Sales, and Other Non-
ogy in different ways, depending on its USPS Paid Distribution: Average No. Copies Each Issue During Preceding 12 Months: 4,831; No. Copies of Single Issue Published Nearest to Filing Date: 4,922.
specific goals. Amazon Go, for example, (4) Other Classes Mailed Through the USPS: Average No. Copies Each Issue During Preceding 12 Months: 0; No. Copies of Single Issue Published Nearest
uses what the company calls “sensor to Filing Date: 0. (c.) Total Paid and/or Requested Circulation: Average No. Copies Each Issue During Preceding 12 Months: 9,633; Actual No. Copies of Single
fusion” — a combination of overhead Issue Published Nearest to Filing Date: 9,889. (d.) Free Distribution by Mail: (1) Outside-County as Stated on Form 3541: Average No. Copies Each Issue During
cameras, lidar, RFID (radio-frequency Preceding 12 Months: 21; Actual No. Copies of Single Issue Published Nearest to Filing Date: 0. (2) In-County as Stated on Form 3541: Average No. Copies
identification), and shelf-weight sensors — Each Issue During Preceding 12 Months: 0; Actual No. Copies of Single Issue Published Nearest to Filing Date: 0. (3) Other Classes Mailed Through the USPS:
Average No. Copies Each Issue During Preceding 12 Months: 0; Actual No. Copies of Single Issue Published Nearest to Filing Date: 0. (4) Free or Nominal
Rate Distribution Outside the Mail: Average No. Copies Each Issue During Preceding 12 Months: 1,960; Actual No. Copies of Single Issue Published Nearest to
Filing Date: 1,951. (e.) Total Free Distribution: Average No. Copies Each Issue During Preceding 12 Months: 1,981; Actual No. Copies of Single Issue Published
Nearest to Filing Date: 1,951. (f.) Total Distribution: Average No. Copies Each Issue During Preceding 12 Months: 11,614; Actual No. Copies of Single Issue
Published Nearest to Filing Date: 11,840. (g.) Copies Not Distributed: Average No. Copies Each Issue During Preceding 12 Months: 4,805; Actual No. Copies
of Single Issue Published Nearest to Filing Date: 5,583. (h.) Total: Average No. Copies Each Issue During Preceding 12 Months: 16,419; Actual No. Copies of
Single Issue Published Nearest to Filing Date: 17,423. (i.) Percent Paid and/or Requested Circulation: Average No. Copies Each Issue During Preceding 12
Months: 83%; Actual No. Copies of Single Issue Published Nearest to Filing Date: 84%. (16) Electronic Copy Circulation: (a.) Paid Electronic Copies: Average
No. Copies Each Issue During Preceding 12 months: 26,901. No. Copies of Single Issue Published Nearest to Filing Date: 27,856. (b.) Total Paid Print Copies
+ Paid Electronic Copies: Average No. Copies Each Issue During Preceding 12 Months: 37,499. Actual No. Copies of Single Issue Published Nearest to Filing
Date: 37,745. (c.) Total Print Distribution + Paid Electronic Copies: Average No. Copies Each Issue During Preceding 12 Months: 39,708. No. Copies of Single
Issue Published Nearest to Filing Date: 39,696. Percent Paid (Both Print and Electronic Copies): Average No. Copies Each Issue During Preceding 12 Months:
94%. No. Copies of Single Issue Published Nearest to Filing Date: 95%. This Statement of Ownership will be printed in the Fall 2021 issue of this publication.
I certify that all information furnished on this form is true and complete.

Robert W. Holland Jr.

SLOANREVIEW.MIT.EDU FALL 2021 MIT SLOAN MANAGEMENT REVIEW 19

FRONTIERS

How In-Store Tech Will Transform Retail (Continued from page 19)

For example, Walmart’s goal is to im- themselves and in the infrastructure to Innovation Lab, launched in January 2021
as a partnership between the university’s
prove inventory management, reducing support them. This makes the decision Bensadoun School of Retail Management
and Alimentation Couche-Tard (Circle K),
instances when an item is out of stock or a of whether to build or buy key. There are one of the largest convenience store chains
in the world. The goal of the lab — which
food item remains on the shelf beyond its several prepackaged, integrated systems is a real-world, fully operating frictionless
store — is to investigate how to use various
freshness date. That focus determined its available from third parties. In fact, in 2020 frictionless technologies for responsible
innovation. We study how retailers can use
choice of cameras, sensors, and algorithms. Amazon announced plans to launch a new data to make better operational decisions,
and we are looking at ways to balance that
It’s more interested in the “grab” than the business selling Amazon Go’s technology data use against privacy concerns. For ex-
ample, we are experimenting with how to
“go.” It reportedly has no plans to other retailers. Other tech players and aggregate anonymized data in ways that
characterize certain shopper “personas,”
to change its checkout processes. startups include Standard Cognition, V7 which would protect personal data and yet
be useful to retailers.
While none of the early adopters has Labs, and AiFi.
FRICTIONLESS STORES ARE still
emphasized it, another potential objective 3. How will you address concerns about nascent, but we expect the concept to in-
filtrate the retail world at a daunting pace,
of adopting frictionless in-store technol- personal data? Some consumers are as tech giants like Amazon and Alibaba
continue to invest in it heavily. Physical
ogy is reducing or eliminating theft, alarmed at the level of in-store personal retailers will need to meet rising con-
sumer expectations for convenience and
which costs U.S. retailers more than surveillance that some retailers are imple- speed while collecting and analyzing more
data in more useful ways. That doesn’t
$13 billion annually. That can be accom- menting. Facial recognition is the most mean their strategies should duplicate
Amazon’s or Alibaba’s. It does mean that
plished by requiring customers to identify controversial technology. In the U.S., each retailer must figure out how to use
technology to eliminate the friction
themselves via a payment method or their Amazon Go stores do not use facial recogni- points that matter most to its customers
and its own bottom line.
personal account in order to gain entry; tion, but in China, certain Hema and 7Fresh
Selena Zhu is an investment banking ana-
subsequently, tracking technologies can stores accept payment based on facial lyst; she was a research fellow in McGill
University’s Retail Innovation Lab when
record which products they leave with recognition technology. A camera scans a this article was written. Maxime C. Cohen
(@maxccohen) is a professor of retail and
and charge them accordingly. shopper’s face, matching it to and charging a operations management, codirector of the
Retail Innovation Lab, and a Bensadoun
2. Which technology will you use, and registered account. The shopper confirms Faculty Scholar at McGill University. Saibal
Ray is the James McGill Professor of Oper-
how will you source it? Your strategic goal their identity by entering their mobile phone ations Management and academic director
of McGill’s Bensadoun School of Retail
determines the technology required and number. Even with no facial recognition, Management. Comment on this article
at https://sloanreview.mit.edu/x/63122.
how it will be deployed. Amazon Go uses frictionless stores collect vast amounts of
Reprint 63122. For ordering information, see page 4.
overhead cameras and sensors that sense data, which can introduce a certain“creepi- Copyright © Massachusetts Institute of Technology,
2021. All rights reserved.
weight on shelves so that it can track ness”factor. How comfortable will people be

where customers go and what products as cameras track them moving throughout

they select (and put back). Walmart also the store, record“dwell time”— that is, how

uses cameras and shelf sensors but deploys much time they spend in each section of the

them differently to achieve its goal of im- store — and collect information on exactly

proved restocking. Companies that use what they picked up or looked at? Retailers

stores as mini warehouses, like Hema and can use such data to construct behavioral

7Fresh, do not use cameras and sensors. metrics such as customer attention, dis-

Rather, they use overhead conveyor belts, traction, engagement with products, and

people, and scooters. The Chinese stores movement throughout the store.

also deploy several technologies aimed at Consumers worry about how that data

improving the in-store physical shopping is used, and regulators are increasingly step-

experience. For example, interactive dis- ping in: Europe’s General Data Protection

plays show customers detailed product Regulation has led a general trend toward

information, like country of origin or better protection of customer data, such as

ingredients — similar to the information the California Consumer Privacy Act. How-

available when shopping online. Some ever, retailers should not only make sure

stores have autonomous carts that follow they comply with pertinent regulations but

customers as they shop and automatically also be transparent with customers about

scan product bar codes as items are added. what data they collect and how they use it.

Most deployments require significant McGill University, where two of us

investment, both in the technologies teach, studies such issues at its Retail

20 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

New from the MIT Press

Explore the Management on the Cutting Edge series,
published in cooperation with MIT Sloan Management Review,
at mitpress.mit.edu/management

MANY BUSINESSES ARE SEEKING to be better corporate citizens by reducing their

environmental impact and improving conditions for workers. While activist consumers have

played a role in pushing companies to make positive changes, visionary leaders are themselves

considering the growth opportunities that can come from pursuing such agendas.

Executing a business strategy that results in less damage to the environment and is equitable

for all stakeholders doesn’t have to mean sacrificing margins, say Marco Bertini, John Pineda,

Amadeus Petzke, and Jean-Manuel Izaret. They argue that more creative thinking about both

pricing mechanisms and cost mitigation can allow a company to do well by doing good.

Supply chain scholars Tim Kraft and Yanchong Zheng see efforts to improve transparency in

the supply chain — and root out bad suppliers with poor environmental or labor practices — as

a way for companies to stand out from competitors and appeal to customers who prefer to buy

from socially responsible businesses. A particularly murky area of the supply chain is unauthor-

ized subcontracting, but myth-busting research by Felipe Caro, Leonard Lane, and Anna Sáez de

Tejada Cuenca demonstrates the power of analytics to predict — and curtail — this problem.

Finally, while some are pessimistic about the prospects for large-scale decarbonization of

sectors such as industrial heat and heavy transport, Amory Lovins presents an alternative view:

He sees a disruptive transformation on the horizon, in which new competitors will seize on the

shift away from fossil fuels to renewable electricty to develop new business models — and bring

us closer to the promise of a net-zero 2050. — Elizabeth Heichler

SUSTAIN
STRAT

22 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

SPECIAL REPORT

25
Can We Afford
Sustainable Business?

34
How Supply Chain
Transparency Boosts
Business Value

41
Four Myths About
Unauthorized
Subcontracting

46
Decarbonizing Our
Toughest Sectors —
Profitably

EG ES
CREATING VALUE WHILE
DOING RIGHT BY PEOPLE
AND THE PLANET

SLOANREVIEW.MIT.EDU FALL 2021 MIT SLOAN MANAGEMENT REVIEW 23

DO GOOD
AND DO
WELL

More and more leaders are embracing
sustainability. They’re discovering that what’s
right for people and the planet can also have
a positive long-term impact on the bottom
line. These days, consumers and shareholders
alike are holding companies accountable.
And sustainability is quickly evolving from
something nice to do to a major
competitive advantage.

Prepare your leaders to make a world of
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ĸĴķĸŅņĻļŃ ĸʼnĸĿłŃŀĸŁŇ ŅłĺŅĴŀп
powered by MIT Sloan Management Review.

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SKILLSOFT LEADERSHIP
DEVELOPMENT PROGRAM

POWERED BY

SUSTAINABILITY STRATEGIES: RETHINKING COSTS

Can We Afford
Sustainable Business?

Taking a creative approach to pricing can benefit society,the environment —
and your company.

BY MARCO BERTINI, JOHN PINEDA, AMADEUS PETZKE, AND JEAN-MANUEL IZARET

‘‘Howarewegoingtopayforthis?”
In that question lies the conundrum faced by the growing ranks
of corporate leaders who recognize that business must, at the very
least, stop contributing to the most urgent problems facing hu-
manity and ought to, at best, help solve them. In mission statements
and strategic plans, many companies are making commitments to
improving sustainability and reducing inequity — but when it
comes to meeting those goals, they are tripped up by the financial
implications.
In reality, we have no shortage of ideas on how to provide greater and more equitable access to goods and
services, use them conscientiously and more effectively, and leave the least amount of waste behind. But we are
frequently held back in implementing those ideas because of the presumption that any sustainability initiative
invariably leads to higher costs, higher taxes, higher fiscal deficits, and, ultimately, higher prices.“How are we
going to pay for this?” becomes a killer question
seemingly designed to stifle progress.
Overlooked in the debate, however, is one
factor that unnecessarily limits the scope that
leaders in all spheres — whether business,
politics, or nonprofit — need to implement
solutions that can scale to meaningful impact.
That factor is the price mechanism. We con-
tend that it’s possible to find creative solutions
that rally all market actors around responsible
behaviors that mitigate the negative externalities
of commerce before businesses tally them up and
price them in. In one sense, we argue that organi-
zations act more as caretakers of markets than as
simple producers, using the incentives and in-
formation embedded in the price mechanism to
allocate the responsibility for broader and fairer
access, for conscientious and effective consump-
tion, and for handling waste more efficiently.

GARY WATERS/THEISPOT.COM FALL 2021 MIT SLOAN MANAGEMENT REVIEW 25

SUSTAINABILITY STRATEGIES: RETHINKING COSTS

At the root of the problem is the premise that Capitalizing on Degrees of Freedom
the only way companies can ease the burden of
commerce on our society is to account for it prop- The good news is that leaders have far more leeway
erly and find someone to foot the bill. This premise with the price mechanism than they realize. This
corners businesses into what we call a taboo trade- quickly becomes apparent when they stop thinking
off. A company can try to pass the incremental cost that “How are we going to pay for this?” is the only
of environmentally or socially responsible prac- question and “Price in the externalities” is its only
tices onto customers, but they may not be willing answer. In fact, every price decision builds on the
or able to pay it and thus flee to cheaper competi- answers to three basic questions:
tors or leave the market entirely. Alternatively, the
company can absorb this cost by sacrificing mar- • What are customers paying for?
gin, cutting corners on quality, or making the • Who is going to pay?
supply chain “sweat” until the economics work • When and how do we transact?
out. In each case, the financial or reputational risk
is such that the organization often sees “Do noth- Most businesses take these questions for granted
ing” as the pragmatic solution. It dodges the and believe the answers to be moot and immutable.
trade-off instead of addressing it. However, rejecting that assumption and thinking
more expansively about what, who, when, and how
This conundrum is particularly frustrating for can lead to innovative solutions.
leaders who are committed to driving change.
Emmanuel Faber led France’s Danone for over Rethinking what customers pay for matters
six years and was widely seen as a prominent because it determines the extent to which organiza-
advocate for a more responsible capitalism that tions generate revenue by delivering outcomes that
serves not only shareholders but also the environ- customers desire rather than providing them with
ment, employees, and suppliers.1 But in March inputs (products and services). The traditional
2021, Faber lost his job as chairman and CEO after “make and sell” approach can put a financial and
activist shareholders voiced their displeasure physical strain on access, because it forces custom-
with Danone’s financial performance, strategy, ers to find a solution and purchase it outright. This
and governance. approach neither motivates customers to think re-
sponsibly about consumption nor guarantees that
The dismissal of someone like Faber reflects an they will be satisfied with the purchase. Finally,
undercurrent of skepticism that still simmers be- “make and sell” transfers ownership — and there-
hind the scenes at purpose-oriented businesses. fore the burden of disposal — from suppliers to
One CEO of a European multinational reportedly customers who may not have the drive or expertise
said that if he made his company’s environmental to dispose of goods responsibly.
policy greener, “my profit margin would fall 3%
per year, my stock price would fall 15%, and I Today, a host of novel commercial arrange-
would get fired.”2 Indeed, a recent study indicates ments — such as subscriptions and memberships,
that CEOs who enact greener or more sustainable pay-as-you-go models, collaborative consumption,
policies are significantly more likely to get fired revenue-sharing agreements, and performance-
for poor performance than CEOs who do not.3 based contracting — can address these challenges
without transferring ownership. Each of these

Leaders have more leeway with the price mechanism than
they realize — if they stop thinking that “How are we going to
pay for this?” is the only question and “Price in the externalities”
is its only answer.

26 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

alternatives can ease the access problem inherent in opportunity to engage people. For example, to fight
traditional transactions, because companies earn against low donation rates in 2014, the relief orga-
their revenue only when they provide customers nization Misereor deployed interactive billboards
with direct, unencumbered access to their offerings. that enabled bystanders to offer 2 euros by swiping
Similarly, pay-as-you-go and sharing approaches en- their credit cards over the screen. True to its princi-
courage sensible consumption because customers ple of “playful, not pitiful,” Misereor deployed
pay at each consumption episode, and performance- technology such that the swipe activated an engag-
based contracts ensure that companies get paid only ing interactive sequence depicting the credit card
when they deliver value, not when they promise it. slicing a piece of bread to feed the hungry or freeing
an imprisoned child.5
As they consider who pays, business leaders need
to question whether it makes sense for all customers In the rest of this article, we show how a broader,
to pay the same price, or even to pay at all. This may more creative take on these three questions can al-
seem potentially unfair. But whenever universal leviate the taboo trade-off and accelerate progress.
access is the target in a sector, businesses should
consider varying prices based on people’s ability or Scaling Solar Energy
willingness to pay or, in the case of third-party pay-
ers, the value that an individual end user derives. The battle to mitigate the effects of climate change is
widely seen as a race against time. This urgency was
In certain situations, companies might think in recognized by the 196 countries that signed on to the
terms of interconnected currencies such that cus- 2015 Paris Agreement, which committed to reaching
tomers might pay to satisfy their own basic needs in zero carbon emissions by 2050.6 Conducting busi-
something other than money. One example is sub- ness as usual will doom those efforts.
sidizing the purchase of water filters in order to
eliminate the need to boil water on wood fires to Making progress against this ticking clock re-
make it potable. The reduction in carbon emissions quires a multitude of solutions aimed at improving
resulting from the decreased use of wood fires has a equitable access to renewable energy sources, com-
monetary value on the carbon market, and this can bined with more conscientious consumption. The
be used to fund the enterprise.4 The key here is to circumstances and challenges vary greatly from
ensure that the behavior tied to the intermediate market to market, but one common denominator
currency (such as fewer wood fires) aligns with the is that traditional views on the price mechanism
benefit pursued by the user (such as access to clean create a taboo trade-off that hinders the adoption
water). Otherwise, focusing on the former to gen- of cleaner solutions. How can the energy sector
erate revenue can distract from achieving the latter, transition from a profitable carbon-based market
which is in fact the primary goal. to one that is equally profitable but greener?

Likewise, in some sectors, certain behaviors are One of the biggest obstacles inhibiting the adop-
clearly desirable from a social or environmental tion of solar energy among households is the
perspective, such as purchasing soon-to-expire upfront investment required to install solar panels.
food to avoid waste or participating in physical In developed countries, a residential installation
activity to improve one’s health. In those cases, can cost tens of thousands of dollars, even though
businesses should consider varying prices not the price per watt for photovoltaic (PV) panels
based on customers’ ability or willingness to pay, dropped by almost 80% between 2010 and 2020.
but based on their readiness to act responsibly. After making this investment, homeowners must
wait many years to break even and start to enjoy the
Companies should likewise reconsider when financial benefits that solar energy provides. The
and how to collect payment. They can turn to discrepancy between the timing of payments and
micropayments to allow more granular access. If onset of cost savings is so large that no reasonable
reasonable, they can also defer payments to ease the price concession can bridge it satisfactorily.
financial burden on customers or, importantly, to
better align the timing of costs and benefits. Finally, However, opportunities emerged when the sup-
one can think creatively about payment as an pliers of solar energy solutions reexamined the
three core questions.

SLOANREVIEW.MIT.EDU FALL 2021 MIT SLOAN MANAGEMENT REVIEW 27

SUSTAINABILITY STRATEGIES: RETHINKING COSTS

• What are customers paying for? Simply put, It is interesting to note that the market for direct
households want to pay for cleaner energy rather than purchases grew impressively as well in the same pe-
the inputs to access that energy. Recognizing this, pio- riod, from 147 MW to 720 MW. In other words, the
neering companies Sunrun and SolarCity (now lower prices for PV panels would have naturally
known as Tesla Energy) began offering customers a driven growth.9 The lesson is that products can be-
power purchase agreement (PPA). Instead of selling come even more accessible — and progress toward
panels or establishing a fixed set of loan payments,they ambitious environmental, social, and governance
sold customers the energy output from the panels in- goals can be achieved even faster — when compa-
stalled on their roofs, reflected as a discount to their nies are willing to reconsider preconceived notions
utility rates. They also guaranteed the system output about their prices.
for 20 to 30 years. This change of focus, from panel
sales to the provision of clean energy,enabled PV man- The problem of energy access is universal. In
ufacturers to offer an alternative to the traditional sub-Saharan African countries, it can be prohibi-
approach predicated on a large upfront payment. tively expensive to extend existing grids to serve
remote populations. This includes 22 million dis-
• Who is going to pay? Homeowners still pay for placed people in the region who lack access to
energy, but, to a large extent, the U.S. federal govern- electricity. Solar home kits have therefore become
ment has also paid large amounts of money for the an attractive alternative, because they can help
installation of solar panels, through a mixture of most families meet their basic power needs and
subsidies and tax credits. Another alternative to out- avoid relying on diesel generators (or going with-
right purchase, leasing, lessens the need for these out power). The upfront retail cost of a basic solar
extensive government payments as a means to bring home kit is around $180, but that is a large expense
down the large upfront cost and create a purchase for a family that might earn $1 to $2 per day.10
incentive. Ideally, this shift can take the government What has accelerated adoption of the kits is an
(and its taxpayers) out of the equation entirely and approach similar to the one used by telcos: a de-
change the “who” to the homeowners themselves. posit combined with a pay-as-you-go charge. Most
people use their cellphones to make the micropay-
• When and how do we transact? Let’s assume ments directly. The overall benefits of the solar
that the upfront cost of a PV installation by Sunrun home kits are numerous, ranging from less pollu-
in the U.S. is $21,000, before tax benefits.7 The ma- tion and greater safety to freeing up time for
jority of homeowners are still opting to pay for or education or work. They also offer a more reliable
finance that expense and draw the “free” solar en- source of energy, not only because of the abundant
ergy. But around 35% of homeowners now opt to sunshine, but also because diesel fuel or other en-
enter into a PPA, which eliminates this upfront ex- ergy sources are subject to disruption.
pense in exchange for a guaranteed energy supply
from day one at monthly payments below prevail- Lifesaving Treatment for All
ing market rates. This agreement creates a
dependable revenue stream for the supplier and The hepatitis C virus (HCV) currently afflicts over
also offers consumers an appealing alternative to 70 million people worldwide. It is a leading cause of
paying or financing a significant upfront cost. cirrhosis and liver cancer; a Centers for Disease
Control and Prevention study found that in 2013, it
Combined with the overall decline in PV prices, killed more people in the U.S. than the next 60 in-
the introduction of PPAs alongside traditional leas- fectious diseases combined, including HIV and
ing agreements helped fuel exponential growth in tuberculosis.11
the solar market. Take California as an example.
Installed capacity increased from 163 megawatts What makes disease management challenging is
(MW) in 2010 to 1,950 MW in 2015. Leasing the wide range of symptoms and the respective costs
accounted for 63% of the installations in 2015, to treat them.It may cost only a few hundred dollars to
versus just 10% in 2010.8 For comparison, leasing treat patients with mild symptoms, whereas treat-
historically accounts for around 30% of new car ment costs can run as high as $300,000 for the roughly
registrations in the U.S. each year. 10% of patients who require a liver transplant.

28 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

Gilead and the state of Louisiana brought new thinking to the
price mechanism for a hepatitis C treatment, resolving the
taboo trade-off by rethinking what customers pay for, and
how they transact.

This reality presented Gilead Sciences, maker of allows funding to reach all patients where there is a
breakthrough HCV therapy Sovaldi, with a signifi- clear clinical and economic rationale.
cant taboo trade-off. By curing an otherwise
chronic disease in just 12 weeks, Sovaldi literally Spreading payments over time and benefits
provides a lifetime benefit to patients. But the in- across the population yields better economics for
dustry’s standard pricing approach — which is to all. This arrangement is aptly nicknamed the
charge a price per treatment at the time of care — Netflix model, because it resembles a subscription
makes it prohibitively expensive to treat patients to a streaming service. The buyer pays a fixed price
with mild symptoms. At a price tag well north of for access to a catalog of content, rather than paying
$50,000 for that 12-week course, Sovaldi makes potentially much more for individual content
economic sense only for that small minority of streams a la carte. This model is similar to the
patients with severe complications. concept of software vendors’ enterprise license
agreements, under which an entire population of
A lower price point would broaden access and employees gains access to a software catalog. The
hasten the World Health Organization’s goal of supplier secures a constant revenue stream and
reducing deaths due to HCV by 65% by 2030.12 serves many more users than it would on a case-by-
But it would also make the cure far less profitable, case basis. The buyer secures value over time for the
creating a quandary for leaders in biopharma entire population in a way that allows everyone to
companies who have a mandate to recover sub- benefit, regardless of their consumption level.
stantial investments in R&D and yield returns to
investors. In 2019, Louisiana paid a subsidiary of Gilead a
lump sum in exchange for as much of its HCV regi-
A novel approach to the price mechanism of- men as warranted to treat patients in its Medicaid
fered the health care ecosystem a way to resolve the program and correction facilities through 2024.13
taboo trade-off. Gilead worked with the state of The exact terms of the deal are not known, but the
Louisiana to rethink two of the fundamental ques- amount is estimated to be significantly less than the
tions outlined above: aggregate sum that would have been necessary to
treat all HCV patients at the ongoing per-therapy
•What are customers paying for? Instead of pay- price. If we assume roughly $35 million per year for
ing to treat only the most affected patients on the the minimum 31,000 HCV patients mentioned in
standard per-dose or per-therapy basis, health insur- the news release, that amounts to about $1,130 per
ance payers could pay “per population cured.” This patient per year for population-level coverage,
would allow for a spreading out of total benefits at the or approximately $5,600 per patient over the five
population level, regardless of the extent of any indi- years of the contract.14 Later in 2019, the state of
vidual’s symptoms at the time of treatment. Washington entered into a similar deal with the
drugmaker AbbVie.15
• When and how do we transact? The payments
are spread out over multiple years, rather than There is some skepticism about the willingness
being due when treatment is administered, to bet- of different players in the health care ecosystem to
ter match the timing of the lifetime benefits to come to the table on this type of arrangement ver-
patients. This also benefits the Louisiana Medicaid sus the more familiar pay-per-treatment one. But
system, which pays for fewer liver transplants and several new trends are helping all parties become
other expensive interventions. This approach

SLOANREVIEW.MIT.EDU FALL 2021 MIT SLOAN MANAGEMENT REVIEW 29

SUSTAINABILITY STRATEGIES: RETHINKING COSTS

accustomed to aligning prices with the timing of qualifying students to attend selected colleges or
value delivery in a way that boosts efficiency. These technical schools for free, and Tennessee Reconnect,
trends include the increasing adoption of quality- which allows adults without a degree or certification
adjusted life years as a generic measure of disease to complete one at no out-of-pocket cost. The differ-
burden and a means to price treatments based on ence between the Tennessee programs and an ISA is
health outcomes, as evidenced by Roche’s recent that there is no repayment plan at all.
efforts on personalized reimbursement models.16
The program has worked for several years be-
Driving Efficiency in Education cause it aligns the incentives for all parties. Students
gain access to an education, while the state derives a
The cost of higher education in the U.S. is increas- return on its investment by creating taxpayers and
ingly untenable for both students whose financial also making the state more attractive to companies
futures are hostage to crippling levels of debt and to that need a large pool of workers with 21st-century
the federal government, which backs over 90% of the skills. The state also gains because the Tennessee
more than $1.7 trillion in outstanding student Promise program requires students to fulfill a com-
loans.17 At issue is how to prevent that pile of debt munity service commitment.
from rising further and, more broadly, how to ensure
that spending on higher education actually leads to Closing the Loop in Fashion
desired outcomes such as learning and employment.
If the fashion industry were a country, it would be
One solution addresses the“who”and the“when the fourth-worst emitter of greenhouse gases in the
and how” questions, and in some cases the “what” world, trailing only China, the U.S., and India.19
question as well. Known as an income-share agree- One estimate shows that players in the sector con-
ment (ISA), the arrangement calls for the student sume more energy than aviation and shipping
to pay the educational institution only when they combined.20 At the same time, the dependence on
are earning an annual salary above a certain thresh- cotton — and thus the corresponding dependence
old. The payment is a percentage of their income on irrigation and agrichemicals — has had consid-
until the tuition is paid in full. The difference be- erable environmental impact: It can take as much
tween an ISA and a conventional loan is that there as 2,700 liters of water to make one cotton T-shirt.21
is no interest rate, nor are any payments required if Even then, each American on average throws away
the student remains unemployed or earns wages 80 pounds of textiles every year, which adds up to
below the threshold. These programs may appeal to around 12.8 million tons of trash.22
students in one- or two-year skill-certificate pro-
grams, but major universities such as Purdue have Consider a pair of “fast fashion” jeans that retails
also launched ISA programs.18 for, say, 40 euros (roughly $50). The Impact
Institute estimates the “true price” of these jeans, or
The state of Tennessee has turned the principle of the sticker price factoring in the cost to society and
the ISA into a comprehensive program under the the environment of bringing the product to mar-
umbrella Drive to 55. The “55” refers to the target of ket, at 73 euros (around $90).23
having 55% of residents possess a college degree or
technical certification by 2025. The program includes The taboo trade-off here is clear. On the one
the Tennessee Promise, which offers scholarships for hand, consumers are likely to balk at paying almost
twice as much for something intended to last one

Income-share agreements are one solution to the crisis of
higher education cost and student debt that addresses the
“who” and the “when and how” questions, and in some
cases the “what” question as well.

30 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

Companies are taking creative steps to reduce the waste
inherent in the fashion pipeline. One way is to promote reusing
or recycling clothes instead of trashing them, as a means to
close the loop.

or two seasons. On the other hand, most producers accessories rather than the items themselves. This
and retailers do not have nearly enough margin to shift in the “what” does away with having to rely on
absorb the spike in costs. Faced with this prospect, the conscientiousness of individuals and puts reuse
turning a blind eye to the environmental impact is and recycling back on the shoulders of manufactur-
almost understandable. ers, which presumably can handle this task more
efficiently and at scale. Returning to the example of
The challenge, then, is to look for ways to miti- jeans, MUD Jeans from the Netherlands leases jeans
gate the negative externalities rather than pricing to customers for 12 months, after which they can
them in. To that end, companies are taking creative keep them or return them for recycling. Similarly,
steps to reduce the waste inherent in the fashion Rent the Runway lets people rent high-end clothes
pipeline. One of the most far-reaching steps is to that would otherwise be prohibitively expensive to
promote reusing or recycling clothes instead of purchase, while Nuuly offers a clothing subscription
trashing them, as a means to close the loop. As that starts with six items for $88 per month.
Karl-Johan Persson, then-CEO of H&M, explained,
“We have to change how fashion is made. We have As people grow more accustomed to renting
to go from a linear model to a circular model, and clothes or subscribing to a wardrobe service, sup-
we have to do it at scale.”24 pliers gain degrees of freedom to mitigate the taboo
trade-off expressed in the true price of clothing.
This is exactly where rethinking the “what”
question is critically important. The fashion indus- Making Smarter Prices
try’s traditional “make and sell” model, where the
ownership of an item of clothing transfers from the Our own research and work with CEOs and other
retailer to the customer at the point of sale, puts the leaders have convinced us that organizations must
responsibility for closing the loop squarely on the rethink the three critical questions we have described
shoulders of each individual. This is not efficient, if they want to strike a healthier balance between
given that people differ in their desire to do good their sustainability goals and their more immediate
and, even if sold on the idea of recycling, may not obligations to customers, employees, and share-
have the means or opportunity to do so. holders. The following recommendations — which
run from the initial thought process through to
One way to motivate people to be more respon- implementation — should guide leaders to find
sible is to pay them for it. For example, as part of its creative new answers to the what, who, when, and
Worn Wear program, popular outdoor clothing how questions.
company Patagonia offers customers store credit
when they trade in old items. However, the indus- Make the “green premium” transparent and
try as a whole may not advance on circularity at the actionable. The root cause of the taboo trade-off is
speed we need unless it embraces a means of gener- what Bill Gates dubbed the “green premium.”
ating revenue that is not predicated on the transfer When an environmentally friendly product costs
of ownership — one that does not rely on individ- twice as much as the conventional “dirty” version,
ual customers to do the right thing. few customers or businesses are willing to foot the
bill. But when managers have greater visibility into
For example, fashion labels should think seri- what is driving higher costs, they can make more
ously about introducing leasing and subscriptions, informed decisions on where to direct their
where customers buy access to apparel and

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SUSTAINABILITY STRATEGIES: RETHINKING COSTS

attention as they reconsider both how prices are set single company cannot pursue on its own. Creative
and the decisions in the supply chain that can re- approaches to the price mechanism tend to involve
duce the footprint of business as usual. multiple partners, such as financing partners for
renewable energy and vehicles, and value-based
Focus on outcomes, not products. This mind health partners for migrating to health outcomes.
shift forces a broader scope that brings externalities Financing, support, and last-mile delivery are all
into sharper focus. Some apparel companies, for ex- common puzzle pieces in the ecosystem that re-
ample, are reorienting from “selling garments” to quire a company to look beyond its core business.
“clothing people” and are incorporating tailoring, re-
pair, and recycling programs into their consumer Create a shareholder tailwind. While tension
engagement. Similarly, shifting from “selling cars” to may always exist between sustainability and profit-
“providing mobility”may reduce materials consump- ability, more and more stakeholders are seeing the
tion and waste while providing vehicle makers and former as part of long-term value creation rather
new competitors with new opportunities to meet cus- than a threat to it. Turning shareholder headwinds
tomer needs. Offering true solutions to customer into tailwinds is an important factor. The leverage of
problems will remain aspirational as long as compa- powerful investors is now providing support for via-
nies focus too much on the means rather than the end. ble sustainability actions. For example, BlackRock
has made a commitment to sustainable investing as a
Align payments and benefits. For many solu- path to long-term value creation, and the California
tions, the biggest hurdle is the clear misalignment Public Employees’ Retirement System has recently
between the timing of payments (usually upfront) pushed for more accountability on climate risk in oil
and the onset of benefits (usually over time). For ex- and gas. In our experience, significant changes to the
ample, the sticker price on an electric vehicle such as price mechanism requires dedicated communication
the Chevrolet Bolt is about 40% higher than a com- and engagement with all stakeholders.
parable gas-fueled car, but the lifetime operating
costs are significantly lower for the former, never THE WAY THAT MOST companies currently un-
mind the environmental benefit from lower emis- derstand the price mechanism does not bode well
sions.25 Alternatives to paying upfront, such as for their ability to help address the world’s most
subscriptions, leasing, pay-as-you-go models, and pressing social and environmental challenges. The
even performance-based agreements, shift the tim- narrow focus on price points — what we can refer
ing of payments to align better with the timing of to simply as the “How much?” question — imposes
benefits perceived by customers. They also make constraints on an organization’s ability to achieve
access to products affordable to more people by the scale that its sustainability solutions deserve.
spreading expenses over time.
Indeed, the now-popular notion of green
Serve populations, not segments. Population- premiums is, at its essence, a redefinition of that
based pricing agreements make sense when a solution narrow “How much?” question. But business lead-
has broad applicability, but individual customers’ ers need to stop thinking about pricing simply as a
willingness or ability to pay varies dramatically. In this bar that they can prod up or down to get customers
case, the “what” shifts from a single dose or single to buy less or more. Every pricing decision com-
product to coverage for an entire population. Optimal prises additional, more strategic choices that can
pricing based on target segments is exclusionary by mitigate the negative externalities of commerce be-
definition, while population-based pricing aims to fore companies price them in.
find a way to be inclusive. A salient example is the
population-level agreements struck by Pfizer- The urgency to act is increasing. Businesses are
BioNTech in the U.S. and Europe for its COVID-19 facing growing pressure to translate commitments
vaccine, which facilitated much lower price points into action and impact, or they risk jeopardizing
than normal for such a breakthrough treatment. their relationships with their increasingly consci-
entious, dollar-voting customers and investors.
Activate the ecosystem. Rethinking the com-
pany’s solution or time-shifting this year’s revenues We obviously are not claiming that rethinking the
into the future often creates opportunities that a price mechanism is the ultimate answer — but we

32 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

Businesses are facing growing pressure to translate commit-
ments into action and impact, or risk jeopardizing relationships
with their increasingly conscientious, dollar-voting customers
and investors.

are asserting that a more efficient price mechanism Access to Solar Energy in Complex Crises,” (Norcap and
is among the necessary means to accelerate progress. Boston Consulting Group, August 2020), www.nrc.no.
Broader thinking on prices will help catalyze the Prices mentioned in the following policy brief are for a
search for innovative and enduring solutions that 20-watt solar home kit in 2018: R. Fetter and J. Phillips,
are profitable, scalable, and palatable to customers. “The True Cost of Solar Tariffs in East Africa,” policy brief
(Durham, North Carolina: Nicholas Institute for Environ-
Marco Bertini is a professor of marketing at Esade mental Policy Solutions, Duke University, February 2019),
Ramon Llull University and a visiting professor at https://energyaccess.duke.edu.
Harvard Business School. He is also a senior adviser
at BCG. John Pineda is a partner and director in 11. “Hepatitis C Kills More Americans Than Any Other
BCG’s San Francisco office. Amadeus Petzke is a Infectious Disease,” Centers for Disease Control and
partner and associate director in BCG’s Berlin office. Prevention, May 4, 2016, www.cdc.com.
Jean-Manuel Izaret is the global leader of the
marketing, sales, and pricing practice at Boston 12. “Hepatitis C,” World Health Organization, July 27,
Consulting Group (BCG). Comment on this article 2020, www.who.int.
at https://sloanreview.mit.edu/x/63127.
13. “Louisiana Launches Hepatitis C Innovative Payment
REFERENCES Model With Asegua Therapeutics, Aiming to Eliminate
the Disease,” Gilead, June 26, 2019, www.gilead.com.
1. L. Abboud, “Danone Board Ousts Emmanuel Faber as
Chief and Chairman,” Financial Times, March 15, 2021, 14. “Methods,” Drug Pricing Lab, accessed July 14,
www.ft.com. 2021, https://drugpricinglab.org.

2. A. Bris, “Danone’s CEO Has Been Ousted for Being 15. H. Liu and A. Mulcahy, “Why States’ ‘Netflix Model’
Progressive — Blame Society Not Activist Shareholders,” Prescription Drug Arrangements Are No Silver Bullet,”
The Conversation, March 19, 2021, https://theconversation Health Affairs, July 1, 2020, www.healthaffairs.org.
.com.
16. “Innovative Pricing Solutions,” Roche, accessed
3. T.D. Hubbard, D.M. Christensen, and S.D. Graffin, July 14, 2021, www.roche.com.
“Higher Highs and Lower Lows: The Role of Corporate
Social Responsibility in CEO Dismissal,” Strategic Man- 17. A. Helhoski and R. Lane, “Student Loan Debt Statistics:
agement Journal 38, no. 11 (November 2017): 2255-2265. 2021,” NerdWallet, July 15, 2021, www.nerdwallet.com.

4. “Carbon for Water,” Vestergaard, accessed July 14, 18. E. Kerr, “Income Share Agreements: What to Know,”
2021, www.vestergaard.com. U.S. News & World Report, April 13, 2021, www.usnews
.com.
5. J. Radovanovic, “Misereor Social Swipe Abolishes
Excuses for Not Donating,” Brandingmag, May 16, 2014, 19. A. Berg, K.-H. Magnus, S. Kappelmark, et al., “Fashion
www.brandingmag.com. on Climate” (Copenhagen: McKinsey & Company and
Global Fashion Agenda, 2020), www.globalfashion
6. “The Paris Agreement,” United Nations Climate .agenda.com.
Change, accessed July 14, 2021, https://unfccc.int.
20. “UN Helps Fashion Industry Shift to Low Carbon,”
7. “Cost of Solar in 2021,” Sunrun, accessed July 14, United Nations Climate Change, Sept. 6, 2018, https://
2021, ww.sunrun.com. unfccc.int.

8. J. Brady, “The Great Solar Panel Debate: To Lease or to 21. “The Impact of a Cotton T-Shirt,” World Wildlife Fund,
Buy?” NPR, Feb. 10, 2015, www.npr.org; and A. Hobbs, Jan. 16, 2013, www.worldwildlife.org.
E. Benami, U. Varadarajan, et al., “Improving Solar Policy:
Lessons From the Solar Leasing Boom in California,” 22. M. Gunther, “Fast Fashion Fills Our Landfills,” JSTOR
PDF file (San Francisco: Climate Policy Initiative, July 25, Daily, Sept. 27, 2016, https://daily.jstor.org.
2013), www.climatepolicyinitiative.org.
23. “The True Price of Jeans,” True Price, May 23, 2019,
9. Ibid. https://trueprice.org.

10. This report lays out energy need tiers, with the focus 24. Gunther, “Fast Fashion.”
for clean energy in refugee communities on tier 2 needs
(around 50 watts): B. Giæver, N. Hjellegjerde, B. Gomez 25. “The Green Premium,” Breakthrough Energy, ac-
Rojo, et al., “EmPowering Africa’s Most Vulnerable: cessed July 15, 2021, www.breakthroughenergy.org.

Reprint 63127. For ordering information, see page 4.
Copyright © Massachusetts Institute of Technology, 2021.
All rights reserved.

SLOANREVIEW.MIT.EDU FALL 2021 MIT SLOAN MANAGEMENT REVIEW 33

SUSTAINABILITY STRATEGIES: SO CIAL RESPONSIBILITY

How Supply Chain
Transparency Boosts
Business Value

Increasing visibility into suppliers’practices takes work
but can lead to new market opportunities.

BY TIM KRAFT AND YANCHONG ZHENG

In November 2020,executives from RICHARD BORGE/THEISPOT.COM
Amazon, Ikea, Nike, and other
high-profile companies were called
before the U.K. Parliament to ad-
dress claims that their suppliers
might be using forced labor.1
Members of the House of
Commons’ Business, Energy and
Industrial Strategy Committee
were investigating the potential
exploitation of Uyghur Muslims from the
Xinjiang region of China.2 They directly chal-
lenged company representatives on how their
organizations maintain visibility into and combat
modern slavery within their supply chains.
With businesses’ sourcing practices under
such scrutiny, supply chain transparency has
become an imperative in many industries.
Emerging regulations such as the U.K. Modern
Slavery Act and the California Transparency in
Supply Chains Act are not the only drivers of this
trend, however. In industries such as apparel,
consumer electronics, and food and beverage,
companies are facing pressures from all sides to
demonstrate better environmental and social
practices in their supply chains.
Consumers increasingly want to know more
about where and how the products they purchase
are being made. They are actively rewarding
companies that provide visibility into their

34 MIT SLOAN MANAGEMENT REVIEW FALL 2021

supply chains and punishing companies that do typically occur in the upper tiers of a supply chain.
not. Meanwhile, advocates for reform, such as For example, a recent study of 3,922 supplier rela-
Fashion Revolution and the Clean Clothes tionships found that second-tier suppliers
Campaign, are pressuring brands to be more trans- committed, on average, 18% more instances of non-
parent by grading and publicizing their levels of compliance per audit than first-tier suppliers, and
transparency. Investors are also increasingly critical the third tier committed 27% more.5
of incidents that violate acceptable environmental,
social, and corporate governance practices: In the To increase the effectiveness of audits, companies
U.S., it is estimated that such incidents erased al- must find ways to expand their reach for greater im-
most half a trillion dollars’ worth of value from pact. For example, to increase oversight of its
public companies from 2015 to 2019.3 suppliers, Patagonia reduced its supplier count by
50% in the late 2000s.As a result, the company is able
In practice, creating a transparent supply chain to annually audit 100% of its first-tier suppliers as
is not simply a matter of determining what infor- well as a subset of second-tier suppliers that accounts
mation to disclose to consumers; businesses must for 80% of its total material costs. These changes
first gain visibility into their own supply chains. have resulted in stronger and more collaborative
However, the level of effort and resources needed to relationships with suppliers, which helped the com-
monitor first-tier suppliers, let alone upper-tier pany increase its visibility into its supply chain and
ones, can be very costly and time consuming. enhance its reputation among consumers.
Furthermore, such efforts are often not required by
regulation and thus are viewed as necessary only Although many brands and manufacturers may
if “something bad” has happened, so getting not have the resources or capabilities of a company
management buy-in to proactively commit the like Patagonia to extend their auditing influence
necessary resources can be difficult. beyond first-tier suppliers, they can increase their
reach in other ways. One approach is to partner with
Companies must find efficient and effective independent auditors, local trade unions, or non-
ways to gain visibility into their supply chains, governmental organizations that work within a
given the increasing demands for greater transpar- supplier’s region. For example, as a collaboration
ency from regulators, consumers, activists, and between the United Nations’ International Labor
investors, and the vast amount of resources such a Organization and the World Bank Group’s
commitment entails. In this article, we present in- International Finance Corporation, the Better Work
novative methods for making such improvements program is actively performing independent,
and provide evidence of the business value that external assessments of 1,700 garment factories em-
greater transparency can enable. ploying over 2.4 million workers in nine countries.
In addition, it works closely with local governments
Audits Are Only a Starting Point to improve labor laws and advise unions on how to
strengthen workers’ voices. Through frequent, un-
Traditionally, companies have relied on audits to announced audits and on-the-ground actions such
monitor their immediate suppliers and ensure that as working with local unions and governments,
responsible practices are being followed in their sup- these efforts can often uncover region-specific issues
ply chains. However, audits alone are not sufficient that overseas brands cannot.
for truly gaining visibility into one’s supply chain. To
begin with, audits are only snapshots of supplier Another approach is to conduct joint audits,
practices at the time the audits occur. There is evi- where multiple companies pool their resources to
dence that suppliers often find ways to game audits audit common suppliers. After the 2013 Rana Plaza
and hide what they don’t want an auditor to see.4 collapse in Bangladesh, in which over 1,100 workers
Furthermore, audits require a significant commit- died, it became evident that many brands and retail-
ment of time and resources, the cost of which often ers in the apparel industry lacked visibility into their
limits their frequency and narrows their scope to supply chains. The resulting pressure placed on the
only first-tier or key suppliers. But the reality is that industry to improve working conditions helped
the more severe social and environmental incidents shift European retailers’ compliance focus from

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SUSTAINABILITY STRATEGIES: SO CIAL RESPONSIBILITY

self-certification to more collaborative certification share comparable data at the industry level, the ini-
efforts. As a result, retailers and brands signed on to tiative has the potential to move the conversation
the Accord on Fire and Building Safety in Bangladesh, forward from monitoring and compliance toward
a legally binding five-year agreement that aimed to factory improvements.
improve and better monitor the country’s working
conditions.6 As part of the accord, retailers collabo- While these new approaches to auditing can
rated on conducting audits and shared the cost. provide better insights into supply chain compli-
ance, we believe they are only part of the solution.
Also gaining traction is the practice of sharing
audit information through trustworthy third Overcoming Barriers to
parties. Service providers such as Sedex and non- Supply Chain Visibility
profit organizations such as the Fair Factories
Clearinghouse are offering online tools and plat- Many would argue that technologies like the internet
forms to help buyers and suppliers share audit results of things and blockchain are key to improving visi-
more easily and efficiently. Such data sharing can bility into supply chains. IoT devices and sensors
help minimize duplicative efforts and reduce poten- provide a way to collect granular, high-frequency
tial audit fatigue for suppliers, which often must environmental and social performance data
satisfy multiple, similar audit requests from their throughout a supply chain to monitor key consider-
buyers. The ability to demonstrate such efficiency ations, such as a product’s carbon footprint, during
gains is key to motivating brands and suppliers to each stage of production. Blockchain protects the
participate in these innovative platforms. integrity of data with immutable ledgers so that
users of the data can trust it (such as confirming that
There are still hurdles to making collaborative fair trade certification requirements have been met).
efforts such as these work. Manufacturers and
brands may be hesitant to fully share audit infor- The enhanced collection and sharing of data en-
mation due to potential intellectual property (IP) abled by these technologies has the potential to
risks and the fear of leaking commercially sensitive offer unprecedented supply chain insights com-
information to competitors. Many companies be- pared with those afforded by infrequent audits. But
lieve that their suppliers give them a competitive they cannot ensure transparency on their own.
advantage and should remain undisclosed. In our Other obstacles — namely, infrastructure limita-
conversations with Sedex leaders, they acknowl- tions and stakeholder misalignment — must first
edged that overcoming such resistance remains a be addressed.
challenge and ultimately requires building trust
among the participating companies. Having large Infrastructure barriers. Many supply chains
buyers on board can help demonstrate to others the originate in underdeveloped regions where technical
credibility of collaboration around audits. infrastructure, good management practices, and
even awareness of environmental and social issues
Another challenge to collaboration is the fact are lacking or nonexistent. Trying to gain visibility
that audit information is often interpreted and into these regions and improve production practices
measured differently across companies. To address is a major hurdle for many companies.
the lack of a common audit language for assessing
social and labor conditions in the apparel industry, Consider Goodio Chocolate, a Finnish craft choc-
brands, government organizations, and nonprofits olatier that aims to provide “radical transparency”
have come together to form the Social and Labor into the supply chain behind its products. The com-
Convergence Program (SLCP). This multistake- pany experimented with using blockchain technology
holder initiative is aimed at creating a common to trace raw materials and wages in its cacao supply
framework and language for assessing social and chain but failed for two main reasons. First, the small-
labor conditions. Uniquely, the SLCP’s emphasis is holder cacao farmers from whom Goodio sources
on data collection and information sharing, not on do not have the knowledge and capabilities to operate
interpretation of the data, which is still in each a technology as advanced as blockchain. Second,
brand’s hands. By creating a way to generate and trade deals with these farmers are often on the basis
of verbal agreements rather than formal contracts
that could be tracked through the blockchain.

36 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

Given such constraints, companies are finding of the supply chain. Furthermore, providing the
innovative ways to extend their supply chain visi- necessary data is often seen as extra work solely for
bility using existing, common technologies such as the purpose of fulfilling their buyers’ compliance
cellphones. For example, Sedex (in partnership requirements.
with IT provider &Wider) and Elevate (through its
Laborlink mobile platform) are creating solutions A variety of carrots and sticks can be used to en-
to crowdsource insights into potential labor and courage supplier transparency. This is especially
safety issues on the factory floor by building safe true for small, informal suppliers that historically
communication channels for workers to call or text may not have paid attention to environmental and
to report incidents. These platforms provide work- social issues. For example, Sourcemap, a provider
ers with a voice while providing suppliers and of supply chain mapping and traceability tools,
downstream buyers with a means to quickly gain often relies on the market power of its large, cor-
extensive insights into their supply chains without porate customers (including Hershey and H&M)
having to rely solely on resource-intensive audits. to influence suppliers to share information.
Similarly, many suppliers initially joined the Sedex
Another powerful but admittedly less simple platform based on requests from their buyers.
approach to improving supply chain visibility that While such incentives represent important first
is gaining attention is the use of predictive analytics steps to attaining supplier buy-in, we contend that
and data triangulation. For example, by partnering solely relying on such “sticks” is not a sustainable
with Elevate and using large-scale worker voice approach.
data, the Global Fund to End Modern Slavery is
creating predictive tools to help buyers detect un- To gain suppliers’ trust, it’s important to show
authorized subcontracting and forced labor in them the “carrots.” These can be in the form of
informal garment factories in Bangladesh and granting preferred-supplier status, offering more
India. Similarly, Sedex is developing data triangula- attractive contract terms, or jointly investing in
tion methods that integrate multiple data sources capacity building. But it’s even more effective to
(such as audit reports and worker voice data) to educate suppliers to see the long-term benefit of
help uncover a truer picture of factory practices. transparency. As Simon McCalla, CEO of Sedex,
Analytics is one of the ways we see the conversation notes, “Our theory of change is to empower
on supply chain monitoring shifting from reactive suppliers to change their mentality from seeing
to more proactive management. transparency as yet another requirement for
compliance to viewing it as a way to achieve cost
Stakeholder misalignment. Many companies savings and, eventually, an opportunity to create
lack a culture of data sharing, and incentives are
not well aligned across stakeholders in their supply The practice of sharing audit informa-
chains. When supply chain partners’ objectives tion through trustworthy third parties
don’t align, it creates another major roadblock can help minimize duplicative efforts
to supply chain visibility. Large supply chains or and reduce potential audit fatigue for
ones where the flow of information is poor are suppliers, which often must satisfy
particularly susceptible to misalignment. While multiple, similar audit requests from
downstream retailers and brands may feel the need their buyers.
to be more transparent about what is occurring in
their supply chains due to regulatory, consumer,
activist, and investor pressures, upstream suppliers
may not have the same sense of urgency. Many up-
stream suppliers view their sourcing practices and
own supply chains as part of the value proposition
that they offer to downstream buyers. From their
perspective, being more transparent could decrease
their leverage and lead to them being squeezed out

SLOANREVIEW.MIT.EDU FALL 2021 MIT SLOAN MANAGEMENT REVIEW 37

SUSTAINABILITY STRATEGIES: SO CIAL RESPONSIBILITY

business values,” such as winning more contracts Transparency Can Create
and attracting new buyers. While the education New Business Opportunities
process can take time due to suppliers’ lack of re-
sources and procedures, the long-term benefit is a Gaining visibility into your supply chain enhances
shift in mindset throughout the supply chain, your ability to monitor and improve suppliers’ en-
from risk mitigation to proactive improvement. vironmental and social practices, but the potential
It’s important to note that there is often a need for benefits don’t stop there. Improved visibility can
education on the buyer’s side as well, particularly also create new market opportunities. Consider, for
among upper management, given that some in- example, the number of small businesses and start-
tangible and long-term benefits of investments in ups whose business models are based on the
transparency may not immediately translate to concept of transparency. In the chocolate and
the bottom line. coffee industries, where poor labor practices and
low wages in the upper tiers of supply chains are
Interestingly, transparency can sometimes be common, companies such as Goodio Chocolate
the carrot itself to improve performance. Studies in and Moyee Coffee are creating value propositions
health care and energy usage have shown that re- centered on the idea of end-to-end visibility.
vealing relative performance against a peer group Similarly, in the cosmetics industry, which has long
can be a powerful tool to drive positive behavior been criticized for a lack of transparency regarding
change.7 Relatedly, in our discussions with Sedex products’ potential health risks, companies such
leaders, they commented that they are investigating as Beautycounter are building their brands on the
how relative performance transparency may be idea of “clean beauty.”
used to nudge suppliers on its platform to further
share information and improve practices. An im- For companies such as these, one way to capture
portant consideration in the design of such relative the market value of improved supply chain visibility
performance schemes is to ensure that the intro- is to better communicate the environmental and
duction of competition does not lead to unethical social performance of their supply chains to the
practices, with suppliers taking shortcuts to dem- public. As consumers increasingly consider sustain-
onstrate certification and win business. ability to be an integral part of their purchase
criteria, better communication can lead to market
Misalignment can also be caused by IP con- advantages. Take, for example, Alta Gracia Apparel,
cerns. Consider GreenBlue, an environmental a manufacturer of officially licensed collegiate
nonprofit dedicated to increasing visibility into apparel whose products are sold in university
the chemicals and substances used in products and bookstores and by online retailers. Alta Gracia guar-
supply chains. Suppliers are often reluctant to dis- antees that the workers making its apparel in the
close their products’ chemical and material Dominican Republic receive wages and benefits to
makeup to buyers, worrying that they will reveal cover the cost of a family’s needs — wages that are
trade secrets and lose their competitive advantage. 340% higher than what is required by law. To test
To overcome such concerns, GreenBlue built an the value of transparency in the market, Alta Gracia
innovative platform called Material IQ (MiQ) that and its research partners ran a field experiment at a
allows upstream suppliers and downstream buyers university bookstore. They found that when video
to share sensitive chemical-toxicity information clips describing Alta Gracia’s practice of paying liv-
without divulging closely guarded information. ing wages to workers were displayed, the company’s
Suppliers submit sample products to Scivera, a product sales increased significantly.8
GreenBlue partner and third-party chemical safety
assessment provider, which then evaluates and In our own research, we consistently observe
scores a product’s chemical makeup and the asso- that companies benefit from providing increased
ciated risks. This information becomes part of visibility into the social responsibility practices of
MiQ, so buyers that subscribe to the platform can their supply chains. For example, improved visibil-
view the potential hazards of the product but not ity strengthens customers’ trust in a company and
enough information to reverse engineer it. can result in revenue benefits, especially when
customers are generally skeptical of businesses’

38 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

corporate social responsibility (CSR) claims. One way to capture the market value
Furthermore, greater visibility can induce con- of improved supply chain visibility is to
sumers who are less socially minded to increase better communicate the environmental
their valuations of a company’s social responsibil- and social benefits to consumers, who
ity efforts. Companies serving a global market can increasingly consider sustainability to
positively influence consumer preferences by tai- be an integral part of their purchase
loring their CSR communications in a way that criteria.
best aligns with the cultural values in different
market regions. For example, a culture that values small suppliers in the region. During a 2011 trip to
competition and personal achievement (such Cameroon, Taylor executives discovered some dis-
as that in the U.S.) may be more readily persuaded turbing facts about the ebony sourcing process.
by fact-based statements, whereas a culture that For example, wood suppliers, on average, had to
emphasizes caring for others and quality of life cut down 10 trees to find one tree with the desired
(such as Finland) may be more strongly affected by pure black color. Furthermore, they observed poor
stories from beneficiaries.9 labor practices at the Crelicam mill. These discov-
eries motivated Taylor to purchase the mill and
A second business opportunity comes from vertically integrate its ebony supply chain. The
enhanced efficiency. Improved visibility helps company also established labor practice standards
companies to target their environmental and social at the mill comparable with those found in the U.S.
responsibility efforts more efficiently and to accu- The mill began to accept wood with stripes of color
rately evaluate the associated outcomes. That is, from the wood suppliers at prices equal to those
companies can now direct resources where they are for pure black wood, and Taylor started to sell
needed most to address environmental and social wood to its competitors. Using its position as both
issues in their expansive supply chains, as well as a supplier and a producer, the company helped
identify the right set of suppliers with which to reeducate the market — both consumers and com-
forge collaborative relationships. This can then petitors — to accept guitars made with striped
support capacity building, which is important for ebony wood, thus significantly improving the sus-
improving practices, particularly in developing tainability of ebony forests.
countries. For example, Goodio sources cacao for
its chocolates directly from a small number of Taylor Guitars is not an isolated example of a
cacao cooperatives in Peru. By leveraging its close company playing a positive role in shaping industry
relationships with these cooperatives, Goodio gains standards and behavior around supply chain trans-
visibility into its supply chain and works with these parency. For example, in the apparel industry,
farmers to ensure both the quality of the cacao Patagonia and Nike have helped set the expectation
beans and the responsible treatment of the farmers, that large brands should disclose their supplier lists
including fair pricing. In the long run, strengthen- and share public maps of where their products are
ing these cooperatives can help improve the sourced and made. Similarly, Starbucks launched the
farmers’ practices and provide them with leverage Coffee and Farmer Equity (CAFE) Practices in
in the marketplace to receive better prices and ac- 2004, establishing one of the first sets of ethical
cess a wider range of buyers. sourcing standards in the coffee industry. A central

A third potential benefit arises from creating
opportunities to take a leadership position within
an industry. Consider, for example, Taylor Guitars.
In the early 2010s, high demand and low supply of
ebony wood led to widespread illegal logging,
which exposed many guitar manufacturers to
compliance and reputation risks. Taylor sourced
its ebony from the Crelicam mill in Cameroon,
which in turn sourced its raw wood from several

SLOANREVIEW.MIT.EDU FALL 2021 MIT SLOAN MANAGEMENT REVIEW 39

SUSTAINABILITY STRATEGIES: SO CIAL RESPONSIBILITY

component of CAFE Practices is transparency, re- Tim Kraft is an associate professor of operations
quiring suppliers to provide information on where and supply chain management and the associate
coffee beans are sourced and the prices paid to farm- research director of the Supply Chain Resource
ers. CAFE Practices allow Starbucks to develop deep Cooperative at the Poole College of Management,
working relationships with coffee suppliers and pro- North Carolina State University. Yanchong Zheng
mote ethical sourcing practices in the industry.While is the George M. Bunker Professor and an associate
the company sources only about 3% of the world’s professor of operations management at the MIT
coffee, over 18% is now grown under CAFE Practices. Sloan School of Management. Comment on this
article at https://sloanreview.mit.edu/x/63105.
The Path Forward
REFERENCES
Supply chain transparency has become a critical
component in consumers’ purchasing criteria, and 1. H. Abdulla, “U.K. Holds Hearing on Exploitation of
companies now must decide how transparent they Forced Labour in Xinjiang,” Just-Style, Nov. 5, 2020,
want to be. But they must gain visibility into their www.just-style.com.
own supply chains before they can make them
more transparent to consumers and partners. This 2. V.X. Xu, D. Cave, J. Leibold, et al., “Uyghurs for Sale,”
increased visibility can help mitigate supply chain Australian Strategic Policy Institute, March 1, 2020,
risks — to workers, the environment, consumers, www.aspi.org.au.
and a company’s production capabilities and repu-
tation — and ensure compliance with social and 3. C. Flood, “ESG Controversies Wipe $500bn Off Value
environmental standards. It’s also crucial to the of U.S. Companies,” Financial Times, Dec. 14, 2019,
next stages in the evolution of sustainable supply www.ft.com.
chains, which include increased knowledge
sharing, deeper collaboration with partners and 4. J. Webb, “Do Supply Chain Audits Work? Dealing With
competitors, and greater ownership by down- Deviant Suppliers Like a Journalist,” Forbes, Oct. 26,
stream retailers and brands regarding what occurs 2016, www.forbes.com.
in their supply chains.
5. “Going Deep: The Case for Multi-Tier Transparency,”
Although audits are a necessary tool for manag- Sedex, November 2013, www.sedex.com.
ing compliance, truly increasing supply chain
transparency requires companies to both innovate 6. In 2018, two landmark cases brought against multina-
and expand their toolboxes by introducing new tional fashion brands under the accord resulted in
methods for gaining visibility into suppliers’ prac- settlement payments totaling more than $2.3 million
tices. They must also bear in mind that the process for the remediation of unsafe conditions in Bangladesh
is not just about making technology investments — factories.
it also requires business innovation that addresses
infrastructure and incentive alignment barriers. To 7. H. Song, A.L. Tucker, K.L. Murrell, et al., “Closing the
realize the true benefits of transparency, however, a Productivity Gap: Improving Worker Productivity Through
change in mindset is needed. By educating supply Public Relative Performance Feedback and Validation of
chain partners on the value of transparency, com- Best Practices,” Management Science 64, no. 6 (2018):
panies throughout the supply chain can benefit 2628-2649; and R.W. Buell, S. Mariadassou, and Y. Zheng,
from both improved efficiency and more collabor- “Relative Performance Transparency: Effects on Sustain-
ative relationships and capture potential revenue able Choices,” working paper 19-079, Harvard Business
opportunities. And by leading transparency efforts School, Boston, January 2019.
in their respective industries, companies can place
themselves in an advantageous position to proac- 8. R.W. Buell and B. Kalkanci, “How Transparency Into
tively address regulatory and activist requirements, Internal and External Responsibility Initiatives Influences
shape new market trends, and create new business Consumer Choice,” Management Science 67, no. 2
opportunities for themselves. (2021): 932-950.

9. T. Kraft, L. Valdés, and Y. Zheng, “Supply Chain Visibility
and Social Responsibility: Investigating Consumers’
Behaviors and Motives,” Manufacturing and Service
Operations Management 20, no. 4 (fall 2018): 617-636;
T. Kraft, L. Valdés, and Y. Zheng, “Consumer Trust in Social
Responsibility Communications: The Role of Supply Chain
Visibility,” SSRN Electronic Journal, Oct. 27, 2020, https://
papers.ssrn.com; and M. Hämäläinen, T. Kraft, D. Thomas,
et al., “Supply Chain Transparency at Goodio Chocolate,”
in “Responsible Business Operations: Challenges and
Opportunities,” eds. J.M. Swaminathan and V. Deshpande
(Cham, Switzerland: Springer, 2021), 225-241.

Reprint 63105. For ordering information, see page 4.
Copyright © Massachusetts Institute of Technology, 2021.
All rights reserved.

40 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

SUSTAINABILITY STRATEGIES: SUPPLY CHAIN TRANSPARENCY

Four Myths
About Unauthorized
Subcontracting

Organizations that want to improve supply chain visibility — and reduce
diverted orders — must use analytics and think beyond price.

BY FELIPE CARO, LEONARD LANE, AND ANNA SÁEZ DE TEJADA CUENCA

It has never been more impor-
tant for a brand to know who,
exactly, is making its products.
A case in point: A summer
2020 Sunday Times investiga-
tion revealed that during the
COVID-19 pandemic, workers
making clothes for “ultrafast”
fashion brand Boohoo toiled
for less than minimum wage in
cramped conditions, with lax safety measures
in place.1 Though Boohoo claimed that the
factory was not a direct supplier, it lost more
than 1.5 billion euros ($2 billion U.S.) in mar-
ket value in the immediate aftermath of the
Times report.2
As Boohoo discovered, suppliers can pose
serious risks to a company’s reputation and
finances, and the nature of the modern supply
chain — global, complex, and frequently
opaque — only increases the dangers. Compa-
nies that outsource manufacturing often
discover that their suppliers rely in turn on layers of subcontractors, often without the buyer’s knowledge
or approval. Making matters worse, these unauthorized subcontractors are more likely to operate unsafe
workplaces, engage in unfair labor practices, and violate health and environmental laws.
Unauthorized subcontracting is the bane of businesses that are working to improve visibility into their supply
chains. The 2013 collapse of Rana Plaza, an eight-story commercial building in Bangladesh, killed more than a
thousand apparel workers and drew worldwide attention to the problem.Workshops in the building made cloth-
ing for several prominent brands, including Italian fashion company Benetton and Irish retailer Primark, but
many of the companies claimed to be unaware that their orders had been farmed out. These problems aren’t
limited to Bangladesh and go beyond building compliance: Companies have come under fire in many other

BRIAN STAUFFER/THEISPOT.COM FALL 2021 MIT SLOAN MANAGEMENT REVIEW 41

SUSTAINABILITY STRATEGIES: SUPPLY CHAIN TRANSPARENCY

THE parts of the world for using subcontractors that em- out orders occasionally, depending on the circum-
ployed children and exploited forced labor.3 stances. (See Myth 2.)
RESEARCH
The pandemic has made the need to address What’s even more revealing is that the factories
The authors set out to supply chain visibility even more urgent by expos- that are prone to using unauthorized subcontractors
investigate the factors ing the terrible working conditions in plants share some common characteristics. For one thing,
that can lead suppliers to producing essential goods. A notorious example is they tend to be less specialized and make items in a
engage in unauthorized the meatpacking industry. In Germany, 180 work- greater number of different product categories —
subcontracting, using data ers at one slaughterhouse tested positive for the pants, sweaters, and overcoats, for example. (See
(provided by a global supply coronavirus; a senior union official blamed “a sick “More Product Categories, More Problems.”)
chain manager) on 32,000 system” and a meat industry that has long relied on
orders, of which 36% were “dubious subcontractors.”4 This suggests that when factories make commit-
subcontracted without ments to deliver products but lack the specialized
In response to the workplace problems in their know-how needed to produce them, they are more
authorization. supply chains, companies have adopted codes of likely to turn to unauthorized subcontractors to fill
conduct, conducted regular audits, and required those orders.
They identified the key that suppliers adhere to international health and
drivers of unauthorized safety rules. However, if they want to demonstrate Unauthorized subcontracting also varies by
subcontracting and found their commitment to the well-being of the people country. On average, Vietnam had the highest level
that it could be predicted who make their products and to the communities of incidence, closely followed by Cambodia and
correctly for 82% of the in which they live, they’ll need to get a grip on the China. This doesn’t necessarily mean that all of those
orders in out-of-sample problem of unauthorized subcontracting. subcontractors have substandard operations, how-
ever. In fact, many of the unauthorized factories in
tests and for 75% of One major challenge is that data on unauthor- China meet higher safety standards than the average
suppliers. ized subcontracting is hard to come by. We workshop in Bangladesh. But paradoxically, these
collaborated with a large supply chain intermediary plants are not on authorized-subcontractor lists be-
that, in the aftermath of the Rana Plaza disaster, cause they lack the resources to complete all the
kept records of orders that went to subcontractors paperwork and obtain the necessary approvals, even
that were not on buyers’ authorized lists. In our though they could successfully do so.
analysis, more than a third of the 32,000 orders —
placed by 30 brands with 226 apparel factories — MYTH 2: Unauthorized Subcon-
involved an unauthorized supplier.5 tracting Is Mostly Driven by Price

Through our research findings, we can debunk Not surprisingly, price pressure — when a buyer of-
four common misunderstandings or myths about fers a price lower than that paid for a similar order in
the practice of unauthorized subcontracting — the past — can make it more likely that the supplier
and offer specific guidance for companies seeking will turn to an unauthorized subcontractor. For in-
greater visibility into these opaque links in their stance, prices that were 25% lower increased the
supply chains. chance of unauthorized subcontracting by 9%. This
fits with the conventional wisdom: Subcontracting is
MYTH 1: All Factories (in Develop- a way for a manufacturer to cut corners and save
ing Countries) Are Doing It money. But while price is important, it’s not always
the main driver.
Because the problem is so widespread and the prac-
tice has been going on for so long, it’s easy to imagine More important is whether a factory is running
that all factories in developing countries have deal- close to capacity when a new order comes in. At
ings with unauthorized and substandard workshops. some point, the factory can’t fulfill all of its contracts,
But the data suggests that impression is incorrect. and farming them out becomes a way to manage the
overflow and keep its customers satisfied.
In fact, we found that manufacturers vary
widely in their use of unauthorized factories. Only We found that in periods of high factory utiliza-
a small fraction (11%) always send their orders to tion, unauthorized subcontracting frequently
a noncompliant subcontractor, while a majority happens in batches. Once the queue of factory or-
(57%) never engage in the practice. The rest farm ders exceeds the plant’s capacity and is sent to a

42 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

subcontractor, it’s likely that the next order will also MORE PRODUCT CATEGORIES, MORE PROBLEMS
exceed the threshold and be farmed out. In fact,
when a plant sends one order to an unapproved Unauthorized subcontracting is above the average (represented by the dotted
subcontractor, the chance that it will divert the next line) for most factories that produce more than four product categories. The size
order almost doubles. Batching had a bigger effect of each circle indicates the number of factories.
than price or any other driver that we studied.
UNAUTHORIZED
Factories might have several reasons for running SUBCONTRACTING
so close to capacity. More orders mean more busi-
ness and potentially higher earnings, especially if a 80%
supplier can subcontract out the work profitably. A
supplier might fear, not unreasonably, that rejecting 6
an order will mean that the buyer won’t return with
future purchases. And some plant managers lack 70% 8
more sophisticated planning tools and instead
schedule production on an ad hoc basis. 16

A related misconception is the belief that a supplier 60%
is more likely to subcontract out rush orders than those
with longer lead times. We found the opposite to be 50% 14 2
true: While only 24% of rush orders were dispatched
to an unapproved contractor, 38% of those with a 40% Average unauthorized
lead time of more than two months were farmed out. 16 subcontracting (36.4%)

The reason? Short lead times are more common 32
with orders for fashion items, but it takes more so- 30%
phisticated operations to make them — something
that is lacking in the informal factories that receive 85
the bulk of the subcontracted orders. 47

ln contrast, basic apparel items, such as plain pull- 20%
overs, typically change less often and can be ordered
far in advance. They are also easier to make and can 10%
be more easily farmed out to other nearby factories.
However, these are often makeshift workshops that 0
may not meet the customer’s compliance standards. 1 2 3 4 5 6 7 8 Over 8

MYTH 3: Consumer Advocacy NUMBER OF PRODUCT CATEGORIES MADE BY EACH FACTORY
Doesn’t Work
Building Safety and signed on to the Alliance for
Fashion consumers are typically far removed from Bangladesh Worker Safety initiative, which required
the working conditions in distant, largely invisible, stepped-up factory inspections and worker safety
informal factories. Therefore, it’s easy to imagine training. The groups provided grants to pay for plant
that pressure from those shoppers, when it can be upgrades and set up worker-safety committees and
mustered at all, would be largely ineffective. The re- hotlines to receive complaints about violations.
ality is that global consumers have more power to
effect change than might be assumed. Consumers are increasingly demanding greater
transparency in the apparel supply chain through
After the Rana Plaza disaster, widespread con- advocacy groups like Fashion Revolution and the
sumer protests pushed brands and retailers to Clean Clothes Campaign, and via social media
compensate victims of the building collapse and to movements such as #WhoMadeMyClothes, which
crack down on poor workplace conditions in their is aimed at making brands accountable for the
supply chains. In response, retailers and fashion working conditions at their factories.
brands adopted the Bangladesh Accord on Fire and
It’s frequently the largest, best-known brands
that are the focus of these campaigns, and they have
proved to be the most sensitive to public pressure.
H&M, a Swedish fashion retailer, was the largest ex-
porter of clothing from Bangladesh and received
the brunt of attention after the Rana Plaza disaster.6
It was among the first companies to sign the
Bangladesh Accord.

This is consistent with our study results.We found

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SUSTAINABILITY STRATEGIES: SUPPLY CHAIN TRANSPARENCY

that the chance of unauthorized subcontracting is Get rid of the worst actors. The first step is the
22% lower for orders placed by well-known brands. simplest: Weed out those factories that constantly
Specialty retailers like H&M are more exposed to use unauthorized subcontractors. Only a small
consumer backlash than lesser-known, private-label fraction of factories are “serial offenders,” accord-
brands. As a result, they are more likely to exercise ing to our findings. Industry insiders we talked to
greater oversight over their suppliers. described these suppliers as “mock factories” —
plants that have passed buyers’ audits but don’t
MYTH 4: Companies Can’t Do Much actually produce anything. Instead, they simply
transfer their orders to factories that haven’t been
The long list of subcontracting horror stories might approved by the buyer.
suggest that there is little companies can do to iden-
tify unauthorized suppliers and prevent their One warning sign is if the supplier claims that it
abuses. However, based on our research, buyers can can produce essentially anything. Our evidence in-
use analytics and big data to discover with high lev- dicates that factories that produce many different
els of accuracy when manufacturers are most likely categories of goods are more likely to rely on unau-
to use subcontractors. They can even predict which thorized suppliers. When a brand’s demand for
orders will probably be farmed out. variety requires more versatile suppliers, it at least
needs to have a solid understanding of the suppli-
Using our analysis of the supply chain interme- er’s actual skills.
diary’s orders, we trained a model to do just that.
With information already in the hands of an inter- New Balance has on occasion taken this step.
mediary, the model can predict with more than When it reported on its 2017 audit of 96% of its
82% accuracy when an order will be diverted to a first-tier suppliers, the company said that it termi-
subcontractor. A similar model can identify suppli- nated relationships with three suppliers, two of
ers that use unapproved factories and those that them for reasons related to sourcing.7 Gap Inc. ex-
don’t with 75% accuracy. plicitly addresses unauthorized subcontracting on
its corporate website and warns that the practice is
The model can be plugged into a brand’s existing grounds for terminating the supplier relationship.8
decision support systems to monitor pending or-
ders, the workload at each supplier’s factories, and Help suppliers manage workloads. “Unau-
the average price per category and then flag those thorized subcontracting happens at factories in
orders most likely to be farmed out. It could even moments of duress, so you must know your facto-
suggest alternative factories. Brands — working with ries’ capacity,” a former Nike executive told us. The
governments and nongovernmental organizations athletic apparel maker holds regular supplier con-
(NGOs) such as the Sustainable Apparel Coalition — ferences just for that purpose. Other brands could
could use this information to put pressure on facto- follow suit.
ries with abusive labor policies and substandard
living and working conditions. Nike also gains insight into suppliers’ perspec-
tives via the Better Buying Institute, which provides
Ours is a fairly simple model, and its purpose is a tool for suppliers to anonymously rank compa-
mainly to show that such forecasting is possible. nies’ purchasing practices. It focuses on seven areas
With more data, advanced machine learning tech- where buyers can help — or hurt — a supplier’s
niques such as artificial neural networks could ability to meet contractual obligations profitably
deliver even more accurate results. while providing a safe work environment.

Lessons for Supply Chain Leaders By working jointly with supply chain partners
from the beginning of the design process, a busi-
Our findings can help businesses increase their vis- ness will be able to anticipate demand and plan
ibility into what goes on in their supply chains. factory capacity in advance, leading to a sustainable
There’s no silver bullet, but companies can mini- supply chain without resorting to subcontracting.
mize the problem by working with suppliers closely Moreover, data-based models can be used to im-
and continuously. We suggest that they take the fol- prove production schedules and reduce costly and
lowing actions. time-wasting changes to orders.

44 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU

Be willing to pay. While low prices aren’t the right: The disruption caused by the coronavirus
main reason suppliers divert orders, it is a factor; the pandemic and the resulting economic shutdowns
Ethical Trading Initiative lists aggressive price nego- has accelerated already trending changes, such as
tiation among poor purchasing practices that put shifts to online shopping and remote work. The
pressure on supplier capacity, working hours, and same should happen with tackling unauthorized
labor costs.9 A brand can reduce unauthorized sub- subcontracting to increase supply chain visibility.
contracting by guaranteeing that its payments are in
line with what it has paid in the past. Indeed, compa- Felipe Caro is a professor of decisions, operations,
nies that value transparency and compliance might and technology management at the UCLA Anderson
be willing to pay a slight premium to ensure that they School of Management. Leonard Lane is a senior
know where their goods are made. This is especially lecturer of strategy at the University of California,
true for the large specialty brands that can be easy Irvine’s Paul Merage School of Business. Anna Sáez
targets for consumer and labor advocates. de Tejada Cuenca (@annasdtc) is an assistant pro-
fessor of production, technology, and operations
Be more diligent. Too often, brands focus only management at IESE Business School. Comment on
on their first-tier suppliers, but greater attention to this article at https://sloanreview.mit.edu/x/63121.
those in the second tier can pay big dividends. That
should include visits to facilities that aren’t on a REFERENCES
brand’s list of approved suppliers. They should also
work toward bringing more of those subcontractors 1. C. Wheeler, A. Bassey, and V. Matety, “Boohoo:
into the authorized fold. We heard of one informal Fashion Giant Faces ‘Slavery’ Investigation,” The
factory in China that was quite advanced but wasn’t Sunday Times, July 5, 2020, www.thetimes.co.uk.
on the compliant list because the process of becom-
ing certified was too burdensome. Streamlining the 2. E. Paton, “Why You Should Care That Boohoo Is Mak-
certification process can help expand the base of ap- ing Headlines This Week,” The New York Times, July 8,
proved suppliers. NGOs can also help nudge buyers 2020, www.nytimes.com.
and suppliers in the right direction by gathering in-
formation and exposing problems. 3. “Child Refugees in Turkey Making Clothes for U.K. Shops,”
BBC News, Oct. 24, 2016, www.bbc.com; N. McKenzie
Patagonia is among those companies going be- and R. Baker, “Surf Clothing Label Rip Curl Using ‘Slave
yond the first tier: It has extended its monitoring to Labour’ to Manufacture Clothes in North Korea,” The
tier 2 of its supply chain, specifically looking at the Sydney Morning Herald, Feb. 21, 2016, www.smh.com
largest suppliers of raw materials. It employs an .au; and “Vietnam: Torture, Forced Labor in Drug Deten-
audit and remediation process similar to what it tion,” Human Rights Watch, Sept. 7, 2011, www.hrw.org.
uses for tier 1 factories.10 HP engages its tier 1 sup-
pliers in outreach to the next tier: It trains the first 4. “Coronavirus Flare-Ups in Germany, South Korea Show
rank directly on its code of conduct and then in- the Risks in Easing Restrictions,” Los Angeles Times,
volves them in jointly training the second tier.11 May 9, 2020, www.latimes.com.

Buyers that prefer having an arm’s-length rela- 5. Further description of the data and a thorough empirical
tionship with their suppliers can at least collect analysis is available in F. Caro, L. Lane, and A. Sáez de Tejada
data and use predictive analytics to flag which sup- Cuenca, “Can Brands Claim Ignorance? Unauthorized
pliers or orders are risky. One source of tools and Subcontracting in Apparel Supply Chains,” Management
services to help with this is Elevate, which provides Science 67, no. 4 (April 2021): 2010-2028.
analytics on unauthorized subcontracting.
6. M. Kerppola, R. Moody, L. Zheng, et al., “H&M’s Global
CRITICS OF corporate social responsibility initia- Supply Chain Management Sustainability: Factories and
tives say that they are just window dressing used to Fast Fashion,” University of Michigan case no. 1-429-373
adorn annual reports. However, in the case of unau- (Ann Arbor, Michigan: WDI Publishing, 2014).
thorized subcontracting, businesses have the means
for these efforts to have a real impact. The time is 7. “Responsible Leadership: Who We Are,” New Balance,
accessed July 13, 2021, www.newbalance.com.

8. “Unauthorized Subcontracting: Prohibiting Unauthor-
ized Subcontracting,” Gap Inc., accessed July 13, 2021,
www.gapinc.com.

9. “Guide to Buying Responsibly,” Ethical Trading
Initiative, Sept. 7, 2017, www.ethicaltrade.org.

10. “Working With Factories,” Patagonia, accessed
July 13, 2021, www.patagonia.com.

11. “HP 2011 Global Citizenship Report,” PDF file (Palo
Alto, California: HP Inc., 2011), 91-116, www.hp.com.

Reprint 63121. For ordering information, see page 4.
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SLOANREVIEW.MIT.EDU FALL 2021 MIT SLOAN MANAGEMENT REVIEW 45

SUSTAINABILITY STRATEGIES: ENERGY FUTURES

Decarbonizing Our
Toughest Sectors —
Profitably

Cutting carbon emissions from harder-to-abate sectors like heavy transport
and industrial heat will create new strategic opportunities for business.

BY AMORY LOVINS

To avert runaway climate change, we must elimi- ALEX NABAUM/THEISPOT.COM
nate global carbon emissions by 2050. While
much of the focus has been on the main cul-
prits — power plants, buildings, and cars —
more than one-third of emissions come from
heavy transport such as trucks and planes and
the heat-intensive manufacture of materials
such as steel and cement. We can’t reach our goal
without addressing these sectors, too. But how?
They’re widely considered hard to abate —
stubbornly resistant to decarbonization, which many believe would be
slow, costly, and unprofitable.
But abatement is not only feasible — it will be amply rewarded, if
done strategically. In this decade, a rich stew of new technologies, mate-
rials, design methods, financial techniques, and business models, along
with smart policies and aggressive investments, could revitalize, relocate,
or displace some of the world’s most powerful industries. By the 2030s,
trucking, aviation, and shipping could be decoupling from climate.
Steel, aluminum, cement, and plastics could take new forms, be used
more sparingly, and be made in new ways, in unexpected places, under
novel business models.
In this article and a companion technical paper1, I examine business
strategies that can help make all this possible and generate trillions of
dollars in the process. While the strategies are distinct, they share
a common thread: Increasingly competitive and abundant
renewable electricity is undercutting and displacing fossil

46 MIT SLOAN MANAGEMENT REVIEW FALL 2021

fuels. Outpaced and outcompeted, coal and gas SOARING RENEWABLE ELECTRIC CAPACITY Gigawatts
plants are being starved of revenue while their fixed 1,627
costs per kilowatt-hour rise. Electrified heavy The electricity-generation capacity of modern renewable sources,
transport and industrial manufacturing heat pow- chiefly wind and solar, now surpasses that of all hydroelectric dams. 1,443
ered by renewables will likewise undercut, devalue, According to the International Energy Agency, renewables added a
and strand their fossil-fueled rivals, siphoning off record 278 gigawatts of capacity in 2020 (258 without hydropower),
the old technologies’ revenues to fund their own representing 90% of all net capacity additions.
expansion. The growing arguments for making and
using renewable electricity will reinforce one an- Solar 1,279
other, accelerating the demise of fossil fuels and
propelling one of the greatest disruptions in busi- Wind 1,120
ness history.
Biomass and waste 982
Let’s now explore the five business innovation
strategies that will speed this transformation. Each Other renewables 854
is described as it applies to key sectors where it can
bring early wins. But many of these will apply NOTE: “Other renewables” does not 749
across sectors and can be even more powerful in include large hydroelectric projects of 658
synergistic combinations. more than 50 megawatts. 564

1REPLACE 481
Rapidly scale green technologies to 414
outcompete legacy rivals and supplant 354
obsolete technology assets. 227 245 281 311
Heavy road vehicles, chiefly 18-wheel class 8 trucks,
average just 6 miles per U.S. gallon and emit nearly 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
4% of global CO2 — over half of the carbon
produced by heavy road transport. This dirty SOURCES: Frankfurt School-UNEP Collaborating Centre for Climate & Sustainable Energy Finance and
technology is vulnerable to competition, as Elon BloombergNEF
Musk knew when he unveiled Tesla’s all-electric
Semi prototype in 2017. The Semi, designed to dis- PLUMMETING RENEWABLE ELECTRICITY COSTS
place diesel 18-wheelers, gets over 17 miles per
gallon equivalent2 and, if charged with renewable Solar power costs have fallen as much as 89% in the past decade, onshore
electricity, emits nothing. It can accelerate from 0 to wind power costs have dropped by 63%, and battery storage costs have
60 mph in 20 seconds pulling a typical payload (ver- dropped by 89%. Solar and wind costs are now competitive with fossil fuels’.
sus diesel trucks’ 1 minute or so), climbs a 5% grade Further innovation will push these costs even lower in the coming decades.
15 to 20 mph faster than a diesel, and with the latest
batteries has a range of about 600 miles — compa- Global benchmark costs in 2019 U.S. cents per wholesale kilowatt-hour (LCOE)
rable to a diesel truck’s daily range. After a half-hour
recharge, it can then go another 400 miles. Tesla 80 Battery storage
expects to deliver the first units in late 2021.While the (4 hours, implied
Semi will initially cost 50% more than a diesel 60 by historic battery
18-wheeler, Tesla says owners will recoup that pre- pack prices)
mium from saved operating costs in two years and 40
enjoy a million-mile warranty.3 And Tesla has com- Battery storage
pany: In the U.S. alone, at least 14 manufacturers Solar Range (4 hours)
expect to be producing electric heavy trucks by 2023.
While there were just over 2,000 electric trucks of Onshore wind
all sizes on U.S. roads in 2019, by some estimates that
Offshore wind
SLOANREVIEW.MIT.EDU
Utility photovoltaics,
tracking

Utility photovoltaics,
no tracking

20

0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

The global benchmark is a country-weighted average using the latest annual capacity additions.
The storage levelized cost of energy (LCOE) is reflective of a utility-scale Li-ion battery storage
system with four-hour duration running at a daily cycle and includes charging costs. All LCOE
calculations are unsubsidized.

SOURCE: BloombergNEF

FALL 2021 MIT SLOAN MANAGEMENT REVIEW 47

SUSTAINABILITY STRATEGIES: ENERGY FUTURES

number could grow to more than 54,000 by 2025. of concept: For every e-car battery it manages, the
McKinsey forecasts that e-truck demand across European system integrator The Mobility House
China, Europe, and the U.S. could reach 11 million earns 1,000 euros annually from exchanging elec-
units by 2030. To get a glimpse of electric trucks’ tricity and a dozen other services between the battery
future, consider e-cars’ recent trajectory: Driven by and the grid. Each Tesla Semi can exploit a storage
falling battery prices, low life-cycle costs, high capacity that is five to 10 times that of an e-car.
performance, and improvements in range, global
sales of plug-in autos rose 43% in 2020, reaching Other innovative incentives and financing strat-
4.2% market share, while total auto sales fell 14%. egies include automotive “feebates” — fees on
high-emission cars, and rebates on low-emission
Fueled autos are now in their fourth year of cars — now provided by many countries.4 Feebates
shrinking sales. But because battery costs fall 18% could be effectively extended to trucks. In addition,
with each doubling of cumulative production, elec- e-trucks’ fuel savings could be used to pay into
tric autos should soon be as cheap to buy as fueled leases, enabling small, independent diesel-fueled
ones. I expect e-truck sales and prices to track truckers, who haul most U.S. freight, to replace
e-cars’ trajectory, driven by these same factors. their inefficient rigs promptly with e-trucks rather
Indeed, Europe’s biggest truck makers are so bullish than wait years for used hand-me-downs. Because
on e-trucks that they plan to deliver their last fueled e-trucks are cheaper to own and can last far longer
truck in 2040, 10 years ahead of schedule. than diesel trucks, we can expect them increasingly
to supplant dirtier, more costly, and less durable
All of this will require an extensive recharging diesel laggards.
infrastructure. Until that’s in place, e-trucks will be
limited to major transit corridors or to fixed-base 2 TRANSFORM
(out-and-back) operations — both important mar- Create novel incentives and business
kets. Ultimately, e-trucks’ ability to outcompete models that reward innovative competi-
remaining diesel rigs will depend on a far-flung in- tors challenging incumbent industries with
frastructure supporting irregular long routes. breakthrough technologies.
Although the cost of building it will be high, so is the Like trucking, the more complex and risk-averse
revenue potential. Truck stops will be motivated to aviation sector will need clean-energy and efficiency
install charging stations to recoup lost diesel reve- innovations to reduce emissions. Jetliners using 65%
nues, and utility companies will have an incentive to to 80% less fuel than today’s fleet were designed over
join with (or compete against) truck-stop operators a decade ago by the likes of Boeing, NASA, and
in supporting infrastructure development. Utilities MIT but would take a lifetime to emerge if efficiency
may also chase new revenues by leasing truck batter- keeps rising just 2% per year. But novel incentives
ies separately (with the ripple effect of helping to and business models could rapidly bring established-
lower e-truck prices, speeding the trucks’ adoption). but-underused innovations to the marketplace —
and do so even faster if the latest aviation-efficiency
E-truck penetration will also be supported by advances are applied.
“smart recharging” and other opportunities to cut
costs and generate revenues from charging and stor- Consider Otto Aviation’s 2020 Celera 500L
age technologies. Solar and wind power operators prototype, a super-aerodynamic, multifueled long-
can accurately predict their output, revealing when range air taxi that can expand from carrying six to
electricity is likely to be abundant and cheap — seating more than 20 passengers. The company
hence when charging parked trucks’ batteries can didn’t just put a fuel-sipping engine into an existing
cost the least and when selling stored electricity back airframe. It built the 500L from scratch for unprec-
to the grid can earn the most. Haulers can then add edented efficiency. The result: The plane has twice
recharging schedules to the variables they optimize. the range, eight times better fuel economy, one-
As long-haul drivers sleep, their trucks can earn sixth the operating cost, and one-fifth the carbon
money, exploiting the trucks’ fast charging and big emissions of a comparably fast (but more cramped)
batteries to sell valuable services back to the grid business jet. It’s a formidable competitor and an
while preserving the next day’s needed range. Proof

48 MIT SLOAN MANAGEMENT REVIEW FALL 2021 SLOANREVIEW.MIT.EDU