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THE NEW STRATEGIC FRONTIER:
ENVIRONMENT, SUSTAINABILITY, AND ENTREPRENEURIAL INNOVATION

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During the last few decades, humans have emerged as a new force of nature. We
are modifying physical, chemical, and biological systems in new ways, at faster
rates, and over larger spatial scales than ever recorded on earth.
―American Association for the Advancement of Science, 1998

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Globally the movement toward “sustainable development” has caused many firms to
adopt policies and practices that reflect what is called a “sustainable business” or “triple bottom
line” approach. Efforts toward sustainability in business refer to the redesign of strategy and
products as part of a larger societal project directed toward reconciling economic growth with the
integrity of ecological systems, human health, and related poverty, social instability and conflict.
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“Triple bottom line” refers to the demonstration of strong corporate performance across
economic, social, and environmental indicators. Performance against these measures serves as an
indicator of fiduciary responsibility to a growing set of concerned investors, and therefore can
help ensure continued corporate access to capital. Sustainable business practices also enable
companies to lower costs, differentiate products, protect and enhance brands, reduce risk, and
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position for competitive advantage over rivals less attuned to trends. In 2005, when American
firms General Electric and Wal-Mart announced their sustainability strategies—following in the
footsteps of other global companies—the issues moved solidly into the U.S. business
mainstream.

Sustainability related innovation—the creation of new products, processes, technologies,

markets, and ways of organizing business—are evident worldwide. Evidence ranges across
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venture capital investments in clean energy technologies, carbon markets, radical material
productivity (10× efficiency), green buildings, “smart growth” city planning, the continued
expansion of the organic food market, benign chemistry goals guided by green chemistry
principles, and biomaterials replacing oil-based feedstock for industrial and consumer
applications. The accelerating activity is driven in part by rapidly expanding scientific
knowledge from a variety of fields. For example, the last two decades have witnessed dramatic
advances in our understanding of pollution’s health impacts, the value of ecological system
services, renewable energy technology solutions, and biotechnology applications aligned with
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This note was prepared by Andrea Larson, Associate Professor of Business Administration. Copyright  2006 by
the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies,
send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

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nature’s laws. This new knowledge can be strategically invaluable to firms. Indeed, many
innovative firms have already embraced sustainability perspectives to their advantage.

Sustainable development refers to an economic development paradigm targeted to the

imagined ideal of more widespread human prosperity that, by design, sustains nature’s life-

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support systems enabling expansion of the next generation’s choices, rather than limiting them.
Sustainable business is a derivative of sustainable development at the firm and supply-chain
level that enables growth, positive financial performance and sustainability of natural systems
on which commerce depends. Natural systems are understood to include human health and viable
communities. With twenty years of research and implementation of sustainable development
notions, natural system viability and global poverty issues have shifted from periphery to core
strategic concern for many multinational firms, a change driven by historically unprecedented

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population and economic growth pressures.

Imagining the ideal serves to define a more preferable state. Backcasting from that ideal
vision allows a different conversation about alternative paths forward. That mode of thinking has
been adopted by innovative corporations and is transforming existing markets, creating new
ones, and embedding sustainability principles in firms’ strategies. The growing “sustainability”
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imperative―to systemically incorporate health issues, ecological impacts, community effects,
and short and longer-term fiduciary responsibility to stockholders and stakeholders ―presents
strong incentives for companies to understand this changing competitive landscape and explore
its inherent opportunities.
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A New Role for Humans on the Planet

Humans have become a central force in nature. Although we have always influenced the
physical environment around us, our reach has extended dramatically in the last 50 years through
technology and globalization. Our anthropogenic (human) impact has altered fundamentally the
chemistry, ecology, and biology of living and nonliving systems. Our progress has resulted in an
unprecedented population explosion in the last 50 years, with the accompanying exponential
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growth of industrial production, energy use, and material throughput. Technology advances now
race to keep pace with the demand for land, water, materials, energy, and food. The rates and
scales of change combine with staggering volumes of waste that disrupt and impair natural
systems worldwide (e.g., human health, ecologies, habitat, climate, and the hydrologic and
biogeochemical cycles). Yet those same natural systems provide the critical services on which
we depend—self-regenerative renewal, clean water, healthy air, productive soil, healthy food.
Even our bodies, natural systems we tend to take for granted, are experiencing growing levels of
contaminants from food, air, and water, what the U.S. Centers for Disease Control call our “body
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burden.”

As we are just beginning to acknowledge those historically unprecedented realities, the

new information influences governments and nongovernmental organizations. Both sets of

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institutions increasingly direct and constrain commercial and industrial activity to ameliorate and
mediate adverse impacts and damage to public commons. To ensure the right to operate and
enjoy continued success, businesses are adapting to novel complexities. As is typical under
changing circumstances, some firms resist while others embrace change, looking for the
inevitable opportunities that result from altered market conditions.

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Entrepreneurial innovators—whether individuals, companies, or collaborative networks
of firms—are particularly open to change. They are entrepreneurial in the processes they employ
and innovative in their pursuit of services and products that substitute for those known to
undermine and pose hazards to human and ecological health. Many entrepreneurial innovators
use new and creative inputs, concepts, and recently evolved frameworks to guide their thinking,
thereby accelerating creative outcomes.

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Business leaders and entrepreneurs advancing sustainable business practices and
strategies understand that indicators associated with environmental degradation and related
health and social equity disparities can be seen as market inefficiencies. They also understand
that information asymmetries put them in a preferred position to take advantage of overlooked
and underappreciated revenue and profit opportunities. These are opportunities, not just for new
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products and services, but also for alternative processes, technologies, and organizing
arrangements across supply chains.

Drivers of Change
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A confluence of forces now influences product and service markets in ways that
companies ignore today at their peril. It has been called a “perfect storm” of factors and includes:

 emergent science about pollution impacts on human health and ecological system
functions (from fields including but not limited to oncology, toxicology, endocrinology,
biology, zoology, and atmospheric science)
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 growing national, regional, and international environmental agreements

 widespread public health concerns (in developed as well as emerging economies)
 increased regulation (e.g., European Union, China, Taiwan, California, Minnesota, etc.)
 rising market demand for “clean” energy, safe food, efficient transportation, and green
buildings
 more active and effective NGO strategies demanding change (boycotts, lawsuits, protests,
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market campaigns)
 fast-growing numbers of U.S. shareholder petitions to corporate boards focused on
corporate fiduciary responsibility related to human health and environmental issues

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 widespread use of investment screens by international and national institutional investors
to support corporate “triple bottom line” and “sustainability-designed” corporate
strategies

Each item adds complexity to business decisions, and if viewed through a “change is threat”

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lens, each is an obstacle. To the entrepreneurial mind however, change points to opportunities.

What Is “the Environment”?

A systems view of interdependencies and coevolutionary adaptation to natural systems

are required as scientific backdrop to decision making in business today. Discussion about the

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“environment” in western cultures traditionally engaged people in debates over parks, species
protection, and government regulation. Climate change and weather events, pollution and
environmental health effects, and growing markets for organic food and hybrid cars all suggest
we are learning new ways to view the environment. Rather than seeing the environment as
existing “out there” apart from us we are reminded that our daily lives are totally interlocked
with natural systems; we are part of nature and our economy is embedded and totally dependent
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on the quality and quantity of the planet’s basic capital stocks of air (atmosphere), water, soil,
species, fisheries, and so on. We are now aware of the medical and scientific indicators of
pollution’s disruption to healthy lives and stable, functioning natural systems―often because of
personal experiences with problems such as asthma and urban smog that shuts out blue sky and
irritates the lungs. Thus, as our comprehension of “environment” becomes more informed, it also
becomes more complex. The problems require a shift from linear thinking to a systems
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perspective.

The term “environment” now embraces a wide array of tightly coupled topics, including:

 biosphere and earth system changes

 climate modification
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 soil depletion
 deforestation
 fisheries management
 human health
 air quality
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 habitat decline
 species extinction
 reproductive and immune system dysfunctions in mammals including humans

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 energy technologies
 environmental refugees
 environmental justice issues
 water supply

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 national security
 national competitiveness

Environment is no longer just about corporate compliance with regulations and overhead
expenses. Nor is it the narrow concern of marginalized, so-called left-leaning and “tree-hugging”

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political advocates. It is an apolitical topic: environment today is tied to urgent issues that will
determine how we create a global society, including not just ecological concerns, but human
health, social justice, national security, and political stability.

How Did We Get Here?

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How did we get here? Through countless small decisions and unintended consequences
that have become clear only over time and with more advanced monitoring technologies.
Humans have always altered their natural environment. What is new, however, is the accelerated
pace at which we have altered the environment during the last 50 years, and the cumulative
effect of western economic development. The science is conclusive: given the scale and intensity
of current and future human economic activity, we are exceeding the carrying capacities of
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limited natural systems. These systems, including the human body, cannot assimilate and self-
renew in the face of growing waste streams.

But now that we know our choices shape the physical world and climate from the local to
global scale, as well as the chemical composition of soil, water, and the human body, these
advances and shifts in knowledge and attitudes are creating new business opportunities. At the
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same time, health and environmental issues have gained more importance for younger people in
their roles as consumers and employees. A generational change is occurring as environment is
increasingly understood as overlapping with health and persistent poverty.

The global scope, complexity, and pace of the changes help explain why many
companies have failed to respond, remaining locked in outdated modes of thinking. Key drivers
of the human–environment relationship are well known and include population growth (a
projected doubling of population from eight billion to 12 billion in the next 50 years), technology
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and communication advances, fossil-fuel-based energy and transportation systems, and the linear
processing of increasing volumes of natural and synthetic materials into waste, which challenges

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nature’s capacity to absorb and renew its life support systems.1 Science experts have been
documenting the shift for decades, though this information rarely has entered management
education forums (see Scientific American special issues for early overviews of the topics2). As
economist Kenneth Boulding stated many years ago, “Anyone who believes that exponential
growth can go on forever in a finite world is either a madman or an economist.”

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What Do We Know?

Scientific knowledge about the impact of industrial waste (molecular and visible) on
natural systems (cellular, ecological, and earth systems) has expanded dramatically as scientists
develop more sophisticated measurement tools and conduct crossdisciplinary studies. It is now

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well known that climate, hydrologic systems, fisheries, soil and agriculture, air composition,
biological systems of mammals (reproductive, immune, neurological, endocrine)—all these
natural systems, even in the most remote and seemingly pristine areas of the world—are
susceptible to contaminants distributed by industrial activity and weather patterns.

Appropriation of land for human purposes combined with rising concentrations of

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naturally occurring elements and synthetic compounds now present unprecedented challenges to
health and our economic growth models. Complicating matters further, much of the information
about their effects lies scattered across academic and scientific fields. Academic silos and lack of
support for crossdisciplinary research prevent scientists, let alone business decision-makers, from
integrating available data. In the meantime, business managers must respond to a growing
number of pressures and problems in a piecemeal fashion, unable to see that systemic changes
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require systemic solutions.

For companies, such turbulence translates into increased government scrutiny, regulatory
action, lawsuits, and boycotts. Growing public concern, expanded stockholder activism and new
stock exchange indexes focused on companies’ more broadly defined fiduciary responsibilities
are additional signs of a changing competitive landscape. Many U.S. firms in industries on the
front lines of these battles (energy, chemical, oil) altered their operating procedures years ago as
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they came under pressure to be more responsive. They have been followed by a wave of
entrepreneurial thinkers who see opportunity not constraint.

“Environment” within U.S. Corporations

Until very recently, environmental issues were considered peripheral to core business.
They were viewed as the responsibility of environmental managers and an unfortunate source of
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1
See J. R. McNeill, Something New Under the Sun: An Environmental History of the Twentieth-Century World
(New York: W.W. Norton & Company, Inc., 2000) and Gretchen Daily, Ed., Nature’s Services (Washington, DC:
Island Press, 1997).
2
Scientific American, 261, September 1989.

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additional overhead expenses. The environment has been viewed as another management
challenge, much like re-engineering, safety rules, or implementing just-in-time inventory. To
some extent, firms have recognized how the character of environmental issues has changed, but
full grasp of those changes is still evolving along with the science. Yet for an increasing number
of firms under pressure from stakeholders, the issues demand senior-level attention and

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incorporation into strategic thinking. “Intrapreneurs,” those who innovate from inside
companies, are active with or without senior level support.

What is clear is that company reactions have typically conformed to past understanding
of environmental issues as well as to business models dating from a time when the environment
was (understandably) separate from business. Our mental models and intellectual discourse—the
foundations on which the practice of management are built—have been slow to adapt to the new

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reality.

Are environmental concerns merely quality issues to be added to the total quality
management (TQM) agenda? Or could we be in a transitional phase toward a business model
that acknowledges a company’s need to continuously adapt to responsibilities inherent in human
co-evolution with natural systems? How should we think about the issues, and what are the
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innovators doing?

New Definitions Leading to Innovation

New design parameters driven by this redefinition of the business–environment

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relationship are generating business innovation. This frontier of entrepreneurial activity is

distinguished from traditional conceived entrepreneurship (small business creation) and
mainstream business by its orientation to the creation of future products, services, and markets.
Frameworks including industrial ecology, green chemistry and engineering, earth systems
engineering and management, sustainability science, and cradle-to-cradle design provide
valuable conceptual guides. Selling the function of a product not the product itself, reverse
logistics, life cycle analysis, design for environment, dematerialization, industrial metabolism—
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these are the new terms and concepts. Hybrid cars, smart grid, LED lighting, fuel cells, thin film
photovoltaic laminates and advanced wind turbine design and biomass conversion technology for
fuels and materials are examples of the new technologies, products, and markets.

Why the Lens of Entrepreneurship?

To study entrepreneurship, under its classical definition, is to examine and understand

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how and why new ways of meeting human needs emerge. Where economists seek to explain
equilibrium in the economy, entrepreneurship scholars seek to explain changes in the economy.
Innovation is at the heart of entrepreneurship, as economist Joseph Schumpeter observed in
1934. Innovation takes the form of new products, services, processes, technologies, markets, and

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organizational structures that challenge existing ways of conducting business. Entrepreneurial
innovation departs from and disrupts existing industrial and commercial patterns. The study of
entrepreneurship investigates the causes, mechanisms, and effects of changes outside the range
of existing practices. Companies developing green building designs and materials, clean-tech
energy technology, decentralized water purification, small scale wind power turbines, biomass-

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based plastics, benign product formulations, and organic agricultural practices are a subset of the
larger pool of entrepreneurial innovators―a subset that recognizes the system consequences of
multiple trends and positions itself for opportunity.

Ideas from the field of entrepreneurship are useful in explaining the processes by which
individual and organizational innovation happens at the business/environment nexus. It is
worthwhile to consider what Joseph Schumpeter (1934) called innovation: the “creative

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destruction” that rejuvenates market economies by disrupting existing modes of thinking
and action. Schumpeter also distinguished entrepreneurs as putting together “new combinations”
as opposed to simply being managers or in capitalist businesses. Friedrich von Hayek’s (1945)
observations about the availability of dispersed and diverse knowledge and helps explain why
some individuals see opportunities while others do not. Prolific entrepreneurship writer Peter
Drucker (1985) pointed out the major changes that create opportunities, many of which
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correspond to the conditions present with environmental and sustainability opportunities.
Howard Stevenson’s (2006) distinction between “trustee” and “promoter” perspectives
illuminated the differences between bureaucratic and innovative corporate approaches, and Saras
Sarasvathy’s (2001) effectual reasoning contrasted with causal reasoning provided insights into
entrepreneurial processes and mindsets. Sankaran Venkataraman’s (1997) observation that
entrepreneurship study explains how and why opportunities are exploited to bring into existence
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markets for goods and services that do not yet exist highlights the importance of
entrepreneurship scholarship/research to our understanding of environmental entrepreneurship
and sustainability innovation.

Questions about the sources of opportunities for entrepreneurial innovation are central to
entrepreneurship. Understanding why, when, and how opportunities arise is key. Furthermore,
why do some see the opportunities and act on them while others seek only to optimize within
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existing systems? What are the processes through which new product or technology ideas are
transformed into viable businesses, whether by startups or large corporations? Thus,
understanding why rapidly growing markets have developed for organic food, clean and
renewable energy technologies, and nontoxic industrial materials requires studying the changing
conditions that give rise to those innovations and the process steps entrepreneurial innovators
take to create viable enterprises.

To understand the opportunities, we study the innovators, both individuals and

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organizations that create new products and markets. Most economic activity and market
processes are framed by given ends-means approaches that influence whether opportunities are
perceived. In other words, often in business the goals are clear and the means for achieving the
goals are, for the most part, well established. Therefore, without explicit awareness, most of the

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economy functions under preconceived assumptions. People tend to do things the way they have
always been done, making only incremental modifications at the margins.

Such incremental changes to existing ways of doing business separate the mainstream of
business activity from entrepreneurial activity. Entrepreneurial initiative is inherently innovative.

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It drives corporate and societal transformation. Hence entrepreneurial opportunities are
differentiated from business opportunities more generally by their possibilities for preferable
product and service solutions that break away from current products, practices, and markets.
Entrepreneurs and entrepreneurial organizations are more alert to new goals and newly available
alternative resources in the form of information, materials, or technology to achieve those goals.
They are the creators of new ends-means visions and new combinations that eventually come to
replace the existing structures.

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Neither entrepreneurship nor the phenomenon of innovation at the intersection of
business and natural systems can be fully understood without a network perspective.
Entrepreneurship is best understood as a process of innovative change, one that requires network
engagement, cultivation, and ongoing management. The emergence of innovation depends on the
ability of (entrepreneurial) leaders to identify and mobilize network participants (e.g., those who
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bring information, expertise, skills, funds, materials, equipment, etc.) to create the change in
product or process design.

Furthermore, research on innovation tells us that groups that generate new ideas are often
composed of outsiders, players entering an industry for the first time, people more open to
change, participants willing to experiment and motivated to explore future options as opposed to
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only currently known possibilities. Outsiders, particularly critical outsiders, can bring orthogonal
perspectives, attitudes, and information to an entrepreneurial venture that challenge accepted
ways of thinking. In the case of innovation related to the changing environment–business
relationship, outsiders attuned to the issues but who offer heretofore under-represented views can
bring important new knowledge.

This perspective on networks, outsiders, and innovation is consistent with what we

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already know about entrepreneurs and their activities. Entrepreneurial activity in society is
information-driven. It depends on differences in the distribution of knowledge and information,
and relies on a diversity of capabilities out in the world to imaginatively connect new
information and knowledge to commercial opportunities.

In conclusion, faced with new complexities, certain companies and individual

entrepreneurs are forging innovative paths to reconcile human impacts on human health and
natural systems without compromising financial performance and the provision of high-quality
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goods and services. Those innovative individuals and companies are pioneers creating future
goods and services, future production processes and markets, and future ways of conducting
business. They draw from a range of sources to guide their actions—from simple opportunity

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recognition (e.g., identifying unmet needs in the market) to a deeper understanding of the
changing scientific information and shifting social conditions from which opportunities emerge.

Bibliography

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Drucker, Peter F. Innovation and Knowledge. New York: Harper and Row, 1985.

Hayek, Friedrich, “The Use of Knowledge in Society.” American Economic Review, XXXV,
No. 4, September 1945: 519–30.

Roberts, Michael J., et al., Eds. New Business Ventures and the Entrepreneur, 6th edition. New

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York: McGraw-Hill/Irwin, 2006.

Sarasvathy, Saras D. “Causation and Effectuation: Toward a Theoretical Shift from Economic
Inevitability to Entrepreneurial Contingency.” The Academy of Management Review 26, no. 2
(April 2001): 243–63.
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Schumpeter, Joseph A. The Theory of Economic Development. Boston: Harvard University
Press, 1934.

Venkataraman, Sankaran. “The Distinctive Domain of Entrepreneurship Research,” in Advances

in Entrepreneurship, Firm Emergence and Growth 3, J.A. Katz, ed., Greenwich, Conn.: JAI
Press, 1997: 119–38.
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