Sustainable Servers: How HPE’s Supply Chain is Combating Climate Change
Hewlett Packard Enterprise’s aggressive plan to reduce greenhouse gas emission starts with its suppliers
There is widespread consensus among the scientific community that the Earth is warming due to human emission of greenhouse gases (“GHG”). Beyond this scientific consensus there is little to no agreement among governments, corporations and other stakeholders as to what should be done and who should be combating this issue.[1] There are organizations that have chosen to use their power and influence to take measurable steps to combat climate change above and beyond regulatory mandates. The non-profit organization CDP runs a global disclosure system that enables companies and governments to measure and manage their environmental impacts. CDP has recognized Hewlett Packard Enterprise (“HPE”) as 1 of 29 companies amongst the 3,300 companies assessed for their commitment to combating climate change by working together alongside their suppliers to improve sustainability and taking advantage of low-carbon opportunities.[2]
HPE’s largest revenue stream is the sale of servers and they lead the worldwide market for server sales.[3] In a competitive environment with continued technological improvements, and decreased costs, the server industry is trending towards a commoditized product with low margins. To stay competitive in this market HPE has strategically differentiated itself by branding itself as a server provider that is combating climate change by taking direct actions to reduce the volume of greenhouse gas that is emitted in the production of its servers. They have publicly announced the goal to “reduce manufacturing-related GHG emissions on an absolute basis within their supply chain by 15% by 2025”.[4] HPE believes that by achieving these sustainability goals they will be the “first IT company to establish a supply chain that is in line with climate science.” This they believe will result in avoiding “100 million tons of emissions. These reductions equate to taking 21 million cars off the road for an entire year.”[5]
Will these supply chain upgrades increase the cost of HPE’s servers and will the consumer be willing to pay for a higher priced, ecofriendly product? HPE has set their strategy with the view that enterprises are focused on ESG policies and purchasers will be choosing their enterprise suppliers based on more factors than just price. Lara Birkes, vice president and chief sustainability officer for HPE said, “When customers use our energy efficient technology that is manufactured in factories with science-based targets, they will cut their own carbon emissions, achieving exponentially more with less environmental impact.”[6] The question remains, will HPE’s customers react positively to this marketing program by purchasing more ecofriendly servers? Recent research from the Nielsen Global Survey would support HPE’s decision to focus on a sustainability program. They find that, “66% of global respondents say they’re willing to pay more for products and services that come from companies that are committed to positive social and environmental impact.”[7]
The genius of this program is that HPE is pushing all of the required capital costs of this supply chain program to its suppliers while HPE is able to profit from these publicity of the GHG emission reduction initiatives. HPE stated that, “The program will also incentivize suppliers to set and achieve these goals by assessing them favorably through HPE’s social and environmental responsibility (SER) scorecard, which directly ties their SER performance into HPE’s procurement decisions.”[8] HPE has been very vocal and transparent about these initiatives to garner free earned press as well as signal to its supply chain that there are real financial incentives in complying with this program. HPE has set a defined strategy for the next decade to grab the market for enterprise consumers that want to purchase servers from an ecofriendly supply chain. The questions remain:
- What type of customer, do you believe will be willing to pay a premium for HPE’s servers that were built using less greenhouse gas? What would an appropriate premium be for these “eco friendly” servers?
- How should HPE react to suppliers that refuse to cooperate with their greenhouse gas emission reduction goals? Should HPE sacrifice quality or price for these higher standards?
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[1] Henderson, Rebecca M., Sophus A. Reinert, Polina Dekhtyar, and Amram Migdal. “Climate Change in 2017: Implications for Business.” Harvard Business School Background Note 317-032, October 2016. (Revised July 2017.)
[2] “CDP Supply Chain Report 2016 | 2017.” www.cdp.net, https://www.cdp.net/en/research/global-reports/global-supply-chain-report-2017.
[3] “Worldwide Server Market Revenue Declines 4.6% in the First Quarter as the Market Prepares for a Major Refresh, According to IDC.” www.idc.com, International Data Corporation (IDC), 6 June 2017, www.idc.com/getdoc.jsp?containerId=prUS42707717.
[4] “HPE Launches World’s First Supply Chain Program Based on Climate Science.” HPE Newsroom, Hewlett Packard Enterprise, 25 Mar. 2017, https://news.hpe.com/hpe-launches-worlds-first-supply-chain-program-based-on-climate-science/.
[5] See Note 4
[6] See Note 4
[7] “Green Generation: Milennials say Sustainability Is A Shopping Priority,” Nielsen website, November 5, 2015, http://www.nielsen.com/us/en/insights/news/2015/green-generation-millennials-say-sustainability-is-a-shopping-priority.html
[8] See Note 4
Austin,
Interesting article. I find it exciting and uplifting whenever large companies such as HP are willing to make significant commitments to incorporating sustainability into their supply chains. I would be curious to know what measures exactly HP plans to take and, like we discussed in sustainability at IKEA, how far they will be willing to extend their supply chain in order to ensure the quality and substance of sustainability claimed by their suppliers. I believe that as more corporations move in the direction of demanding sustainable measures of their suppliers, suppliers who are willing to provide greener sourcing alternatives will gain an increasingly competitive advantage. Those who are unwilling to comply for cost reasons or otherwise, I believe, will experience greater pressures to do so by their customers in the coming years. In the same vein, I think it will soon become a low-hanging fruit for corporations to attract green-conscious shareholders by touting green goals and actions. As a result, I think many companies will be willing to make bulk orders for servers for which they pay a premium justified by green ratings. My only question for HP’s strategy would be this: is a 15% reduction in GHG emissions enough progress to justify the premium or will HP have to shoot for something more?
Hi Austin,
I also enjoyed reading your paper. It’s interesting to see that HPE is using their approach to environmentally responsible production of their servers as a point of differentiation in a fairly commoditized market. Regarding your questions, I have a few thoughts. For the first, I think that large enterprises (as opposed to small/medium) will be the consumer most likely to see this as a helpful point of differentiation. For starts, they’ll be the ones with boards and customers agitating them about taking measures to combat climate change. My guess is that SMEs likely don’t trumpet the fact that they have servers, or who makes them – they’d be more motivated by price than the corporate environmental responsibility angle. This would obviously be a different story for non-profits or other businesses focused on the environment or for whom this is a priority.
For the second question – I think HPE would need to take a bit of a price hit and pay more if they run into issues getting suppliers to meet their GHG requirements. Sacrificing on quality is a quick way to lose the large enterprise customers who could likely absorb some amount of additional costs to have another feather in their cap regarding environmental policies. My question would be what steps HPE is taking on their own end to reduce their GHG emissions, beyond just their suppliers. Are they making concurrent reductions on their own end?
Thanks Austin. I find HP in a perfect position to push the ‘green’ server concept because of its customer base. My guess is that most of the customers for the servers will be IT and Internet companies, most of which happen to be advocates for less GHG emission. Quite likely, these IT and Internet companies set the target to reduce or even eliminate GHG emission themselves, meaning they are more than willing to buy the servers with a ‘green’ supply chain, helping them to achieve their own goals. In some sense, I think the move to a ‘green’ supply chain will help HP to secure more customers and orders even with a higher price.
If HP’s supplier push back on the idea of ‘green’ supply chain, I think HP can first offer higher price to the suppliers who are willing to join the team. Those who lose the orders from HP may find it hard to secure orders from other customers with a scale comparable to that of HP. Over the time, I believe at least some of them will accept the idea. With more suppliers coming in, HP can leverage its bargaining power and seek lower quotes from suppliers.
Hi Austin,
Thanks for sharing this piece on HPE. After reading your piece, I find myself feeling a bit cynical. While – as your Nielsen source suggests – there appears to be a general shift towards sustainability-influenced purchasing decisions on an individual level, I fear that procurement organizations at a corporate level will ultimately be focusing more on the dollars and cents associated with their server purchases. Further, it appears that, at this point, sustainability claims regarding consumable items are more capable of influencing the purchasing habits of their consumers (e.g., baby food, coffee, tea, snacks, etc.). Despite my cynicism, HPE’s strategic shift in the space is an interesting one that may pay dividends as these millennial consumers become the leaders of corporate procurement organizations.
Thanks for bringing up this topic Austin. This is an important question for suppliers that are attempting to differentiate themselves in a commodity goods market. As other commentators have noted, there is some uncertainty on the likelihood of large companies making procurement decisions based on values. At the same time, HPE itself does not seem to face any specific challenges from climate change. There is no operating model challenge it needs to address through this strategy. In the event that suppliers are able to offer this service to HPE and HPE is able to sell this onwards as a feature to customers, there is again a lack of defensibility in this differentiation. Given these factors, there seem to be very minimal reasons for HPE to continue to offer this service, if desired customer traction is not observed.