Author: davidpmain

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REBOOT World View

The Social Contract

“Respect for human rights is not social work; it is not merely an act of compassion. It is the first obligation of government and the source of its legitimacy”, Ronald Reagan

Kate Raworth’s diagram of the Embedded Economy (Figure 3-1), with my adaptation, is a useful framework to think systemically about the global context in which we live and critical interconnections related to our economies, societies and the environment.  This model shows the key components of the global system with the individual in the centre, surrounded by the components of the economy, which sits within a society and reside in the global ecosystem.  This is not a fully closed system as the earth is fuelled by the sun and it also dissipates heat.  There is also consumption of scarce resources by society and generation of waste that goes back into the environment.  This is the framework or macro-ecosystem that we need to get in balance to be sustainable.

Figure 3-1

Our current system is not in balance! In this Anthropocene era, we are increasing the heat of the planet which is affecting the living world. At the same time, we have been changing land use, displacing and causing the extinction of fauna and flora, depleting finite resources and then disposing of waste matter in unecological ways. We have taken the world out of its most stable 12,000 year period, which has been the period of great human development, into an unsustainable cycle.

This model for driving sustainability does not have the state in the centre as in the case of command economies such as Russia and China with individuals as participants in a state led system.  It also does not have free markets and capitalism sit in the centre, as it does currently in the Western world with the overwhelming focus on capitalism and corporates, with the individual or citizen secondary.   This also is not a plutocracy model, which as Nobel Laureate economist Joseph Stiglitz describes America moving to a government “of the 1%, by the 1% and for the 1%”. 

You just have to look at your life to realise that society has not been properly oriented on citizens. There are occasional exceptions, such as war and the current pandemic, with generate some small rebalancing.  A perfect example of this corporate centricity is the public bailout of the financial sectors misdemeanours in the 2008 Great Recession.

This lack of primary focus on the individual is apparent in a myriad of ways.  The unequal delivery of public services such as health and education to individuals. The reduction of services levels, or raising of prices, when public services are outsourced. The use of public funds to bail out failing corporates and financial institutions. The inadequacy of financial and legal consequences for currency manipulation, interest rate manipulation and mis-selling by financial institutions. The weak governmental response to pollution and environmental damage. The declining levels of personal privacy.

The primacy of the corporation over the individual also manifests itself in what appears to be small ways; but, are cumulatively substantial. We have virtually no control over our personal information on the web. We are served terms by websites in order to use them that are unintelligible, onerous and leave us no choice but to accept.    We see subscriptions from companies that cause term based commitments; yet, companies are able to change their terms of the contract throughout the period.  With regulated companies, such as telecoms, we see that it easy to sign up to new services on the web, yet it is incredibly difficult to cancel services and it needs to be done through their understaffed call centers. And the list goes on.  

Proper protections for consumers would not allow this corporate behaviour, and it would provide material enough penalties to the corporates that they would not repeat offend.  The only way to create a sustainable model is to focus how we operate to be citizen centric and not corporate or government centric.

Individuals are consumers, employees, voters, environmental stakeholders and members of communities.  If we are to build a better model of how we operate then we need to define what the social contract that societies should be striving to provide.  This provides the moral compass for where we are trying to get to.  The other components in the society, in particular the state, the market economy and the financial markets need to be aligned and incentivised to deliver against this target social contract.

The target social contract is the “North Star”, it defines that the individual consents to surrender some of their freedoms, participate in and abide by the rules of the society and submit to the authority (in the case of a democracy to the decision of a majority) in exchange for the protection of their remaining rights, personal safety and security, maintenance of social order, access to employment to earn income, and provision and access to public services.  The social contract that I am referring to is the set of expectations that a member of a society should be able to have that is consistent with building a strong, fair and sustainable society for future generations.  

The rights of an individual start with the UN Declaration of Human Rights that was signed in 1948 and was adopted by a vote of 48 in favour, 0 against and 8 abstentions.  Today there are 193 member states of the UN, all of whom have signed on in agreement with the Universal Declaration of Human Rights (UDHR)  by signing at least one of the nine binding treaties influenced by the Declaration, with the vast majority ratifying four or more.  Currently, 79 of the countries have independent National Human Rights Institutions that comply with International Standards.

The rights include 30 basic human rights. The foundation of the Declaration are the principles of dignity, liberty, equality and brotherhood.  Sitting on these principles are the rights of individuals; the rights of the individual in civil and political society; spiritual, public and political freedoms, and social, economic and cultural rights.  

The 17 UN Sustainable Development Goals (SDGs), see Figure 3-2, take these concepts of human rights and add further specificity.  Over 90 percent of the goals and targets of the SDGs correspond to human rights obligations.  These SDGs defined in 2015 and agreed by over 190 countries, have an agenda and targets set for 2030.

Figure 3-2

It is important to note that across many of the SDGs is the key phrase “for all”.  This is a big shift in thinking on what is expected from a society and how the thinking behind the delivery of services is changing.  The shift has been from average and median thinking to heterogeneous thinking and focus on the importance of inclusivity, or the elimination of exclusion, and overall fairness.  A. Philip Randolph captured this when he said, “A community is democratic only when the humblest and weakest person can enjoy the high civil, economic, and social rights that the biggest and most powerful possess”. It is the focus on ensuring that the world we live in is less plutocratic.

Inclusivity and fairness thinking is not socialist thinking and does not exclude wide ranges of income between people.  It does contemplate that everyone has some minimal rights and a right to fair treatment.  SDG’s are not the enemy of capitalism; rather they are foundations of compassionate and responsible capitalism which in the medium and longterm will be dramatically more sustainable than short term zero-sum-gain thinking.  As I showed in my previous blog, the most prosperous countries are also the most well balanced.  Fair compensation, high levels of employment, good health, education and strong social security have multiplier effects on the prosperity of a society.  

The Cambridge Institute for Sustainable Leadership, has linked the SDGs into three broad social ambitions and three environmental ambitions (Figure 3-3).  These social ambitions revolve around basic needs, decent work and wellbeing.  

Figure 3-3

These three needs are vital components of the target social contract; but, there are also additional components required. The pervasive digital gathering and use of data attacks privacy. This capability combined with the proliferation of communications and the ability to personalise and deliver fake news to mislead, misinform and misdirect behaviour is a real societal problem. These real and tangible issues relate to Articles 12 and 19 defined in the 1948 Declaration of Human Rights (Figure 3-4). 

Figure 3-4

At the time these were written it would not have been possible to predict the impact of technology.  As I noted in my first blog of this series, even now it is almost unfathomable how much data on each person is being gathered and how it is being used.  This along with the personalised delivery of communications which can be either true or fake news is creating real cracks in societies.  The 2016 and 2020 US presidential elections have provided a real magnification of what can happen.  How can a country become so polarised and how can 70% of the Republican voters truly believe there has been massive fraud no matter what the courts say or even what the people who have managed the elections say?  The answer is that the information they watch, read and have been fed is different.  In democratic countries with only mass media, it used to be that the truth would rise to the top and there would be a common set of information.  In most countries, there were also rules on the accuracy and balance of information that was provided to voters to help them make their decisions. False information was filtered out by reputable media and there were rules on the truth of advertising messages.  Social media has bypassed this with the ability to push personalised communications that can be either true or fake, and algorithms that reinforce the personalised messages, so there is no longer a common set of facts that all people will see.  Is it possible to maintain an effective and stable democracy without a common set of information and facts from which citizens cast their votes?

There is also a fundamental bias of information driven by both mass media and social media.  We are increasingly seeing that the public view of what is happening in the world is severely distorted from reality.  Figure 3-5 illustrates this distortion perfectly.  If this is the case on a subject such as causes of death, imagine the levels of distortion of reality of other relevant topics to the individual.  If we believe that transparency, data and facts, and truth is paramount to the individual who is a consumer, an employee, a voter and a member of a society, then this is a fundamental social contract issue that must be solved.  

Figure 3-5 

Inevitably the ability to increasingly personalise can be both positive and negative.  Providing more relevant information or advertising more relevant products and services for consumption can have real value to the individual.  However, having information on race, gender, sexual orientation, disability, health, income, etc. can also allow for discriminatory behaviour and pricing for exclusion or to take advantage of an individuals circumstances.  With increasing use of AI, which relies on historical data this can help to reinforce old practices.  We have seen an example of this in 2018 when Amazon was innocently trying to make their recruitment more efficient and found that because of historical data they continued to reinforce gender bias.  The more disturbing use of data is when it provides a company asymmetric knowledge vs. the consumer and they then exploit this opportunity.  Asymmetry of knowledge and power has been an age old problem with financial and pharmaceutical companies exploiting their situation making customer the big losers.  This problem now has arguably crossed the line with how social media companies and other tech giants exploit consumers and their data to enhance their business and keep out competition.  The collection of data is continuing to gather steam and will explode further with the penetration of IoT based devices and the growing levels of information from biotech and neurotech applications.  Privacy control must be one of the fundamental rights of an individual going forward.  

We are seeing the progressive escalation of concern on the power of the large tech companies, in particular the GAFA group – Google, Apple, Facebook and Amazon – with respect to both privacy, anti-trust and misinformation.  The GAFA have between them faced anti-trust challenges and investigations in multiple regions including the US, EU (including individual countries within the EU), India, Canada, Australia, and Japan. Even though fines have been in the billions of dollars this is pocket change for these companies.  The focus on getting the tech giants under control will only escalate. 

Meanwhile some progress has been made with the GDPR (General Data Protection Regulations) that went into effect in May 2018 in the EU and is helping to set the standards that other countries will move towards. The GDPR regulations do have some privacy related rights related to data deletion, previously known as “the right to be forgotten”; but, this is incomplete.  This may be a big step for corporations; but, it is only a small step from an individual’s perspective on rights to privacy.  

So, to conclude there are five categories of components of a social contract to create an individual and citizen centric society that can thrive and prosper going forward.  As identified above by the SDGs and CISL, there are the three requirements of basic needs, well-being and decent work. The basic needs involve minimum levels of availability and access to food, water, shelter, energy, sanitation, communications, credit and transport for all.  It is vital to note that availability and access also included fair pricing.  In terms of wellbeing, there is affordable healthcare and education, and equal access to justice, safety and security.  Healthcare needs to be comprehensive and should not result in gaps as big as 10 years expected length of life differences at birth depending on which side of the street you were born.  The nature of access to education, is about narrowing the gap to affordable and high quality education to provide life and mobility opportunities.  This education includes K to 12, University and apprentice/applied educational programs and reskilling. The third requirement is decent work.  Decent work comprises living wages, social security programs to assist in managing through out different work situations, being disabled and pension arrangements.  Access to ongoing education to provide mobility will be increasingly important as the fourth industrial revolution, particularly with respect to AI and robotics, becomes increasingly pervasive.  

Wrapping these three requirements is the fourth component, which is the right to be living in a climate and environmentally sustainable environment.   The climate and environmental challenges are both global and local issues.  Due to the climate urgency and the potential implications of missing the Paris Climate Agreement target of not more than 2 degrees Celsius increase in average temperature, overall this is the most important component of the social contract.  We know we are tracking to hit over a 3 degree increase in temperature.  This has critical consequences for different countries including liveability, the local economy, access to food and water, and massive inter-country issues such as environmental refugees. Environmental refugees are also inevitably linked into both economic and political refugees.  The refugees crisis can only increase from its current estimated level of 80 million of which 46 million are internally displaced people according to UNHCR.  Predictions of 200m or more climate migrants by 2050 are not uncommon.  The ripple effects of this should not be underestimated in terms of human cost, economic cost, rising populism and societal destabilisation. 

The fifth component comprises the core human rights of privacy, access to facts and the truth, and the interlinked rights of freedom of information and freedom of speech. At the heart of privacy is personal control over all the personal information that is gathered, generated and used in the public arena of the internet and other networks of information.  Collective access to data, information and the truth has to be essential.  This means that fake news needs to be clearly identified, be managed in its distribution, and restricted in critical areas such as advertising and the social media push of content.  Social interaction and discourse needs to have common ground based on truth for societies to operate effectively.  Finally, freedom of access to information and freedom of speech is fundamental.  The debate around this is rightly growing and becoming increasingly complex with developing factors such as the growth of ‘fake news’,  the social media driven and algorithmic based delivery of content, the emerging “cancel culture”, and the growing voice of a full range of minority interests.  

Being definitive on the requirements of each of the components of a “North Star’ social contract is complex; but, excusing ourselves and not progressing on them is irresponsible.  Each country will need to define their specifics behind a common set of principles for all countries. The vital thing is that we become individual and inclusive centric to how we ‘reboot’ to create more sustainable societies and a more sustainable collective world.  

At the heart, the social contract is about solving inclusivity and fairness, which is the solution to the problem of inequality. We can see the urgency to address the growing issue of inequality in many countries. Yet in context, Branko Milanovic, an expert on global inequality, assesses that about 80% of inequality is across countries as opposed to within countries (Branko Milanovic, “Global Inequality – A New Approach For The Age of Globalisation”). Solving multi-lateral problems is exponentially more complex than country problems. I will explore this and inequality in more detail in later blogs.

In my next blog, I will looking in more detail at the role of the government in a democratic society.

#social contract #climate change #global warming #Universal Declaration of Human Rights #inequality #inclusivity #fairness #privacy #digital trust #cyber #mass manipulation #truth #Global Inequality #SDGs #Sustainable Development Goals #Paris Climate Agreement #UNHCR #UDHR #refugees @Kate Raworth @ Joseph Stiglitz @Branko Milanovic @CISL @Google @Apple @Facebook @Amazon

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REBOOT World View

Successful Societies

“It is not the strongest species that survive, nor the most intelligent, 
but the most responsive to change”, Charles Darwin

To address the three challenges, that I identified in the last blog – decarbonisation and biodiversity regeneration, inclusivity and fairness, digital privacy and collective truth – it is worth understanding where we are starting from.  Looking at the components of successful countries and societies is a good place to start.  Most comparisons of countries are focused on GDP per capita, the growth of GDP per capita, and the unemployment rate.  I think we all know that there is much more to life and a society than just these factors.  Income is important but there is also health, education, happiness, safety, freedom, fulfilment and purpose.

Lyndon B. Johnson said, ”The Great Society is a place where every child can find knowledge to enrich his mind and to enlarge his talent…  It is a place where the city of man serves not only the needs of the body and the demands of commerce but the desire for beauty and the hunger for community…It is a place where men are more concerned with the quality of goals than the quantity of their goods”.  The language may not be gender appropriate for today, but the idea of what makes a society is captured. 

Yet, as we sit here and watch what is happening around us we know it is even deeper than this.  It is the ability of someone being able to go to church or to teach a class and not have any risk of being attacked. It is the ability of someone of BAME origin or any gender to have equal respect, equal opportunity and equal justice. It is the ability of a young woman to be able to travel unintimidated on public transport late at night.  It is the feeling that you are safe at home and that your job is secure even though you may different political views.  It is not just freedom of thought but also freedom of speech.  

In my analysis, I tried to look at successful countries and societies based on a simple composite ranking across a set of factors including GDP/Capita, Exports as a % of GDP, GINI coefficient, life expectancy, mean years in school, democracy index, gender inequality, homicides, and CO2 emissions per capita. On a GDP per Capita basis, the USA is 9th; and surprisingly, from a composite rank perspective, 25th out of the top 25 countries with the highest GDP per Capita (populations over 4 million people).  This jars with the American narrative we have been fed over generations; although perhaps not, when we watch with amazement the reducing presence of America globally, the polarisation of the country and its massive decline in global respect, especially in the last four years.  More specifically, this is reflected by America’s withdrawal from the Paris Climate Agreement and the World Health Organisation, the levels of social division, the growing gap between the haves and the have nots, the implicit caste system that still to some extent exists, the rapid rise of the public buying of arms and munitions through fears for their own safety and the conduct of the US Presidential Election.  Xi Jinping, Putin, Erdogan et al. are salivating as they watch the main symbol of democracy and prosperity in disarray and broadcasted around the world.  

The common thread across the top 25 countries in GDP per Capita is that they all have market economies and 23 of the 25 (excluding UAE and Kuwait) have democratic forms of government.  It is also worth noting that looking across other countries, there are no strong and progressively developing economies that don’t have market economies.

The top 10 countries (Switzerland, Norway, Sweden, Denmark, Ireland, Netherlands, Singapore, Austria, Finland and Germany) based on the composite ranking outperform as a result of having a much more balanced society.  As well as a high GDP, they have less inequality and higher levels of upward mobility, a higher life expectancy, a more educated population, a more effective democracy, better gender equality, lower homicide rates and are more environmentally friendly.  I would argue that these countries have been able to create an overall better balance between the role of the market economy and the state, and how they together contribute to the well being of their citizens.  

These top 10 countries also outperform across all measures (except CO2 emissions) vs. groups of upper middle income, lower middle income, and low income countries.  It should be no shock that these dimensions are all intertwined to create more prosperous and sustainable societies.

Definitions
Developed countries – Top 10 overall ranking – Switzerland, Norway, Sweden, Denmark, Ireland, Netherlands, Singapore, Austria, Finland, Denmark
Upper Middle Income – Selection of 5 countries – China, Turkey, Brazil, Botswana, Colombia
Lower Middle Income  – Selection of 5 countries – India, Indonesia, Nigeria, Egypt, Ghana
Low Income – Kenya, Bangladesh, Tajikistan, Rwanda, Ethiopia
Note: The data is based on simple averages across the countries

If you look at government spend as a percent of GDP across the country groupings in Figure 2-2, small government involvement in the economy is not a characteristic of advanced economies. More advanced economies do have higher rates of taxation and larger investments in the delivery of public services than less developed countries. Looking across the most advanced economies, there is no apparent clear model of the optimal involvement of a government.  Most of us intuitively believe that a well functioning market economy should create more opportunities, innovate faster, grow more quickly and therefore have more potential to create a better society across a range of dimensions. Perhaps less intuitive, is that strong delivery of public services and the creation of a well balanced society also appears to be an important contributor to economic performance.

So, what is the role of the government to help create a well functioning society.  Lee Kwan Yew, Prime Minister of Singapore from 1959 to 1990, stated, “the ultimate test of the value of a political system is whether that society establish conditions that improve the standard of living for the majority of its people.”  He always stated that the proof is in the pudding; rising incomes for the broad middle class, health, security and economic opportunity.  Today, I would argue that there should also be a concept of ‘no one left behind’ and an opportunity for all; which would be encapsulated by ensuring that there aren’t rising levels of inequality and there are increasing levels of mobility within a society.  In addition, most people would also add responsibility to ensure that society operates in a climate and environmentally sustainable way.  

Arguably the primary fuel behind the growth of the standards of living has been the development of market economies and the driving force of capitalism.  The personal rewards of taking risks and succeeding and of hard work has accelerated progress and built strong economic foundations to many economies. 

Yet, capitalism without frameworks has never worked sustainably.  Unstructured accumulation of wealth and power leads to self destruction of a free market economy, exploitation of the masses, environmental damage, and inevitably social instability.  Since the 19th century, combinations of legislation, regulations, other frameworks and tax policy have been required to manage against the creation of monopolistic powers and the retention of competitive market sectors. Legislation has been required to deal with slave and child labour and to institute the concept of minimum wages.  Rules and requlations have had to be put in place to deal with city air pollution, water pollution, land waste, environmental destruction, the erosion of the ozone layer.  Extensive regulations have also had to be put in place to control financial markets.  Finally, consumer protection has required regulations and legislation for food and drug safety, minimum product warranties, mis-selling and misuse of personal information.  

So, let’s not kid ourselves that unbridled capitalism is in a societies interest.  The real question is – what is the right combination of the freedoms of a market economy and the participation of the government.   A lighter touch is always ideally preferred; however,  in most countries we are still a long way from having the right balance.  To move in the right direction and prioritise actions it is vital that there is clarity on what the social contract is within a society.  Societies are complex systems and there are no simple solutions.  Any individual initiative by either the market economy, the government or the public will inevitably have trade-offs and shortcomings.  The UN Sustainable Development Goals illustrate this complexity in living colour with 17 areas of focus and 169 subsidiary goals!  

Looking at the most successful societies gives us insights into what they have done and where they have been successful in creating their broad based societal success.  R. James Breiding’s book “Too Small To Fail” which focused on the innovative approach of smaller successful countries provides a number of good examples.  Examples include Finland’s transformation of their education system, Singapore’s low cost-high quality inclusive healthcare system, Denmark’s leadership in renewable energy, Israel’s building of a Silicon Valley style ecosystem, and the Nordic story on leading in gender balance. These are best practice examples that give guidance on better ways to move forward.  The challenge is to move towards these best practices globally and then well beyond.  

The three challenges are steeped in the historic practices of our take-make-waste culture, the singular focus on the maximisation of short term profitability and minimally regulated use of technology and data at the expense of the citizen.  Each country sits in a different place on the continuum of progress to solving these issues locally. But we should not forget that all three challenges need to be solved also at the global level.  Isolated examples of progress against climate will not solve this existential crisis! The context for progress is also now different.  There is urgency. There is a recognised need for a unified approach to tackling these issues. There must be an accelerated development and adoption of critical technologies.  And, there is a need, and a demand from the public, for a fundamentally more purpose driven, values driven and sustainability focused approach to how we live and how our societies operate. 

In the next blog, I want to talk about a framework for solving these issues and the social contract. 

#climate change #global warming #decarbonisation #biodiversity #species extinction #regeneration #rewilding #carbon sequestration #inequality #inclusivity #fairness #privacy #digital trust #cyber #mass manipulation #truth #social contract #Too Small To Fail @James Breiding #Sustainable Development Goals #SDGs #Paris Climate Agreement #WHO #take make waste

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REBOOT World View

The Three Challenges

We have a choice!  Kneel before and be conquered or rise 
above and turn the challenges into opportunities.

In this third series of blogs, I will be exploring the three big global challenges that we need to address and the role and needs of the individual, the market economy and the state to solve them to move towards a resilient and sustainable world.  

As a backdrop to this, and with the most serious threat of climate change to achieve resilience and sustainability, we should see ourselves not as inheritors of the earth from previous generations rather as borrowers from future generations. Our burning platform is the threat to the lives of our children, our grandchildren and future generations. 

Overall you can look at where we are from two perspectives.  If you were a pessimist, you would say that even excluding what is happen to our climate and CO2 emissions our situation is disastrous. We have about 1 billion people in extreme poverty, of which most are in sub-Saharan Africa, and income and wealth inequality is growing not shrinking.  We have an exploding population that started at under 1bn people in 1800 that has reached 7.8bn today and could be as high as 11 bn by 2100.  The child mortality rate for children up to 5 years old is as high as 12% in some countries.  The life expectancy rate in Africa is about 63 years old which is dramatically below the top countries where the expectancy is over 80 years old.  About 13% of our population are illiterate, over 250 million children are out of school and learning outcomes are much lower in countries with low levels of GDP per capita.  The level of pollution and waste is continuously growing. We have been over exploiting our resources – energy and minerals.  We continue to destroy key forests especially in the Amazon for beef and soy, and in Indonesia for palm oil.  People are working too hard.  We have too many wars and too much terrorism. There is a large gender gap and real issues of racism.   And the list goes on.  

The optimist would say, yes but.  Yes, there are lot of challenges in the world; but, on almost every dimension we have made significant progress and therefore we should be confident that we can solve the issues that lie in front of us.  Despite population being 8 times larger now vs. in 1800, world GDP has grown by about 100 times.  In that same period, life expectancy has increased from about 30 years to over 80 years in many countries.  The share of population in extreme poverty has dropped from about 90% in 1820 to 44% in 1980 and is now below 10%.  The average work week was over 60 hours in the late 1800s and is now below 40 hours.  In terms of education, in 1800 about 87% of the global population were illiterate, in 1980 it was 30% and now it is only 13% of the population. School enrolment and attendance is improving every year, as well as mean years of schooling and learning outcomes. Our death rates from pollution, disease and homicides are all dropping.  Our farming yields in grain production have allowed us to cover all the needs of a growing higher income population without needing additional land since the 1960s.  We have been successfully covering off our increased consumption of fish since the 1990’s with fish farming. Our shift in use of energy use from wood to coal, to oil, to natural gas, to nuclear and now to clean energy sources has helped reduce our pollution rates per kilowatt hour.  Just since 2010, solar energy generation has increased twentyfold with wind energy generation tripling.  With technology and asset sharing we are dematerialising our spend.  Our levels of gender bias are reducing. Almost everywhere people’s lives overall are improving.  The optimist would summarise this by saying on virtually every part of our life there is a clear long term learning curve of progress and there is no reason for this to not continue. 

Although the positions look diametrically opposite giving us a perspective of two different worlds, both sets of facts are true.  It is all about which lens you look through at the world.  We have made significant progress however there is still a lot of work to do to make the world a better place.  Solving these issues is not just a matter of economics and technology.  Its complexity is like creating a beautiful symphony, it requires getting a lot of different musicians to play their instruments in an orchestrated way.  The musicians in this symphony, or actors in this play, are us as individuals, the market economy, the state and the third sector.  We should remember as individuals we are consumers, we are participants in the different sectors and if activated we are voters that drive our political systems explicitly or implicitly.  

No matter which lens’ you look at our situation, there are three big challenges in a peaceful world that need to be significantly progressed to continue our slow climb towards a better place – Shangri-la. If we don’t address them with the right urgency we could be on the slippery slope to an inferno.  We are at an inflection point!

I think of myself as an activated optimist. We can solve the problems in front of us if we have the will and commitment, because we do have the wherewithal.  To a large extent we already have all the knowledge and capabilities we need; and, for the areas we don’t the technologies and solutions are in sight.  Sitting back and naively expecting these challenges to be solved and with the right urgency is irresponsible.  Taking the view that these challenges are all someone else’s problem and they will solve it, is misconceived.  Everyone can contribute at a minimum by being more thoughtful in their consumption of food and energy, generation of waste and participation in recycling programs, and involvement in their community and society.  

So, what are the challenges.  Firstly, and with urgency, global warming and collapsing biodiversity.  These are two highly interconnected issues and effectively part of the same family of challenges.  Global warming is well documented and confirmed to be largely human driven by virtually all scientists.  It can be measured in terms of CO2 parts per million (including equivalents for GHG gases such as methane) and the short term impact can be felt in terms of average increase in temperature vs. the industrial average temperatures and the level of weather extremes.  We are now sitting at CO2 levels of about 415 ppm (part per million), with the world having fluctuated between 150 ppm and 300 ppm for over a million years.  Also, up to early 20th century we have been in a unique 12,000 year period of climate stability – seasons, weather and temperature predictability – that has provided optimal conditions for the human race to spread around the world and develop.  Slowing down climate warming also helps to significantly reduce the release of C02 and other GHGs from what will occur from melting ice, melting permafrost and warming oceans.  The land, oceans, and ice are large carbon and methane sinks that hold multiples more of these gases than currently exist in our air.  

Biodiversity comprises the genetic, species and ecosystem diversity that has developed and helped created this stable environment.  It is also what has created the environment for effective carbon sequestration in the land and sea.  We are now running at an unprecedented loss rate of flora and fauna which is affecting our food supply, carbon sequestration and environmental stability.  The current rate of diversity loss is estimated to be 100 to 1000 times the naturally occurring extinction rate.  David Attenborough effectively describes this in his latest book and documentary, “A Life on Our Planet”.  The solutions include shifting to regenerative farming, regenerating fishing stocks in the seas, and rewilding land and seas. 

The second challenge is inequality.  Inequality manifests itself at one level in terms of the extremes in distribution of income and wealth, and the shortfall in the basic necessities of life – food, shelter, clothing, health and education.  However, it also is reflected in freedoms, our access to opportunities, and our rights to safety, security and equal justice.  Unfortunately, the absolute levels of inequality are significant both within and across most countries and continue to persist.  It is no wonder that there appears to be rising social unrest across many countries, LGBTQ+ and BLM movements and many other areas of social concern. Clearly, our market economies and governments have not been effectively addressing these issues.  A focus on these issues and adjustments to how governments and market economies operate can solve this situation. There is global consensus that this is a critical issue that must now be solved.  

The third challenge is digital trust and mass manipulation.  At its base level, this is about privacy and the need for enlightenment and truth in a society.  These components are key drivers of freedom, transparency and trust.  For a period now we have seen increasing levels of theft of private information, expansive monitoring and surveillance (accelerated during this pandemic), rising populism and increasing distrust of governments.  We just have to look at the US elections, and other recent elections, to see evidence of this.  

The digital world has provided us with some amazing levels of progress and benefits; but, unfortunately it can have a dark side.  This includes the program to monitor, manipulate and control the Uighurs in China and the building of their overall digital social credit system.  The Western world has a somewhat equivalent system that gathers all forms of data to make credit evaluations of individuals; good and bad behaviours are judged on risk, reliability and trustworthiness of individuals with respect to financial transactions.  The dark side also includes the targeted delivery of fake news to drive votes in democratic elections as is shown in the movie ‘The Great Hack’ describing the use of social media in the US 2016 election and the Brexit vote, among others.  A growing number of countries have tech ops groups to drive misinformation and manipulate election outcomes among other clandestine objectives. The targeting and selection of news/fake news comes from intimate analysis of people’s use of social media.  The ease with which you can micro target the delivery of real or fake information through social media to shift people’s thinking and behaviour is growing.  The fragmentation of truth, the growth of conspiracy theories, a missing common base of facts and increasing levels of misinformation for a population will cause growing problems.  Democracy has been an essential component of social progress across the world and needs to be protected.  The value of democracy has not been helped by the shambolic display of US 2020 presidential election; thankfully, it appears that is has held up this time.   As well as an economic recession we now appear to be in a democratic recession with rising populism and the growth in power of China; 

Extensive problems are caused by  the social media companies (Facebook, Twitter, Instagram, etc.) which are driven by their advertising business models which are fed by building addictive dopamine generating behaviour for billions of users.  Their success is based on gathering every conceivable piece of information about you and combining it with AI to serve you content and create the desired outcomes/behaviour shifts that provides a return to their clients for the money they spend on the social media site.  You are the product and the information they have on you includes – every piece of content you generate, every piece of content you look at and for how long, the web of friends and people you interact with, likes, follows, comments, reactions to content you look at and is served up to you, every website you visit, all the times you are on each site, GPS coordinates, etc., etc., etc.  At the same time, there is very little control and no direct responsibility for the content they serve you, which may also be content from foreign trolls and bots, conspiracy and extremist groups, and false advertising.  The implications on the individual of social media addiction, misinformation, distortion of the real world, breach of personal privacy and freedom is significant and the accumulation of this across whole societies is extremely concerning.  

These challenges can be translated into the need to focus on three things.  Firstly, decarbonisation and biodiversity regeneration.  Secondly, inclusivity and fairness. Finally, digital privacy and collective truth.  The first two challenges are well covered off by the UN Sustainable Development Goals (SDGs).  The third challenge is recognised and looked upon with increasing concern around the world and is highlighted by the World Economic Forum as one of the key risk factors we are facing.

There are three critical issues to solve in addressing these challenges.  Firstly, ensuring there is clarity on the potential solutions for each of the challenges.  This concerns having clear solutions that will drive us to address the challenges within the required timeframes.  Inevitably, this will be a combination of existing solutions that are already in place but not pervasive enough; existing technologies that are proven but only in early stages of rollout and need to cycle through further generations of development to increase their effectiveness and drive down their cost position; and, emerging technologies and applications that are in sight to be available within the next 10 years or so. 

Secondly, to be clear on roles of the individual, the market economy, the state, and the 3rd sector to drive the implementation of solutions.  This is very much about finding the right approach that does not disrupt the ongoing innovation and development that has progressed us to where we are today.  Probably, the most critical issue is to find the right balance between the role of the state and the reliance on the market economy and capitalism.  Within the state there are the supra-national activities and then the roles of the government at the state, regional and local levels.  Within the market economy, investors, asset managers, and corporate boards and executives all have vital roles. And, there is also an important role of the individual as a member of the public, a consumer, a worker/contributor, and a voter who has a stake in the outcomes.  Finally, there is also the 3rd sector which includes charities, voluntary and community organisations, social enterprises and cooperatives, advocacy groups, think tanks, private research institutes and large philanthropic organisations.  We are seeing a growing role of philanthropic groups, such as the Gates Foundation, that are focused on large global problems including health, education, poverty and now climate change. 

Thirdly, implementing the incentives and checks and balances to ensure progress is being made to time.  The most critical challenge in this regard is to maintain a focus on the actions and time frames agreed in the 2015 Paris Climate Agreement which is to try to keep climate warming below 2 degrees centigrade and targeting 1.5 degrees.  We are already well behind the goal as we are currently trending towards a 3+ degree Celsius outcome, so there is a lot of work to get back on track.  These incentives, checks and balances need to be keeping the pressure on each set of participants to meet their responsibilities, solve how to make adjustments, and have back-ups to shortfalls. 

I think we have a pretty good idea of what we could do for ‘Decarbonisation and Biodiversity Regeneration’ and ‘Inclusivity and Fairness’.  The challenges have been understood, potential solutions have been identified and quantified, and the goals have been set within the 17 UN SDG’s and the Paris Climate Agreement.  What is missing is a well thought through program accompanied by the commitment, mobilisation, resourcing, incentivisation and monitoring that is required to ensure we meet the goals within the timeframes identified. 

‘Digital Privacy and Collective Truth’ perhaps sits as a different type of problem given that is likely viewed more at a national level and within the purview of each country’s political system; yet, it sits within the global scope of the internet and the global footprint of the large social media companies.  Privacy and the need for facts and truth are a human right, they are also vital for the effective long term development of a society; however, cyber and all its manifestations are also seen as a new form of, cross border and internal, warfare and mass manipulation.

I will be exploring in more depth, these three challenges – decarbonisation and biodiversity regeneration, inclusivity and fairness, digital privacy and collective truth – along with the roles of the individual, the market economy and the state in subsequent blogs. 

#climate change #global warming #decarbonisation #biodiversity #species extinction #regeneration #rewilding #carbon sequestration #regeneration #rewilding #inequality #inclusivity #fairness #privacy #digital trust #cyber #mass manipulation #truth @David Attenborough @Gates Foundation @Bill Gates

Categories
Covid

Post Covid

“Individual commitment to a group effort – that is what makes a team work, a company work, a society work, a civilization work”, Vince Lombardi

Blog 5 on Post Covid disruption, resilience and innovation

In earlier blogs, we have explored how this pandemic will affect consumer behaviour and how businesses and governments need to respond to build back better to create a ‘new normal’.  This final blog of the series will take a macro level view of the way forward and how a coordinated response needs to come together.  The Covid crisis does not sit on its own, it is surrounded and complicated by all the other pressures that need to be addressed simultaneously including employment and economic recovery, climate, inequality and geopolitical tensions.

Unfortunately, the end of the crisis is not just around the corner as Donald Trump likes to tout.  We are now deep again into the Covid crisis.   According to WHO as of 30 October, we are now approaching 1.2m deaths and 45m confirmed cases.  Many countries are now going back into a deeper level of lockdown.  This looks like we will continue with uncertainty for at least another few months, at which point we will have gone past a year of Covid.  The scale of this crisis dwarfs the ‘great recession’ which started in 2008.  No organisation should be passively watching what is happening; rather, the focus should be on ensuring survival and then coming out stronger for a ‘new normal’.

One of the critical things that must happen for the post-Covid period, or living with Covid period, is that all the actors necessary for a strong recovery (public, companies, government, 3rd sector) need to participate and move in the same direction.  This alignment needs to also work on a multi-lateral basis. 

Summarising from previous blogs, at the macro level there are 5 areas where there needs to be a strong aligned response to create a ‘new normal’ (Figure 5-1).

Figure 5-1

Assuming we come out of this period either learning to live with Covid in a relatively normal way or with a massive vaccination program, the most vital area of focus will be economic and employment recovery.  In the second quarter, virtually every economy had significant year on year negative growth with Spain and the UK having in excess of a 20% year on year decline.  The third quarter will be better than the second quarter, but it will still be substantially down year on year.  The ILO (International Labour Organization) at the end of June 2020 had a baseline global scenario of a 4.9% loss of working hours in this second half of 2020 which equates to an equivalent of 140 million jobs.  This assumed no second wave of Covid!  All predictions involve a massive task to restore the economy to restore employment to previous levels.  

The economic damage and loss of employment have hurt the lower income sectors of all economies the most.  This crisis has also more adversely affected women vs. men and the younger groups in employment.  Addressing this imbalance is essential as well as dealing with all the overall issues of inequality.  

What is clear from our current experience, is that there is also significant work to do in both the health and education sectors to create fit for purpose capabilities that can deal with the challenges of repeat disruptive events and move forward providing higher quality and more reliable day to day services going forward.  Across all sectors of the government, especially in health and education, digital innovation or the delivery of ‘fourth industrial revolution’ capabilities are vital.

One of the large controversial areas that has significant attention in many countries is the right of governments to impinge on constitutional rights of citizens during the Covid crisis.  These rights include, key rights of movement, ability to gather, rights of free speech, rights to gather and use information.  There have been a number of situations in several countries, particularly in Germany, where the courts have stepped in on government interventions and defined them as overreaching, unenforceable and unconstitutional.  Restoration of these rights will be a critical part of restoring social balance.  There are some more insidious things that need to be dealt with that I will cover off with respect to privacy, freedom and democracy in my next blog series on ‘The individual, the market economy and the state’.  There will also need to be a restoration of the rights and abilities of companies to do business without the restrictions that have been imposed on them.  

The final area and the largest looming challenge, that has not taken a break, is the urgent need to address climate warming and biodiversity.  Decarbonisation and recovering biodiversity must be integrated into creating a ‘new normal’ for the living with Covid or post-Covid world.

To create alignment against these factors, ideally requires 4 key components.  Multi-lateral coordination, public-private alignment, financing and frameworks and a strong focus on innovation (Figure 5-2).

Figure 5-2

When I first started writing this blog at the beginning of the year, my biggest concern regarding the climate and fairness global challenges was the lack of global coordination and response to these issues.  This was then exacerbated by the pandemic.  Since the end of the second world war, the US has shown the leadership to help coordinate and bring together the countries necessary to address key multi-lateral challenges across the full range of issues from health challenges such as HIV/Aids and Ebola, to security and nuclear threats, to the need to address the erosion of the ozone layer.  They were one of the leaders to set up the UN Nations post World War II. 

Unfortunately, under the misguided leadership of Donald Trump, the US has turned inward, moved to an “America First” win-lose focus and escalated geo-political tensions.  Let’s see what happens in the elections and the post-election response.  The first signal will be whether or not the US finalises their withdrawal from the Paris Climate Accord which was targeted for November 4.  For the sake of global progress in dealing with these urgent issues of the pandemic, climate, inequality, and the recovery of a proper democratic process in the US, let’s hope that this is the last we see of Donald Trump in the political arena!  

Multi-lateral coordination is often seen primarily as coordination between countries to drive different agendas.  The scope of these challenges will require responses well beyond just the political sphere.  It needs the involvement of the 3rd sector including of some of the great foundations, such as the Gates Foundation which is working on some of the big issues around health, education and gender equality.  And, most importantly, it needs the productive involvement of the private sector (investors and corporations) with their scale, reach, investment capacity and innovation capabilities.  After all, in the advanced economies most of the wealth lies with the private sector and this investment capability must be tapped into to help solve these challenges with urgency.   

Even deeper alignment of public and private sectors are required at the national level.  The pandemic has seen a much higher inward focus than we have seen for decades.  Local economies are inextricably linked to the health of the private sector and the support of the government, especially in these Covid times.  We should also not forget that the full multiplier effect of the role and services of the government is a substantial part of any countries employment base.  This inward focus, and also the self centered national response to the Covid crisis such as the control of PPE, suggests that governments and companies need to rethink their global supply chains and identify where there needs to be more local sourcing.  Public-private alignment and partnerships are also required in order to have any chance of achieving progress in meeting the Paris Climate Agreement targets and to make progress against inequality.  

The alignment and working together of the public and private sectors requires proactive and productive involvement of the government, key leaders in business and key influential investment groups.  It is in the interest of all parties to contribute to the ‘new normal’.  It does mean that investors and companies have to be thinking in a longer term context and from a multi-stakeholder perspective.  The good thing is that there has been a growing movement in this direction linked to climate change, inequality and the United Nations Sustainable Development Goals.  The integration also requires the convening power of groups such as the World Economic Forum, who this summer initiated such an initiative called ‘The Great Reset’.

The need for financing and improving of market frameworks is substantial and of an unseen scale since the rebuilding post the second World War.  This includes the recovery of employment and repositioning of economies to meet the needs of the future not the past.  We have already invested over 10% of annual gdp in the advanced economies to weather the pandemic storm and substantial new rules, regulations, emergency measures have been put in place to deal with the storm.  A lot more money will be required to restore economies, and there will be a need to remove the often oppressive pandemic related rules, regulations, and collection of personal information.  And, even more financing and framework adjustments are needed to make sure we can prosper and de-risk our future.

The rebooting of our way of life needs to result in a world that is inclusive, multi-stakeholder oriented, more long term focused and aligned to an environmentally sustainable world.  It also need to make a step change in its preparedness for large disruptive events – pandemics, cyber, climate related.  To this extent the frameworks (legislation, regulatory frameworks, reporting requirements, etc.) need to be fit for purpose and future oriented.  This does not have to be more layers of rules and regulations; hopefully, it will be new frameworks replacing or updating old frameworks and not the further layering of bureaucracy.

The financing requirements of the recovery and the setting of a new normal will be vast.  This is going to require the combined financing and investment power of the public and private sectors.  As well as further debt financing, governments will need to look carefully at their taxation programs to not only finance the needs for public services going forward but also to ensure that the right frameworks and incentives are in place to drive private investment in the right places with the right urgency.  In a number of countries, this would also involve a rethink about the focus of some of the current subsidies; such as agricultural subsidies in the US that are driving mono-crop farming in the US vs. regenerative farming.  

Finally, the ‘new normal’ way of life should look and feel very different to the pre-Covid normal.  The driver of achieving this is private and public innovation.  This is accelerated digitisation of the economy and all its sectors including building remote and hybrid working capabilities, hybrid medical and education delivery.  It needs to result in countries predominately driven by clean energy, that have heavily shifted to the electrification of mobility and have significantly changed through the use of AI, sensing and other digital capabilities. Companies need to shift to ‘circular’ strategies and innovation will help them achieve their Net Zero targets.  Innovation is also needed to drive large shifts in food production and consumption and the move towards regenerative farming and rewilding. Increasing carbon sequestration on land and in the oceans is a fundamental part of dealing with climate change and biodiversity.

With the convergence of all these challenges, we are fortunate that we have never been better equipped to meet them head on. We already have the technological know how to drive massive change and new technologies and capabilities are well underway to help us complete this shift.

This is a challenging but also exciting time. As Barack Obama said in a UN General Assembly in 2016, “if you had to choose any moment in history to be born, you would choose right now. The world has never been healthier, or wealthier or better educated…” Obama then called on the audience to look with optimism to the future. “Not blind optimism, but hard-earned optimism, rooted in very real progress.”

#Covid #pandemic #WHO #UN #Donald Trump #economy and employment #inclusivity and fairness #health and education #freedom and privacy #decarbonisation and biodiversity #inequality #climate change #net zero #Barack Obama # sustainable development goals #multi-lateral #public-private # frameworks and financing #innovation

Categories
Covid REBOOT

Post Covid

“Follow the leaders”, sculpture by Isaac Cordal, Berlin, Germany April 2011  
Also known as “politicians discussing climate change”

Blog 4 on Post Covid disruption, resilience and innovation.

This blog will explore the role of the government and how it needs to change to be effective in the ‘living with Covid’ or ‘post Covid’ world.  

As I have talked about in other blogs, the context to talk about the governments role is against an individual centric world, which is not a company or government centric view.  Individuals are the building blocks of societies. As depicted in Figure 4-1, from the individual in the centre there are concentric circles going out for the economy, society and the environment.  Defining the social contract between individuals and their societies, or countries, sets the parameters within which the different actors must operate and the goals they must strive to achieve. The actors are the market economy, the government, the 3rd sector, and the public themselves. For a longterm sustainable world there must also be a social contract with the earth. We must live within the resource constraints and operating system of the earth to keep it in balance – clearly an area where we are currently failing at on most fronts. Finally, this model implies that the sum of the country/societal models rolls up into an aggregated view which then ideally operates sustainably from an earth and climate viewpoint.

Figure 4-1

The role of the government (the state) that I refer to is against the the model of advanced countries, which are both democratic and market economy driven.  Against almost any set of comparative measures analysing country performance, these two factors are key descriptors of success.  It is worth noting Winston Churchill’s famous quote on democracy, “No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time”. The majority of what I discuss would apply in different forms to all countries.

To start, one of the key questions is what is government for?  Lee Kuan Yew, Prime Minister of Singapore from 1959 to 1990, stated, “the ultimate test of the value of a political system is whether that society establish conditions that improve the standard of living for the majority of its people.  He always stated that the proof is in the pudding; rising incomes for the broad middle class, health, security and economic opportunity.  Based on the United Nations Sustainable Development Goals (SDGs), I would overlay onto this the concept of social inclusiveness on core human rights.  These rights would include minimum rights related to income, shelter and food; equal access to quality health and education; equal treatment, rights and opportunity; and, freedom of speech and movement.  
 
Based on this definition, we can all see shortcomings in our own countries.  This pandemic along with other challenges, including economic, the ‘black lives matter’ and ‘me too’ movements, and the climate and environmental challenges bring to light shortcomings.  
 
It is worth looking at what the roles of the government are in the advanced countries (Figure 4-2).  Broadly, there are three different sets of activities.  The first set are core roles typically linked to the base functioning of a country.  The second set are government roles associated with the provision of public services to individuals.  The final set are roles linked to the goal of contributing to the development and stability of the economy and protection of the environment.  Not all advanced countries effectively cover all these roles.  For example, the US does not have universal healthcare and the provision of education to all children is highly imbalanced.

Figure 4-2

Effective government is complex and challenging at the best of times.  We all worry about whether or not the government is focused on the right things, whether or not they are spending their money wisely against the priorities they have set, and what is the true impact of their spend versus the rhetoric we hear.  

As I see it, and have noted before, the strategic framework that I set out for businesses is also the same framework for the government (Figure 4-3).  This is required of a system based framework.

Figure 4-3

For each role of the government, it ideally should be able to define the economic, social and environmental impact they want to achieve, the delivery model for achieving the impact and the way that it is financed fiscally and/or through debt financing.  Wouldn’t it be great to have a government report card against each of its roles so that there was clear accountability!

The pandemic has affected all parts of the governments in most countries in profound ways.  Healthcare, welfare and education systems have been deeply affected, tested and come up short in many ways.  Public transport systems usage has collapsed. Police forces and the military have been asked to perform different tasks. The levels of economic support provided and demanded are at unprecedented levels. The level of cross border cyber attacks have grown.  The need for multi-lateral coordination has increased.  And, the list goes on!

As we move, to ‘living with Covid’ and, hopefully then a post-Covid world, reverting to governments previous modus operandi will not be adequate in most countries.  There are also other large disruptive factors that have not been effectively addressed; these include, climate change, social fairness and growing geo-political tensions; and in each country, they will have their own additional lists, such as Brexit for the UK.  All of this creates a complex cocktail of challenges for governments to focus on going forward.

There are four overall areas for the government to think about (Figure 4-4).  Firstly, their role in the welfare of the public, their key constituent. This includes being ready for the next equivalent pandemic, making sure that at all times normal medical treatment can be provided, and solving how to continually improve the quality of healthcare services with an ageing population and tight financial requirements.  

There are big concerns over the quality and impact of education during Covid.  There is a lot of work to do in understanding digital education delivery and putting in capabilities for either fully remote delivery (for emergencies) or ongoing hybrid education.  The opportunity should also be taken to see how education impact can be enhanced vs. the current normal in-person education delivery.  

Restoration of freedoms. The pandemic has resulted in significant restrictions on individuals and in many cases undue use of private information. There have been losses of freedom of movement and of socialisation. There have been restrictions on the ability to work with remote working being mandated in many areas. Many countries have put in curfews in locations with high outbreaks. Last but not least, in a number of countries, individuals have had to sign up to apps so that the health authorities can track their movement. There have been requisite loss of freedoms for businesses and organistions to operate. Eliminations of these restrictions and restoration of normal rights is a critical part of moving to a new normal; no one wants a full time ‘nanny state’.

In addition, across all parts of the government, they can make a big impact by ensuring the optimum levels of employment in the supply chains related to their services; this includes, having a careful look at the role of local vs. international sourcing. 

Figure 4-4

Secondly, restoring the performance of the market economy.  Universally, the performance of the market economy is the key driver to economic growth and the improvement of the welfare of the population of a country.  One of the key roles of the government in advanced economies has been to reduce the impact of a recession and contribute to its rebound – economic smoothing.  In the post pandemic environment, this includes helping sound economic companies and sectors to recover; looking at challenged sectors and thinking how to assist them in reconfiguring into a successful relevant sector going forward; and, providing stimulus in the form of research and development, and financial support, to key strategic and growth sectors going forward – including driving the green agenda. 

Thirdly, investing in infrastructure and public goods to get them appropriately focused for impact going forward and to improve employment levels.  With a ‘new normal’ being driven off changes in consumer behaviour, the government needs to incorporate this into the specific requirements and capacities needed for each service they provide.  There is also a period of excess resources required for catch up in areas such as the health sector where diagnosis of ailments and treatments have lagged during the crisis.  

Building resilience against future disruptions (including pandemics, fires, flood, tornados, etc.) should also not be forgotten. It is very clear that a number of countries were highly unprepared for a pandemic despite everyone knowing that it was a possibility.  Just look at the preparedness of countries such as S Korea, Singapore, Japan and Germany and the superior outcomes they have achieved vs. the woeful performance of the US, UK, Spain, Belgium and many South American countries among others who were caught unprepared.  

Linked to resilience is the need to shift services to include the use of digital capabilities to improve the efficiency and effectiveness of service delivery as well as resilience.  Improved administration efficiency, digital and hybrid healthcare and education delivery are other clear areas.  Japan, under its new prime minister, Yoshihide Suga, has just announced a minister responsible for the digitisation of government services.  

The other area governments should look at is bringing forward investments that create a multiplier effect on employment and the economy.  Climate change is one of these areas, where accelerated investment is critical in any event to help countries meet their Paris Climate Agreement commitments. As with this pandemic, climate change also demands each of the governments to improve levels of global cooperation.  Global problems need global solutions.  

There are limits to investment capacity, so governments need to make tough choices on where to focus their efforts and then what combinations of the 3 Fs (frameworks, financing and fiscal) they use to stimulate the market economy.  Frameworks are regulations and other non-financial mechanisms that the governments put in place to shape markets, drive consumer behaviour, deliver public services and protect individuals and organisations.  Clearly, financing and fiscal are the financial mechanisms for funding different activities.  To the extent that the government can find ways to help the economy recover without always reverting to financing, then we are all ultimately better off.  This could be as simple as re-zoning roads to provide plenty of room for outdoor seating for cafes and restaurants to help them rebuild their businesses.  

One of the leading modern economists, Mariana Mazzucato, has been pushing to create/recreate dynamic public-private interaction and the creation of mission oriented industrial strategies.  She clearly identifies that the state is instrumental in many parts of our economy, including helping to stabilise and grow the economy, yet the spoils of their involvement is never appropriately compensated vs. the risk. Virtually all the upside where the government is assisting accrues to businesses and their shareholders despite the public (through taxes) taking the risk.  Whether the government is helping businesses to recover, helping sectors to reconfigure or stimulating the growth of new sectors, through R&D or investment, the government should be looking for a fair reward structure for their successful involvement.  This should help reduce a governments debt burden, and the consequent public tax burden, over time.  It should also help drive improved corporate responsibility.

In summary, for each government this is a complex equation of where to spend and how much.  The three categories of potential spend are addressing fundamental shortfalls in public services, providing market economy recovery and growth support, and bringing forward government programs that will create a job multiplier effect.   Some example areas are shown in Figure 4-5.

Figure 4-5

Integral to the development of a ‘new normal’ is also a society aligned with accelerating progress against our critical environmental challenges of addressing climate change and biodiversity. Clear focused programs on these must be included. As an example see Figure 4-6.

Figure 4-6

Behind all these factors and potential initiatives to restore and progress economies, is the simple truth that uncertainty is the enemy of progress. Having clarity on government actions and programs, confidence that they won’t unsuspectingly change and some forms of longer term certainty that individuals and the market economy can plan on and rely on is critical.  This gives individuals and companies confidence, horizons they can plan against, and an improved ability to raise further financing.

#Covid 19 #pandemic #post Covid #strategy #disruption #resilience #innovation #WHO #McKinsey #Accenture #EY #UN SDGs #WEF #blacklivesmatter #metoo #DoughnutEconomics @Kate Raworth @Mariana Mazzucato #biodiversity #remote working #strategic framework #climate change #government role #social contract #public #infrastructure #fiscal policy #monetary policy

Categories
Covid REBOOT

Post Covid

“Take these broken wings and learn to fly”, Paul McCartney

Blog 3 on Post Covid disruption, resilience and innovation.

In the last blog, we talked about changes to consumer behaviour as a result of our current and ongoing Covid experience.  Whether we end up living with Covid or are living in a post Covid vaccinated world, consumer behaviour will have changed.  

Six areas of likely change were identified, see Figure 3-1 and described in more detail in Blog 2, although the scale of these changes are not clear and will vary across countries and customer segments within a country.

Figure 3-1

The drivers of these changes from the Covid experience to date are:

  • Structural responses by businesses to Covid.  For example, policy shifts by companies towards remote working will make changes to consumer spending and ripple through to the retail and service sector around offices.  
  • Structural responses by governments. For example, rules and regulations on crowds and distancing, or adjustments related to public transport and other types of infrastructure.
  • Behavioural changes linked to actual and perceived health risks of consumers
  • Behavioural changes linked to economic changes and uncertainties to large sets of consumers 
  • Changes in the attitudes of sets of people with respect to buying locally as a response to seeing local economic distress in combination with a sense of social responsibility and increased climate change concerns
  • Responses by the government to address potential future health challenges and alleviate the economic recession we have entered.  As an example, this would include accelerated investment in moving a country towards ‘greening’ the economy and society.   
  • The increased rate of change of adoption of existing technology applications and introduction of new technology applications

For business, to continue to deal with the Covid crisis, emerge stronger and be on top of these changes there are 6 aspects to running a business that should be top of mind (Figure 3-2).  These components are valid for both consumer and B2B businesses.

Figure 3-2

Before we explore the six areas, it is vital that a company does not lose sight of its strategy and what it is trying to accomplish.  In my previous series of business strategy, I introduced what I believe is the right strategic framework for the future (Figure 3-3).  Having a business purpose that is focused on delivering both a return to investors and a combination of economic, social and environmental impact, is what captures hearts and minds.  Engaging the hearts and minds of employees, participants in your supply chain and customers contributes to higher levels of performance and resilience in challenging times.  A strategy is also a guiding light around which the changes you need to make and initiatives you need to deliver sit.  You want to build a strong business for the medium-long term not just survive the short term!

Figure 3-3

Let’s now explore each of the six activities to help identify opportunities to move forward more effectively.  Six months into Covid and I am sure that many businesses are well on the way to making changes and adjusting to a ‘new normal’.  I hope some of these factors will add to your plans.  

Starting with financial stability and resilience, there are 3 areas of particular focus that I want to address (Figure 3-4).

Figure 3-4

Cash is king – For companies that have real concerns about survival, the most important first thing to do is to switch from a prime focus on profitability to a core focus on cash.  This combines the focus on revenue and costs with the timing of receipts and payments.  Structurally changing the amount of working capital needed in the business can often free up the cash needed to get through difficult times.  It also helps a company look in more detail on the specifics of what they are spending their money on, making better decisions on the amount and timing of product purchases for inventory, and the need for new assets and how they might be paid for, such as a rent or a lease vs. outright purchase. 

The classic approach to this is to do a 13 week rolling cashflow plus 9 rolling months (12 months in total).  To get really focused and extract the most value from this approach the cashflow should be updated on a weekly basis or at least every 2 weeks. 

Finance for resilience –  If your cash position is not strong and you cannot cover the business challenges through an extended period of time then finding new financing should be a priority.  Although in general equity is preferable to debt in times of high uncertainty, if debt is the only answer then you should be looking at increasing your cash position to give plenty of headroom.  Remember a bird in the hand is worth more than two in the bush.  Banks are notorious for lending you an umbrella when it is sunny and taking it away when it starts to rain; so, be very focused on both the terms of repayment and any covenants on the debt.  Before locking in any agreements, be sure there is understanding on the implications of what has been agreed against different challenging scenarios.

If equity is an option, then in general raise a large amount so that there is headroom for a long time and you can ride through potential challenging fundraising times at a later date.  It will also allow you to rapidly take advantage of future challenges your competitors may have or aggressively pursue new opportunities.  Having too much cash on the balance sheet in the current times is a high class problem!  

Scenario Plan – In these times of pandemic disruption, we are now in a non-linear period of change.  Extrapolating historic revenue trends is an insufficient approach to financial planning.  Building alternative scenarios is the only way. Scenarios should particularly focus on identifying where you might hit critical performance/survival points and what contingency plans need to be in place and triggered as you move towards these points. Creating scenarios over a broad range of outcomes is an essential part of being able to rapidly react to different performance paths, because time is money.

Customer focus is the next area to look at (Figure 3-5) as having a clear approach for efficiently optimising your revenues and contribution is mission critical.

Figure 3-5

Customers First – If the company has been suffering during the pandemic and the challenge is to get back towards old levels of revenues as soon as possible then getting the most cost efficient approach to recovering revenues is what you are trying to accomplish. The simple way to think of customers is that there are three core categorisations to think about – customers, dormant customers and prospects.  Customers are those that you currently consider to be ongoing customers and would often be defined as having done business with in the last 12 months. Dormant customers are those that were former customers but are now inactive; consistent with the definition above of customers, these would be customers who have been inactive for at least 12 months.  Prospects are potential customers you have never done business with before.  

The economics of revenue generation are very different by each of the groups with existing customers being by far the best economically and prospects being the worst.  It is true to say that the best way to grow revenues is by first optimising the retention and growth of existing customers.  Having to replace customers to stand still is not efficient.  Mass product marketing, and not using customer data, will tend to be far less efficient for many businesses. 

The likely customer response rates to sales and marketing initiatives are driven by 6 core variables to start with (Figure 3-6).  As a company builds experience with targeting, modelling response rates and measuring real results, there should be continuous refinement of the variables.  

Figure 3-6

Recency, frequency and monetary value (RFM) looks at the currency and loyalty of a customer.  A recent high volume and long term high value customer is the most likely customer to buy from you.  For high value – high potential response customers you should be willing to invest more to get them to buy product.  For example, you may do a telephone call to high value customers; but, it would be prohibitively expensive to cold call low value dormant customers.

For marketing specific products, you also want to consider channel affinity, timing and product affinity.  Channel affinity is the channels of communication and sales channels that have worked in the past with a specific customer.  Timing is critical to consider as for example, a product may be seasonal or have specific renewal timing (eg. insurance products).  Product affinity is the definition of how close the product you are trying to sell is to historic products that the customer has bought.  The closer the affinity, the higher the likely response rates. 

For both existing customers and dormant customers personalisation of messaging, offers and promotions will drive up response rates.  To drive up the sales value of customers from previous levels you ideally want to know what ‘share of wallet’ you have vs. their full potential with you.  This can also be done by evaluating whether low value customers ‘look alike’ with some high value spenders.  If you have emails for all customers, subject to GDRP restrictions, then this is an essential low cost communications channel for both existing customers and dormant customers; however, this does not necessarily mean that you should not spend some money to engage in additional ways with high value customers.

For new customers, or prospects, different sales and marketing activities are required.  The choice of approach should be linked to the historic cost of customer acquisition and subsequent customer profitability of different sets of activities.  It may well be that mass marketing is more efficient than specific targeted marketing at specific prospect segments.  If you are doing targeted marketing, then it is valuable to try and profile the characteristics of potential new customers vs. the characteristics of current high value customers (‘look alike’ modelling).

If you have been doing this for some time, with well structured test and control techniques, then you should already be well down the road to efficiently rebuilding your revenues. 

Reward Loyalty – In this context, this is about looking for ways to lock in revenue streams for an extended period of time and/or generate pre-purchase revenues to enhance the cashflow and the amount and reliability of future revenue streams.  This is effectively looking at alternative business models that will improve your cashflows.  You can look at Blog 9 in my Business Strategy series to look at this in more depth.  One example of this would be to provide discounts/benefits for minimum levels of pre-payment for future purchases.  For example, the Starbucks card generates upfront cash for subsequent use by customers.  An alternative example would be to convert an upfront payment to a locked in minimum period of monthly payments.  A final example would be to offer a full year’s subscription to a service at a discounted upfront payment vs. the sum of 12 monthly payments.  These all can drive improved and/or more reliable cashflows and potentially improve customer retention rates and average revenues per customer.  

Listen to Customers – When your business is going non-linear through dramatic shifts in consumer behaviour change – buying habits, use of on-line, and a changing mix of how your customers are spending –  then in depth listening to customers on a continuous basis is essential to be able to catch and react to changes as soon as possible.  You should use a combination of surveys and in depth discussions to really understand what is driving the changes.  The conversations will help you to frame potential changes/solutions to these behavioural changes as well as making your communications more contextually relevant and effective.

Innovate to Retain – With large consumer behavioural changes, more marketing and better messaging alone will not be enough.  To retain and grow revenues, innovation across a number of dimensions may well be necessary – channels to market, pricing, packaging, product, services and promotion.  Fast effective innovation needs time and attention, robust testing and evaluation, and resource commitment; it should not be an add on to teams that already have a full workload.  If you need new skills sets that are not available internally, outsource to make sure that you start well down the experience curve; this is especially important if for the first time you are moving to on-line selling and marketing.  

Remote working is a vital capability for flexibility and to be able to always operate.  The pandemic has highlighted this.  No company can afford to be without this capability.  I have identified 3 key areas to highlight (Figure 3-7).  

Figure 3-7

Shift to Hybrid/Remote Working – Remote or hybrid working is not new.  Since the beginning of the digital era, the shift started with sales teams, outsourcing services and online selling.   Many companies realised that if you move to flexible workspace and allowed some remote work that you only need about 65% of the desks and generate huge savings on office space.  The pandemic has made companies realise that remote working is also a resilience capability.  

The pandemic has also helped companies test which activities work effectively remotely and which ones don’t. In general, it seems that all types of creative work can be much more effective in person and socialisation between people is an integral part of building effective working relationships.  Of course, from a human perspective there are lots of other dimensions that need to be evaluated from the convenience and saving of commuting time, to the inherent need of all of us for socialisation and to the higher challenges of the lower income employees who have less space at home to be able to have a productive working space.  

If employees need to work from home then the company needs to ensure that they are equipped to do so with mobile phone, portable computers and screens, adequate internet etc. and, if necessary, adequate space to work.  Behind these capabilities for individuals is often the need for a set of team based tools that share calendars, improve productivity and communications, track output and ensure security of data. Solving the ecosystem of how the business works effectively remotely is critical.  

Move to the Cloud and SAAS – The cloud and SAAS (software a a service) are great enablers for businesses today.  They are the core enablers of enterprise wide hybrid and remote working.  You can reduce the need for large tech teams to run your IT infrastructure and variabilise your costs and as we well as adding remote capabilities.  Why not allow experts at storage and retrieval, and experts with intensive sector wide applications worry about the applications for non differentiating parts of your businesss in a way that you could not afford to do.  

Almost all large companies, that have not already switched, will have a ‘not invented here’ issue with their tech teams and be defending their realm.  In a few cases, their in-house systems may drive competitive advantages; but, in most cases it is the fear of change and the idea of technical debt arresting progress rather than the potential benefits of new applications.  Do you really think that internally you can build a better cloud at a lower full cost than Amazon, Microsoft, Google and IBM?  And, do you think that you can build a better set of customer facing application than Salesforce.com for example?  Have a look at their development budgets that you are competing against.  Many of these cloud and SAAS applications have already built integrations between them, so the prime focus of attention is the setup, and in some cases customisation, of the solutions to get the full business benefits.

Test and Learn – Going remote may sound easy and it’s just about technology; however, this is all about trying the create the right set up to optimise the interaction of people within the business and with other key third parties. The goal should be to create a new level of performance and not just replicate the in-office approach to work.  The measures of success aren’t just on short term performance and productivity measures, the new way of working must also outperform in attracting and retaining the best employees.  The company needs to test and learn to find the right people processes and the right tools.  The processes need to include the right daily interactions, both task and social oriented, and involve the right tools (eg. Slack) for communicating and interacting.  

People, process, and cost efficiency need close scrutiny when a business takes a revenue hit and the dynamics of doing business change. It is essential to see how to offset the revenue hit and shift to the right capabilities going forward.  Figure 3-8 identifies three areas to cover off.

Figure 3-8

It is easy to ‘slash and burn’ costs and forget about everything else if you are in fear of failing; however, it is useful to be clear on why the company was successful up to the time of the pandemic.  Inevitably, it included a combination of the people, the culture and the processes, among other things, that got you there.  Don’t forget, it is many of the current components that will also help you to rebound.  I also encourage you to consider how to minimise the social cost you may generate by how you address the short term challenges.  We all need to face up to the economic, social and environmental challenges around us and do our part.  

Share the Pain – Philosophically and practically, each company lives within an ecosystem.  That ecosystem involves the company, and all the parts within that organism, and all the other interrelated companies in the supply chain and support sectors.  At the extreme for example, if you are running a ‘just in time’ manufacturing operation, then you are completely reliant on the supply side from raw materials to components moving through the supply chain to time; and, if anything disrupts this timing then your business suffers.  Against this context of an ecosystem, then any cost reduction activities needs to also consider the implications across the performance of the ecosystem.  

When you are looking at cost reduction opportunities, you need to look at all the places that costs can either be taken out, reduced or renegotiated.  Depending on how you approach this you can win or lose friends in this process.  Maintaining trust, respect and loyalty from those in the business and those you do business with is a key part of the decision making.  This is where ‘sharing the pain’ comes in.  If people see that the pain is being shared and thoughtfully distributed rather than inflicted on an easy victim you will often be better off.  The ruthless exercise of power over a weaker but important supplier does not translate to long term loyalty and reliability; however, displaying an understanding of their situation and trying to solve the problem in a constructive way does.  

In the same way, with the potentially devastating impact on certain people from the loss of employment, agreeing that everyone will take a short term pay cut to preserve employment and allow the company to rebound more effectively may be a better answer to dismissals.  Shared pay cuts should ideally come in the form of higher pay cuts to the higher paid, or at least the executive teams, whose lives are less affected – this is leadership and an understanding of social impact!

Understand Mission Critical – As businesses evolve in good economic times, it is easy to be less focused on understanding the full relationship of incurring additional costs and the related benefits to revenue and profits.  There tends to be a growing pool of ‘nice to have’ vs. ‘need to have’ activities.  

In challenging times, getting back to the basics is essential.  Start by being very clear on what is critical to attracting and retaining customers, and ideally growing the revenue per customer.  With this in mind, then the best way to do this, with the least negative impact, is through process mapping to simplify, speed up, reduce waste, reduce process breakdowns and cut costs.  This is the constructive approach to cost cutting.

Leverage with Technology – Across all processes, it is worth looking at where technology could fit and what SAAS (software as a service) applications could be used.  The goal is to explore reductions in time, improvements in quality, and reductions in human involvement.  There is every reason to believe that there are opportunities in all functional areas.  They can range from scanning invoices and automating entry into accounting systems, chatbots and customer self service opportunities, tools for customer relationship management and automated marketing, project management software, HR applications, etc.  Many people will be surprised at the extent of opportunities to automate and improve processes with technology.

Customer and business analytics are most valuable in times of change. They should be embedded in how a company works.  There is a lot of talk about KPI’s, balanced scorecards and customer analytics; however, too many companies fall short of what is really required.  Every year, the ability to generate or collect information so that a business can be run on facts improves.  The faster you receive information the faster you can make informed decisions.  There are four key topics (Figure 3-9) to cover off that really make the difference.

Figure 3-9

KPI Driven – Over time I have seen too many companies at the executive level over focus on financial based data; yet, the financial data is the outcome of customer, operational, process, and HR based activities.  To take decisions, key information needs to be linked to the root cause of what needs to be managed.  Building effective dashboards is not easy but it is invaluable.  Cascading down KPI’s is what helps create the linkages between decisions at the top and impact at the coal face.  

Continuous Market Analysis – In challenging and uncertain times, being on top of shifts in consumption and customer behaviour and then being able to react is essential.  Being able to discern seasonal variations and general volatility from new trends in consumption is the critical skill.  This is often helped by active discussions and feedback from customers and prospects.

Integrate with Rapid Decision Cycles – Analysis without consequent decision making has little value.  As an example, in the retail fashion sector in the early 1990s many product and sourcing decisions were made typically at least 12 months before the start of the season.  Then Gap innovated to move to 6 week cycles of decision making with the finalising of product and volume decisions much closer to the period; and now, Zara can turn around product within 2 weeks to take advantage of in season trends.  This type of capability transforms the performance of a business by ensuring the business is not laden with excess inventory, minimising lost sales by taking advantage of high selling items and adding new high selling product in season.  Think about the analogies to this in your business.  

Speed, agility and innovation is what underpins a company’s ability to react in difficult times and succeed over time. The four components to examine are set out in Figure 3-10. In technology companies, we continuously witness updates in applications and the developments of whole new versions of software and hardware.  With Apple, we are on iPhone 11, Apple Watch Series 6, and the Mac OS Catalina soon to be Big Sur. An ability to continuously raise the bar on what you deliver to customers keeps competitors chasing you rather than the other way round. Businesses in all sectors need these capabilities.

Figure 3-10

Shift to Agile Management – Agile project management is the most common way that companies undertake software development.  It is an iterative development methodology of breaking down development into discrete sets of deliverables, often with a time frame of about 2 weeks, that rapidly speed up development.  It also more often than not, does not require the full definition of the end product; rather, that becomes clearer as the team goes through each cycle and incorporates continuous learning related to the end product or service.  

The concept of running a whole business also on rapid cycles with clearly defined deliverables is gaining steam.  It creates a winning mindset and approach to the business by a management team that is so much more powerful than a standard monthly routine.  In some businesses, such as certain retail sectors, it may be better to run on weekly cycles in certain parts of the business.  

Fact based decision making – There is no reason to make decisions without facts anymore.  That is not to say that you do not also overlay judgements based on analysis of the future.  Facts include both internal information and external information (customer, market, competitor, etc.).  The critical point to focus on is that agile management requires very current feedback; and in times of great change, such as these, external dynamics can shift very quickly.  Just as in retail, you need to be able to identify the hot new products, brands, and shifts in purchasing focus as early as possible.  Trying to save money by using less current external information is usually a ‘false economy’.

Stand Alone Innovation Team –  In my experience, from running many companies, effective innovation can only be achieved with proper resource dedication and commitment.  Without resourcing away from the black hole of day to day management and challenges, the speed of innovation is inevitably compromised. Innovation needs to be seen as mission critical as day to day performance.

Learning Curve Driven – ‘Fail fast’ is the common phrase for companies that are truly learning curve driven.  The faster you learn the quicker you can go down the learning curve.  This is an essential part of smaller companies outperforming larger slower companies.  To effectively learn and push the envelope further and faster culturally, it must be acceptable to fail and not a negative on a person’s performance.

Leadership sits on top of the drive to change, the sets of market initiatives you pursue, and the new capabilities you put in place.  The key mindset is to see the unsettling of markets and operations as an opportunity.  Leadership needs to think like an attacker not and incumbent.  They need to be thinking about new opportunities, new markets, new ways of doing things, new applications of technology and leading with empathy and inclusion.  For most people, change is uncomfortable; however, for leadership it needs to become a way of life and a challenge you look forward to conquer.

The next blog, will explore the implications for governments of the post Covid, or living with Covid world.  

#Covid 19 #pandemic #post Covid #strategy #disruption #resilience #innovation #consumer segmentation #consumer behaviour #GenZ #millenials #baby boomers #WHO #sustainable development goals #McKinsey #Accenture #EY #UN SDGs #WEF #blacklivesmatter #metoo #DoughnutEconomics @Kate Raworth #agile #test and learn #cloud #SAAS #process efficiency #CRM #customer retention #remote working #strategic framework #climate change

Categories
Covid REBOOT

Post Covid

‘Learn the past, watch the present, and create the future”,
Jess Conrad

Blog 2 on Post Covid disruption, resilience and innovation.

Covid 19 is raising lots of questions about the future.  The most prescient questions are related to solving this health crisis. Most importantly, is when will there be a vaccine ready for use and/or how can we live with Covid 19 and have a relatively normal way of life without economic disruption.  The second set of questions relate to what life might look like when it gets more normalised, and in what way will this Covid experience have changed our environment and changed us to create a ‘new normal’.  The third set of questions are related to how companies need to adjust what they are doing to manage through the crisis and be successful going forward. Finally, how must the government adjust their priorities to help the people and the economy recover and be ready to effectively face the challenges going forward.  

The debate is well underway and will continue for many years on how each country has dealt with the crisis, what was successful, what was not and what are the critical lessons that we must address to be more effective in future pandemic situations.  At the end of the day each country has chosen a path heavily based on ‘science’, as they claim, and this had resulted in a mix of responses in terms of the level of lockdown, the rate and approach to opening up, the response to new outbreaks, the use of masks and highly variable economic responses.  Clearly, the science is not clear and nor are the appropriate responses health wise, economically or politically.  We can only hope that through the diversity of responses that we will take advantage of this, look at the facts, compare the outcomes from multiple perspectives and do a dramatically better job next time.

So how have our lives changed and what are the components of a ‘new normal’ way of life for living with Covid or post Covid?

To think about consumer behaviour, it is useful to start by looking generally at consumer segmentation and then we can explore how behaviour might change against those segmentations as a result of the current Covid experience.  

As an initial context, it is worth quickly visiting what components make up and drive consumer segmentation.  There are four categories of factors that drive consumption and buying behaviour (Figure 2-1) – geographics, demographics, psychographics, behavioural. From analysing customer behaviour with data on these factors, clusters of common behaviours can be identified and then used to target and market to the relevant customers for a consumer business.  There are equivalent techniques that are used in business to business.  

Figure 2-1

If you just look at these factors and reflect on your Covid experience you will see that there are inevitable changes to consumer behaviour post Covid.  There will have been changes in a broad cross section of areas including:

  • the income of many people 
  • the potential need to look at alternative occupations
  • changes in attitudes to health and economic risk
  • adjustments to lifestyle priorities 
  • changes to how you work and the level of commuting you do
  • changes to where and how you buy for different product categories, eg. in-store vs. on-line

Many of these changes are not temporary adjustments where customers will fully revert to previous behaviour.  To explore this, it is useful to start with customer segmentation from two perspectives. Firstly, understanding basic generational differences and secondly having a look at customer segmentation based on combinations of the four dimensions that generate understandable clusters of consumers. I will then overlay the Covid experience and then talk about post Covid behaviour.

Starting with generational segmentation, McKinsey has put together a simple comparison of generational differences (Figure 2-2).  Each generation has been brought up in a different contextual environment – political, economic, social, environmental and technological.  That new context added to the specific context of our upbringing drives our behaviour and consumption patterns all other things being equal.  Clearly, this representation in Figure 2-2 is very much a ‘Western’ or ‘industrialised’ world representation and applies less so to the developing world which live in very different socio-economic and political contexts.

Figure 2-3

Each of the generations are different in size and at any point in time have very different levels of overall consumption.  Gen Z, although the smallest economic segment, are critical to understand as they are the generation most in tune with the current world.  They are influencers that affect the direction of travel of the other segments with the closest segment, the Millennials, that will shift the most from their influence.  The retired generation will shift the least.  

Key components of Gen Z behaviour include:

  • Adoption of technology – including the extensive level of home shopping and use of social networks. They are the first generation of truly digital natives.
  • Social conscience – ‘Me Too’, ‘Black Lives Matter’, fair trade, ethical sourcing
  • More experience oriented vs. product oriented 
  • Responsibility to the planet

Obviously, there are many other factors that affect consumer behaviour and as a result everyone in a generation does not behave in the same way.  There are many different sources of analysis from all the consulting firms on how consumers segment in general; however, I chosen to pick some analysis that McKinsey has done that identifies 7 segments that group into the three themes of value, quality and image (Figure 2-3).  

Figure 2-3

These segments mix attitudes with the practical links to individual situations including income/affluence, education and life stage. Within each segment here will be mixes of all generations; but, each generation will mix differently across the segments.   The mix of these segments will also vary across countries.  

Many companies will have done their own analysis and defined segments in a way that is relevant to their business and helps them successfully attract and acquire new customers.   The more detailed and specific your understanding of your customers, the better you will be equipped to rapidly respond to changes in behaviour and be on the winning side of changes.  

Let’s now look at the impact of Covid.  For most of us there has been a big change in our behaviour, for many there has been a change in the current economics or future prospects of their household and for everyone they have had to take views (implicitly or explicitly) on their risk attitudes towards health and economic uncertainty (See Figure 2-4).  These changes effectively add overlays onto any segmentation which will cause changes in clusters around key attributes and therefore create a new segmentation of customers.

Figure 2-4

Behaviourally, there has been a massive shift to on-line working, where possible, and on-line education that has been decided by others.  In addition, there have been requirements to stay at home, limit time outside, and curb social get togethers.  As a result, most people have adapted how they live in terms of solving how to work at home, being home educated, significantly increasing their at home eating and home fitness, etc.   They have also gained time from the reduction in commuting time and other transportation time.   The sum of these changes have driven new behaviours including home cooking, home fitness, remote shopping, on-line entertainment and on-line socialisation.  These new behaviours are in turn also linked to a reprioritisation of where and how we spend our money and of course linked to changes in economic circumstances.    

For most of us, we have now reached the 6 month level of changed behaviours and we are not back to a normal life with no restrictions, such as a return to commuting every day, in-person education, high levels of socialisation, visiting the gym and taking holidays in other countries without lockdown requirements on return.  Shops, restaurants, offices, transportations systems etc. have not been adapted fully to accommodate a full return to our previous lives. 

Economically, levels of unemployment have grown dramatically, and with those countries with furlough schemes growing levels of unemployment have to a large extent just been delayed.   The increased unemployment is not spread evenly across the market; rather, it has hit the high street, the leisure and entertainment sector, the travel and tourism sector and parts of the health sector. It has also disproportionately affected women and the young.  With uncertainty on the recovery of many businesses, especially in these sectors, many consumers face a period of economic uncertainty.

This overall experience has created heightened levels of both health and economic trauma.  The health trauma will tend to be higher with the elder populations and those at risk.  Although, there is large range of impact by country (using deaths per million as a measure, Figure 2-5), the trauma has also come from the level of measures imposed on a population by the government and the fear based media coverage on Covid.  The perceived health risk is almost certainly higher than the actual risk on average; however, perception is reality for most people.  

Figure 2-5

The economic trauma, which leads to uncertainty, has been pervasive with effectively all of the top 25 countries, based on GDP per Capita, seeing unprecedented declines in their second quarter year on year GDP growth (Figure 2-6).  The economic declines are not necessarily linked to the health outcome of the Covid crisis; rather, they are much more related to the prevention and lock down steps taken by governments.   

Figure 2-6

Although many countries are trying to move back towards normal, this is a slow process.  There is pressure to maintain certain behaviours such as distancing; and, on and off lock downs are regular occurrences in countries as new pockets of Covid appear.  We are a long way from being post Covid as there is no clarity on a vaccine, and therefore no clarity on the timing of the distribution of a vaccine.  Finally, we are entering the flu season with a likely increased risk of further Covid challenges.  

Moving on to how to think about changes in consumer behaviour going forward which will either be in a ‘living with Covid’ or a ‘post Covid’ world.  The question is not will behaviours change but rather to what extent will they change.  There are already clear structural drivers of change which include a significant economic impact to a large number of people from much higher unemployment in most countries and large permanent adjustments to working arrangements with many companies. 

Analytically, consumer behaviour in a product or service sector or with a particular company are highly predictable by looking at four core variables – recency, frequency, monetary value and channel affinity.  Here are the variable definitions:

  • Recency – time since last purchase
  • Frequency – number of purchases made over time
  • Monetary value – total spend
  • Channel affinity – preferred channel for purchases, which shops and in-person vs. on-line

Intuitively, these variables make sense as people to a large extent are habitual.  They have routines, they repeat buy products or experiences they like, they become brand loyal as they build trust and become emotional engaged, and their choice of where to buy from is linked to their routines and convenience.  On the flip side of these behaviours, is a general reluctance for many people to try something new, to buy in a different way, to try a different brand, and if you are in routines you expose yourself less to alternative products or choices.  Clearly, there will be segments of people where these generalisations are less relevant; however, they are very relevant when looking at broad shifts in behaviour across segments of consumers. 

The experience of the Covid lockdown has impacted all these variables.  Restrictions on what we can do, where we can buy from and how we work coupled with health and economic uncertainty has significantly changed the behaviour of many people.  As with all behavioural changes they can be positive, in total or for parts of the experience, or negative.  The key to long term behavioural change is whether or not the Covid induced behavioural changes have provided rational or emotional benefits going forward.  In the case of permanent structural changes (eg. your company moves to part-time remote work vs. all in person), the change in behaviour will naturally become the norm , with benefits being realised in different ways such as cost, time, convenience and performance.  

The other part of behavioural change is to what extent the new valued behaviours have repeated and become habitual.  Going back to the metrics of recency, frequency, monetisation and channel affinity, the longer the period of new behaviours being experienced, the stickier and more long lasting they will become.

So, what does a review of available Covid related consumer research into behaviour change from either structural changes to markets, health and economic stresses and uncertainties, or new personal preferences indicate on potential behaviour change going forward – see the 6 themes identified in Figure 2-7.

On a personal level, what has happened for most people, perhaps excluding some Gen Z and some of the aged, is the increased pervasiveness and use of technology within our lives.  Technology significantly impacts all of the 6 areas identified above.  Many consumers have to some extent been forced to increase the rate of their adoption of technology across their lives.  Consumer who only bought food in person are now doing a weekly shop online.  Workers at home are more comprehensively using technologies (e.g. Zoom) for meetings and interactions and they are then using the same technologies for remote socialisation.  Home fitness apps are being used as gyms have been closed.  Core education is being conducted remotely. Higher levels of use of on-screen interactive games are being used as well as the use of services such as Netflix and Amazon Prime.  Large numbers of consumers have now overcome their reluctance to use technology and experienced its benefits.  

Looking now at each of the 6 themes:

‘Your home is your fortress’ – This is a place of safety in times of health risk.  We should expect there is now a higher appreciation of home time and a clearer definition of what people want from their homes.  Consumers have been increasing their investments in the technologies to be able to work, play and be educated at home.  There are also some trends emerging of disproportionate DIY growth and I would expect that overtime there may well be higher levels of purchasing of other in-home products.

‘Work-play rebalance’  – With remote working now and clear trends towards more remote working going forward, this will free up significant amounts of commuting time for alternative use, e.g. fitness, entertainment, home cooking, etc.

‘Redefine leisure, entertainment and travel’ – Almost certainly there will be changes in the consumption mix of leisure, entertainment and travel; but how it plays out is very hard to predict.  During lockdown and the subsequent restrictions there have been major short-term changes linked to home entertainment, reduction of the use of restaurants and bars, and minimisation of, or closer to home, travelling.

‘Shifts in consumption’ – Driven initially by lockdown there has a been a massive shift in consumption to on-line purchasing.  A significant portion of this will have gone through Amazon who, in many countries, is involved in about 50% of all home shopping.  It can be expected that not all of this will revert back to in person shopping.  In a McKinsey study (“Understanding and shaping consumer behavior in the next normal.”, McKinsey & Company, July 2020) on consumers who tried grocery delivery for the first time during the Covid 19 crisis, more than 80 percent say they were satisfied with the ease and safety of the experience; 70 percent even found it enjoyable and 40 percent said they intended to continue to get their groceries delivered after the crisis.  In many countries, such as the UK, for a period of time almost all clothing stores were closed and so there was also a dramatic shift to on-line purchasing of this product category.

Consumers have now bought products from new stores (on-line and in-person) so loyalties will have started to change, and new loyalties/habits will have started to occur after 6 months of the Covid 19 crisis.  With hygiene, or health safety, now also being part of the purchasing decision, traditional large and crowded stores will tend be lower in the consumer choice of where to shop.  In addition, with on-line purchasing, especially through Amazon, a traditional limited choice in a store has been replaced by massive selection options, and research is indicating that this is affecting historic brand loyalties.  Another factor that will affect historic brand loyalty are the Covid induced economic stresses and uncertainty which is driving swathes of consumers towards more cost-value product selection.  Finally, the combination of visible local economic turmoil coupled with growing climate and social responsibility concerns is expected to accelerate a shift to local produce and green and ethical products.  

‘Hybrid Education’ – Almost all children, with involvement of their parents, and university students have been forced to try some form of on-line education.  Some of it will have been successful and some unsuccessful; nevertheless, it will have built further comfort with the use of technology for education.  Many will have looked beyond their schools to supplement their learning and tried what has been available on-line for a number of years and provides a more advanced and appropriate technology based educational experience.  For K-12 (Kindergarten to grade 12) education they may have tried the Khan Academy or for university or further education they may have tried edX, Coursera, or Udacity. New and improved on-line experiences are arriving on the internet continuously and will challenge poor face to face experiences or augment this traditional learning mode.  Enhancing its continued adoption will be the low cost or free use access to these quality educational applications.  

‘Hybrid and holistic health’ – This pandemic has brought a strong awareness to our health.  The linkage of Covid 19 risks to those with ongoing health problems (e.g. heart, diabetes, asthma, etc.) has brought to light the importance of wellness.  There has been dramatically increased use of digital wellness apps (yoga, circuit training, etc.) and also increases in the purchase of at home fitness equipment.  More people are walking or riding bicycles and reducing their use of public transport.  In traditional medical health, we have been forced to have on-line medical appointments as in many countries doctors will not initially see you in person.  Once again, with the 6 months of new habits forming supplemented by the high levels of media identifying concerns with the upcoming flu season, an increased focus on wellness and prevention and further growth of on-line medical should be expected. 

I have not seen any in-depth research that provides real insights into the scale of change to a ‘new normal’ and there is more to learn as we continue to live in this pandemic.  The consulting companies through their sampling have pulled together their sense of segmentation of post Covid customers which I think is useful to consider but each company needs to pull together its own views and then though ongoing analytics refine their own segmentation. Just as an example here are the segment names defined by three consulting companies – Accenture, McKinsey, EY. The names help you visualise the segments and you can see the overlap between the alternative segmentations.

  • Accenture – ‘the Worrier’, ‘the Individualist’, ‘the Rationalist’, ‘the Activist’, ‘the Indifferent’
  • McKinsey – ‘Affluent and unaffected’, ‘Uprooted and ‘unemployed, ‘Financially secure but anxious’, ‘Out trying to make ends meet’, ‘Disconnect retirees’
  • EY – ‘Get to normal’, ‘Cautiously extravagant’, ‘Stay frugal’, ‘Keep cutting’, ‘Back with a bang’

What we do know is that the longer restrictions and forced changes in behaviour last, the more likely future behaviours will at least reflect the positive experiences of the changed behaviours.   It is also clear that the rate of adoption of new technologies across the generations has accelerated and this will stimulate further investments to improve the related experiences.  Cycles of innovation and adoption will accelerate as a result of this pandemic. For many consumers, usually of an older age, they may not have bee able to delay the adoption of certain technology applications; and therefore, will likely be more comfortable trying new applications going forward.

For business, the pandemic disruption has now caused us to go into a period of non-linear change across many parts of our lives.  This means business need timely data and analytics to identify changes in demand and the growth of new opportunities. They will also need the agility and flexibility to respond and take advantage of new market opportunities or to minimise the costs of current activities that will no longer be profitable.  As noted earlier, these non-linear changes will be driven by a combination of:

  • Structural responses by businesses to Covid.  For example, policy shifts by companies towards remote working will make changes to consumer spending and ripple through to the retail and service sector around offices.  
  • Structural responses by governments. For example, rules and regulations on crowds and distancing, or adjustments related to public transport and other types of infrastructure.
  • The overlaying onto customer segmentation of behavioural changes linked to actual and perceived health risks of consumers
  • The additional overlaying of economic changes and uncertainties to large sets of consumers 
  • Changes in the attitudes of sets of people with respect to buying locally as a response to seeing local economic distress in combination with a sense of social responsibility and increased climate change concerns
  • Responses by the government to address potential future health challenges and alleviate the economic recession we have entered.  As an example, this would include accelerated investment in moving a country towards ‘greening’ the economy and society.   
  • The rate of change of adoption of existing technology applications and introduction of new technology applications

I will talk more about some of these factors in the next blogs.  These blogs will get into more detail on how businesses can be more effective at responding to this changing situation and also the role of the government.  

#Covid 19 #pandemic #post Covid #strategy #disruption #resilience #innovation #consumer segmentation #consumer behaviour #GenZ #millenials #baby boomers #WHO #sustainable development goals #McKinsey #Accenture #EY #UN SDGs #WEF #blacklivesmatter #metoo #DoughnutEconomics @Kate Raworth

Categories
Covid REBOOT

Post Covid

Blog 1 on Post Covid Disruption, Resilience and Innovation

Sept 2020 – We have not yet emerged from the Covid 19 pandemic.  Depending on whose narrative you are listening to and where you live, we are either towards the end of the first wave or at the beginning of the second wave.  Most countries in the northern hemisphere are expecting it to come back stronger as we move into the autumn and winter season.  Vaccine progress is encouraging and treatments are apparently improving as we learn more.  We are starting to build our experience on how to live with Covid and some countries are doing better than others at this.  In any event, we will be at the least learning to live with Covid 19 until we have a vaccine that has been widely distributed. If we solve Covid 19, we will need to hope a mutation or other virus does not show up for a long period of time.

In my view, we need to expect that we will be living with periodic disruptions from pandemics. Just look at our past as illustrated in Figure 1-1  .  Of course, the data shown on Covid 19 is not up to date; as of 6 September there were over 887 thousand deaths (www.worldometers.info/coronavirus/). Since 2000, we have had SARS, Swine Flu, MERS, Ebola and now Covid 19.

Source: Visual Capitalist,
Figure 1-1

What we do need to do is dramatically improve our management of viruses through being prepared, responding quickly by understanding the difference between exponential and linear, track and trace, have a coordinated multi-country response to manage and cure the virus, and have much better coordinated social and economic responses.  We can only hope that there will be proper analysis of our current situation so that lessons will be learnt; and, the learnings will be applied to continuously improve how we manage pandemics. 

In my second blog on Business Strategy, I provided an early view on how we were doing globally, and this was my assessment (Figure 1-2).

Figure 1-2

I would have hoped that over time the assessment on how we have been managing would potentially have underestimated how we were doing; unfortunately, if anything, the rating is generous.  We have seen the US fully withdraw from the WHO (World Health Organisation) and not work as part of a coordinated medical response. On the other hand, we have seen the EU agree to a €750m recovery fund to help EU countries respond to the pandemic. Both the virus management, including overall health management, and economic management analysis of our performance at the global, national, and local levels will provide a lot of lessons for the future!  Few nations have escaped unscathed and our interconnectedness economically has affected all nations.  

So what will change going forward in how we live our lives, how we work, how we socialise, how we learn, what we consume and what we do for entertainment?

New experiences, new realities, new understandings and new real or perceived fears change us.  For many our economics have also changed. Millions of jobs have been lost or are at risk.  Tens of thousands of companies have collapsed and more will collapse from shortage of financing and a too slow rebound of busines.  As with most challenging situations, there have also been some winners who have been in the right place at the right time, or responded and were able to benefit from the situation.

Once again, as with most crisis, inequality comes up as a major issue.  Those who can work remotely – office workers, financial sector workers, those in the technology sectors, managers, executives – can largely isolate themselves from the health risks; whereas, those on the front line – doctors, nurses, transport workers, home delivery workers and those in essential sectors – take on the health risks and allow many of us the ability to isolate.  It is also a group of people that have a lower overall income profile to those who stay at home and they do not have the same financial capacity to live through a lock down.   Even worse, in the lower income countries the governments do not have the capacity to respond with relevant financial assistance to workers and companies as well as having inadequate health care systems for the majority of the population.  We know that in many of these countries significant proportions of the population survive day to day or week to week and lockdowns put themselves and their families in front of other health risks such as starvation.   

The important role of technology has been made even more visible.  Whether for home working, home schooling, home shopping or for entertainment we have seen the power of technology.  We have all witnessed the accelerated adoption of technology in each of these areas.  Some say that we have moved forward 5 years in the last 6 months in terms of technology adoption.  We have moved into a position where the perceived risk of not adopting certain new technologies, and new ways of doing things, is more risky to our livelihood than sticking to status quo.  This is new!  

Our life of living with Covid 19, or post Covid 19, does not sit in isolation.  Integrated with this situation is the financial crisis, evolving geo-political tensions and challenges, other man-made challenges, and most importantly the need to address climate change and biodiversity, and the challenges of inequality.  The way forward needs to incorporate all these realities.

To add a bit more context to the two key longer term challenges, it is useful to refer to Kate Raworth and her book Doughnut Economics which is looking at economics for the 21st Century.  The basic premise of a long term sustainable world is that society must sit between a minimum basic social foundation for all and live within an ecological ceiling as depicted in Figure 1-3.  This is the Doughnut.

Kate Raworth, Doughnut Economics
Figure 1-3

If you then evaluate where we are across a set of dimensions for the social foundation and the ecological ceiling, you find that we have a lot of work to do to establish a fair social foundation for all and live within our environmental boundaries.  From Kate Raworth’s Doughnut Economics she has reflected the situation within Figure  1-4.  This depiction is linked to and consistent with the 17 UN Sustainable Development Goals, which I have discussed in earlier blogs as the best Global consensus of what we need to accomplish by 2030 and then beyond.  

Kate Raworth, Doughnut Economics
Figure 1-4

The climate and environmental issues will be familiar; although, perhaps not the extent to which we are well beyond the science based limits of climate change, biodiversity loss, land conversion and nitrous and phosphorous loading.  

In my view the social foundation components all link into the theme of inequality.  The inadequate access to minimum acceptable levels of food, shelter, water, energy, health and peace and justice for all.  The inequality of access to quality education and networks (internet, etc.).  The inequality of opportunity in terms of income and work, gender equality (#MeToo), social equity (#Black Lives Matter) and political voice.  

This set of blogs although focused on living with Covid 19, and post Covid 19, necessarily has to incorporate these other pressures and disruptions that we are facing.   The blogs will explore likely shifts in consumer behaviour, the impact on businesses and certain sectors and how they need to react, and some views on the role of the government and how it needs to change. Overall, the topics are covering managing in disruptive times, creating resilience and the critical requirement for continuous innovation.

Once again, please share this material, share your views, push forward the discussion.

#Covid 19 #pandemic #post Covid #strategy #disruption #resilience #innovation #WHO #sustainable development goals #UN SDGs #WEF #Doughnut Economics @Kate Raworth

Categories
REBOOT Strategy

REBOOT Business Strategy

“You cannot avoid the responsibility of tomorrow
by evading it today”, Abraham Lincoln

Blog 15 of the Business Strategy Series

This is the final blog on the strategic framework and of the Business Strategy Series.  I will be continuing to write on related subjects.  I am also working on another series that will look at the roles and linkages of the market economy and the state – another critical subject as we work through these turbulent and challenging times.  A coordinated response between the market economy and governments is mission critical for solving our climate crisis and we can see how vital it is for other disruptions such as the pandemic we have now lived with for 6 months.  

The components in the strategic framework (Figure 15-1) that have been introduced are focused on helping business executives and their boards create a long term sustainable business that has a true purpose in society by delivering both economic returns to investors and impact to other stakeholders.  

Figure 15-1

To date we have discussed purpose and the delivery model.  In this blog, I want to talk a bit more about impact, strategic timeframes, sustainability and resilience.  I will then complete the discussion with a short piece on portfolio strategy.  

Starting with environmental/climate impact.   Through the ESG reporting requirements (Environmental, Social, Governance), companies are being asked to look at the environmental at both level 1 impact, which is the company’s direct impact, and level 3 impact which considers the full supply chain impact including product use.  Clearly, at the environmental level the specifics of each sector, and its supply chain, will have different environmental dependencies and different opportunities to create impact.  Key sectors such as energy, food, packaging, retail, manufacturing and fashion which have high resource use, significant energy and water usage, and large supply chains will have high environmental impact unless they have already taken action (Figure 15-2). The urgency to create full circular strategies and lead the way is most vital for these high dependency companies; although, that should not stop all companies from moving forward as well.  

Figure 15-2

Taking the view at the societal level, that the climate problem can be solved by just focusing on the major companies that are contributing to climate change, reduced bio-diversity, high water use, etc. is definitely insufficient if you look at the science.   Part of the solution is for the public to be also looking at their consumption and making it more in tune with the needs for environmental sustainability. So the full and necessary challenge is to create a major shift in how we all live and how businesses, the government and NGOs operate. 

As I noted in Blog 14, for companies delaying this shift to a societally responsible strategy will only result in an increasingly challenging shift for each year of delay as the need to hit targets by certain dates will not shift.  Each company in each sector needs to set ambitious and timely targets to make its contribution to this.  It is management’s, and the Board’s, challenge to ensure that the strategy they set meets both its economic needs and its responsible level of impact.  

In addition to the sector, the geographic footprint of a business has implications for the impact focus and targets that it sets (Figure 15-3).  For example, companies that have large supply chain footprints in the developing world need to be thinking much harder about its specific social impact goals that it wants to achieve.  Truly exploring the UN Sustainable Development Goals will help define these.  Business as usual in many parts of the world will perpetuate the fundamental environmental, social and economic challenges that need to be overcome.

Figure 15-3

A helpful approach to thinking about how to incorporate impact programs and goals into the business is to look at the leading companies that are already a long way into this journey to be a responsible company.  

One of the companies leading the way is Unilever, who have been focusing on this now for over 10 years.  They now report on their progress against their goals each year (Figure 15-4). 

Source: Unilever Website,
Figure 15-4

From their website, you will see that they have created specific time based targets that roll up to overall ambitious goals, they have linked them to the Sustainable Development Goals, they are tracking their performance over time and they are publishing their performance publicly.

Other good examples covering different sectors are IKEA, Patagonia, Interface, Orsted, Tata and Microsoft.

As noted in Blog 12, strategic timeframes need to be extended vs. the typical 3 to 5 year timeframe (Figure 15-5).  A longer term time frame needs to be added to consider fundamental impacts such as climate, major changes in technology adoption and putting in place the right components for resilience.  3 to 5 year thinking and short term ROI horizons will not ensure adequate thinking on the sustainability of a strategy.  

Figure 15-5

Linked to this, it is critical that there is a proper review of the potential activities and events that change markets and/or generate new opportunities (See Figure 15-6 for examples).  These events will range from changing views on environmental responses required, SDG compliance, new regulations, a changing geo-political environment and of course the potential for massive impact from new and converging technologies.

Figure 15-6

More important than ever is to develop strategic scenarios that would be effective based on different views of what could happen in short, medium and longer term horizons (Figure 15-7).  The approach for doing this is to pressure test strategic options against different externalities and come up with some plausible scenarios to evaluate.  These scenarios need to be developed holistically and need to be comparable. The components of the scenarios should cover off customers, products/services and supply chains, investment, metrics, people, processes and technology. 

Figure 15-7

With a real analysis of alternative scenarios, the comparison should provide further clarity around the performance opportunities for the business as well as the risk parameters.  The true strategic options can be explored along the key dimensions of profitability/ROI, impact, implementation risk, meeting of key stakeholder needs, sustainability and resilience.  

This moves strategic thinking significantly on from a pure profit and shareholder only focus.  In the short run, realigning the business to survive this pandemic and be able to prosper in the post Covid world, having an organisation that is proactively progressing on gender and race issues, as highlighted by the ‘black lives matter’ and ‘me too’ movements, and making a real contribution to the global climate/environmental targets that need to be met are big topics in most board rooms, and with investors, employees and customers.  These challenges need much more than tactical reactions, they are strategic and structural challenges that will inevitably require some major changes to most businesses in terms of how they operate, who they do business with, where they invest, and what performance targets can be expected.  

The overall strategy and each of the components should fit coherently into the strategic framework (Figure 15-8). Continuous evaluation of the components of the strategy over time and looking for ways to continuously improve and refine the strategy is equally as vital as the initial setting of the strategy. As the rate of change in the world accelerates, dynamically adjusting/refining the strategy and improving execution is mission critical. Speed and agility are much more important than a singled minded short to medium term focus on efficiency.

Figure 15-8

The final subject, I want to touch on is the implications of this in a company with a portfolio of businesses. Investors and stakeholders will be looking at the overall economic and impact performance of the business. Non-performing business units within the portfolio will have an overall effect on the attractiveness of the business to investors, employees and other key stakeholders.

The proposed approach to evaluate a portfolio of businesses is a four step process (Figure 15-9). Firstly, evaluate the portfolio of businesses from an economic perspective. Secondly, overlay the environmental impact of the businesses on to the economic performance of each of the businesses. Thirdly, look at the full alignment of the set of businesses against sustainability impact which will include social and economic impact. Finally, look at the portfolio options from a resilience perspective. This review should be done considering the realistic potential scenarios of each of the businesses.

Figure 15-9

Now looking at each of these components in a little more depth. Starting with the stand-alone economic strategy, we have the traditional grid looking at business position vs market attractiveness (Figure 15-10). Both components of the strategy should be looked at from a short, medium and longterm perspective. Business position is the combination of profitability, market position, and ability to maintain performance over time as markets change and evolve. Market attractiveness is the combination of size, growth and the economic attractiveness of the market. The grid should be fairly self explanatory. If you have a strong market position in an attractive market then you ideally want to stay in the market and should be willing to invest and grow your position. Whereas, if you have a weak position in an unattractive you would rather manage the business for cash or divest from the market and reinvest the capital in more attractive businesses.

Figure 15-10

Moving on to the Environmental overlay (Figure 15-11), this takes the overall position from the economic strategy grid in Figure 15-10, Business Attractiveness, and matches it against the Environmental Attractiveness of the business. High environmental attractiveness has a low or positive environmental footprint within the timeframe of meeting the targets set by the Paris Climate Agreement and the environmental focused SDGs. For many businesses, the key target is the year the company will achieve a Net Zero carbon emissions equivalent level 3 footprint (ie. including the full supply chain of the business).

Overall, unattractive businesses, unless you have clear sight on how to transform them, should be harvested and/or sold. If an unattractive business is also very unattractive from an environmental perspective, such as a coal business, it is more likely that this should be divested as attracting investors and raising funds in your overall business will tend to be more challenging. In an equivalent way, if you have a small business with real potential in an environmentally attractive sector it may well be that you should be diverting your investment capacity into this business to build it. An interesting set of companies to watch on these dimensions will be BP, Shell and Exxon. Both BP and Shell have committed to reach a Net Zero CO2 emission target by 2050. It is not yet clear that they have strategies set out on how to achieve this; but, what is clear is that they will be redirecting their cash generation to the renewables sector where they have much smaller strategic positions. It has been a broad set of stakeholder pressures, including collapsing share prices, that have driven the adoption of these strategic commitments.

Figure 15-11

The third component of a portfolio review is the review of the alignment of impact overall with the business portfolio options (Figure 15-12). Although, climate impact tends to get the lion share of the attention from the press, economic and societal impact are vital components of the SDGs, and in many business and geography combinations, as you can see in Figure 15-3, they may be more important than climate impact. The food sector, including food retailers, are a great example of this with their broad geographically spread supply chains.

Figure 15-12

Finally, having evaluated the businesses, and their strategic options, in an overall and comparative context, the final step is to compare realistic combinations of businesses from a portfolio perspective. In particular, given the businesses have been evaluated against the three areas of impact, the portfolio options should be looked at from an economic return vs. a risk diversification perspective (Figure 15-13). The risk assessment is against the longterm sustainability and resilience of the portfolio scenarios. Adjusting a portfolio to reduce risk has real value, as we have seen in this pandemic. The potential benefits of a tight focus of businesses in terms of sector, geography, supply chain, efficiency and commonality of disruption risks may not be justified from a sustainability and resilience perspective. As I have noted before flexibility, adaptability, and diversification can provide real value to the business overall.

Figure 15-13

This brings to a conclusion, the series on Business Strategy. I hope you have found it thought provoking and useful; and hopefully, it will help you make a difference in your business and create a deeper impact in the world around you.

I will continue to write blogs to delve in deeper to sectors and subjects that will explore strategy and sustainability in a deeper context. As noted in the about section of my blog, REBOOT is not just about business, it is about the need for structural changes, or a new operating system, across all areas connected to our lives and our world.

Please continue to follow, share, engage in conversation, contribute and also reach out to me if you want to talk about this further. I can be reached through LinkedIn.

Categories
REBOOT Strategy

REBOOT Business Strategy

“It always seems impossible until it is done”, Nelson Mandela

Blog 14 of the Business Strategy Series

In this second blog describing the strategic framework (figure 14-1), I will cover off talking about the delivery model which is the strategic component behind the purpose of the business that drives both the economic and impact model of the business.

Figure 14-1

The delivery model aligns the customer proposition with the delivery components that are comprised in a circular strategy, to address climate and environmental impact, and the social strategy that focuses on economic and social impact (Figure 14-2).

Figure 14-2

Behind all businesses are the dimensions of customer – product fit.  The three key strategic pieces of this comprise a powerful proposition to the customer, ensuring the proposition is differentiated from its competitors, and focusing on a market segment that is attractive or ideally large and growing. 

Achieving and sustaining a differentiated customer proposition is critical to success.  To this end, having an intense and ongoing understanding of a business’ existing and potential customers in terms of purchasing decision making and behaviours, usage and post-usage behaviours, and the factors that will drive emotional engagement are vital.  We can see the potential components of a proposition (Figure 14-3) and the ways to differentiate are growing over time. The newer dimensions include differentiating over environmental sustainability and responsibility, the business model as discussed in Blog 9 of this series including channels to market, and a number of technology based dimensions.

Potential Components of a Value Proposition,
Figure 14-3

In many ways, the bigger challenge is sustaining differentiation vs. the initial achievement of a differentiated proposition.  Success attracts copycats.  New technology or technology convergence invites disruption.

There are a number of components businesses need to have in place to succeed in sustaining differentiation.  Firstly, superior customer knowledge of existing and potential customers.  Secondly, and closely associated, is superior CRM (customer relationship management) capabilities.  The purchasing and usage experience of a product or service drives customer retention, which results in repeat buying and referrals.  Relentlessly improving this experience will be even more critical going forward as the environmental movement drives longer life products and higher levels of service.  Thirdly, the collection and use of data, including competitive information.  Fourthly, having innovation capabilities and agility to continuously improve, react to problems and opportunities, and to integrate major changes as new technological capabilities. Speed and agility in many sectors are mission critical for success.  Finally, none of the other dimensions matter if you do not have the financial capacity to progress on these factors and withstand competitive pressures.  

Now let’s move on to look at environmental impact.  To truly embrace environmental impact and set ambitious targets from an attitudinal, operational and strategic perspective you need to look at your business through the eyes of a circular strategy.  My first exposure to this concept was over 15 years ago when I read ‘Cradle to Cradle: Remaking the Way We Make Things’ by William McDonough and Michael Braungart, where they presented an integration of design and science that provides enduring benefits for society from safe materials, water and energy in circular economies and eliminates the concept of waste.

The book put forward a design framework characterized by three principles derived from nature.  Firstly – “Everything is a resource for something else. In nature, the “waste” of one system becomes food for another. Everything can be designed to be disassembled and safely returned to the soil as biological nutrients, or re-utilized as high quality materials for new products as technical nutrients without contamination”. Secondly – “Use clean and renewable energy. Living things thrive on the energy of the solar system. Similarly, human constructs can utilize clean and renewable energy in many forms – such as solar, wind, geothermal, gravitational energy and other energy systems being developed today – thereby capitalizing on these abundant resources while supporting human and environmental health.”  Thirdly – “Celebrate diversity. Around the world, geology, hydrology, photosynthesis and nutrient cycling, adapted to locale, yield an astonishing diversity of natural and cultural life. Designs that respond to the challenges and opportunities offered by each place fit elegantly and effectively into their own niches.”  

The circular economy is most easily visualised by Figure 14-4 below.

Figure 14-4

One of the real champions of this approach are the Ellen MacArthur Foundation who have been working with major corporations to rapidly and dramatically reduce the carbon footprint and environmental impact they are having on the planet.  Their mission is to accelerate the transition to a circular economy. The Ellen MacArthur Foundation works with business, government and academia to build a framework for an economy that is restorative and regenerative by design.  Figure 14-5 identifies the main components of the thinking within a circular strategy.

Figure 14-5

The starting point for developing a circular strategy is to know where you currently stand in terms of both economic cost and environmental impact (Figure 14-6). This sets the business’ starting point.

Figure 14-6

Secondly, explore ways that you can add value and revenue growth by making changes to your business model.  Getting the right business model is critical to align with a circular strategy.  As I noted in Blog 9 of the series there are many alternative business models that can be explored.  Below in Figure 14-7 are some examples of business models of some newer businesses.

Figure 14-7

Achieving a full circular strategy in product based businesses is a major commitment of time, energy and resources.  This also requires full alignment across all parts of the business and its supply chain.  Defining the end point allows the business to define the journey and time frame to achieving it in order to deliver on the financial performance and meet the impact requirements of a responsible business.

Integrated with the circular strategy, a business needs to overlay a social strategy, which includes economic impact.  I believe the acid test of a strong social strategy is whether or not, or to what extent, the company is contributing in its own way to reducing inequality, ensuring inclusivity, and contributing to future generations of all children being better off.  This is positive impact.

The constituents of a social strategy are the customers, employees, people within the supply chain and communities which are touched by the business (Figure 14-8).

Figure 14-8

The social strategy can impact on many of the SDG’s (Figure 14-9) including ‘responsible consumption and production’, decent work and economic growth’, ‘quality education’, ‘good health and well-being’, ‘gender equality’, ‘reduced inequalities’, and ‘clean water and sanitation’.

Figure 14-9

The impact focus of the social strategy will range from compliance with core principles such as anti-slavery, fair trade and gender equality, to specific proactive stances against behaviour that violates the core values of the businesses, or finding areas where the business can add some real specific value (Figure 14-10).

Figure 14-10

Most recently, we have seen the incident with Patagonia who removed its advertising on Facebook in a “Stop Hate for Profit’ campaign.  Alex Weller, Patagonia’s marketing director for Europe said, “It’s no secret that social media platforms have been profiting from the dissemination of hate speech for too long.  Facebook continues to be the most resistant of all the social media platforms to addressing this critical issue and so that’s why we decided to take action against it specifically.” Since Patagonia’s stance others like Adidas, Verizon, Coca-Cola and Unilever made similar moves.  Patagonia has said that it will stay the course and stand by this commitment for as long as it takes.  We will see the strength of the stance of other companies as time passes.

Overall, companies need to think about what their social balanced score card should look like (Figure 14-11).  

Figure 14-11

Just as with the other components of the thinking requiring short, medium and long term views, so does the organisational thinking.  This organisational thinking for the organisational components per the McKinsey 7S model (Figure 14-12) needs to be matched against both the time horizons and the alternative strategic scenarios in order to be properly assessed.

Figure 14-12

Critically, to get each of the organisational components right there needs to be clarity on the performance requirements (Figure 14-13) of the organisation.  Arguably, if there are some big strategic shifts in the business as a result of also needing to drive impact, then there will likely be some material changes required to the organisational needs of the business and linked to this the incentive structure to drive alignment. 

Figure 14-13

Finally, as the environment changes, the sector evolves and the company learns, there will need to be continuous adjustments to the strategy and the components of delivery in order the achieve both the economic and impact goals of the business.  Integration and alignment of these components is critical as well as continuous feedback across the cascade of components with appropriate adjustments (Figure 14-14).

Figure 14-14

In final blog of this series, I want to talk in more depth about impact, strategic time frames, sustainability and resilience. I will also finish off with a short discussion on portfolio strategy for companies with multiple businesses.