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“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.

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“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.

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Blog 13 of the REBOOT Business Strategy Series

This is the first blog discussing a new strategic framework relevant for the world we now live in.  To date, I have covered off some background on how the world is getting increasingly complex from a societal, environmental, technological and disruption perspective; and the implication of this is a need to look at business strategies from a system based perspective so that business are aligned with economic, society and environmental goals.  Critically, linked to this are that the general consensus on these goals globally are best defined by the 2015 UN Sustainable Development Goals for 2030, which also link in with the 2015 Paris Climate Agreement.

The next section then went on to cover off 8 gaps in traditional strategic thinking that need to be covered off for a strategy in the 21st century.  These gaps were driven by deep interconnections of a business with their environment, which is not just their business sector.  These interconnections are vital to understand as there is continuous change and ongoing disruptions that are and will be affecting a business.  These factors include societal and economic factors as we can see now with the Covid 19 pandemic and ‘Black Lives Matter’ movement, the impact of new technologies, and most importantly the need to globally address the challenges of climate change and other key environmental issues. 

This new framework tries to create a shift in how we think about our business, away from just profitability for shareholders to goals that are also aligned other stakeholders including the public, consumers, suppliers, communities and governmental interests.  It is worth noting that investors are now requiring this shift given that the long term interests of businesses are for a sustainable world and they can see real business risks on the horizon from climate change.

The traditional stand alone thinking (Figure 13-1) can be summarised by, firstly, a virtually exclusive focus on the shareholder as Milton Friedman had summarised,”the social responsibility of business is to increase its profits”. Secondly, an industry and competitor analysis as defined by Michael Porter’s five forces analysis matched to an understanding of the business’ internal capabilities.  Thirdly, profit and market based key metrics.

Figure 13-1

A  new system based framework needs alignment from the business through to the economy, society and to the environment (Figure 13-2).

Figure 13-2

To create alignment a business needs meaningful purpose that aligns with the business on delivering against both its own economic goals as well as creating impact (Figure 13-3).  This is the challenge of strategy design, to cover the needs of both profitability and impact.  

Figure 13-3

Clearly, this can add complexity as the performance measures are now broader; however, it also creates opportunity and new ways of differentiating and competing.  For deeply entrenched players in the market who have adverse impact on the climate/environment, they are going to have to think about how they will use their resources and market position to evolve to a new sustainable strategic position and focus.  For the younger and nimbler companies, they will need to think about how to use their speed and flexibility to create a stronger positioning ahead of their key competitors.  If you are already there, then take advantage of your position.

A key part of this system-based framework is that it is relevant for all types of organisations whether in business, government or as an NGO.  Clearly, each type of organisation, as with each business, has to be clear on their economic model and what their impact targets are in order to get clear on what delivery model they need.  In the government and with NGO’s, they will have very different sources of funds; but, in any event they need to solve a sustainable financial model to survive rather than to make a profit.  A governments whole raison d’être should be impact; although, for many of us it may well be that their targets and metrics of achievement are unclear!  

Surrounding these triangles are three components that need to be full addressed within a strategy (Figure 13-4).  Firstly, having a clear view of the key stakeholders of the business.  Secondly, the business must be built to last – it must be sustainable.  This means the business must be able to continuously deliver value to it customers, it must deliver the right economic performance for investors, and it must provide the appropriate impact for other stakeholders. And, the business must be able to adjust, adapt and move forward in a way that this continues over time.

Thirdly, the business must be resilient and thus have the capability to withstand and manage through different scenarios of disruption from the 5 types of macro forces – societal, environmental, economic, technological, and geo-political – to the core challenges specific to the   

Strategic Framework
Figure 13-4

There are six tests of a business strategy:

  1. Is the business Purpose Driven?
  2. Can the business create real differentiated value for its target customers over time?
  3. Can the business perform at a level to attract and retain investors?
  4. Does the strategy integrate generating economic, social and environmental impact at ambitious levels for key stakeholders?
  5. Does the business strategy create sustainability and resilience?
  6. Does the strategy have ambitious and achievable triple bottom line metrics covering profit and impact targets?

At the heart of a business lies its purpose.  It is the driving force and acid test of all business decisions.  It is what attracts and retains employees, customers, other participants in the supply chain and investors.  Sitting above the strategy are three components Vision, Mission and Values.  There are a lot of different views about how to define vision and mission, and sometimes they are combined; so to clarify, I have created definitions that fit with this strategic framework.

Figure 13-5

Within this strategic framework, the purpose defines how the world will be a better place as a result of the business.  The first component of the purpose is the Vision.  The Vision is the business’ view of the better world that the industry or sector will contribute to.  The Mission is the part of the vision that the company is targeting to fulfil.  I like to describe the Mission as the North Star that the company wants to be continuously moving towards.  Finally, the Values defines behaviourally how the Company‘s operates – what drives it, what motivates it, and how it will behave with its employees, customers, suppliers, communities, society and environment.  The combination of the vision and mission should be something that engages, and gains agreement from, all key stakeholders.

Here are some examples of the vision and mission, or a combined statement, for purpose driven companies.  

Orsted

Our vision is a world that runs entirely on green energy.

Mission: “We want to be a company that provides real, tangible solutions to one of the worlds most difficult and urgent problems.”

This is a Danish Company that started life as a state owned organisation focused on coal and oil.  Most recently it has been recognised as ….

Within this strategic framework, the purpose defines how the world will be a better place as a result of the business.  The first component of the purpose is the Vision.  The Vision is the business’ view of the better world that the industry or sector will contribute to.  The Mission is the part of the vision that the company is targeting to fulfil.  I like to describe the Mission as the North Star that the company wants to be continuously moving towards.  Finally, the Values defines behaviourally how the Company‘s operates – what drives it, what motivates it, and how it will behave with its employees, customers, suppliers, communities, society and environment.  The combination of the vision and mission should be something that engages, and gains agreement from, all key stakeholders.

Here are some examples of the vision and mission, or a combined statement, for purpose driven companies.  

Orsted

Vision: “Let’s create a world that runs entirely on green energy.“

This is a Danish Company that started life as a state owned organisation focused on coal and oil.  Their current primary focus is on offshore and on shore wind farms. Most recently it has been recognised as the most sustainable company in the world in the Corporate Knights 2020 Global 100 Index.

Novo Nordisk

“Our purpose is to drive change to defeat diabetes and other serious chronic diseases such as obesity and rare blood and endocrine disorders. We do so by pioneering scientific breakthroughs, expanding access to our medicines and working to prevent and ultimately cure disease.“

How many other pharmaceutical companies have a missions to ultimately cure diseases where it derives all its revenues from?

Unilever

Vision – “to make sustainable living commonplace.”

Mission – “To add vitality to life. We meet everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good and get more out of life.” 

Tesla

Mission: “To accelerate the world’s transition to sustainable energy“

We all know Tesla for it’s pure electric vehicles; however, it now has a full suite of energy products that incorporate solar, storage and grid services.

Ikea

Vision: “To create a better everday life for the many people”

“Our business idea supports this vision by offering a wide range of well-designed, functional home furnishings products at prices so low that as many people as possible will be able to afford them.”

Microsoft

Mission: “To empower every person and every organization on the planet to achieve more”

“Our platforms and tools make small businesses more productive, multi-nationals more competitive, nonprofits more effective and governments more efficient. They improve healthcare and education outcomes, amplify human ingenuity, and allow people everywhere to reach higher.”

Patagonia, an outdoor clothing company, has had a sustainable mission since the beginning and has self imposed an earth tax of 1% of revenues for support activities to save the planet.  It has a very broad mission, “we’re in business to save our home planet”

It has defined it values in a different way to most companies that state the obvious ones of honesty, integrity, etc.  Their values are more action oriented, very honest,  and I think much more engaging:

“Build the best product – Our criteria for the best product rests on function, repairability, and, foremost, durability. Among the most direct ways we can limit ecological impacts is with goods that last for generations or can be recycled so the materials in them remain in use. Making the best product matters for saving the planet.

“Cause no unnecessary harm – We know that our business activity—from lighting stores to dyeing shirts—is part of the problem. We work steadily to change our business practices and share what we’ve learned. But we recognize that this is not enough. We seek not only to do less harm, but more good.

Use business to protect nature – The challenges we face as a society require leadership. Once we identify a problem, we act. We embrace risk and act to protect and restore the stability, integrity and beauty of the web of life.

Not bound by convention – Our success—and much of the fun—lies in developing new ways to do things.”

With a broader awakening of Boards and executive teams, as well as investor pressure, we should expect an increasingly rapid shift to much more purpose driven vision, mission and values? The companies not moving in this direction will inevitably be left behind.

The overall strategic framework tries to achieve 3 core objectives. Firstly, to ensure the business is systemically integrated into its economic, social and environmental situation context. Secondly, provide absolute clarity that the business is also focused on impact as well as profit to meet the needs of all key stakeholders. Finally, to have a true longer term perspective that considers both resilience and sustainability.

In the next two blogs, I will fill out the other components of the framework.

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Blog 12 of the Business Strategy Series

The final area to focus on in the 8 areas that need additional strategic focus is ‘From medium term strategies to long term scenario based strategies”.

Traditional strategic planning, with some sectoral exceptions such as the energy sector, has a medium term focus (Figure 12-1).  The typical time frame for a strategy tends to be in the 3 to 5 year period, closely linked to the normal tenure of a CEO and the incentive designs for the executive team.  

Figure 12-1

In the Harvard Law School Forum on Corporate Governance, in a post on 12 February 2018, they refer to a recent Equilar Study regarding the tenure for CEOs at large-cap companies (S&P 500).  The median tenure of CEOs sat at 5 years in 2017 with a declining trend (Figure 12-2).

Figure 12-2

With all the macro dynamics at play, this time frame for planning and incentive alignment is far too short.  In the current enviroment, strategic thinking needs to be longer term focused to accommodate potential disruptions, address major shifts in products and services from new technologies and accelerated adoption and convergence of existing technologies, align with the UN Sustainable Development Goals for 2030 and address climate change.  

The climate change path is not yet clear as we have been slow to react, and are therefore, too early in the cycle of creating deep impactful changes; however, we are clear that we are not moving fast enough to get on a climate scenario with acceptable potential outcomes.  What is clear is that the longer we delay taking action the more an extreme response will be required (Figure 12-3). With delays in strategic response to climate change, the future challenges for management will only increase.

Figure 12-3

With all these factors, only through really creating scenarios will it become strategically clear on the implications of certain decisions.  In addition with climate only really playing out in about the next 30 years, it will not be until closer to 2050 that we will have clearer understanding of the potential full impact and the trajectory we are on.  

These factors shine a light on the need for changes to strategic planning horizons and the disciplined use of scenarios (Figure 12-4).

Figure 12-4

Programmes of substantial change in major components of a strategy take time, such as a shifting to a circular strategy, geographic rebalancing of assets and supply chain with increased geo-political tensions, and adjusting to major changes given the lessons learnt from Covid 19.  The key is to try and understand potential key inflections points, non-linear and exponential type relationships where straight line extrapolations are invalid.  These points can be driven by internal actions, fundamental shifts in markets, core changes in the role of technology, and other macro shifts and disruptions, including climate change.  

In addition, to considering these points noted above is the need to reconsider the businesses view on the importance of sustainability and resilience versus a complete focus on pure efficiency with the hope that no extraneous events will interrupt this focus.  Since 2008, with the financial crisis, through to the current challenges from the pandemic, we are seeing that the winners are the businesses that are most resilient.  The businesses with single source or tight supply chains, high financial leverage with low rainy day capacity, or those that have been slow to embrace the power and value of technology for distributed working are requiring government handouts and/or bail out funding to survive.  This is not in the interest of investors or other stakeholders including the tax paying public.  Risks of disruption are increasing not slowing down, and not understanding and planning for them is irresponsible.

This analysis, thinking and understanding of the external environment and the market then needs to be married to the companies own internal analysis and understanding.  The internal analysis involves the management and boards strategic view on whether they want to be a leader, a near follower or a laggard (slow follower).  This view will be linked to the current situation of the business in terms of leadership, organizational capacity and capabilities, the infrastructure and technical debt of the business, the business’ innovation capabilities, the strength of their supply chain and third party relationships, and the financial capacity of the business to evolve.  The meshing of internal factors, the industry and competitive environment and macro factors is what underpins the choice of scenarios and the appropriateness of planning horizons.  

An interesting case history to look at is Orsted.  Orsted (formerly Dong) began life in the 1970’s, as a Danish state owned energy company focus on building coal fired plants and sea bound oil and gas rigs around Europe.  By 2006, they had started to build offshore wind farms and decided to focus more on green energy.  They then started to close down coal plants and sell off their oil and gas sites.  They now have 24 offshore wind farms with more under construction, have sold off their oil and gas sites and have committed to be coal-free by 2023.  Henrik Poulsen, CEO, recently said, “we’ve transformed a Danish utility predominantly based on fossil fuels into a global leader in green energy, which was ranked as the world’s most sustainable company earlier this year. In the process, we’ve increased the market value of the company by several hundred per cent. We’re now at a point where the transformation is completed, and we’ve built a strong platform for global growth”.

Scenario planning helps understand the variability of potential outcomes under different scenarios and select the right way forward with a deep understanding of the assumptions behind the direction and the tipping points where strategic adjustments are needed.  If you think of Orsted, the scenarios they would have had to explore would have had a set of critical assumptions on relative cost of energies, reliability of the energy sources, adoption rates of renewables, costs and risks of offshore windfarms, implementation risks etc.  Given that they started building their offshore windfarms in 2006 wind and solar were the high cost energy sources.  Projecting forward cost, capacity and quality curves on new technologies is a critical part of the scenario planning.

Figure 12-5

Different business scenarios will be required linked to different climate scenarios, and assumptions on regulatory changes, geo-political dynamics, investor behaviour with respect to the SDGs, etc.  Creating clarity around critical decisions that have strategic consequences, variable financial outcomes, and different impact outcomes is critical.

Finally, Boards will have to solve how to create focus and alignment against longer term goals vs. the short term tenure and wealth creation focus of executives.   

To summarise, the discussion on the eight areas requiring deeper strategic focus:

  • Strategic analysis has to evolve significantly and look at a number of issues in much more depth
    • Shifting from thinking about shareholders to stakeholders
    • Adding macro modelling on top of industry analysis
    • Extending risk monitoring with macro risks and then implementing resilience strategies and capabilities
    • Building a deeper understanding of customer – product fit and the forward looking dynamics of the market
    • Embedding technology, innovation, and design capabilities across the business which is critical in a rapidly changing world
  • Rethinking of business models and integrating impact into business objectives
    • Innovating through improving your business model
    • Setting  objectives around the ‘triple bottom line’
  • Strategic planning to create scenarios and look at longer timeframes
    • Move from short and medium term strategic planning to short, medium, and long term planning
    • Build scenarios of different sector, economic, social, environmental and technological scenarios to evaluate strategic decisions
    • Timeframes critically need to cover the impacts of alternative climate scenarios

In the next section, I will outline a high level system based strategic framework, with a long term view, that is much more fit for purpose than what has traditional been used for a core focus on shorter term shareholder returns.

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“Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the licence to operate from key stakeholders.” Larry Fink, CEO, Blackrock

We have now covered the first six of the eight topics for strategic focus.  As a reminder, the eight topics are:

  1. From shareholders to stakeholders
  2. From Michael Porter’s five forces to macro models
  3. From risk monitoring to business resilience
  4. From product-market fit to customer–product fit
  5. From simple to multi-factor business models
  6. From product to company based technology, innovation and design
  7. From profit focus to triple bottom line
  8. From medium term strategies to long term scenario based strategies

The seventh topic, from profit focus to triple bottom line, is a major shift for most companies from being shareholder focused to stakeholder focused.  This shift in the purpose of the business requires new thinking, different leadership and major adjustments to incentive systems to create alignment.  Simply put, a company must now extend their objectives beyond measurements almost exclusively focused on shareholders to also add measurements on environmental, social and economic impact.  

Let’s start by looking at the pressures to move beyond a pure profit focus. These pressures are from nations, central banks, investors, consumers and the public as illustrated by Figure 11-1.

Figure 11-1

In 2015, the UN reached agreement, with all United Nations Member States, on 17 Sustainable Development Goals and 169 targets focused on economic, social and environmental goals for 2030.  193 countries are signed up to this agreement.  

Also in 2015, the Paris Climate agreement was signed.  The Paris Agreement sets out a global framework to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C. It also aims to strengthen countries’ ability to deal with the impacts of climate change and support them in their efforts. There are now 197 countries signed up to this agreement.  Shockingly, the US under Donald Trump said that it was going to withdraw from the agreement and the effective date is 4 November 2020, 1 day after the next presidential election.  You can imagine who the rest of the world is voting for!  

As of June 2020, twenty countries and regions have agreed net-zero targets by 2050 –  Austria, Bhutan, Costa Rica, Denmark, the European Union, Fiji, Finland, France, Hungary, Iceland, Japan, the Marshall Islands, New Zealand, Norway, Portugal, Singapore, Slovenia, Sweden, Switzerland and the United Kingdom.  Denmark is leading the way and has legislated a target of reaching a carbon emissions target 70% below its 1990 levels by 2030.

About 50 central banks have now joined the NGFS, the central banks’ network focused on climate change risk management. .  Mark Carney, former Governor of the Bank of England, has been one of the global leaders in pushing forward this climate agenda. The Bank of England will be the first central bank to test how well the financial system can withstand risks posed by climate change.  Under this test the largest lenders, insurers and asset managers will have to stress test their portfolios against different climate scenarios.  In turn, they will need to engage the companies behind these loans, insurance policies and investments to provide information for this reporting. The Federal Reserve has declined to participate; but, it is realising that this position will not be tenable for much longer (FT.com 120120, Gavyn Davies).

Investors representing about $130tn in investments are now starting to require ESG (Environmental, Social, Governance) reporting.  Some of these portfolio managers have also set climate targets for their portfolios as part of their criteria for investment.  Two of these funds are the Norwegian and Japanese Soveriegn Wealth Funds, each of which have fund valuations well in excess of $1 trillion.

There is also a group of over 450 investors, Climate 100+, who represent $40tn in investment that are initially focused on 161 global companies that cover up to 80% of global industrial emissions with 3 goals.  Firstly, to improve corporate climate governance, secondly to curb emissions in line with the Paris Agreement and finally to strengthen climate related disclosure.  

Shifts in investment focus and willingness to lend money to certain sectors is already underway.  One of the first sectors to be hit hard has been the coal industry.  Investors are looking more intensively at the ESG focus of companies and adjusting their decision making on investments. Banks are under increasing pressure to do responsible lending and are also starting to restrict their focus towards companies that are impact focused; although, there is still a long way to go.  

The fourth group of stakeholders are customers who are increasingly voting with their wallets on social and environmentally responsible companies.  This involves shifting their purchasing from companies who breach fair trade principles, are not diversity inclusive, support Amazon deforestation, are high CO2 emitters, and are plastic and types of polluters.

Finally, there is the public that are showing that they want things to change whether it is climate protests all over the world linked to Greta Thunberg, who has twice been nominated for the Nobel Peace Prize, or the response to the recent ‘black lives matter’ protests.  Both of these are driving significant rethinking in Board rooms regarding environment and social responsibility. 

The memorable way to capture this approach is to use the phrase John Elkington coined over 25 years ago, the ‘triple bottom line’ (TBL) or as it is also named ‘people, planet, profit’.  The idea is that as well as profitability of the company there needs to be impact measurements linked to sustainability.  

The use of this phrase has gone in different directions, so I will define it specifically as to how I am thinking about it.  Given the need to integrate with the UN SDGs (Sustainable Development Goals), which is the best current consensus on the set of components required for long term sustainability of the planet, there are three areas of external impact that need attention – economic, social and environmental impact.  Clearly, also for the company to be sustainable it must focus on its profitability and growth in order to attract and retain capital. In this context then the company has two factors in the economic component (Figure 11-2).  Firstly, its own economic performance; and secondly, its external economic impact at the local, national and international levels.  

Figure 11-2

Companies now need to both align their Triple Bottom Line strategies with their key stakeholders as well as building the reporting and measurement requirements for internal use, for ESG reporting and for the needs of investor rating agencies.

These are the impact definitions that need to be considered to establish the impact measurements the company chooses to focus on.  

  • Economic: the positive and negative impact an organization has on the local, national and international economy. This includes creating employment, generating innovation, paying taxes, wealth creation and any other economic impact an organization has.
  • Social: the positive and negative impact an organization has on its most important stakeholders. These include employees, families, customers, suppliers, communities, and any other person influencing or being affected by the organization. 
  • Environmental: the positive and negative impact an organization has on its natural environment. This includes reducing its carbon footprint, usage of natural resources, toxic materials and so on, but also the active removal of waste, reforestation and restoration of natural harm done.

There is confusion on how a company should define its own situation specific impact factors.  Clearly, this is going to be affected by sector and geography as well as the specific strategy of the company, and how impact ties into the value proposition to its customers and other key stakeholders.  The concern is that companies must focus on ambitious impact targets aligned to ambitious profitability targets.  With the fuse on climate change and other critical environmental issues burning, just reporting on ESG without a deep understanding, thinking and commitment to a strategy with impact will fall far short of what is required and ultimately expected by key stakeholders.   

Setting impact factors can start with understanding the current impact of a company; however, it does not stop with just setting tighter targets within the existing strategy that require moderate changes to achieve.  From an environmental perspective, if you are depleting resources, are an energy producer, have high energy consumption, are a manufacturer or you have high volumes of waste (eg. packaging) then a major rethink of your strategy is probably needed to ambitiously reduce your environmental footprint and reposition yourself.  The broad goal would be to shift from a linear strategy of ‘take-make-waste’ towards a wasteless or circular strategy.   One of the leaders in this space who are helping drive this shift is the Ellen MacArthur Foundation (www.ellenmacarthurfoundation.org ).  

The core elements of a circular strategy, to create a circular economy, is to firstly design out waste and pollution.  Secondly, to keep products and materials in use and finally to regenerate natural systems.  From an economic and social impact view, the goal is very much about responsible management towards employees, customers, other players in the supply chain and related communities.  Considerations include anti-slavery, fair trade and work practices, providing living wages, the provision of health services, education/skills development, paying taxes (eg. not working through tax havens), and enhancing  and supporting the key communities that interact with the business.  Decisions on the impact focus, as well as profitability, also need to be tied into resilience considerations.   A strong and sustainable strategy will create alignment of the business with the economy, society and environment (Figure 11-3). 

Figure 11-3

In summary, businesses need to shift their thinking to focus on both profitability and impact.  Impact factors are defined by the UN SDGs. The specific impact targets that a business sets as its goals will be affected by the industry sector, the businesses geography and the particular strategy of the business.   Businesses need to revisit their strategies and in many cases make some fundamental changes in order to set ambitious impact targets along with their profitability ambitions.    

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“Talent wins games, but teamwork and intelligence wins championships ” – Michael Jordan

Blog 10 of the Business Strategy Series

From product to company technology, innovation and design.

Just think about the smart phone – the i-phone – that was introduced to the market in 2007 and closely followed by the Android phone.  The previous generations of the phone included the fixed location home phone, then we moved to rather bulky mobile phones where you could only talk, then on to phones with messaging and some functions such as calendar, etc. And now we have the i-phone and what does it do with all its apps?  It is a phone, it lets you manage your emails, it is your console for social media, it can access and play any music, it can access and play videos, it can track and help you manage your health, it is a camera, it is a library, it is a research assistant, it’s a games console, it can let you do all your banking, it has Siri your assistant, it’s your mobile office, and the list goes on and on!  How much more will you be able to do when you add IoT, 5G and AI technologies?  That is the power of technology, innovation and design (Figure 10-1).

Figure 10-1

What are some of the interesting lessons that the smart phone illustrates in terms of the role of technology, innovation, and design (TID)? Just think back to the pre-smart phone era as to what it would take to do the same things – how much would it cost, how much space would it take, how much more time would it take to do the same task and switch between tasks, how does the performance of each task compare in terms of productivity, what level of physical resources would you have depleted, what would be the energy foot print of having all those capabilities and using them.  Across virtually every relevant dimension you can think of there is a learning curve from innovation.  

What do I mean specifically by learning curve?  With time, volume and experience a task or set of tasks has the potential to improve across a set of key dimensions including output quality and productivity, cost, resource use and breadth of capabilities provided.  This is progress –  continuous improvement – in key dimensions of performance over time.  It won’t all be a in a straight line.  There will be a combination of incremental improvements, step changes, setbacks; but, overtime there will be progress.  The smart phone in combination with broadband, computing power, big data, battery life has now made a significant change to the lives of billions of people.  

This concept of the learning curve has the potential to replicate across virtually all aspects of our life if we focus on learning and innovation.  Here are some examples of improvements that are being seen in the world in Figures 10-2 to 10-7.

Since 1820, World GDP has grown by about 100 times while population growth has been 8 times.

Figure 10-2

Since 1800, life expectancy at birth has increased from below 30 years to over 80 years in some countries.

Figure 10-3

The share of the world population in absolute poverty has dropped from about 90% in 1820 to now under 10% of the population.  Even since 1980, it has dropped from about 44% of the population to below 10%.

Figure 10-4

With all the growth in GDP and GDP per capita, the average weekly work hours per person has dropped.  This is also the case if you look at household work with the advent of the dishwasher, washing machine and drier, the oven, the vacuum cleaner, etc.

Figure 10-5

The death rates from pollution per 100,000 people have declined, as with homicide deaths, disease related deaths, deaths from other health conditions and traffic related deaths.

Figure 10-6

Cereal yield improvements have almost fully offset the need for additional land from the growth of the population since 1962 from 5.15 billion to the 2014 level of 7.3 billion people (we are now at about 7.8 billion people) and improvements in income per person which has driven growth in calorie intake.

Figure 10-7

If you want to really study this, I suggest Steven Pinker’s book ‘Enlightenment Now’ as a good place to start.  The other source to look at is www.ourworldindata.org which was founded by Max Roser.  

With the ability to create improvements across the world through learning, process improvements, focusing on reducing waste and development and use of new technologies, we should be systematically looking at how to improve all parts of a business. It may not all be on the Moore’s law curve that we see for computing power ( Figure 10-8) or a perfect experience curve. 

Why have I called this technology, innovation and design?  Technology is the availability of a new capability that has the potential to create an impact.  The common thinking of technology progression is Moore’s Law.

Moore’s Law is the observation that the number of transistors in a dense integrated circuit doubles every two years. Figure 10-8

Innovation is the conversion of a capability into a specific application to enhance or transform the value of a product or the performance of a business.  In the example below, are examples of how technology has driven down the cost-performance ratios of key products which open up large new market opportunities.

Figure 10-9

Design is the conversion of an application specific innovation into a product or service to drive adoption.  Without adoption of an innovation, no value is created.

Figure 10-10

What are the implications for business and strategy?  Everything!  What is the strategy to transform customer value, reach new customers, improve productivity, employ capital more productively, reduce costs, reduce resource use and reduce CO2 emissions?  A committed focus on innovation should drive medium and long term performance for shareholders, and improve alignment with key other stakeholders.  The opportunities go well beyond just product.  

Figure 10-11

Here are some 5 key areas to think about.  

  1. A continuous focus on understanding your customer in terms of how they make a decision to buy, how they buy a product and how they use the product and finding out where the business falls short will drive improvements across a whole business.
  2. Put as much data around decision making as possible.  De-average your analysis and decision making to help eliminate waste, improve safety and privacy, personalise, find new innovation opportunities and remove unproductive activities.
  3. Put in test and learning processes across your business – in service, in production, in administration, in technological innovation and in new product development.  Create a culture of continuous improvement.
  4. Explore getting the right mix of in-house vs. outsourced capabilities.  This could be efficient access to expert power where it would be hard to create internally.  Alternatively, it could also be outsourcing of non-mission critical activities to groups that are much more efficient.  In addition, it could also link to shifting to third party cloud based systems to de-risk, variabilise costs, reduce technical debt, and let experts innovate new functionality.  
  5. Find the right balance of focusing on continuous improvement vs. finding opportunities to create step changes; for example, from new technology or changing your business model. 

In summary, if you don’t keep moving forward you will be passed. In a rapidly changing world, integrating technology, innovation and design in the operating DNA of the business is mission critical.

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“Innovation is seeing what everyone has seen and thinking what nobody has thought”, Dr. Albert Szent-Györgyi (discovered Vitamin C)

Blog 9 of the Business Strategy Series

The natural subject to follow on from customer – product fit is to explore business models.  The business model definition in the context of this discussion is, the economic model for profitability that joins the value proposition to the target customers with the delivery model of resources and processes that need to be combined to meet the customer need, and to build and grow the business.

It is critical to understand that the three components, the value proposition, the set up to deliver the value proposition and the economic model are all intertwined. As an example, in the US you might ask how does everyone seem to own a car and regularly get a new car. Surely, with the level of debt in America, most people don’t have the available cash to buy a new car!  The answer is that if you combine lease financing with a car you can expand the market by reaching a whole set of customers with limited or no savings, who can make payments out of their monthly pay.   In the case of General Motors (GM), you have GM the car manufacturer and GM Financial the lease provider.  The combination of the two provides the value proposition of a new car based on monthly payments and drives the overall profitability of GM from both product margins and financial margins from the  leases.  

A more modern example is AirBnB who are the biggest providers of rooms for short term accommodation.  They do this without owning any real estate.  They have crowd sourced the rooms, they then pay for them and resell them on a variable cost basis. AirBnb effectively then takes an intermediary margin to drive the economics of their business.  Both of these examples show how the economic model is an integral part of the value proposition and also dramatically affects the scale opportunity for the business.  Business model innovation, with innovation within the economic model, is a critical component in the development of new successful businesses.

There are five key economic dimensions of the business model that I will explore.  The first dimension is who pays. Is it the customer who pays for the product or service or does someone else pay – these are direct or indirect models.  One of the earliest versions of the indirect model is a newspaper or magazine that is free, and all the revenues are made from ads placed in that media.  The companies placing the ads are indirect beneficiaries of the consumer business if the ads generate revenues for the advertiser.  

Today two of the FAANGS (5 prominent American technology companies – Facebook, Apple, Amazon, Netflix, Google) have a core model that the consumer does not pay.  They are Facebook and Google.  These two companies make most of their money from the placement of ads in the web pages of their consumers.  In these digital models there are also opportunities to make money off the consumer data that they collect.  The reality of these economic models, although it may not be obvious, is the user of the service is the product and the economic customer is the advertiser or purchaser of consumer information.   The internet spawned a large movement towards this model; although, many companies have found that ad revenues alone are not enough and a hybrid model is usually required.

The second dimension is the economics of revenue growth.  There are two fundamentally different types of revenue focus, product focused (transaction oriented) and customer relationship driven.  The economics of the two models are very different and best suited for different situations.  In the transactional model, the sales, marketing and service costs related to the sale are covered within the profit margins of the product/service sold.  In the economic profile of a customer relationship focus, the upfront costs of finding a customer are often expensive; however, as long as you capture customer information and are able to market to them subsequently the follow on marketing and sales costs to a customer can be very low.  If this is matched with a product offer that you have reasonable expectations you can generate recurring revenues, and ideally growing revenues over time, then you would be willing to lose money on the first purchase and make the profit up in subsequent purchases.  

In the early days of Amazon, there was always wonder at how the economics of Amazon made sense as they were unprofitable for years. If you look at it from a customer relationship perspective it was clear that when you have a high growth curve your focus is on new customer acquisition and each new customer at the beginning of their relationship is a loss maker.  Jeff Bezos clearly believed from books and then adding new product categories that the lifetime economics of a customer would be positive and this was a critical part of his economic model.  

The third dimension is revenue payment model.  There are a number of payment timing approaches in a model which include individual purchase, periodic purchases (unstructured buying over time) and subscription payments.  

Figure 9-1

These three dimensions are captured in Figure 9-1.  The indirect model of who pays is captured in the ‘Free’ column.  In the free column, if a customer never makes a payment then the revenues for the organisation needs to be collected from interested intermediaries.  In the grid, you can see that for digital companies that involve high frequency of use, often the right model is customer focused and subscription payments.  In contrast for non digital, companies such as FMCG companies and physical retailing where it is difficult to capture a name and efficiently use it, they will tend to be product focused.  Many of them try to become more relationship oriented by adding a loyalty program to a standard offer.

Often, there are companies that use a freemium model in the digital world.  A freemium model of a no cost low specification software application can often be an effective way to create a low cost of customer acquisition by offering a free trial product and then by watching their behaviour to trigger opportunities to upgrade the customer to a paying version of the product.  Spotify uses a variation of this model, where you can use Spotify for free if you are willing to put up with a regular flow of irritating adverts.  To get rid of this negative experience and then enjoy the full benefits of Spotify you take on a subscription.  From a Spotify perspective the ad revenues for a free customer is an offset to the customer acquisition costs for creating a subscription customer.  Spotify understands the large network benefits of having as many customers as possible using their service, so freemium pricing is a critical component of their strategy to be a leader in this sector.

This matrix, product vs. customer focus, and the revenue payment model are the two standard ways that most companies look at their business model.  

Many companies are now adding additional dimensions to their thinking about what the right proposition is to the customer and how the financial models works for the business.  The fourth dimension relates to how the product/service to the consumer is financed in relationship to the payment from the customer.  In this dimension, the standard approach is that the consumer pays the full value of the product or service at the time of purchase.  In this context, the company needs working capital financing for the product until a customer comes along.  

At the other end of the spectrum, the company will build up a product offer for the market by working as an intermediary effectively selling other peoples products.  The company may pre-buy inventory for resale, or crowd source product (eg. AirBnB) where they only buy a product or service when there is a need.  Crowd sourcing is a working capital and asset light model and the key is to solve how to add value in the middle as an intermediary.  Many people will refer to these businesses as market platform businesses. 

The final approach within this financing dimension, is what I have call provider financed.  In this case, the company has financed the asset and then provides the product as a service so the company only gets full financial coverage on the asset from multiple uses and/or multiple customers.   This can help significantly expand the market by taking out the affordability issue in the use of the product or service.    This is also known as an asset sharing model. 

With the focus now moving towards climate and environmentally friendly businesses, business models that are focused on high asset utilisation should have an important role in our lives going forward.  One of the sectors, where this is often talked about is the auto industry.  It is clear that cars are used only a small fraction of the time that they are available for use.  It is thought that if cars were in a high asset utilisation model, then we might only need about 10% of the cars currently in circulation.  This movement may also accelerate with the shift to autonomous driving vehicles.  

This leads us to the fifth and final dimension within business model that I want to focus on.  With the drive towards making businesses climate friendly, and the growing recognition that asset sharing is an interesting opportunity  for both the customer and the asset owner, there is a growing movement away from asset ownership towards ‘use’ and ‘result’ focused business models.  

Once again within the automotive industry, we can see examples of each of these three models (Figure 9-2).  At the product focus end of the spectrum are the automotive manufacturers which include Toyota, VW, BMW, Mercedes, GM, Ford, Fiat, Renault, Peugot and the new entrant Tesla.  In the service focus part of the market, there are all the rental car companies and then new entrants such as Zipcar.  Zipcar is a highly convenient rental service to use the car as you want.  The service features include highly convenient pick up and drop off, a clean car, a full tank of gas/petrol, insurance and simple payment with all inclusive pricing.  Many consumers in urban environments are shifting to not owning a car and just paying per use.   At the results focus end of the spectrum, you have taxis and more recently Uber, and equivalent crowdsourced point to point personal transport service providers.   

Figure 9-2

If you were a large car manufacturer today, or a major player in the supply chain, facing a shift to electric cars, all the climate pressures, the emergence of crowd sourced / asset sharing companies, and in the medium term the growth of autonomous driving vehicles, what would your strategy be?

The mapping of the asset financing dimension and the product-service dimension provides and interesting look at the strategies of different companies (Figure 9-3).  An interesting business model to look at is Microsoft Office 365.  Microsoft has shifted from selling Work, Excel and Powerpoint as individual products or bundled as one off purchases to a subscription model with additional bundling of other services. This has helped to transform their business and economics.  They now have a product suite that is an integral part of their ‘cloud first’ strategy that provides a steady monthly flow of income, plus conversion to high proportion of direct sales to capture margins and only nominal additional marketing costs per existing customer for further potential sales.  This model also helps to open up additional innovation and cross selling opportunities off their cloud platform.  Uber and AirBnb in the marketplace and result box in the grid were able to build multi-billion dollar businesses by leveraging off other peoples assets and driving very simple user experiences.

Figure 9-3

One of the masters of business model innovation is Amazon.  Amazon has built a business fortress with innovative use of business models (Figure 9-4). Amazon uses different combinations of business model components for each business. They go well beyond just looking at simple business models and create advantage from multi-factor business models.

All their businesses are customer relationship oriented and collect customer data.  The B2B businesses have leveraged off and enhanced the home shopping infrastructure.  Each business has carefully focused on how to drive drive growth, optimize the use of cashflow, and generate the long term profitability requirements of the business with a compelling customer proposition.

Figure 9-4

Going forward, it will be very difficult for anyone to compete directly against Amazon.  They have a relentless focus on customers and on how to drive continuous growth and improvement in the relationship they have with them, and they are innovation and execution obsessed.  Finally, they know how to use their scale with data, with the range of product and services they provide, and the efficiency of their infrastructure to their advantage.  It is no wonder that there is talk about the monopolistic market position that Amazon sits in.  

Clearly, there are other factors to explore that drive a business model, including different types of pricing, such as freemium and yield management pricing, and the selection of channels to market, which also have an impact on market size and growth potential, pricing and the cost structure of the business.

There is a real trend of businesses to move from simple business models to multi-factor business models. Different combinations of dimensions will create a business model with different financial characteristics and different market size and growth opportunities. The models create different financial profiles in terms of:

  • Upfront cash to get the business started and operating
  • Ongoing working capital and growth financing
  • Time to self sustaining economics
  • Resilience – reliability and predictability of future revenue streams, ability to handle economic disruptions, etc.
  • Market size and market growth potential

From a climate and impact perspective it is also critical to identify a sustainable business model. It is essential to explore models that will reduce waste from the traditional product delivery model of take – make – waste, towards a no waste model of being focused on maximising the life of a product/service and optimising the utilisation through reselling, remanufacturing, asset sharing, and finally optimised recycling.

Exploring different business model components is an essential piece of the innovation focus within a business. Creatively looking at whether adding further dimensions to the business model, as Amazon have, or fully switching to a different model, as Microsoft with Office 365 have, is a vital part of business strategy.

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Blog 8 of the Business Strategy Series

To date I have addressed 3 of the strategic topics that are integral to strategic thinking going forward.  The topics have been ‘from shareholders to stakeholders’, ‘from Michael Porter’s five forces to macro models, and ‘from risk monitoring to business resilience’.  In this blog, I will cover ‘from product – market fit to customer – product fit’. 

A more detailed understanding than product market fit is required in assessing the full  opportunity for a business.  Marc Andreessen, co-founder of influential Silicon Valley venture capital firm Andreessen Horowitz, coined the term product-market fit in a 2007 blog post, defining it as “being in a good market with a product that can satisfy that market.”  Traditionally this has been from primarily looking at the existing market.  In the venture capital world, this usually involves market testing to confirm that an exciting market opportunity exists which is the right place to start.  Unsurprisingly, with existing businesses this examination of an existing market is also done but often with not enough rigour on looking at the future.  

Customer – product fit is the matching of a product or service proposition with the needs of a large, and ideally growing, set of customers that will underpin a thriving business over time..  The reason that I choose to call it customer – product fit is that the critical thing is that only by truly understanding the customer will you match a need with the right product fit.  In addition, in an established business having a proper detailed understanding of market dynamics, opportunities and how they will evolve is mission critical to investment decisions.  Customer fixation is critical to success.  With markets evolving at increasing rates of change, too many companies are overly focused on competitors vs. customers.  

In an interview with Inc. magazine in 2019, Jeff Bezos talks of 4 key principles that drive Amazon’s business – Customer obsession, eagerness to invent, long-term thinking and operational excellence.  He says, “The first and by far the most important one is customer obsession as opposed to competitor obsession,” he says. “I have seen over and over again companies talk about being customer focused, but really when I pay close attention to them I believe they are competitor focused, and it’s a completely different mentality, by the way.”  He then goes on to say ” If you’re competitor focused, you have to wait until there is a competitor doing something. Being customer focused allows you to be more pioneering”.  Finally, this customer focus is encapsulated by a quote of his in Blomberg Businessweek, August 2014, “We don’t want to start with an idea and work toward the customer. We want to start with a customer problem and then invent to a solution.” – Jeff Bezos, Bloomberg Businessweek, August 2004

There are a number of factors that are creating a need to think differently by looking at customer – product fit (Figure 8-1).  Let me first talk about all the influencing factors and then I will come back to talk more specifically about customers.  Firstly, the need to focus on climate and environmentally sustainable products and services will be critical for all sectors with varying degrees of urgency.   With climate, leglisation, investor and public demand will be changing the shape and size of many consumer and b2b segments and the specifics of the product and service offers. For example, will your sector need or want to move from short cycle products (use – dispose) to long cycle products (eg. use – upgrade – resell – recycle), or go from a product purchase model to an asset sharing model.  Understanding how market segmentation will change as a result of both customer purchasing habits responding to the issue and other market requirements is essential to explore.

Figure 8-1

Secondly, the need to think about fit requires evaluation in the context of different time horizons.  For example, music has shifted in delivery format from LPs to cassettes to downloadable to live streaming.  With the acceleration of new technologies emerging many sectors will see fast and significant changes in what needs can be met, the design and delivery of the product or service, the payment models, the post-sale experience and the after-use experience.  The time between ‘new normal’ customer and market environments will shrink from a combination of technological shifts, climate change and other major disruptions.  

Thirdly, customers increasingly care about the sourcing of products; being on top of shifts in this thinking will be critical.  This care, and ultimately how they vote with their pockets, can link to environmental concerns (eg. deforestation), social concerns (eg. fair trade, child slavery, desire to buy local) and geo-political views (eg. anti-China).  

Fourthly, creating scenarios of potential market and competitive environments in the future will be more important than deeply understanding the current competitive environment.  The combination of new technologies, adoption curves of existing known technologies and the shift to sustainable businesses will change the shape of many markets.   You just have to think about how different your life was in 2007 when there were no smart phones and apps, limited bandwidth broadband, low data storage, much more limitations to on-line shopping and the use of social media was just starting!  When the key success factors, skills and capabilities change for a market sector, there will be changes in competitor sets and the dynamics between them.

Finally, with your customer – product focus what kind of innovation cycles will you need to stay relevant?  This isn’t just what we think of in terms of rapid ongoing upgrades to an existing product; rather, it is thinking about the time periods and likely fundamental shifts that the product or service may require to stay relevant.  All these factors can have a material bearing on customer – product fit going forward which is where strategy is focused.

Now back to the core thinking about customers.  I will focus on thinking about the dynamics in consumer markets, and then discuss business to business (B2B) markets.  I am amazed at how many people rely on impressions of what is happening that may well be 20 years or more out of date.  Two great books that deal with this are Enlightment Now by Steven Pinker and Factfulness by Hans Rosling. Challenge your executive team, and Board, to go through the 13 questions that Hans Rosling asks to see how current your thinking is on the world today.   Most groups that do this will be surprised by how much their knowledge is out of date.  Our knowledge base tends to be heavily biased by what is newsworthy as opposed to what is actually happening.  Up to date facts and knowledge is critical to picking the right geographies and customer groups to focus on; and, deeply understanding target customers and the potential market and product dynamics linked to them is fundamental to growth.

At the macro level, the global population continues to grow.  We are now approaching a global population of 7.8 bn people and we expect to hit 10 bn people by 2055. The dynamics of this growth have changed and will change significantly over time (Figure  8-2).

Figure 8-2

This is a growth rate of about 1.05% per annum currently which is expected to decline on an ongoing basis until population growth has virtually stopped by 2100.  The population growth rate was as high as 2.05% in the period between 1965 and 1970. A tremendous change occurred with the industrial revolution: whereas it had taken all of human history up to year 1804 for world population to reach 1 billion, the second billion was achieved in only 123 years (1930), the third billion in 33 years (1960), the fourth billion in 14 years (1974), the fifth billion in 13 years (1987), the sixth billion in 12 years (1999) and the seventh billion in 12 years (2011). During the 20th century alone, the population in the world has grown from 1.65 billion to 6 billion. (Source: worldometers.info, UN Nations – World Population Prospect: the 2019 Revision (June 2019)). In the 21stcentury, the population is expected to grow to about 11 bn by the end of the century at which point the population will have probably peaked.

If we then look at sources of population growth from 1950 to 2055 forecasted levels, the sources of growth evolve significantly by both geographic region (Figure 8-3) and by World Bank income classification based on the 2018 country classifications (Figure 8-4).   Firstly, from a geographic perspective, the combination of North America and Europe represented 28% of the global population in 1950 and by 2055 it will only be 11% of the population.  Europe will start to decline as of 2025, and North American growth will be very slow.  Asia will continue to grow through to 2055 and then start to decline; although, the sources of growth will change between countries.  Africa will continue to be high growth, and then effectively be all the growth from 2055 to 2100.  From an income growth perspective these growth patterns will be exaggerated further as income growth rates are higher in lower income countries.

Figure 8-3 Figure 8-4

If you look at growth using World Bank Income Groups as defined in 2018, both high-income and upper middle income group populations growth will have peaked by 2050 and all the growth will be in the lower middle income and low income group countries to 2100.  

Behind these numbers, there is the other dynamic of population breakdown by age (Figure 8-5).  These trends can also cause tremendous shifts in spend as populations age.  Figures 8-6, 8-7 show how different the dynamics can be when you compare Japan (the oldest average age country and a declining population) with a large high growth country young country such as Nigeria.

Figure 8-5
Figures 8-6, 8-7

Clearly these dynamics then need to be overlaid with consumption patterns and income availability to really understand and define opportunities.

The last aspect of B2C customer – product fit that I want to talk about is customer purchasing behaviour.  In consumer markets, we have gone through the different generations from Baby Boomer to Gen X, Y and now Z (Figure 8-8).  There have been massive shifts in attitudes, behaviours, purchasing and consumption.  These shifts cause great challenges across many businesses ranging from hiring, to work expectations and work environment practices, and clearly also to consumer spend on product and service offers. 

Figure 8-8

Through the generations, and with technology changes, we are seeing major changes to consumer spend in a number of ways.  Firstly, in the mix of spend such as shifts from products to experiences and trends towards wellness.  Post Covid 19, I think we can expect some further shifts in the mix of spend, perhaps less travel and more spend on the home. Time will tell! Secondly, there is the evolution of functional needs within product categories; for example, towards organic in food, or simplicity, time saving and integrateability in more technical products.   The functional elements then also blend in with the emotional factors, the third category.  These would include the potential need to express individuality, badges/brands for association, design, local vs. mass produced, etc.  Finally, there are some overall higher level themes that would go across sets of product categories linked to social responsibility and ethics such as climate, ethical sourcing and fair trade.  Being on top of these trends and understanding the link back to customer needs and segmentation is critical strategically.  

As with consumer purchasing, B2B markets have similar complexity and an ever greater importance of understanding technology and innovation trends that will affect a companies mix of spend and specific purchase criteria.  Bain & Company, my alma mater, has done some excellent work analysing and categorising the most important elements for a purchasing decision.  Figure 8-9 is their Elements of Value pyramid for B2B buyers.  Across industries, the most important factors will vary; and then, within an industry, markets will segment against certain clusters of factors.  

Properly, identifying these market segments and then understanding them is essential for properly mapping customer – product fit.

In summary, focusing on a clear existing market is essential; however, understanding how the market will evolve and purchasing patterns may change is what will drive the sustainability of your market opportunity.  All of this starts with truly understanding a company’s target customers and their needs and problems that they are trying to be solve.  This knowledge will drive investments, how you organise and focus your innovation initiatives, and your ability to compete and outperform.  

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“It’s your reaction to adversity, not adversity itself that determines how your life’s story will develop.”
― Dieter F. Uchtdorf

Blog 7 of the Business Strategy Series

‘From risk monitoring to business resilience’.   How many companies had put pandemics as a risk factor in their risk register and were well prepared?  This is despite infectious diseases being logged as a medium likelihood and a high impact risk in the World Economic Forum’s Annual Global Risks report.  And, since the beginning of this new millennia, in the last 20 years, we have had Sars, Swine Flu, Mers, and Ebola.  Clearly, there were not many companies prepared or we would not have needed government economic support of up to 15% of GDP in wealthy nations.  

In addition, how many companies were prepared for the financial crash in 2008, have fully considered the risks from global warming, the challenges of political, economic or climate based refugee movements, or the full range of risks from different forms of cyber attacks?  This discussion follows on naturally from the previous blog on the need for macro modelling beyond traditional industry analysis.  

The first area of attention is to add macro risks with multi-horizon views into the risk monitoring (Figure 7-1)

Figure 7-1

As the world is getting more complex and more interlinked, the likelihood of an event occurring increases.  In addition, the risk and impact of an event is increasing due to inherent trends that we are facing.  These trends include climate change, population growth, increasing reliance on technology and data, increased population concentration in cities, globalisation and increased levels of debt per capita.  The optimistic view is that behind each of these trends should also be some great opportunities and this is where the great companies will be focusing.  Rigorous analysis should help to identify opportunities out of a risk assessment.  

In the World Economic Forum’s Global Risk Report 2020, they have surveyed their member base to get their view of the likelihood of a risk occurring and its potential impact on a scale of 1 to 5.  The higher risk and likelihood events are listed in Figure 7-2.   

Figure 7-2

The outcome of this survey is set out in Figure 7-3 which shows the set of risks with a combination of high likelihood and high impact.  You can see the clustering of environmental concerns in the top right quadrant.   It is interesting to note that infectious diseases/pandemics were not ranked as high; although, still seen as serious.  

Figure 7-3

The perceptions of risk are not static over time with some of the perceptions being influenced by events that are occurring at the time, such as the 2008 financial crisis.  Since 2007, there are 2 visible trends. Firstly, the escalation in the risk levels related to climate and environmental issues.  Secondly, a growing view of risk levels on the technological front.  The good thing to take away from this risk assessment is that this indicates a growing understanding and view of the risks of climate change and environmental degradation.

Another interesting aspect of this report is that they compare the views of the WEF members against their Global Shapers Community which is the WEFs network of young people driving dialogue, action and change.  In most cases the Shapers see a higher likelihood of an event occurring and in virtually all cases a higher potential impact.  

What is not fully evident, and not addressed in the report, is the extent of government and business response in light of these risk assessments.  You would think that this could be one of the productive outcomes of the WEF Davos Meeting that happen annually.

For a specific business, the ratings of the risks would be affected by a combination of the sector and geography where they are involved.  Business risks can be divided into two broad categories of risk, direct risks (Figure 7-4) and macro, or indirect, risks (Figure 7-5).

Figure 7-4

Behind the direct risk, is the ongoing risk of one of the events occurring and the potential impact of that risk; however, there is also an implementation risk that occurs on an activity when you are undertaking a material action that is new and within your plan, or you are taking a substantive action to either mitigate a risk or respond to a risk that has occurred.  

Similarly, with Macro Risks, there is the physical risk which is the fallout related to the specific event. This would include second and third order effects as we have seen with the current pandemic.  However, there is also a transition risk which involves a fundamental change to the operating environment of the business; and, in these cases there are risks related to the period of change to a new environment.  Examples of transition risk are the risks arising from a transition from our current energy provision to a clean energy sector or a transition from a linear economy to a circular economy in a specific sector. 

Figure 7-5

Against these risks, the management and their boards clearly need to think through how to build resilience.  Resilience strategies can take several forms.  Firstly ‘Shaping’, the company could eliminate or at least partially eliminate risk by boldly implementing a plan upfront. This approach would also be deployed where there were also business opportunities.  An example of shaping, would be a technology company building a second manufacturing facility outside of China due to geopolitical concerns and trade risks. This approach is clearly bolder and requires more upfront investment; and if there is a market opportunity involved it may well be the right approach.  Another interesting example of this is IBM, who started as a mainframe computer business, then separately invested in mini computer business in case the market took off; and then finally, did the same thing with the micro-computer market.  

 Secondly ‘Hedging’, the company could build a specific risk mitigation response capability that would be pre-planned and tested.  This would include optioning, if there are a set of discrete scenarios that would require quite diverse responses.  The goal is to limit the upfront expenditure, but keep the company in the game and help accelerate the speed of response if required; thereby, mitigating the risk.  Thirdly ‘Reacting’, a company could build the information and systems requirements that would give better pre-risk warnings, improve in-risk analysis to help the response, and provide post occurrence monitoring.  Finally ‘Dry Powder’, is to ensure that you have the financial capacity to react to any residual risks including known risks with unknown outcomes and unknown risks. 

In addition to defining risks in terms of likelihood and impact, it is important to categorise the risk.  There are effectively three risk categories.  The first risk category is ‘Clear Outcome’.  An example of this would be the binary decision of a competitor to build a new plant in a key market that would significantly affect the supply – demand dynamics.  

The second category is ‘Range of Outcomes’. In this case there are a set of different scenarios that could describe the future.  In some of these situations, it may link to scenarios of the outcome and timing of regulations related to a sector.   The third category is ‘Unknown Outcomes’.  In these situations, they are known risks but no true understanding on the likely scope of outcomes.  An interesting example of this would be during the development of the electric car market. In 2010,  I think it would be safe to say that the categorization of the development of this market and its implication on diesel and fuel cars would be ‘Unknown Outcomes’.  In 2016, Norway agreed to ban all conventional cars by 2025 and then other countries and cities started announcing bans in 2017.  By this time the risk category in the EU had turned to ‘Range of Outcomes’ and it was just a question of when the bans would be enforced by country across the EU.  Clearly, different types of risk need different option evaluation approaches.  Doing additional research and analysis to be able to shift to a clearer set of outcomes can add significant value.  

Linked to evaluating resilience responses, a business should be able to see that certain actions can create resilience against several, and often unrelated, risk types. This is clustering.  For example, having two manufacturing facilities in two countries rather than a single facility could mitigate risks for floods, fires, geopolitical trade risks and foreign currency risks. Another example would be, moving to an environmentally friendly strategy would help mitigate the risks from changing consumer purchasing behaviour, reduce employee retention risks, get the company ahead of potential new regulations, and reduce the potential of brand and reputation damage from climate action groups. 

The other side of resilience response is to evaluate whether or not risk reduction can be coupled with a new business opportunity. Pressure test your resilience thinking to see if you can turn some of the needed activities into opportunities to create deeper strategic advantages and further customer differentiation. A simple example of this, has been the Covid 19 based rush of many retailers to build an online channel for remote ordering and home shopping.  Many of these retailers somehow missed understanding that adding a home shopping channel market is a basic requirement today and should have been part of their strategy long ago to grow sales anyway.

These different components can be pulled together into an overall approach to resilience management (Figure 7-6).

Figure 7-6

There are a number of ways to build resilience. The most important starting place is to have the right leadership and team in place that have the knowledge and the capacity to build resilience, and rapidly and effectively respond to risks.  This pandemic has shown some stark differences in country and company abilities to respond to risk and significant differences in speed and effectiveness of response.  

There are different ways to think of building resilience and some of them are noted in Figure 7-7  Firstly, diversification is a classic way of reducing risk.  Points of potential diversification would include raw material sourcing, manufacturing locations, distribution channels, data centre locations, geographic focus, and product range. Secondly digital innovation, which would include adding the ability to work remotely, home shopping, using cloud based systems, remote servicing.  Thirdly, product service innovation which would include having a more diversified set of products; but, also being able to rapidly change and adjust products and services for example as new regulations are put in place, software language use changes, and responding to disruptive new entrants into the market.  Fourthly, business model innovation is becoming increasingly important to look at.  We are now seeing a shift in some areas from single product purchasing models to locked in monthly payment models such as with digital news services vs. daily purchases of a newspaper.  Building reliability in revenue flows is a also critical part of resilience. 

Figure 7-7

Next is financial capacity management. In times of crisis, a strong balance sheet always wins.  It is increasingly hard to insure against all potential risks so residual risk may need to be covered off by a stronger balance sheet.   Just like at home, a business needs a cushion for a rainy day!  A strong balance sheet is also critical if a company is seeing increasing volatility of revenues and/or increasing seasonality of the business.  Private equity owned companies that are tightly financed and highly levered are particularly susceptible to small changes in trend lines.  I think everyone would agree that believing that the last line of defense of a business is a rescue by the government is not something worth relying on.

Finally, having partnerships-alliances or reliable third party support to help deal with, or be on call for, certain crisis types is usually a core part of a resilience strategy.  In technology based risks, having a specialised help to deal with cyber attacks is a common use of a third party.  They can help help reduce the risk of an attack succeeding as well as helping to respond to a threat that occurs.  Other examples could include having back up manufacturing capacity and some outsourced service capacity.  For many companies, having your data and software in the cloud results in the cloud supplier (eg. AWS, Google, Microsoft) providing the resources and skills to deal with a cyber attack risk.

Against this whole discussion of risk and resilience, it should be clear that resilience is a core component of strategy.  As noted in a 2016 HBR article, The Biology of Corporate Survival, companies are disappearing faster than ever before. “Public companies have a one in three chance of being delisted in the next five years, whether because of bankruptcy, liquidation, M&A, or other causes. That’s six times the delisting rate of companies 40 years ago.”  If you are focused on long term sustainable performance in a complex and rapidly changing world, resilience, speed, agility and innovation capability will outperform a low cost strategy.   

Source:  McKinsey wrote an excellent article in the HBR that helped shape some of this thinking.  “Strategy Under Uncertainty”, Harvard Business Review, November-December 1997

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“The future depends on what we do in the present”, Mahatma Ghandi

Blog 6 of the Business Strategy Series

‘From Michael Porter’s Five Forces to macro-models’.  In the last blog, we talked about the need to shift from a shareholder perspective to a stakeholder perspective.  In this article, I want to cover off the importance of overlaying onto Michael Porter’s 5 forces industry analysis two factors (Figure 6-1).  Firstly, an understanding and integration of what is happening in the macro environment into the strategic thinking and planning for a business.  In broad terms, these macro factors can be put into one of 5 categories – Economic, Environmental, Geopolitical, Societal and Technological.  Secondly, a detailed analysis and assessment of the threats and opportunities that could come from technology.  

Both of these factors need to be looked at from a multi-time horizon perspective. The external dynamics impacting a company can be significant on all these horizons; therefore, scenario modelling on each of these horizons is essential. As examples, in the short term, we are seeing how a pandemic can have dramatic effects on our business. In the medium term, the movement of a technology into a growth phase of rapid adoption could have a signficant effect on a competitive environment and customer purchasing dynamics. In the longer term, climate change is affecting most businesses and sectors, and may affect longer term investment decisions. Superior understanding about how an industry could be affected provides a real opportunity to outperform and improve business sustainability.

Figure 6-1

Starting with the macro environment, the World Economic Forum ‘Risk Trends Interconnection Map’ (Figure 6-2) illustrates well the range of macro factors that a business may need to watch and monitor. This will help a business decide how to adjust its strategy as these factors and their interconnections wax and wane over time.  

Figure 6-2

Just since February 2020 and the emergence of Covid 19, businesses are having to deal with a combination of many factors including the need for remote working, limited ability to make sales, massive financial pressures from the financial crisis, a collapsing oil price, increasing trade tensions between the US and China, increasing national sentiment, potential implications of greater control being put on Hong Kong by the Chinese government, and in some sectors a heightened level of cyber attacks.  Do any of these have any bearings on your strategy going forward?  This level of challenge to a business will not go away and for many the issue of climate change will only create even more profound challenges.  Thinking about these potential risks in different scenarios over the short, medium and long term is vital.  The key is really to solve how to take advantage of the situation to strengthen the performance potential of the business and strengthen its competitive position.

Secondly, it is vital to look at the threats and opportunities of technological change.  It is easy to forget the accelerating speed at which new technology is adopted at scale (Figure 6-3). For businesses, it affects what products and services can be provided, how businesses operate, which markets they can reach and focus on; and, it results in whole new market sectors being developed.

Figure 6-3

In addition, the speed at which new technologies are being developed and related products are being introduced is astonishing (Figure 6-4, 6-5).  In the research world, there are unprecedented levels of information sharing and collaboration coupled with increasing speeds of access to new research through digitization, open access and data sharing.  Over time, the profile of research is showing higher levels of collaboration and higher levels of cross border research cooperation.  As long as the world keeps opening up this will only accelerate; and in turn, continue the acceleration in the development of new technologies.  

Figure 6-4
Figure 6-5

The biggest challenge emerging from new technology being adopted to its full potential is the ability of individuals, businesses and governments to understand its potential and reap the full benefits (see illustrations in Figure 6-6, 6-7).  Increasingly we are also going to find that many high value applications involve the convergence and integration of multiple technologies. For example, an autonomous driving vehicle combines the use of recent and emerging technologies including AI, robotics, battery storage, big data and sensing.

Businesses need to be more focused than ever on understanding technology based opportunities and innovating new products and services. The old fashioned approach of driving leadership from focusing on primarily driving down its cost position or innovating within its existing knowledge and parameters will not survive. 

Figure 6-6
Figure 6-7

In the analysis of the potential impact of technology, a key factor to assess is the speed of adoption of new technologies.  Despite the potential for high speed adoption, this is not always the case. It is particularly important to analyse in sectors where there is a high concentration of market share among a few companies.  In these situations, there are two factors that affect the speed of change.  Firstly, for any of the key competitors is there a bigger profit opportunity in the short or medium term of adopting new technology?  If the business model of these competitors could be disrupted and their could be a leak of profitability then, depending on the level of competitor concentration, the adoption could be slowed significantly.  Secondly, once one of the big players makes an aggressive move to shift to adopt new technologies and adjust their business model, perhaps from shifting to a long term view of how they need to compete, then the rate of change in the industry is likely to change.  

This slowing down of the potential rate of adoption, was very prevalent in the research publishing sector with the likes of Reed Elsevier (now RELX plc) and Springer (now Springer Nature).  The rate of adoption of the real potential of digital technologies and its full implications to benefit the sector probably took at least 10 years longer than it could have.  Time bought them the ability to search for new sources of profitability before any core compression of performance in their core business. It would also be interesting to speculate what the energy sector would look like today if one of Shell, BP or ExxonMobil would have made a strategic commitment to commit to clean(er) energies say 15 years ago; after all, they knew about global warming in the 1980’s.  

Overlaying onto an industry analysis, how to take advantage of an increasing rate of technology introduction, understanding factors that may delay technology adoption, and managing continuously changing dynamics surrounding a market is fundamental to strengthening the performance potential and competitive postion of a business.

In the next blog, we will look at shifting from risk monitoring to business resilience.