Category: Strategy

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Blog 5 of Business Strategy Series

In Blog 4,  I completed the brief discussion on the current global environment.

To summarise the key points I made in Blogs 2 to 4, the thread of the story was as follows:

  • Covid 19 exposes how little we are prepared for serious disruptive events
  • We live in a complex world with many interconnected factors that will affect our businesses
  • There are multiple types of events that can occur over time that can be highly disruptive to businesses
  • We must move from thinking businesses operate distinctly from the global ecosystem and should only be profit focused.
  • Businesses need to be part of the global ecosystem, and will be mandated to look this way, so strategy must be looked at from a system perspective.
  • The perspective of how we fit into a sustainable world is best reflected by the global consensus represented by the UN Sustainable Development Goals.

The nested circles below (Figure 5-1) illustrate that a business needs to not only build on their identified business opportunity but it must do so in a way that is aligned with the sustainability requirements from an economic, social and environmental perspective.

Figure 5-1

There are eight gaps in conventional strategic analysis and thinking that need to be integrated into system based business strategy. The next set of blogs are going to these eight gaps that are critical to strategic thinking going forward.  The eight gaps 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 technology, innovation and design
  7. From profit focus to triple bottom line
  8. From medium term strategies to long term scenario based strategies

The place to start is ‘from shareholders to stakeholders’.  Some of the early thinking on shareholders, was discussed by the well known economist Milton Friedman.  In his 1962 book ‘Capitalism and Freedom”, he stated, “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game”.  This was linked to his view that the sole responsibility of management was to its shareholders.  

This Friedman doctrine, has been the driving force of thinking and management behaviour ever since.  Businesses are run with an intense primary focus on a mix of profitability, growth, and return on investment which are the critical drivers of shareholder wealth creation.  We see this every day in the stock markets and is the pervasive thinking in private equity.  If you look at the standard structures of incentives for CEOs and their management team, the core wealth generators for them are linked to financial performance and share price performance. This is coupled with the view that stock markets are focused on quarterly performance.

As the world has moved towards and into the 21st century, there has been a growing shift to increasing the view of stakeholders beyond investors to include other direct stakeholders (Figure 5-2).

Figure 5-2

This broader definition of stakeholders has to a large extent been at the core of many ‘family’ owned companies that have been around for decades.  It has also been a much more important part of the thinking of the companies situated in the EU and certain Asian countries.  The reality of these other direct stakeholders is that stronger relationships with each of them will create stronger and more sustainable economic performance. Alienating employees, not treating customers well to build customer retention, and having unstable relationships with suppliers tends to create financial and operating performance issues over time.  In a number of countries including Norway, Sweden, Germany and the Netherlands, company boards reflect the importance of a broader set of stakeholders by having specific representatives for the employees, unlike countries such as the US, Canada and the UK.

Through experience over the years, and as market and consumer behaviour has been changing, it has started to become clear to businesses that there is also a secondary set of stakeholders (Figure 5-3) that can also have a direct impact on the well being of a company and need consideration.

Figure 5-3

These impacts can come from a range of different groups and involve impacts such as regulatory challenges, acquisitions being blocked, government fines or additional taxes, and brand and reputation damaging press from advocacy groups or the media.  Clearly, strong relationships with these stakeholders can also have the opposite effects and open doors to opportunities.

Here are some examples that many of you will be aware of and I am sure there are many other examples that come to mind.

Figure 5-4

In May 2017, Facebook (Figure 5-4) received an EU $122m fine for the breach of anti-trust regulations, and then in 2018 the EU started  an action against Facebook for privacy breaches which had a potential fine of $1.6bn.  In 2019, the Federal Trade Commission imposed a $5bn fine for violating consumer privacy.  As well as the fine, the settlement order also required Facebook to restructure its approach to privacy from the corporate board level down, to establish strong new mechanisms to ensure that Facebook executives are accountable for the decisions they make about privacy, and that those decisions are subject to meaningful oversight.

Figure 5-5

In 2004 Coca-Cola (Figure 5-5) launched Dasani, a leading bottled water brand in the US based on tap water, into the UK. The use of tap water and an ‘interesting’ marketing campaign caused a negative media frenzy, and then a Coca-Cola headquarters frenzy, and resulted in Dasani having to be withdrawn from the UK Market and cancelling planned launches of Dasani in certain other regions of Europe.  I will let you search this incident on the web if you have time for the more detailed and amusing story.

Figure 5-6

The Volkswagen emissions scandal (Figure 5-6) began in September 2015 linked to a violation of the Clean Air act in the US. This breach resulted in plans to spend €16.2bn in reparations and a $2.8 bn fine (source: Wikipedia – https://en.wikipedia.org/wiki/Volkswagen_emissions_scandal). Another example of the failure to meet regulatory compliance and the need to be on top of all regulations and potential new regulations.

Figure 5-7

We are all aware of the environmental movement (Figure 5-7) and the impact it is having on many companies resulting in damaged brands and reputations, boycotting, or brand switching to more ethical brands.  A lot of this pressure has come from a combination of activist groups, such as Greenpeace, naming and shaming companies involved in areas such as deforestation of the Amazon, and public protests including the activities of Greta Thunberg.

Understanding the relevance of these different stakeholder groups is an essential component of strategy.   Evaluating the power, risk, legitimacy and urgency  of these stakeholder groups will affect strategies, priorities, investment spend and programs for effective management of the key groups.

Fully understanding stakeholders, does not end with incorporating secondary stakeholders into your thinking.  There are non-market stakeholders (Figure 5-8) who are outside of the market of the company but can be indirectly deeply affected and therefore affect the company in return. 

Figure 5-8

As can be seen in Figure 5-9, these are examples of the types of corporate related activities that have had significant effects on non-market stakeholders.  There could be future generations that have severe health and well being problems as a result of nuclear or chemical disasters, or poor and indigenous groups that had been taken advantage of but now have rights.  It could be severe economic damage  to indirect businesses, such as in the 2010 Deepwater Horizon Oil Spill involving BP.  By 2018, it was estimated that this had cost BP $65 bn, including $4.5bn in fines.  Finally, with the environmental movement, damage to Flora and Fauna could also have consequences for a company.

Figure 5-9

We have outgrown, Milton Friedman’s view that the sole objective of a company was to increase its profits within the rules of the game.  He argued that the appropriate agents of social causes are individuals—”The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so.”  Today, charity does not solve the concerns of the secondary and non-market shareholders!  Thoughtful strategic integration of the needs of legitimate and valuable stakeholders is essential.  Effective management of all material stakeholders needs to be a fundamental part of managing a business.  In relation to climate change and the environment, we are already seeing that companies not focused on sustainability are losing access to finance, having trouble attracting and retaining talent, and losing customers.  We are only in the early stages of this movement!!

In summary, the landscape of stakeholders is broad and complex and their potential impact on businesses is continually evolving and changing.  Organisations not understanding this will have strategic and performance shortcomings, and be remiss in their responsibilities.

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REBOOT Strategy

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‘When the winds of change blow, some people build walls and others build windmills’ Chinese Proverb

Blog 4 of Business Strategy Series

In earlier blogs, we have talked about the broad range of externalities that can impact a business. We can see from our current experience of Covid 19 that a health crisis is an example of the depth of interconnected issues. Most key environmental, geopolitical, economic, technological or societal macro-factors have a heavy set of interconnections which can impact a business.  

These factors range from events with little or no warning such as floods, pandemics and cyber attacks, to events that are somewhat visible and require a reasonably quick response such as Brexit, regulatory changes, different forms of financial crises, and at the other end of the spectrum factors that are visible and will require large fundamental changes such as climate change, and perhaps AI and robotics.

At the global level, the 2008 financial crisis and the 2020 Covid 19 crisis has shown real weakness in the overall resilience of companies and the reliance of massive government interventions to backstop the collapse of our economies and way of life through both monetary and fiscal policies interventions.  However, it is important to note that the level of interventions that are taken are limited to the capacity of the government to assist.  Many governments, especially in low and middle income countries, lack this capacity.  For the affluent countries, it looks like that the cost of Covid 19 for the governments to keep the economy alive so it can recover will be up to 15% of GDP. There are many more examples at the national level where crisis have needed significant national and also. international responses.  At the company level, too many companies, from multi-nationals to small companies, have not properly addressed the dealing of potential disruptions at the macro level within their strategies to sustain the viability and performance of their businesses.  

Behind all these potential disruptions, the one issue that will not go away is environmental crisis.  No issue is bigger, more complex, or requires more structural change than the current environmental crisis with climate change at the center of this.  This challenge is going to last for decades, if not forever, and we should expect to have major disruptions requiring short term responses as well as longer term fundamental changes. 

Figure 4-1

As most businesses have been in denial, are avoiding the issue, or not are not taking action with any urgency, we have seen international organisations, governments, investors, and the public start to demand systems thinking to deal with this issue of climate change and environmental damage.  From the 2015 Paris Climate Agreement, 189 countries have signed up to individual targets as of February 2020.  A number of countries are starting to commit to net zero carbon emissions targets, including Denmark targeting to reduce their CO2 levels by 70% by 2025 and the UK targeting to achieve Net Zero by 2050 along with a growing number of other countires.  Behind these commitments there are/will be a set of policies, regulations, and incentives to achieve each countries targets.  

There are also investors who represent $130tn (per Mark Carney) of money under management and central banks requiring climate impact reporting.  In addition, a growing set of these investor, including major sovereign wealth funds and pension groups, are setting their own climate targets for their portfolio holdings and will be driving a shift in the investment and funding of companies depending on their climate and environmental impact strategies.  Finally, we can all see the public movements on this issue and the consumer purchasing trends taking shape against the environmental issues.

Next to the environmental movement, there has been ongoing focus on social and economic responsibility.  In 2015, the United Nations Sustainable Development Goals (SDGs) were announced that covered sustainability across environment, social and economic development.   The goals covered 17 core areas of focus, each with a set of sub-goals (Figure 2).  These SDGs were signed up to as a global consensus of most of the countries of the world.  They are the best universal view of goals and targets that a sustainable world should encompass.  These targets are effectively linked to the ESG (Economic, Social, Governance) reporting requirements for large public companies.  It’s worth noting that corporates that are looking at their external impact seriously, such as FMCG companies and supermarket groups, have based their strategies on aligning with the SDGs and not just environmental targets and climate specifically. 

UN Sustainable Development Goals
Figure 4-2

It is clear that companies are operating in a complex world that is disrupting the ideal steady state approach to doing business.  Climate change was the big issue that everyone was talking about until we had a pandemic which also triggered our economic crisis.  Instability is really the business environment that we need to be designing our businesses to work in.  By definition, then strategy must be looked at from a system perspective integrating the externalities of our global economy, society and environment and solving a sustainable way forward.  The best guiding light we have on sustainability and what we need to guide our system based strategy at this point in time are the UN Sustainable Development Goals. Businesses need to be designing their strategies integrated with and aligned to also creating external impact economically, at the societal level and environmentally (Figure 3).

Figure 4-3

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Blog 3 of Business Strategy Series

Now let’s talk about factors that affect our current global environment other than Covid 19.

Businesses sit within a complex ecosystem.   As long as all the factors in that ecosystem are relatively stable then running a business can be relatively straightforward, and if you have been able to build a strong competitive position then you have a good chance of maintaining your position.  However, once the number of dynamics affecting your business start growing the challenge can become exponentially more complex.  

These dynamics can come in many forms and from many sources, ranging from the development of new or existing technologies, to gradual changes in regulations, to activities that require a rapid response from events such as a pandemic, floods and fires, or a financial crash as in 2008.   To make it even worse a number of these dynamics could be happening simultaneously within a short geographic time frame.  Just in the last 9 months, we have had the severe fires that affected California and Australia, and now we have rolled into the Covid 19 pandemic that has also caused a financial crisis, a massive disruption to how we work, and there has been an oil price shock.  This is without looking in more detail into many countries where there will be whole sets of other ripple effects; such as, social instability being driven by lock down in low and middle income economies.

Figure 3-1

If you just look at the World Economic Forum 2020 Interconnections map below on macro risk factors, it is pretty clear that businesses will have to be continuously managing in an uncertain environment and they will need the flexibility and adaptability to deal with a broad set of challenges.

Figure 3-2

These events can require quick responses such as from cyber attacks/data fraud and the current pandemic, to medium term responses from factors such as changing trade relations, as is happening currently between US and China or with Brexit, to fundamental changes required for example in response to climate change.  

Another way to think about this is to look at what types of events can cause economic disruptions or create tipping points.  From this perspective, I am thinking of a tipping point as an event or set of events that drive a fundamental change in performance and/or require a material change in how you manage your business.  A historic straight line extrapolation of performance as an assumption of how to drive key decisions in a business can only looked at as an assumption of hope over reality.  Maybe you will get lucky!

These disruptions can come in many forms including those that are natural, man-made or health based.  As you can see from the graph below (Figure 3) on globally reported natural disasters, we are now in the range of 300 to 400 natural disasters per year vs under 100 in the 1970’s.  

Figure 3-3

It is worth noting that most of these events are weather related.  The extensive science on climate change suggests that the frequency and scale of these weather related disruptions will only increase as the planet is warming.  It could also be argued that the economic disruption per event will also be increasing over time as the world is getting smaller from globalisation.  For example, our food supply chains reach to all parts of the world and material sourcing for our manufacturing comes from many parts of the world.  So a local natural disaster can disrupt businesses all over the world.

There are also multiple sources of potential man-made disruptions as noted in Figure4. 

Figure 3-4

Not all disruptions are problems; although, with the wrong leadership they will be.  An oil spill maybe a problem for one company or an opportunity for another; or, low cost solar energy maybe be a problem for an oil company and an opportunity for clean energy focused companies.  In the digital space, there can be major disruptions from cyber attacks and ransomware, on the opportunity side a whole industry has arisen to help companies deal with these issues.

In 2007/2008 there was a convergence of a set of technologies/digital capabilities that would dramatically change how consumers would run their lives and how we could manage a business.  This was a tipping point.  The convergence included the ability to use computing power against big data, the emergence of cloud computing, the relatively ubiquitous availability of broadband, the launch of the first Apple smart phone and the large scaling of social media usage started by Facebook (only 58 million facebook users in December 2007).  Many companies have changed how they operate as a result of these combinations of technology and many new companies have emerged that are threatening older companies.

In health, this is not the first pandemic we have seen and will not be the last. As of 2 June 2022, we are closing in on 400,000 deaths from Covid 19 and we are still in the first wave.

Figure 3-5

We all know this has also had serious consequences for our economies, how we socialise and our international mobility.  We have no idea how long this will economically affect different sectors and how it will shift consumer and purchasing behaviour both temporarily and permanently.   

So in our environment, we can see an increasing frequency and scale of disruption, some of which are truly just temporary challenges and others that will question the strategy, structure and key operating assumptions about how a business operates. These disruptions may come as complete surprises, become visible with some element of time to respond or have a long term fuse but still need urgent attention, such as climate change.  They will also have different characteristics in terms of being solveable to requiring a fundamental change in the business model of companies that it is affecting.  The question for a business is are you going to deal with these disruptions as and when they occur, are you going to be prepared for certain disruptions and be able to rapidly respond to minimise the cost, or are you going to anticipate some happening and be ready to take advantage of them.  Recognizing that certain disruptions are really also tipping points and being able to react faster than others should be seen as a source of competitive advantage and a way to outperform in the marketplace.  

 In my view, business should consider ongoing disruptions as the ‘new normal’ business environment rather than stability as the normal situation. The potential benefits of resilience in a disruptive world may well be a better strategy than a tight manufacturing and supply chain that will be more efficient in a steady state world. More on this as we talk about risk and resilience in later blogs.

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“When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity.” John F. Kennedy

Blog 2 of Business Strategy Series

Current Global Environment

You can’t start any conversation on the current global environment without talking about Covid 19.

It is useful to look at the global response to the current Covid 19 response.  Here are a few perspectives on how we are doing so far. 

In my lifetime, this is a completely unique situation.  The whole world has been affected from both a health and economic perspective.  There is a potential threat to each person’s life and livelihood.  Even in the world wars, many countries were safe at the local level, especially in the Americas (excluding Pearl Harbour) and in large parts of Africa.  That is not to say that they did not send people to help in the wars.  The war on ISIS which involved over 70 allies to defeat ISIS did not have a short term personal threat to the public in most of the ally countries.  So, this is a global war against an invisible enemy with huge consequences on the lives and health of many and with massive economic consequences.  For the countries that can afford it, it looks like the cost to the governments will be about 15% of GDP from responses and programmes put in place today.  Perhaps, there will be more to come!

Given this is a global war on this pandemic, how have we responded?  Here is my take so far.  

A screenshot of a cell phone Description automatically generated
Figure 2-1

On an overall basis, not particularly impressive!  Although, I would note that at the national level a number of countries (including South Korea, Germany, Vietnam), so far, have done well.  The problem is that we need a global solution if we are going to revert back to a similar life of massive mobility of people across borders. 

We should note that this ‘war’ has only just gone through its first phase.  How many more waves will there be?  Will we be able to defeat this virus, with a vaccine, or will we have to learn to live with it and effectively manage outbreaks? What will happen with mutations of Covid 19?  Are there other potential viruses that could come along? 

Perhaps, this isn’t a war; rather it is just a battle in what over time will be a war over lifetimes against pandemics. As an aside, we know that through the analysis of ice core samples, that with the melting of ice there could be a re-emergence of ancient bacteria and viruses that were not previously known to man.  From what I have read, the risks of further pandemics are growing.  This is unlikely to be a once in a century or once in a generation event.

There are still a lot of unknowns!  It is very unclear how this will play out over the next two or more years.  Almost certainly, geo-political tensions will rise unless there is a major shift in US policy after the coming elections.  I would think that we have to expect further economic ripples as the true cost and implications of Covid 19 add up and become clearer.

While we are dealing with this, we do need to face up to the need for action against climate change.  This Covid 19 report card also indicates there is a lot of work to do at all levels to have an effective response to climate change.

Back to Covid 19.  For businesses, if you created a similar business relevant report card, how did you perform?  Were you able to continue business or were you in the food lines to receive government aid to survive?  Did you look after your employees?  What further related economic ripples, or slow movement to a ‘new normal’, will cause you to take further drastic action or look for a bailout to survive?  

With the level of government assistance to businesses globally, it is clear that businesses in general have failed this resilience test.  The governments have had to step in as the lender, or funder, of last resort.  Many companies, if not most, have no rainy day financial capacity, supply chains have failed, retail sales for many companies have ground to a halt and it has not been possible for many companies to do remote working.  

So there are real resilience questions of leadership, financial capacity, preparedness for a disruption and speed and flexibility of response. Many companies will come out of this situation and realise resilience is a key component of strategic positioning, and if positioned properly out of crisis will come opportunities.

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Blog 1 in Business Strategy Series

Introduction

Thoughts on an upgrade to strategy development for  performing in a sustainable world.

The wake up call has come!  Real leaders are already on the journey!

We are seeing immense upheavals across the world with Covid 19, growing levels of disruption from extreme weather events, increasing rates of technological change and threats,  great geo-political uncertainty, growing levels of public activism on the stewardship of our environment, and the real medium term implications of climate change which will be irreversible if we don’t start moving fast.

This is not a once in a hundred years, or even once in a generation, coincidence of events. This is a trend in this Anthropocene era.  These are systemic  interconnected issues that cannot be dealt with one by one.  We will be failing ourselves and future generations if we do not get on top of this.

We are not moving fast enough to deal with the cumulative effect of these changes. But, at least we are starting to move and gain momentum.  Central banks are engaged, governments are increasingly engaged, investors are also rapidly resetting their expectations of how businesses must be focused on social and environmental impact as well as driving strong investor returns.  

Businesses have not been well equipped in dealing with these unpredictable and emerging disruptions, and most businesses  still have to get there heads around how to engage and be able to perform with these changes and increasing stewardship demands by both the government, regulators and investors.

This is a view on how companies need to evolve their strategic thinking and planning, be much better equipped to perform in this changing world and be aligned with the social and environmental need for balance in our world.  As well as new thinking, this requires dramatically more purpose driven leadership, being able to manage with competing priorities, speed, agility and innovation – more on this separately.

I will be adding new content every week. These blogs will cover three core topics. Firstly, the scene setting of a quick view on the ‘Global Environment for Business’. Secondly, discussion of the ‘Key Components To Evolve Strategic Thinking’. Finally, ‘Strategic Framework For The Future’ will be a view on a practical framework for developing strategies. Each blog will cover off a piece of one of these sections and will be sent out in sequential order.