Tag: climate change

Categories
REBOOT Strategy

REBOOT Business Strategy

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

Blog 15 of the Business Strategy Series

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

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

Figure 15-1

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

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

Figure 15-2

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

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

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

Figure 15-3

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

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

Source: Unilever Website,
Figure 15-4

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

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

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

Figure 15-5

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

Figure 15-6

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

Figure 15-7

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

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

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

Figure 15-8

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

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

Figure 15-9

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

Figure 15-10

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

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

Figure 15-11

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

Figure 15-12

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

Figure 15-13

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

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

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

Categories
REBOOT Strategy

REBOOT Business Strategy

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.

Categories
REBOOT Strategy

REBOOT Business Strategy

“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.    

Categories
REBOOT Strategy

REBOOT Business Strategy

“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.

Categories
REBOOT Strategy

REBOOT Business Strategy

“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

Categories
REBOOT Strategy

REBOOT Business Strategy

“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.

Categories
REBOOT Strategy

REBOOT Business Strategy

‘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

Categories
REBOOT Strategy

REBOOT Business Strategy

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.

Categories
REBOOT Strategy

REBOOT Business Strategy

“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.

Categories
REBOOT Strategy

REBOOT Business Strategy

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.