Coca-Cola – REBOOT

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

Blog 14 of the Business Strategy Series

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

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

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

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

Potential Components of a Value Proposition,
Figure 14-3

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

REBOOT Business Strategy

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.

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:

From shareholders to stakeholders
From Michael Porter’s five forces to macro models
From risk monitoring to business resilience
From product-market fit to customer-product fit
From simple to multi-factor business models
From product to company technology, innovation and design
From profit focus to triple bottom line
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 21^st century, there has been a growing shift to increasing the view of stakeholders beyond investors to include other direct stakeholders (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.

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.

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.

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.

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.

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.

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.

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.