Tag: Covid 19

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Covid REBOOT

Post Covid

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

Blog 2 on Post Covid disruption, resilience and innovation.

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

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

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

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

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

Figure 2-1

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

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

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

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

Figure 2-3

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

Key components of Gen Z behaviour include:

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

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

Figure 2-3

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

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

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

Figure 2-4

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

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

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

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

Figure 2-5

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

Figure 2-6

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

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

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

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

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

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

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

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

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

Looking now at each of the 6 themes:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Categories
Covid REBOOT

Post Covid

Blog 1 on Post Covid Disruption, Resilience and Innovation

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

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

Source: Visual Capitalist,
Figure 1-1

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

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

Figure 1-2

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

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

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

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

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

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

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

Kate Raworth, Doughnut Economics
Figure 1-3

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

Kate Raworth, Doughnut Economics
Figure 1-4

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

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

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

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

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

Categories
REBOOT Strategy

REBOOT Business Strategy

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

Blog 15 of the Business Strategy Series

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

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

Figure 15-1

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

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

Figure 15-2

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

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

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

Figure 15-3

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

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

Source: Unilever Website,
Figure 15-4

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

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

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

Figure 15-5

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

Figure 15-6

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

Figure 15-7

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

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

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

Figure 15-8

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

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

Figure 15-9

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

Figure 15-10

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

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

Figure 15-11

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

Figure 15-12

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

Figure 15-13

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

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

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

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Blog 12 of the Business Strategy Series

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

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

Figure 12-1

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

Figure 12-2

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

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

Figure 12-3

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

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

Figure 12-4

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

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

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

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

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

Figure 12-5

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

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

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

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

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

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“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.

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Blog 5 of Business Strategy Series

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

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

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

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

Figure 5-1

There are eight gaps in conventional strategic analysis and thinking that need to be integrated into system based business strategy. The next set of blogs are going to these eight gaps that are critical to strategic thinking going forward.  The eight gaps are:

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

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

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

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

Figure 5-2

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

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

Figure 5-3

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

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

Figure 5-4

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

Figure 5-5

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

Figure 5-6

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

Figure 5-7

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

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

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

Figure 5-8

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

Figure 5-9

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

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

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

Blog 4 of Business Strategy Series

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

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

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

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

Figure 4-1

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

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

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

UN Sustainable Development Goals
Figure 4-2

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

Figure 4-3

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Blog 3 of Business Strategy Series

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

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

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

Figure 3-1

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

Figure 3-2

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

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

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

Figure 3-3

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

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

Figure 3-4

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

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

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

Figure 3-5

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

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

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

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

Blog 2 of Business Strategy Series

Current Global Environment

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

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

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

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

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

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

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

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

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

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

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

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

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