Tag: innovation

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REBOOT World View

The Nine Waves of Technology Innovation

In the last blog, I talked about the critical interlinking of economic growth with technological progress. 

There are 3 key themes linked to technological development today. Firstly, the general need for continued investment in research and development.  This has driven higher levels of economic well-being and overall economic growth.  Economic growth and the level or research and development are inextricably linked. Historically, the majority of investment funding in basic research is provided by the government and other non-business sources.  In applied research, the spend is more evenly split between business and non-business sources.  Development is dominated by the business sector as they have clear sight on potential economic returns.  

Investment in both research and development are needed to continue to drive economic growth.  Continuous breakthrough research as well as development spend to innovate new products and services is sustains growth over time.  Concern over the reduction in investment by governments is legitimate as the business sectors primary focus is on the later stages of R&D and not on fundamental breakthroughs, such as the invention of the internet.  

Secondly, the impact of technology to drive dematerialisation and help solve our challenges of driving our existence on the earth to a Net Zero position in greenhouse gas emissions and address the need for biodiversity regeneration.  We need to continue to overcome the Malthusian view of disaster scenarios from exponential population growth coupled with only arithmetic improvement in the utilisation of scarce resources that would periodically cause major crises for the human race – often in the form of major population corrections.  In 1968, Paul Ehrlich’s best seller “The Population Bomb” warned of mass starvation and societal upheaval. He warned that the battle to feed all humanity was over.   This was coupled with the 1972 Limits to Growth warnings.  Technological progress helped to ensure that these major corrections and catastrophes did not happen.  However, many of these challenges continue and there is still a lot more progress needed to solve these challenges to move in to a position of some form of balance.

Thankfully, we are now seeing a decoupling of economic growth and resource use, slowing population growth, and an increasing ability to fully overcome the challenges that Malthusian thinking predicted. Along with the dematerialisation, is the current, near term and in sight availability of technologies that can help us shift to a carbon neutral footprint and a declining ecological footprint on land and in the seas.  

Thirdly, the development of new technologies vital to contributing to providing inclusivity and fairness across the world. We have made great strides in reducing the levels of extreme poverty which are now below 10% of the worlds population from a level above 40% in 1980.  Inclusivity means access to food, shelter, energy, quality health services and education, and to economic opportunities for all.  New technologies have and must continue to provide cheaper and more abundant access to products such as high yield drought/flood resistant grains, clean water, continuous provision of energy, new vaccines and medications, internet (included access devices) for remote working, education, telemedicine, etc. 

There is a long way to go to providing an improving way of life for the billions falling far short of the basics, let alone addressing the growing issues of inequality.  Technology and innovation focused on creating abundance in key areas is an essential ingredient for this this quest.  Fundamentally, a core role of technology is the conversion of what’s scarce and making it abundant – eg. energy, water, health, learning, time, money, expertise and resources.  The critical components of abundance are dematerialisation, demonetisation and democratisation of technologies.   These factors are also drivers of economic growth. 

Innovation waves have contributed to economic growth by reducing cost, adding choice, improving the performance of a product, improving the value for money, growing existing markets and opening up new market opportunities; all of which contribute to growth. There are different ways to think of the drivers of growth; but, I like to think of these innovation waves of growth driven by additional forms of value add to the consumer rather than by the specific technology type.  I have defined these innovation waves by the benefits they provided rather than the name of the sets of technologies behind the waves.  Underpinning these benefits driven new innovation waves has been an increasing availability of finance to further invest in the technologies and related market innovations, and in businesses overall to create and build the markets.  I have defined nine innovation waves that we have seen to date. (see Figure 6-1).

Figure 6-1

Each wave has a point where the initial technologies become robust enough to be converted into economic products, and then through further research and continuous innovation they continue to expand market opportunities and drive growth.  Perhaps the most well known example of this is Moore’s law on the development of integrated circuits. Moore’s law is the observation that the number of transistors in a dense integrated circuit (IC) doubles about every two years.  Aligned to an increase in performance of a transistor has also been the remarkable drop in cost.  The combination of the two has driven the affordability of computing power, the capabilities of it to grow and impact almost every market sector and in multiple ways. Computing power is now moving to being ubiquitously available through smart phones.  Continuous improvement requires both research and development.  In the case of transistors, as noted in Figure 6-2, this requires new technologies to continue to drive the wave. As with transistors, they moved from electromechanical technology through to solid state relay, vacuum tube, transistor and integrated circuit technology.  

Figure 6-2

These innovation waves that provide new and different forms of economic growth, effectively layer on top of each other.  Innovation then also happens vertically through the integration of different technologies into new solutions.  

Starting with the first wave of energy.  Energy comes from many primary sources, including coal, steam, oil, hydro, gas, nuclear, geothermal, solar, wind, hydrogen (See Figures 6-3, 6-4).  About 27% of this energy is then converted to electricity and delivered through an electricity grid.  Energy effectively underpins all economic growth as it allowed the development of industry for mass production and provision of products from consumption.  It provides key factors of production such as heating, cooling, lighting, the development and use of production lines.  Continuously available energy underpins economic growth. It is what is required to power all other technologies and innovation waves.

Figure 6-3
Figure 6-4

The second technology wave was affordability which was driven by industrialisation (Figure 6-5).  This transformed the production of goods from masses of artisans with cottage industries to the mechanisation and use of steam energy to produce goods more efficiently and then on to mass production with assembly lines. This transformed the availability of a product as well as dramatically reducing the cost of the product to create economic affordability.  Industry 3.0 saw the introduction of computers, automation, and electronics into production, and Industry 4.0 continues the trend towards automation and data exchange in manufacturing technologies and processes which include cyber-physical systems (CPS), IoT,[31] cloud computing, and artificial intelligence among other technologies.

Figure 6-5

The third innovation wave, I have coined as connectivity which is comprised of two vital components.  Firstly, transport which has driven the mobility of resources, people and products which has dramatically transformed the local ability to produce products and source resources and products; and, for the consumer to personally access new products and services.  The evolution of mobility has transformed markets and created many new markets (see Figure 6-6).  

Source: Evolution of Transport Technology
Figure 6-6

The second part of connectivity has been the development of communications technology, which has opened up markets from the ability to transmit information to, or market to, larger and larger numbers of people cost effectively. Although, the telephone was invented in the 1876.  The mass adoption of the analog telephone did not really start until post 1900.  The evolution of communications has been particularly visible post 1980 (see Figure 6-7). 

Source: TrueConf
Figure 6-7

The combination of being informed of what products and services are available and being able to increasingly access and cost effectively purchase them has created dramatic economic growth. 

Fourthly, the productivity wave started with the invention of the computer. This began with the mainframe, then the mini, micro, portable computer, tablet and now the smart phone.  The driver of this has been Moore’s law (see Figure 6-1).  Aligned with the increase in computing capacity there was also the reduction of cost which drove the adoption of computers from a few to making them ubiquitous across companies, large to small, and individuals.  The initial focus of computers was on mass replication of simple tasks often related to administration.  The use has now moved to all areas of a business including manufacturing, supply chain management, customer service and relationship management, human resource management and enterprise resource planning. Much later in this wave has been the availability of hundreds of applications that sit on our ‘always on’ smart phones and drive our personal productivity.

The fifth wave of de-materialisation has come in many forms from simply reducing material usage, to miniaturisation, to transformation of physical product to digital products, shifts to lower cost and better performing substitutes, to a consumer focus on services and experiences.

The pathways to de-materialize a product include:

  • Optimize – maximize resource effectiveness by reducing the mass or changing the material types in the product, or improving the utilisation of a product
  • Digitize – sell and/or deliver the product electronically or virtually
  • Servitize – sell the utility of the product as a service

A simple example of product dematerialization is the transition in music from physical CDs to digital MP3s to a mobile application for music such as Spotify.

The 6th innovation wave is access.  This is the first wave of value derived from the emergence and adoption of the internet with common protocols for communication, connectivity and sharing.  In many ways, the internet was seen as an opening up of the world and carried the potential to be a great equaliser.  This was the birth of Google with their early mission “to organize the world’s information and make it universally accessible and useful”.  Low cost, or no cost, access to information and knowledge from across the world, visibility of goods and services from anywhere in the world and the decline in the limitations of geographic boundaries expanded market opportunities.  As a great example, we have seen the Khan Academy and MOOCs (Massively Open Online Courses) such as Edx, Coursera and Udacity delivering education remotely across the world. We have also seen the mobile wallet, such as MPESA in Kenya, transforming the vibrancy and economic opportunities within the slums and for the lives of the ‘unbanked’.  

Probably, the best measure of where we are today on access is the global penetration of smart phones (see Figure 6-8). Great progress has been made; but, there is still a long way to go.  From today, there will be continuous development of devices, new ways to deliver internet access to more and more remote areas of the world, new generations of cellular networks to change the power and value of access to the internet, and continuously reducing costs of access and usage.

Figure 6-8

The 7th innovation wave is surveillance which is the name that I have ascribed to what many would think of as customer data and big data. Surveillance recognises that the ability to create value is closely linked to the use of data on a timely basis. Real time delivery of value related to product performance, the behaviour of people and changes in their context provides much higher value than lagged delivery of responses. In fact, preventative based services in response to predicted potential outcomes are likely to be of the highest value. A simple example of this would be the automated breaking of a car to prevent an accident.  In the health sector, early or at risk identification of cancer vs. later stage identification is transformative in terms of life outcomes.

A broad array of technologies are involved in this wave, starting with observational technologies related to video, audio, text and sensors which could be gathered from devices ranging from smart phones to space satellites. Secondly, there are technologies such as data storage, computing power, and AI that need to take the data, analyse and interpret it and decide what actions, if any, need to be taken. Finally, there will be technologies related to the integrated delivery of the service, such as IoT, to create the value.

The concept of surveillance can be seen from both a positive and negative perspective.  On the positive side, it can for example help improve food yields, improve responses to potential tragedies, improve the performance of products and help drive better health and longevity for people. For consumers, it can also improve the timely delivery of information, provide product suggestions, personalise the delivery of news and entertainment, and in general generate value into almost all parts of our life.

The negatives side of surveillance technologies has become particularly visible through the behaviour of Facebook and Google. This is the unknowing gathering and use of private data of private citizens. We have all experienced how apparent private conversations seem to trigger related product offers or serving of content in social media platforms. We have also seen how this deep pervasive knowledge of individuals coupled with fake news is used to attempt to mass manipulate voters on a one to one basis. There is also the potential misuse of genetic information to drive decisions such as the cost of insurance. Surveillance raises complex moral, ethical and legal questions linked to rights to privacy, access to information, use of information and the ability to generate and distribute different forms of false information.

The 8th technology wave is community.  This is the recognition of the benefits to the individual and society from thinking and behaving in the form of community.   Community comprises three variations – crowd based developments, asset sharing, and community based technology applications focused on solving climate, environment and inequality challenges.

Crowd based applications include crowd sourcing, crowd financing and crowd solving. Crowd sourced applications and open IP are increasingly popular. Examples include the linux operating system, Wikipedia, and GitHub. Github is where over 56 million developers work as an open source community.

Crowd financing is the practice of funding a project or venture by raising small amounts of money, often through the internet, from a large number of people. In 2019, the estimated global market size of crowd funding was $14bn and it is projected to grow to $40bn by 2026.

Using crowds to help solve complex and/or time consuming tasks is increasingly prevalent. This can range from taping into the global community of stargazers to find new stars and constellations, to Elon Musk’s recent $100m prize competition to fight climate change.

The idea of sharing the use of an under-utilised asset is not new. What is new is focusing this idea onto converting private assets into scale businesses such as Uber and AirBnb. This transforms the cost of access to a range of assets and services. Another application is where businesses can benefit from sharing the use of an expensive or complex asset. Cloud, app and SaaS (software as a service) platforms are a great way to do business in a way you couldn’t afford to do on your own, or to reduce the cost of use or cost effectively manage highly variable or unpredictable scalability requirements. These platforms have transformed the costs of starting a new business. In August 2020, Research and Markets issued a report saying that the global cloud computing market was expected to grow from $371bn in 2020 to $832bn in 2025.

With the focus on solving climate, environment and inequality challenges there is increasing attention on serving the underserved and providing real solutions for remote locations. Community oriented solutions will often be the answer. These applications will help address climate based challenges, water access, improving health outcomes, access to continuous energy supply and internet access and use.

The 9th and final wave is customisation.  This may sound like a reversion to artisanship; however, it is the concept of mass customisation that can be done at increasingly lower costs over time and reach large potential markets.  It is also not personalisation, as in “what colour would you like” or “would you like it gift wrapped”.  Rather it may well be something truly unique and relevant. This is the last phase of the trend from mass production to segmentation to specialisation to personalisation to mass customisation. Examples range from precision medicine based on each person’s specific genetic make-up, full configurability of personal products such as Nike’s custom building of shoes (see Figure 6-9), cost effectively digital printing truly unique products, or truly customising SaaS software for the unique requirements of a company.

Figure 6-9

3D printing provides extraordinary opportunities as it moves into even more materials and can produce cost effectively products of different scale. It is already being used in products such as prosthetic limbs and body parts, clothing and fashion, building products, furniture, products for space and aircraft parts.

There is no reason to think that the innovation within each wave has to crest and fall. Continuous R&D will cause new surges of opportunities within each wave. As new technologies are developed within one wave they may well apply to a number of the other innovation waves. We have seen how digital technologies and the internet now touch all the waves. Each new layer of technology can create multiple new opportunities and those opportunities only expand as combinations of technology are put together to create new products and services. The autonomous car movement, that is developing, combines multiple technologies that were developed within different waves – clean energy, electric engines, battery storage, robotics, AI, scanning technology, GPS, etc.

The importance of the inter-relationship between economic growth and technological innovation should be not be underestimated. They both provide fuel for each other. This should not be forgotten as we look to solve the climate, environment and inequality challenges. New technologies and innovation creates solutions and economic growth finances them and creates accessibility.

In my next blog, I am going to talk in more depth about the first of the three challenges I identified in the first blog of this series – decarbonisation and biodiversity regeneration.

#technology #innovation #access #affordability #biodiversity regeneration #climate change #economic growth #inequality #energy #affordability #industrialisation #connectivity #mobility #productivity #dematerialisation #access #surveillance #community #customisation #Moore’s Law

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REBOOT World View

The Market Economy and Capitalism

“You know capitalism is this wonderful thing that motivates people, it causes wonderful inventions to be done. But in this area of diseases of the world at large, it’s really let us down.” Bill Gates

In my last blog, I tried to emphasize the importance of the role of government in society.  Its legitimacy comes from the people; and, to maintain its legitimacy it has to have a clear view of the social contract it needs to deliver against.  However, the governments ability to deliver against a credible social contract is underpinned by economic development and growth to drive its financial capacity to provide infrastructure and public services.  The main driver of all successful economies has been the market economy and capitalism.

All the strong economies in the world are market economies. The China miracle with a market economy has created consistent high levels of economic growth. It has averaged 9.45% GDP per annum growth rate from 1978 to 2019 driven by the remarkable entrepreneurial spirit and focus on wealth creation of the people. This has been supported by a real commitment to infrastructure development and a strong focus on public services by the government.

A market economy is an economic system in which the decisions regarding investment, production and distribution are guided by the price signals created by the forces of supply and demand.  The major characteristic of a market economy is the existence of factor markets that play a dominant role in the allocation of capital and factors of production.  Capitalism is a concept integrated with a market economy.  It is directed towards making the greatest possible profit for private people and organisations.

Creation of a market economy is one of the key initial roles of a government.  There are 7 components to the framework for a market economy.

  1. Profit seeking companies
  2. Free market entry and competition
  3. Strong property rights and enforcement
  4. Absence of central planning, control and price setting
  5. Private ownership of most things
  6. Voluntary exchange
  7. Correction of market failures

Within this framework, there are 5 factors that drive a market economy as shown in Figure 5-1. Firstly on human consumption and wants, Alfred Marshall a leading economist captured the nature of demand, in his 1890 book, Principles of Economics, “Human wants and desires are countless in number and very various in kind….. every step in his progress upwards increases the variety of his needs together with the variety in his methods of satisfying them. He desires not merely large quantities of those things he has been accustomed, but better quality of those things. He desires a greater choice of things, and things that will satisfy new wants growing up in him”

Secondly, technological progress helps address the new and growing desires of a person and where there are new opportunities with customers there are new ways to make more money or openings for new entrants.  The profit making goal and opportunity is what drives this technological progress.  It helps make products cheaper and better, as well as driving the innovation of new products and services.  I will talk in more depth about technology and innovation in my next blog.

Figure 5-1

Thirdly, critical to underpinning the effective operation of a market economy is the efficient movement of capital to where there are opportunities to create value and provide a return to investors.  There is clearly significantly more fluidity of finance to opportunities now in the 21st century.  Although, the current financial system does have its weaknesses.  Returns and rewards are very short term focused and the prime focus of investing and lending is cycling around the financial sector rather than investing in the productive economy.  It is estimated that only about one fifth of finance in the US and UK goes into the productive economy.  In the S&P 500 today approximately 90% of profits are used for share buybacks and dividends with only 10% invested back in the business.  This extractive focus of finance does not help to drive economic growth.  

Fourthly on limits to resources, a core part of the effectiveness of a market economy is the efficient movement of factors of production towards producing the most productive goods.  The prevailing theory has been that with limits to resources, market driven pricing and the profit motive, these factors help drive the efficient use and allocation of resources.  Interestingly, we are now starting to move into a new phase of economic growth that is becoming decoupled from resource use.

Historically, technological progress helped to create more efficient use of resources for any good or service; however, rather than creating a reduced use of resource it resulted in additional consumption in other ways.  There was a direct relationship between economic growth and resource consumption.  There are now two themes emerging that affect this thinking and the conversation.  The first is that we are moving into a world of abundance away from resource scarcity; and the second, is the decoupling of economic growth and resource consumption in developed markets.  

Abundance, an idea championed by Peter H. Diamandis a leading thinker on technology and innovation, is the optimistic view that technology and innovation can make rare things plentiful.  He cites extensive research where through the use of new technologies costs are dropping 10 to a 1000x based on following innovation curves, such as Moore’s law in the digital space.  Energy is becoming more abundant and cheaper as we move to solar and wind technologies. Safe clean water is becoming more plentiful as we are able to desalinate sea water, which is 97.5 of all water, and clean polluted water cost effectively.  Food is being produced with less water, less pesticides and less fertiliser.  A smart phone is now a communications device that also give you access to the worlds information, books and music.  It provides medical diagnostics, it is a camera and video player, a calendar, an atlas and the list goes on.  And most importantly it is moving rapidly to be available to everyone.  

Linked to and associated with how technology is changing how we live, is the emerging net dematerialisation of economic growth.  Importantly, it is the combination of technology and capitalism that is driving the continuous movement of creating new and improved goods and services to sell to as many people as possible.  So many people believe the world is getting worse because our brains which are survival oriented focus on the negative things.  Yet you just have to look at almost any area and the trend lines are improving (See https://ourworldindata.org which was founded by Max Roser, or research by Peter H. Diamandis).

In research conducted by Jesse Ausubel, Iddo Wernick and Paul Waggoner, they did a detailed study of the use of 100 commodities in the US from 1900 to 2010.  Ausubel wrote, “…we found 36 have peaked in absolute size…Another 53 commodities have peaked relative to the size of the economy, though not yet absolutely (see Figure 5-2).  Most of them now seem poised to fall”.  Similar results have been found in research in the UK.  This decoupling of material consumption and economic growth is also happening in energy consumption, co2 emissions, farming and water use.  This is the power of technological progress and a market economy driven by a profit motive.  It is worth reading “More From Less” by Andrew McAfee to learn more about this.  

Source: https://andrewmcaffee.org – More From Less – data Figure 5-2

The combination of dematerialisation and abundance should help allay fears of the need to curb economic growth to address climate change.  In fact, driving technological progress and economic growth, which go hand in hand, will be critical contributors to addressing the combination of decarbonisation and biodiversity regeneration with inclusivity and fairness globally.  

Finally, and contrary to what many people want to think, the government has an important role in the development and maintenance of a market economy.  Capitalism alone is insufficient to ensure the well-being of all members and legitimacy of a society.  There is a good reason that there is no example of a successful society based solely on capitalism – a model with a sole profit motive cannot stand on its own in building a society. 

Material deviations in any of the first 6 components to the framework of a market economy requires the 7th component – correction of market failures by the government.  The break down of free market dynamics will inevitably happen without corrections or response. Examples include competitor concentration, restrictions on market entry, use of economic power to control resources, price fixing, imbalances in supply and demand power, taking advantage of factor labour, disregarding consumer safety and security, etc.  To date capitalism has not made moral and ethical judgements on what should and should not be done; governments and the law do have the responsibility for these judgements on behalf of society.   Capitalism has also not been concerned with inclusivity and fairness which is a fundamental part of the provision of public goods.

It is worth noting that one key area where capitalism does not work is in sectors where there is asymmetry in information and power between the supplier and the customer.  A clear example of asymmetry of power is in markets that are monopolistic in structure.  Competition laws are designed to help prevent this.  As important are markets where there is asymmetry in information, where the value of information is a critical component of decision making.  The classic examples of this are in the pharmaceuticals market and consumer financial services.  In the pharmaceuticals market, companies are able to egregiously price their drugs to take advantage of consumers who have limited medical knowledge, coupled with health fears, and limited choice because of intellectual property rights.  In the financial services’ sector there are too many examples of banks being involved in mis-selling and taking advantage of the complexity of financial products and the difficulty of many consumers in understanding them.  Finally, a new emerging area of asymmetry is in digital and social media sectors, where consumers are not able to comprehend the extent to which they are under surveillance and the ways in which their data is being used.  This is about the cost of privacy.  All sectors where the consumer is seriously disadvantaged as a result of asymmetry need attention in terms of oversight, regulation, legislation, pricing management and consideration of intellectual property rules.  

The nature of government involvement in capitalism is important.  Reducing the power of capitalism to create economic growth is not in societies interest.  Rather it is about harnessing the power of it to drive the overall well-being of society. Governments should be concerned with red tape, and they need to think carefully about the balance of incentives they provide (carrot and stick) and the mix of regulation and legislation.  Keeping government interventions as simple as possible, to achieve the desired outcome, requires continuous adjustments.  

There is growing thinking that governments need to move more from reacting and responding to market based problems to shaping outcomes proactively.  This shaping can be to ensure there is appropriate attention focused on topics such as climate and inequality, to helping the market drive progress in specific areas such as the shift to clean energy and electric mobility.  This mission oriented approach can be seen in Denmark and UK with wind power, the US with solar and the development of electric vehicles (and previously the development of the shale energy sector), and Germany with their Energiewende program to transition to a low carbon and nuclear free economy.  China has shaped multiple markets linked to their long time horizon plans ranging from the elimination of extreme poverty to being leaders in electric vehicles and wind powered electricity.  

At the same time, it is often in industry’s interest to get out ahead of the government and solve problems that if not dealt with will inevitably involve government intervention.  We are now starting  to see this more actively especially in the areas of waste management and pollution.  For example, the Alliance To End Plastic Waste is made up of nearly fifty major global companies.  They have committed over $1.0 billion with the goal of investing $1.5 billion over the next five years to develop, deploy, and bring to scale solutions that will minimise and manage plastic waste, and promote post-use solutions.  We are also seeing major groups of investors and asset managers driving ESG reporting and starting to allocate their investments aligned to climate and UN sustainable development goals.  

The intense focus on pure short term capitalism that has occurred from the 1980’s is starting to shift towards more aligned goals with society, such as climate and inequality, and creating what has to date been defined as ‘compassionate’ or ‘responsible’ capitalism.  This will intensify as corporate behaviour is held to account by stakeholder groups and by escalating government agendas on climate, biodiversity, pollution, inequality and the societal impact of technology. It is also being driven at an accelerating rate by investors and asset managers wanting not just ESG reporting but strategies that integrate action on climate and the UN Sustainable Development Goals.

I don’t believe that there is any reason to think that a longer term focused alignment of corporate objectives with those of customers and societies cannot be as profitable as the long term profit outcomes of corporates with their current short term optimization thinking.  

In my next blog, I will look more closely at the importance of technological progress and innovation.

#market economy #capitalism #dematerialisation #abundance #free markets #competition #limits to growth #technological progress #ESG #climate change #UN SDGs @Bill Gates @ Peter Diamandis #Alliance to End Plastic Waste

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Covid

Post Covid

“Individual commitment to a group effort – that is what makes a team work, a company work, a society work, a civilization work”, Vince Lombardi

Blog 5 on Post Covid disruption, resilience and innovation

In earlier blogs, we have explored how this pandemic will affect consumer behaviour and how businesses and governments need to respond to build back better to create a ‘new normal’.  This final blog of the series will take a macro level view of the way forward and how a coordinated response needs to come together.  The Covid crisis does not sit on its own, it is surrounded and complicated by all the other pressures that need to be addressed simultaneously including employment and economic recovery, climate, inequality and geopolitical tensions.

Unfortunately, the end of the crisis is not just around the corner as Donald Trump likes to tout.  We are now deep again into the Covid crisis.   According to WHO as of 30 October, we are now approaching 1.2m deaths and 45m confirmed cases.  Many countries are now going back into a deeper level of lockdown.  This looks like we will continue with uncertainty for at least another few months, at which point we will have gone past a year of Covid.  The scale of this crisis dwarfs the ‘great recession’ which started in 2008.  No organisation should be passively watching what is happening; rather, the focus should be on ensuring survival and then coming out stronger for a ‘new normal’.

One of the critical things that must happen for the post-Covid period, or living with Covid period, is that all the actors necessary for a strong recovery (public, companies, government, 3rd sector) need to participate and move in the same direction.  This alignment needs to also work on a multi-lateral basis. 

Summarising from previous blogs, at the macro level there are 5 areas where there needs to be a strong aligned response to create a ‘new normal’ (Figure 5-1).

Figure 5-1

Assuming we come out of this period either learning to live with Covid in a relatively normal way or with a massive vaccination program, the most vital area of focus will be economic and employment recovery.  In the second quarter, virtually every economy had significant year on year negative growth with Spain and the UK having in excess of a 20% year on year decline.  The third quarter will be better than the second quarter, but it will still be substantially down year on year.  The ILO (International Labour Organization) at the end of June 2020 had a baseline global scenario of a 4.9% loss of working hours in this second half of 2020 which equates to an equivalent of 140 million jobs.  This assumed no second wave of Covid!  All predictions involve a massive task to restore the economy to restore employment to previous levels.  

The economic damage and loss of employment have hurt the lower income sectors of all economies the most.  This crisis has also more adversely affected women vs. men and the younger groups in employment.  Addressing this imbalance is essential as well as dealing with all the overall issues of inequality.  

What is clear from our current experience, is that there is also significant work to do in both the health and education sectors to create fit for purpose capabilities that can deal with the challenges of repeat disruptive events and move forward providing higher quality and more reliable day to day services going forward.  Across all sectors of the government, especially in health and education, digital innovation or the delivery of ‘fourth industrial revolution’ capabilities are vital.

One of the large controversial areas that has significant attention in many countries is the right of governments to impinge on constitutional rights of citizens during the Covid crisis.  These rights include, key rights of movement, ability to gather, rights of free speech, rights to gather and use information.  There have been a number of situations in several countries, particularly in Germany, where the courts have stepped in on government interventions and defined them as overreaching, unenforceable and unconstitutional.  Restoration of these rights will be a critical part of restoring social balance.  There are some more insidious things that need to be dealt with that I will cover off with respect to privacy, freedom and democracy in my next blog series on ‘The individual, the market economy and the state’.  There will also need to be a restoration of the rights and abilities of companies to do business without the restrictions that have been imposed on them.  

The final area and the largest looming challenge, that has not taken a break, is the urgent need to address climate warming and biodiversity.  Decarbonisation and recovering biodiversity must be integrated into creating a ‘new normal’ for the living with Covid or post-Covid world.

To create alignment against these factors, ideally requires 4 key components.  Multi-lateral coordination, public-private alignment, financing and frameworks and a strong focus on innovation (Figure 5-2).

Figure 5-2

When I first started writing this blog at the beginning of the year, my biggest concern regarding the climate and fairness global challenges was the lack of global coordination and response to these issues.  This was then exacerbated by the pandemic.  Since the end of the second world war, the US has shown the leadership to help coordinate and bring together the countries necessary to address key multi-lateral challenges across the full range of issues from health challenges such as HIV/Aids and Ebola, to security and nuclear threats, to the need to address the erosion of the ozone layer.  They were one of the leaders to set up the UN Nations post World War II. 

Unfortunately, under the misguided leadership of Donald Trump, the US has turned inward, moved to an “America First” win-lose focus and escalated geo-political tensions.  Let’s see what happens in the elections and the post-election response.  The first signal will be whether or not the US finalises their withdrawal from the Paris Climate Accord which was targeted for November 4.  For the sake of global progress in dealing with these urgent issues of the pandemic, climate, inequality, and the recovery of a proper democratic process in the US, let’s hope that this is the last we see of Donald Trump in the political arena!  

Multi-lateral coordination is often seen primarily as coordination between countries to drive different agendas.  The scope of these challenges will require responses well beyond just the political sphere.  It needs the involvement of the 3rd sector including of some of the great foundations, such as the Gates Foundation which is working on some of the big issues around health, education and gender equality.  And, most importantly, it needs the productive involvement of the private sector (investors and corporations) with their scale, reach, investment capacity and innovation capabilities.  After all, in the advanced economies most of the wealth lies with the private sector and this investment capability must be tapped into to help solve these challenges with urgency.   

Even deeper alignment of public and private sectors are required at the national level.  The pandemic has seen a much higher inward focus than we have seen for decades.  Local economies are inextricably linked to the health of the private sector and the support of the government, especially in these Covid times.  We should also not forget that the full multiplier effect of the role and services of the government is a substantial part of any countries employment base.  This inward focus, and also the self centered national response to the Covid crisis such as the control of PPE, suggests that governments and companies need to rethink their global supply chains and identify where there needs to be more local sourcing.  Public-private alignment and partnerships are also required in order to have any chance of achieving progress in meeting the Paris Climate Agreement targets and to make progress against inequality.  

The alignment and working together of the public and private sectors requires proactive and productive involvement of the government, key leaders in business and key influential investment groups.  It is in the interest of all parties to contribute to the ‘new normal’.  It does mean that investors and companies have to be thinking in a longer term context and from a multi-stakeholder perspective.  The good thing is that there has been a growing movement in this direction linked to climate change, inequality and the United Nations Sustainable Development Goals.  The integration also requires the convening power of groups such as the World Economic Forum, who this summer initiated such an initiative called ‘The Great Reset’.

The need for financing and improving of market frameworks is substantial and of an unseen scale since the rebuilding post the second World War.  This includes the recovery of employment and repositioning of economies to meet the needs of the future not the past.  We have already invested over 10% of annual gdp in the advanced economies to weather the pandemic storm and substantial new rules, regulations, emergency measures have been put in place to deal with the storm.  A lot more money will be required to restore economies, and there will be a need to remove the often oppressive pandemic related rules, regulations, and collection of personal information.  And, even more financing and framework adjustments are needed to make sure we can prosper and de-risk our future.

The rebooting of our way of life needs to result in a world that is inclusive, multi-stakeholder oriented, more long term focused and aligned to an environmentally sustainable world.  It also need to make a step change in its preparedness for large disruptive events – pandemics, cyber, climate related.  To this extent the frameworks (legislation, regulatory frameworks, reporting requirements, etc.) need to be fit for purpose and future oriented.  This does not have to be more layers of rules and regulations; hopefully, it will be new frameworks replacing or updating old frameworks and not the further layering of bureaucracy.

The financing requirements of the recovery and the setting of a new normal will be vast.  This is going to require the combined financing and investment power of the public and private sectors.  As well as further debt financing, governments will need to look carefully at their taxation programs to not only finance the needs for public services going forward but also to ensure that the right frameworks and incentives are in place to drive private investment in the right places with the right urgency.  In a number of countries, this would also involve a rethink about the focus of some of the current subsidies; such as agricultural subsidies in the US that are driving mono-crop farming in the US vs. regenerative farming.  

Finally, the ‘new normal’ way of life should look and feel very different to the pre-Covid normal.  The driver of achieving this is private and public innovation.  This is accelerated digitisation of the economy and all its sectors including building remote and hybrid working capabilities, hybrid medical and education delivery.  It needs to result in countries predominately driven by clean energy, that have heavily shifted to the electrification of mobility and have significantly changed through the use of AI, sensing and other digital capabilities. Companies need to shift to ‘circular’ strategies and innovation will help them achieve their Net Zero targets.  Innovation is also needed to drive large shifts in food production and consumption and the move towards regenerative farming and rewilding. Increasing carbon sequestration on land and in the oceans is a fundamental part of dealing with climate change and biodiversity.

With the convergence of all these challenges, we are fortunate that we have never been better equipped to meet them head on. We already have the technological know how to drive massive change and new technologies and capabilities are well underway to help us complete this shift.

This is a challenging but also exciting time. As Barack Obama said in a UN General Assembly in 2016, “if you had to choose any moment in history to be born, you would choose right now. The world has never been healthier, or wealthier or better educated…” Obama then called on the audience to look with optimism to the future. “Not blind optimism, but hard-earned optimism, rooted in very real progress.”

#Covid #pandemic #WHO #UN #Donald Trump #economy and employment #inclusivity and fairness #health and education #freedom and privacy #decarbonisation and biodiversity #inequality #climate change #net zero #Barack Obama # sustainable development goals #multi-lateral #public-private # frameworks and financing #innovation

Categories
Covid REBOOT

Post Covid

“Take these broken wings and learn to fly”, Paul McCartney

Blog 3 on Post Covid disruption, resilience and innovation.

In the last blog, we talked about changes to consumer behaviour as a result of our current and ongoing Covid experience.  Whether we end up living with Covid or are living in a post Covid vaccinated world, consumer behaviour will have changed.  

Six areas of likely change were identified, see Figure 3-1 and described in more detail in Blog 2, although the scale of these changes are not clear and will vary across countries and customer segments within a country.

Figure 3-1

The drivers of these changes from the Covid experience to date are:

  • 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.
  • Behavioural changes linked to actual and perceived health risks of consumers
  • Behavioural changes linked to 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 increased rate of change of adoption of existing technology applications and introduction of new technology applications

For business, to continue to deal with the Covid crisis, emerge stronger and be on top of these changes there are 6 aspects to running a business that should be top of mind (Figure 3-2).  These components are valid for both consumer and B2B businesses.

Figure 3-2

Before we explore the six areas, it is vital that a company does not lose sight of its strategy and what it is trying to accomplish.  In my previous series of business strategy, I introduced what I believe is the right strategic framework for the future (Figure 3-3).  Having a business purpose that is focused on delivering both a return to investors and a combination of economic, social and environmental impact, is what captures hearts and minds.  Engaging the hearts and minds of employees, participants in your supply chain and customers contributes to higher levels of performance and resilience in challenging times.  A strategy is also a guiding light around which the changes you need to make and initiatives you need to deliver sit.  You want to build a strong business for the medium-long term not just survive the short term!

Figure 3-3

Let’s now explore each of the six activities to help identify opportunities to move forward more effectively.  Six months into Covid and I am sure that many businesses are well on the way to making changes and adjusting to a ‘new normal’.  I hope some of these factors will add to your plans.  

Starting with financial stability and resilience, there are 3 areas of particular focus that I want to address (Figure 3-4).

Figure 3-4

Cash is king – For companies that have real concerns about survival, the most important first thing to do is to switch from a prime focus on profitability to a core focus on cash.  This combines the focus on revenue and costs with the timing of receipts and payments.  Structurally changing the amount of working capital needed in the business can often free up the cash needed to get through difficult times.  It also helps a company look in more detail on the specifics of what they are spending their money on, making better decisions on the amount and timing of product purchases for inventory, and the need for new assets and how they might be paid for, such as a rent or a lease vs. outright purchase. 

The classic approach to this is to do a 13 week rolling cashflow plus 9 rolling months (12 months in total).  To get really focused and extract the most value from this approach the cashflow should be updated on a weekly basis or at least every 2 weeks. 

Finance for resilience –  If your cash position is not strong and you cannot cover the business challenges through an extended period of time then finding new financing should be a priority.  Although in general equity is preferable to debt in times of high uncertainty, if debt is the only answer then you should be looking at increasing your cash position to give plenty of headroom.  Remember a bird in the hand is worth more than two in the bush.  Banks are notorious for lending you an umbrella when it is sunny and taking it away when it starts to rain; so, be very focused on both the terms of repayment and any covenants on the debt.  Before locking in any agreements, be sure there is understanding on the implications of what has been agreed against different challenging scenarios.

If equity is an option, then in general raise a large amount so that there is headroom for a long time and you can ride through potential challenging fundraising times at a later date.  It will also allow you to rapidly take advantage of future challenges your competitors may have or aggressively pursue new opportunities.  Having too much cash on the balance sheet in the current times is a high class problem!  

Scenario Plan – In these times of pandemic disruption, we are now in a non-linear period of change.  Extrapolating historic revenue trends is an insufficient approach to financial planning.  Building alternative scenarios is the only way. Scenarios should particularly focus on identifying where you might hit critical performance/survival points and what contingency plans need to be in place and triggered as you move towards these points. Creating scenarios over a broad range of outcomes is an essential part of being able to rapidly react to different performance paths, because time is money.

Customer focus is the next area to look at (Figure 3-5) as having a clear approach for efficiently optimising your revenues and contribution is mission critical.

Figure 3-5

Customers First – If the company has been suffering during the pandemic and the challenge is to get back towards old levels of revenues as soon as possible then getting the most cost efficient approach to recovering revenues is what you are trying to accomplish. The simple way to think of customers is that there are three core categorisations to think about – customers, dormant customers and prospects.  Customers are those that you currently consider to be ongoing customers and would often be defined as having done business with in the last 12 months. Dormant customers are those that were former customers but are now inactive; consistent with the definition above of customers, these would be customers who have been inactive for at least 12 months.  Prospects are potential customers you have never done business with before.  

The economics of revenue generation are very different by each of the groups with existing customers being by far the best economically and prospects being the worst.  It is true to say that the best way to grow revenues is by first optimising the retention and growth of existing customers.  Having to replace customers to stand still is not efficient.  Mass product marketing, and not using customer data, will tend to be far less efficient for many businesses. 

The likely customer response rates to sales and marketing initiatives are driven by 6 core variables to start with (Figure 3-6).  As a company builds experience with targeting, modelling response rates and measuring real results, there should be continuous refinement of the variables.  

Figure 3-6

Recency, frequency and monetary value (RFM) looks at the currency and loyalty of a customer.  A recent high volume and long term high value customer is the most likely customer to buy from you.  For high value – high potential response customers you should be willing to invest more to get them to buy product.  For example, you may do a telephone call to high value customers; but, it would be prohibitively expensive to cold call low value dormant customers.

For marketing specific products, you also want to consider channel affinity, timing and product affinity.  Channel affinity is the channels of communication and sales channels that have worked in the past with a specific customer.  Timing is critical to consider as for example, a product may be seasonal or have specific renewal timing (eg. insurance products).  Product affinity is the definition of how close the product you are trying to sell is to historic products that the customer has bought.  The closer the affinity, the higher the likely response rates. 

For both existing customers and dormant customers personalisation of messaging, offers and promotions will drive up response rates.  To drive up the sales value of customers from previous levels you ideally want to know what ‘share of wallet’ you have vs. their full potential with you.  This can also be done by evaluating whether low value customers ‘look alike’ with some high value spenders.  If you have emails for all customers, subject to GDRP restrictions, then this is an essential low cost communications channel for both existing customers and dormant customers; however, this does not necessarily mean that you should not spend some money to engage in additional ways with high value customers.

For new customers, or prospects, different sales and marketing activities are required.  The choice of approach should be linked to the historic cost of customer acquisition and subsequent customer profitability of different sets of activities.  It may well be that mass marketing is more efficient than specific targeted marketing at specific prospect segments.  If you are doing targeted marketing, then it is valuable to try and profile the characteristics of potential new customers vs. the characteristics of current high value customers (‘look alike’ modelling).

If you have been doing this for some time, with well structured test and control techniques, then you should already be well down the road to efficiently rebuilding your revenues. 

Reward Loyalty – In this context, this is about looking for ways to lock in revenue streams for an extended period of time and/or generate pre-purchase revenues to enhance the cashflow and the amount and reliability of future revenue streams.  This is effectively looking at alternative business models that will improve your cashflows.  You can look at Blog 9 in my Business Strategy series to look at this in more depth.  One example of this would be to provide discounts/benefits for minimum levels of pre-payment for future purchases.  For example, the Starbucks card generates upfront cash for subsequent use by customers.  An alternative example would be to convert an upfront payment to a locked in minimum period of monthly payments.  A final example would be to offer a full year’s subscription to a service at a discounted upfront payment vs. the sum of 12 monthly payments.  These all can drive improved and/or more reliable cashflows and potentially improve customer retention rates and average revenues per customer.  

Listen to Customers – When your business is going non-linear through dramatic shifts in consumer behaviour change – buying habits, use of on-line, and a changing mix of how your customers are spending –  then in depth listening to customers on a continuous basis is essential to be able to catch and react to changes as soon as possible.  You should use a combination of surveys and in depth discussions to really understand what is driving the changes.  The conversations will help you to frame potential changes/solutions to these behavioural changes as well as making your communications more contextually relevant and effective.

Innovate to Retain – With large consumer behavioural changes, more marketing and better messaging alone will not be enough.  To retain and grow revenues, innovation across a number of dimensions may well be necessary – channels to market, pricing, packaging, product, services and promotion.  Fast effective innovation needs time and attention, robust testing and evaluation, and resource commitment; it should not be an add on to teams that already have a full workload.  If you need new skills sets that are not available internally, outsource to make sure that you start well down the experience curve; this is especially important if for the first time you are moving to on-line selling and marketing.  

Remote working is a vital capability for flexibility and to be able to always operate.  The pandemic has highlighted this.  No company can afford to be without this capability.  I have identified 3 key areas to highlight (Figure 3-7).  

Figure 3-7

Shift to Hybrid/Remote Working – Remote or hybrid working is not new.  Since the beginning of the digital era, the shift started with sales teams, outsourcing services and online selling.   Many companies realised that if you move to flexible workspace and allowed some remote work that you only need about 65% of the desks and generate huge savings on office space.  The pandemic has made companies realise that remote working is also a resilience capability.  

The pandemic has also helped companies test which activities work effectively remotely and which ones don’t. In general, it seems that all types of creative work can be much more effective in person and socialisation between people is an integral part of building effective working relationships.  Of course, from a human perspective there are lots of other dimensions that need to be evaluated from the convenience and saving of commuting time, to the inherent need of all of us for socialisation and to the higher challenges of the lower income employees who have less space at home to be able to have a productive working space.  

If employees need to work from home then the company needs to ensure that they are equipped to do so with mobile phone, portable computers and screens, adequate internet etc. and, if necessary, adequate space to work.  Behind these capabilities for individuals is often the need for a set of team based tools that share calendars, improve productivity and communications, track output and ensure security of data. Solving the ecosystem of how the business works effectively remotely is critical.  

Move to the Cloud and SAAS – The cloud and SAAS (software a a service) are great enablers for businesses today.  They are the core enablers of enterprise wide hybrid and remote working.  You can reduce the need for large tech teams to run your IT infrastructure and variabilise your costs and as we well as adding remote capabilities.  Why not allow experts at storage and retrieval, and experts with intensive sector wide applications worry about the applications for non differentiating parts of your businesss in a way that you could not afford to do.  

Almost all large companies, that have not already switched, will have a ‘not invented here’ issue with their tech teams and be defending their realm.  In a few cases, their in-house systems may drive competitive advantages; but, in most cases it is the fear of change and the idea of technical debt arresting progress rather than the potential benefits of new applications.  Do you really think that internally you can build a better cloud at a lower full cost than Amazon, Microsoft, Google and IBM?  And, do you think that you can build a better set of customer facing application than Salesforce.com for example?  Have a look at their development budgets that you are competing against.  Many of these cloud and SAAS applications have already built integrations between them, so the prime focus of attention is the setup, and in some cases customisation, of the solutions to get the full business benefits.

Test and Learn – Going remote may sound easy and it’s just about technology; however, this is all about trying the create the right set up to optimise the interaction of people within the business and with other key third parties. The goal should be to create a new level of performance and not just replicate the in-office approach to work.  The measures of success aren’t just on short term performance and productivity measures, the new way of working must also outperform in attracting and retaining the best employees.  The company needs to test and learn to find the right people processes and the right tools.  The processes need to include the right daily interactions, both task and social oriented, and involve the right tools (eg. Slack) for communicating and interacting.  

People, process, and cost efficiency need close scrutiny when a business takes a revenue hit and the dynamics of doing business change. It is essential to see how to offset the revenue hit and shift to the right capabilities going forward.  Figure 3-8 identifies three areas to cover off.

Figure 3-8

It is easy to ‘slash and burn’ costs and forget about everything else if you are in fear of failing; however, it is useful to be clear on why the company was successful up to the time of the pandemic.  Inevitably, it included a combination of the people, the culture and the processes, among other things, that got you there.  Don’t forget, it is many of the current components that will also help you to rebound.  I also encourage you to consider how to minimise the social cost you may generate by how you address the short term challenges.  We all need to face up to the economic, social and environmental challenges around us and do our part.  

Share the Pain – Philosophically and practically, each company lives within an ecosystem.  That ecosystem involves the company, and all the parts within that organism, and all the other interrelated companies in the supply chain and support sectors.  At the extreme for example, if you are running a ‘just in time’ manufacturing operation, then you are completely reliant on the supply side from raw materials to components moving through the supply chain to time; and, if anything disrupts this timing then your business suffers.  Against this context of an ecosystem, then any cost reduction activities needs to also consider the implications across the performance of the ecosystem.  

When you are looking at cost reduction opportunities, you need to look at all the places that costs can either be taken out, reduced or renegotiated.  Depending on how you approach this you can win or lose friends in this process.  Maintaining trust, respect and loyalty from those in the business and those you do business with is a key part of the decision making.  This is where ‘sharing the pain’ comes in.  If people see that the pain is being shared and thoughtfully distributed rather than inflicted on an easy victim you will often be better off.  The ruthless exercise of power over a weaker but important supplier does not translate to long term loyalty and reliability; however, displaying an understanding of their situation and trying to solve the problem in a constructive way does.  

In the same way, with the potentially devastating impact on certain people from the loss of employment, agreeing that everyone will take a short term pay cut to preserve employment and allow the company to rebound more effectively may be a better answer to dismissals.  Shared pay cuts should ideally come in the form of higher pay cuts to the higher paid, or at least the executive teams, whose lives are less affected – this is leadership and an understanding of social impact!

Understand Mission Critical – As businesses evolve in good economic times, it is easy to be less focused on understanding the full relationship of incurring additional costs and the related benefits to revenue and profits.  There tends to be a growing pool of ‘nice to have’ vs. ‘need to have’ activities.  

In challenging times, getting back to the basics is essential.  Start by being very clear on what is critical to attracting and retaining customers, and ideally growing the revenue per customer.  With this in mind, then the best way to do this, with the least negative impact, is through process mapping to simplify, speed up, reduce waste, reduce process breakdowns and cut costs.  This is the constructive approach to cost cutting.

Leverage with Technology – Across all processes, it is worth looking at where technology could fit and what SAAS (software as a service) applications could be used.  The goal is to explore reductions in time, improvements in quality, and reductions in human involvement.  There is every reason to believe that there are opportunities in all functional areas.  They can range from scanning invoices and automating entry into accounting systems, chatbots and customer self service opportunities, tools for customer relationship management and automated marketing, project management software, HR applications, etc.  Many people will be surprised at the extent of opportunities to automate and improve processes with technology.

Customer and business analytics are most valuable in times of change. They should be embedded in how a company works.  There is a lot of talk about KPI’s, balanced scorecards and customer analytics; however, too many companies fall short of what is really required.  Every year, the ability to generate or collect information so that a business can be run on facts improves.  The faster you receive information the faster you can make informed decisions.  There are four key topics (Figure 3-9) to cover off that really make the difference.

Figure 3-9

KPI Driven – Over time I have seen too many companies at the executive level over focus on financial based data; yet, the financial data is the outcome of customer, operational, process, and HR based activities.  To take decisions, key information needs to be linked to the root cause of what needs to be managed.  Building effective dashboards is not easy but it is invaluable.  Cascading down KPI’s is what helps create the linkages between decisions at the top and impact at the coal face.  

Continuous Market Analysis – In challenging and uncertain times, being on top of shifts in consumption and customer behaviour and then being able to react is essential.  Being able to discern seasonal variations and general volatility from new trends in consumption is the critical skill.  This is often helped by active discussions and feedback from customers and prospects.

Integrate with Rapid Decision Cycles – Analysis without consequent decision making has little value.  As an example, in the retail fashion sector in the early 1990s many product and sourcing decisions were made typically at least 12 months before the start of the season.  Then Gap innovated to move to 6 week cycles of decision making with the finalising of product and volume decisions much closer to the period; and now, Zara can turn around product within 2 weeks to take advantage of in season trends.  This type of capability transforms the performance of a business by ensuring the business is not laden with excess inventory, minimising lost sales by taking advantage of high selling items and adding new high selling product in season.  Think about the analogies to this in your business.  

Speed, agility and innovation is what underpins a company’s ability to react in difficult times and succeed over time. The four components to examine are set out in Figure 3-10. In technology companies, we continuously witness updates in applications and the developments of whole new versions of software and hardware.  With Apple, we are on iPhone 11, Apple Watch Series 6, and the Mac OS Catalina soon to be Big Sur. An ability to continuously raise the bar on what you deliver to customers keeps competitors chasing you rather than the other way round. Businesses in all sectors need these capabilities.

Figure 3-10

Shift to Agile Management – Agile project management is the most common way that companies undertake software development.  It is an iterative development methodology of breaking down development into discrete sets of deliverables, often with a time frame of about 2 weeks, that rapidly speed up development.  It also more often than not, does not require the full definition of the end product; rather, that becomes clearer as the team goes through each cycle and incorporates continuous learning related to the end product or service.  

The concept of running a whole business also on rapid cycles with clearly defined deliverables is gaining steam.  It creates a winning mindset and approach to the business by a management team that is so much more powerful than a standard monthly routine.  In some businesses, such as certain retail sectors, it may be better to run on weekly cycles in certain parts of the business.  

Fact based decision making – There is no reason to make decisions without facts anymore.  That is not to say that you do not also overlay judgements based on analysis of the future.  Facts include both internal information and external information (customer, market, competitor, etc.).  The critical point to focus on is that agile management requires very current feedback; and in times of great change, such as these, external dynamics can shift very quickly.  Just as in retail, you need to be able to identify the hot new products, brands, and shifts in purchasing focus as early as possible.  Trying to save money by using less current external information is usually a ‘false economy’.

Stand Alone Innovation Team –  In my experience, from running many companies, effective innovation can only be achieved with proper resource dedication and commitment.  Without resourcing away from the black hole of day to day management and challenges, the speed of innovation is inevitably compromised. Innovation needs to be seen as mission critical as day to day performance.

Learning Curve Driven – ‘Fail fast’ is the common phrase for companies that are truly learning curve driven.  The faster you learn the quicker you can go down the learning curve.  This is an essential part of smaller companies outperforming larger slower companies.  To effectively learn and push the envelope further and faster culturally, it must be acceptable to fail and not a negative on a person’s performance.

Leadership sits on top of the drive to change, the sets of market initiatives you pursue, and the new capabilities you put in place.  The key mindset is to see the unsettling of markets and operations as an opportunity.  Leadership needs to think like an attacker not and incumbent.  They need to be thinking about new opportunities, new markets, new ways of doing things, new applications of technology and leading with empathy and inclusion.  For most people, change is uncomfortable; however, for leadership it needs to become a way of life and a challenge you look forward to conquer.

The next blog, will explore the implications for governments of the post Covid, or living with Covid world.  

#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 #agile #test and learn #cloud #SAAS #process efficiency #CRM #customer retention #remote working #strategic framework #climate change

Categories
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

Blog 13 of the REBOOT Business Strategy Series

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

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

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

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

Figure 13-1

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

Figure 13-2

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

Figure 13-3

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

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

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

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

Strategic Framework
Figure 13-4

There are six tests of a business strategy:

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

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

Figure 13-5

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

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

Orsted

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

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

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

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

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

Orsted

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

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

Novo Nordisk

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

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

Unilever

Vision – “to make sustainable living commonplace.”

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

Tesla

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

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

Ikea

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

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

Microsoft

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

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

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

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

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

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

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

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

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

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

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

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REBOOT Strategy

REBOOT Business Strategy

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

Blog 10 of the Business Strategy Series

From product to company technology, innovation and design.

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

Figure 10-1

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

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

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

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

Figure 10-2

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

Figure 10-3

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

Figure 10-4

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

Figure 10-5

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

Figure 10-6

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

Figure 10-7

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

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

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

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

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

Figure 10-9

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

Figure 10-10

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

Figure 10-11

Here are some 5 key areas to think about.  

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

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