Tag: Orsted

REBOOT Business Strategy

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

Blog 15 of the Business Strategy Series

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 21^st 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.

A new system based framework needs alignment from the business through to the economy, society and to the environment (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.

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

There are six tests of a business strategy:

Is the business Purpose Driven?
Can the business create real differentiated value for its target customers over time?
Can the business perform at a level to attract and retain investors?
Does the strategy integrate generating economic, social and environmental impact at ambitious levels for key stakeholders?
Does the business strategy create sustainability and resilience?
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.

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 ….

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.

REBOOT Strategy

REBOOT Business Strategy

Blog 12 of the Business Strategy Series

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tags business alignment, CEO tenure, climate change, Covid 19, disruption, longterm strategy, Orsted, pandemic, renewable energy, risk and resilience, scenario planning, Strategy, UN SDGs