“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
“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 withfinancial 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 workingis 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 analyticsare 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.
‘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.
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.
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.
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.
“You cannot avoid the responsibility of tomorrow by evading it today”, Abraham Lincoln
Blog 15 of the Business Strategy Series
This is the final blog on the strategic framework and of the Business Strategy Series. I will be continuing to write on related subjects. I am also working on another series that will look at the roles and linkages of the market economy and the state – another critical subject as we work through these turbulent and challenging times. A coordinated response between the market economy and governments is mission critical for solving our climate crisis and we can see how vital it is for other disruptions such as the pandemic we have now lived with for 6 months.
The components in the strategic framework (Figure 15-1) that have been introduced are focused on helping business executives and their boards create a long term sustainable business that has a true purpose in society by delivering both economic returns to investors and impact to other stakeholders.
Figure 15-1
To date we have discussed purpose and the delivery model. In this blog, I want to talk a bit more about impact, strategic timeframes, sustainability and resilience. I will then complete the discussion with a short piece on portfolio strategy.
Starting with environmental/climate impact. Through the ESG reporting requirements (Environmental, Social, Governance), companies are being asked to look at the environmental at both level 1 impact, which is the company’s direct impact, and level 3 impact which considers the full supply chain impact including product use. Clearly, at the environmental level the specifics of each sector, and its supply chain, will have different environmental dependencies and different opportunities to create impact. Key sectors such as energy, food, packaging, retail, manufacturing and fashion which have high resource use, significant energy and water usage, and large supply chains will have high environmental impact unless they have already taken action (Figure 15-2). The urgency to create full circular strategies and lead the way is most vital for these high dependency companies; although, that should not stop all companies from moving forward as well.
Figure 15-2
Taking the view at the societal level, that the climate problem can be solved by just focusing on the major companies that are contributing to climate change, reduced bio-diversity, high water use, etc. is definitely insufficient if you look at the science. Part of the solution is for the public to be also looking at their consumption and making it more in tune with the needs for environmental sustainability. So the full and necessary challenge is to create a major shift in how we all live and how businesses, the government and NGOs operate.
As I noted in Blog 14, for companies delaying this shift to a societally responsible strategy will only result in an increasingly challenging shift for each year of delay as the need to hit targets by certain dates will not shift. Each company in each sector needs to set ambitious and timely targets to make its contribution to this. It is management’s, and the Board’s, challenge to ensure that the strategy they set meets both its economic needs and its responsible level of impact.
In addition to the sector, the geographic footprint of a business has implications for the impact focus and targets that it sets (Figure 15-3). For example, companies that have large supply chain footprints in the developing world need to be thinking much harder about its specific social impact goals that it wants to achieve. Truly exploring the UN Sustainable Development Goals will help define these. Business as usual in many parts of the world will perpetuate the fundamental environmental, social and economic challenges that need to be overcome.
Figure 15-3
A helpful approach to thinking about how to incorporate impact programs and goals into the business is to look at the leading companies that are already a long way into this journey to be a responsible company.
One of the companies leading the way is Unilever, who have been focusing on this now for over 10 years. They now report on their progress against their goals each year (Figure 15-4).
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.
As noted in Blog 12, strategic timeframes need to be extended vs. the typical 3 to 5 year timeframe (Figure 15-5). A longer term time frame needs to be added to consider fundamental impacts such as climate, major changes in technology adoption and putting in place the right components for resilience. 3 to 5 year thinking and short term ROI horizons will not ensure adequate thinking on the sustainability of a strategy.
Figure 15-5
Linked to this, it is critical that there is a proper review of the potential activities and events that change markets and/or generate new opportunities (See Figure 15-6 for examples). These events will range from changing views on environmental responses required, SDG compliance, new regulations, a changing geo-political environment and of course the potential for massive impact from new and converging technologies.
Figure 15-6
More important than ever is to develop strategic scenarios that would be effective based on different views of what could happen in short, medium and longer term horizons (Figure 15-7). The approach for doing this is to pressure test strategic options against different externalities and come up with some plausible scenarios to evaluate. These scenarios need to be developed holistically and need to be comparable. The components of the scenarios should cover off customers, products/services and supply chains, investment, metrics, people, processes and technology.
Figure 15-7
With a real analysis of alternative scenarios, the comparison should provide further clarity around the performance opportunities for the business as well as the risk parameters. The true strategic options can be explored along the key dimensions of profitability/ROI, impact, implementation risk, meeting of key stakeholder needs, sustainability and resilience.
This moves strategic thinking significantly on from a pure profit and shareholder only focus. In the short run, realigning the business to survive this pandemic and be able to prosper in the post Covid world, having an organisation that is proactively progressing on gender and race issues, as highlighted by the ‘black lives matter’ and ‘me too’ movements, and making a real contribution to the global climate/environmental targets that need to be met are big topics in most board rooms, and with investors, employees and customers. These challenges need much more than tactical reactions, they are strategic and structural challenges that will inevitably require some major changes to most businesses in terms of how they operate, who they do business with, where they invest, and what performance targets can be expected.
The overall strategy and each of the components should fit coherently into the strategic framework (Figure 15-8). Continuous evaluation of the components of the strategy over time and looking for ways to continuously improve and refine the strategy is equally as vital as the initial setting of the strategy. As the rate of change in the world accelerates, dynamically adjusting/refining the strategy and improving execution is mission critical. Speed and agility are much more important than a singled minded short to medium term focus on efficiency.
Figure 15-8
The final subject, I want to touch on is the implications of this in a company with a portfolio of businesses. Investors and stakeholders will be looking at the overall economic and impact performance of the business. Non-performing business units within the portfolio will have an overall effect on the attractiveness of the business to investors, employees and other key stakeholders.
The proposed approach to evaluate a portfolio of businesses is a four step process (Figure 15-9). Firstly, evaluate the portfolio of businesses from an economic perspective. Secondly, overlay the environmental impact of the businesses on to the economic performance of each of the businesses. Thirdly, look at the full alignment of the set of businesses against sustainability impact which will include social and economic impact. Finally, look at the portfolio options from a resilience perspective. This review should be done considering the realistic potential scenarios of each of the businesses.
Figure 15-9
Now looking at each of these components in a little more depth. Starting with the stand-alone economic strategy, we have the traditional grid looking at business position vs market attractiveness (Figure 15-10). Both components of the strategy should be looked at from a short, medium and longterm perspective. Business position is the combination of profitability, market position, and ability to maintain performance over time as markets change and evolve. Market attractiveness is the combination of size, growth and the economic attractiveness of the market. The grid should be fairly self explanatory. If you have a strong market position in an attractive market then you ideally want to stay in the market and should be willing to invest and grow your position. Whereas, if you have a weak position in an unattractive you would rather manage the business for cash or divest from the market and reinvest the capital in more attractive businesses.
Figure 15-10
Moving on to the Environmental overlay (Figure 15-11), this takes the overall position from the economic strategy grid in Figure 15-10, Business Attractiveness, and matches it against the Environmental Attractiveness of the business. High environmental attractiveness has a low or positive environmental footprint within the timeframe of meeting the targets set by the Paris Climate Agreement and the environmental focused SDGs. For many businesses, the key target is the year the company will achieve a Net Zero carbon emissions equivalent level 3 footprint (ie. including the full supply chain of the business).
Overall, unattractive businesses, unless you have clear sight on how to transform them, should be harvested and/or sold. If an unattractive business is also very unattractive from an environmental perspective, such as a coal business, it is more likely that this should be divested as attracting investors and raising funds in your overall business will tend to be more challenging. In an equivalent way, if you have a small business with real potential in an environmentally attractive sector it may well be that you should be diverting your investment capacity into this business to build it. An interesting set of companies to watch on these dimensions will be BP, Shell and Exxon. Both BP and Shell have committed to reach a Net Zero CO2 emission target by 2050. It is not yet clear that they have strategies set out on how to achieve this; but, what is clear is that they will be redirecting their cash generation to the renewables sector where they have much smaller strategic positions. It has been a broad set of stakeholder pressures, including collapsing share prices, that have driven the adoption of these strategic commitments.
Figure 15-11
The third component of a portfolio review is the review of the alignment of impact overall with the business portfolio options (Figure 15-12). Although, climate impact tends to get the lion share of the attention from the press, economic and societal impact are vital components of the SDGs, and in many business and geography combinations, as you can see in Figure 15-3, they may be more important than climate impact. The food sector, including food retailers, are a great example of this with their broad geographically spread supply chains.
Figure 15-12
Finally, having evaluated the businesses, and their strategic options, in an overall and comparative context, the final step is to compare realistic combinations of businesses from a portfolio perspective. In particular, given the businesses have been evaluated against the three areas of impact, the portfolio options should be looked at from an economic return vs. a risk diversification perspective (Figure 15-13). The risk assessment is against the longterm sustainability and resilience of the portfolio scenarios. Adjusting a portfolio to reduce risk has real value, as we have seen in this pandemic. The potential benefits of a tight focus of businesses in terms of sector, geography, supply chain, efficiency and commonality of disruption risks may not be justified from a sustainability and resilience perspective. As I have noted before flexibility, adaptability, and diversification can provide real value to the business overall.
Figure 15-13
This brings to a conclusion, the series on Business Strategy. I hope you have found it thought provoking and useful; and hopefully, it will help you make a difference in your business and create a deeper impact in the world around you.
I will continue to write blogs to delve in deeper to sectors and subjects that will explore strategy and sustainability in a deeper context. As noted in the about section of my blog, REBOOT is not just about business, it is about the need for structural changes, or a new operating system, across all areas connected to our lives and our world.
Please continue to follow, share, engage in conversation, contribute and also reach out to me if you want to talk about this further. I can be reached through LinkedIn.
The final area to focus on in the 8 areas that need additional strategic focus is ‘From medium term strategies to long term scenario based strategies”.
Traditional strategic planning, with some sectoral exceptions such as the energy sector, has a medium term focus (Figure 12-1). The typical time frame for a strategy tends to be in the 3 to 5 year period, closely linked to the normal tenure of a CEO and the incentive designs for the executive team.
Figure 12-1
In the Harvard Law School Forum on Corporate Governance, in a post on 12 February 2018, they refer to a recent Equilar Study regarding the tenure for CEOs at large-cap companies (S&P 500). The median tenure of CEOs sat at 5 years in 2017 with a declining trend (Figure 12-2).
Figure 12-2
With all the macro dynamics at play, this time frame for planning and incentive alignment is far too short. In the current enviroment, strategic thinking needs to be longer term focused to accommodate potential disruptions, address major shifts in products and services from new technologies and accelerated adoption and convergence of existing technologies, align with the UN Sustainable Development Goals for 2030 and address climate change.
The climate change path is not yet clear as we have been slow to react, and are therefore, too early in the cycle of creating deep impactful changes; however, we are clear that we are not moving fast enough to get on a climate scenario with acceptable potential outcomes. What is clear is that the longer we delay taking action the more an extreme response will be required (Figure 12-3). With delays in strategic response to climate change, the future challenges for management will only increase.
Figure 12-3
With all these factors, only through really creating scenarios will it become strategically clear on the implications of certain decisions. In addition with climate only really playing out in about the next 30 years, it will not be until closer to 2050 that we will have clearer understanding of the potential full impact and the trajectory we are on.
These factors shine a light on the need for changes to strategic planning horizons and the disciplined use of scenarios (Figure 12-4).
Figure 12-4
Programmes of substantial change in major components of a strategy take time, such as a shifting to a circular strategy, geographic rebalancing of assets and supply chain with increased geo-political tensions, and adjusting to major changes given the lessons learnt from Covid 19. The key is to try and understand potential key inflections points, non-linear and exponential type relationships where straight line extrapolations are invalid. These points can be driven by internal actions, fundamental shifts in markets, core changes in the role of technology, and other macro shifts and disruptions, including climate change.
In addition, to considering these points noted above is the need to reconsider the businesses view on the importance of sustainability and resilience versus a complete focus on pure efficiency with the hope that no extraneous events will interrupt this focus. Since 2008, with the financial crisis, through to the current challenges from the pandemic, we are seeing that the winners are the businesses that are most resilient. The businesses with single source or tight supply chains, high financial leverage with low rainy day capacity, or those that have been slow to embrace the power and value of technology for distributed working are requiring government handouts and/or bail out funding to survive. This is not in the interest of investors or other stakeholders including the tax paying public. Risks of disruption are increasing not slowing down, and not understanding and planning for them is irresponsible.
This analysis, thinking and understanding of the external environment and the market then needs to be married to the companies own internal analysis and understanding. The internal analysis involves the management and boards strategic view on whether they want to be a leader, a near follower or a laggard (slow follower). This view will be linked to the current situation of the business in terms of leadership, organizational capacity and capabilities, the infrastructure and technical debt of the business, the business’ innovation capabilities, the strength of their supply chain and third party relationships, and the financial capacity of the business to evolve. The meshing of internal factors, the industry and competitive environment and macro factors is what underpins the choice of scenarios and the appropriateness of planning horizons.
An interesting case history to look at is Orsted. Orsted (formerly Dong) began life in the 1970’s, as a Danish state owned energy company focus on building coal fired plants and sea bound oil and gas rigs around Europe. By 2006, they had started to build offshore wind farms and decided to focus more on green energy. They then started to close down coal plants and sell off their oil and gas sites. They now have 24 offshore wind farms with more under construction, have sold off their oil and gas sites and have committed to be coal-free by 2023. Henrik Poulsen, CEO, recently said, “we’ve transformed a Danish utility predominantly based on fossil fuels into a global leader in green energy, which was ranked as the world’s most sustainable company earlier this year. In the process, we’ve increased the market value of the company by several hundred per cent. We’re now at a point where the transformation is completed, and we’ve built a strong platform for global growth”.
Scenario planning helps understand the variability of potential outcomes under different scenarios and select the right way forward with a deep understanding of the assumptions behind the direction and the tipping points where strategic adjustments are needed. If you think of Orsted, the scenarios they would have had to explore would have had a set of critical assumptions on relative cost of energies, reliability of the energy sources, adoption rates of renewables, costs and risks of offshore windfarms, implementation risks etc. Given that they started building their offshore windfarms in 2006 wind and solar were the high cost energy sources. Projecting forward cost, capacity and quality curves on new technologies is a critical part of the scenario planning.
Figure 12-5
Different business scenarios will be required linked to different climate scenarios, and assumptions on regulatory changes, geo-political dynamics, investor behaviour with respect to the SDGs, etc. Creating clarity around critical decisions that have strategic consequences, variable financial outcomes, and different impact outcomes is critical.
Finally, Boards will have to solve how to create focus and alignment against longer term goals vs. the short term tenure and wealth creation focus of executives.
To summarise, the discussion on the eight areas requiring deeper strategic focus:
Strategic analysis has to evolve significantly and look at a number of issues in much more depth
Shifting from thinking about shareholders to stakeholders
Adding macro modelling on top of industry analysis
Extending risk monitoring with macro risks and then implementing resilience strategies and capabilities
Building a deeper understanding of customer – product fit and the forward looking dynamics of the market
Embedding technology, innovation, and design capabilities across the business which is critical in a rapidly changing world
Rethinking of business models and integrating impact into business objectives
Innovating through improving your business model
Setting objectives around the ‘triple bottom line’
Strategic planning to create scenarios and look at longer timeframes
Move from short and medium term strategic planning to short, medium, and long term planning
Build scenarios of different sector, economic, social, environmental and technological scenarios to evaluate strategic decisions
Timeframes critically need to cover the impacts of alternative climate scenarios
In the next section, I will outline a high level system based strategic framework, with a long term view, that is much more fit for purpose than what has traditional been used for a core focus on shorter term shareholder returns.
“It’s your reaction to adversity, not adversity itself that determines how your life’s story will develop.” ― Dieter F. Uchtdorf
Blog 7 of the Business Strategy Series
‘From risk monitoring to business resilience’. How many companies had put pandemics as a risk factor in their risk register and were well prepared? This is despite infectious diseases being logged as a medium likelihood and a high impact risk in the World Economic Forum’s Annual Global Risks report. And, since the beginning of this new millennia, in the last 20 years, we have had Sars, Swine Flu, Mers, and Ebola. Clearly, there were not many companies prepared or we would not have needed government economic support of up to 15% of GDP in wealthy nations.
In addition, how many companies were prepared for the financial crash in 2008, have fully considered the risks from global warming, the challenges of political, economic or climate based refugee movements, or the full range of risks from different forms of cyber attacks? This discussion follows on naturally from the previous blog on the need for macro modelling beyond traditional industry analysis.
The first area of attention is to add macro risks with multi-horizon views into the risk monitoring (Figure 7-1)
Figure 7-1
As the world is getting more complex and more interlinked, the likelihood of an event occurring increases. In addition, the risk and impact of an event is increasing due to inherent trends that we are facing. These trends include climate change, population growth, increasing reliance on technology and data, increased population concentration in cities, globalisation and increased levels of debt per capita. The optimistic view is that behind each of these trends should also be some great opportunities and this is where the great companies will be focusing. Rigorous analysis should help to identify opportunities out of a risk assessment.
In the World Economic Forum’s Global Risk Report 2020, they have surveyed their member base to get their view of the likelihood of a risk occurring and its potential impact on a scale of 1 to 5. The higher risk and likelihood events are listed in Figure 7-2.
Figure 7-2
The outcome of this survey is set out in Figure 7-3 which shows the set of risks with a combination of high likelihood and high impact. You can see the clustering of environmental concerns in the top right quadrant. It is interesting to note that infectious diseases/pandemics were not ranked as high; although, still seen as serious.
Figure 7-3
The perceptions of risk are not static over time with some of the perceptions being influenced by events that are occurring at the time, such as the 2008 financial crisis. Since 2007, there are 2 visible trends. Firstly, the escalation in the risk levels related to climate and environmental issues. Secondly, a growing view of risk levels on the technological front. The good thing to take away from this risk assessment is that this indicates a growing understanding and view of the risks of climate change and environmental degradation.
Another interesting aspect of this report is that they compare the views of the WEF members against their Global Shapers Community which is the WEFs network of young people driving dialogue, action and change. In most cases the Shapers see a higher likelihood of an event occurring and in virtually all cases a higher potential impact.
What is not fully evident, and not addressed in the report, is the extent of government and business response in light of these risk assessments. You would think that this could be one of the productive outcomes of the WEF Davos Meeting that happen annually.
For a specific business, the ratings of the risks would be affected by a combination of the sector and geography where they are involved. Business risks can be divided into two broad categories of risk, direct risks (Figure 7-4) and macro, or indirect, risks (Figure 7-5).
Figure 7-4
Behind the direct risk, is the ongoing risk of one of the events occurring and the potential impact of that risk; however, there is also an implementation risk that occurs on an activity when you are undertaking a material action that is new and within your plan, or you are taking a substantive action to either mitigate a risk or respond to a risk that has occurred.
Similarly, with Macro Risks, there is the physical risk which is the fallout related to the specific event. This would include second and third order effects as we have seen with the current pandemic. However, there is also a transition risk which involves a fundamental change to the operating environment of the business; and, in these cases there are risks related to the period of change to a new environment. Examples of transition risk are the risks arising from a transition from our current energy provision to a clean energy sector or a transition from a linear economy to a circular economy in a specific sector.
Figure 7-5
Against these risks, the management and their boards clearly need to think through how to build resilience. Resilience strategies can take several forms. Firstly ‘Shaping’, the company could eliminate or at least partially eliminate risk by boldly implementing a plan upfront. This approach would also be deployed where there were also business opportunities. An example of shaping, would be a technology company building a second manufacturing facility outside of China due to geopolitical concerns and trade risks. This approach is clearly bolder and requires more upfront investment; and if there is a market opportunity involved it may well be the right approach. Another interesting example of this is IBM, who started as a mainframe computer business, then separately invested in mini computer business in case the market took off; and then finally, did the same thing with the micro-computer market.
Secondly ‘Hedging’, the company could build a specific risk mitigation response capability that would be pre-planned and tested. This would include optioning, if there are a set of discrete scenarios that would require quite diverse responses. The goal is to limit the upfront expenditure, but keep the company in the game and help accelerate the speed of response if required; thereby, mitigating the risk. Thirdly ‘Reacting’, a company could build the information and systems requirements that would give better pre-risk warnings, improve in-risk analysis to help the response, and provide post occurrence monitoring. Finally ‘Dry Powder’, is to ensure that you have the financial capacity to react to any residual risks including known risks with unknown outcomes and unknown risks.
In addition to defining risks in terms of likelihood and impact, it is important to categorise the risk. There are effectively three risk categories. The first risk category is ‘Clear Outcome’. An example of this would be the binary decision of a competitor to build a new plant in a key market that would significantly affect the supply – demand dynamics.
The second category is ‘Range of Outcomes’. In this case there are a set of different scenarios that could describe the future. In some of these situations, it may link to scenarios of the outcome and timing of regulations related to a sector. The third category is ‘Unknown Outcomes’. In these situations, they are known risks but no true understanding on the likely scope of outcomes. An interesting example of this would be during the development of the electric car market. In 2010, I think it would be safe to say that the categorization of the development of this market and its implication on diesel and fuel cars would be ‘Unknown Outcomes’. In 2016, Norway agreed to ban all conventional cars by 2025 and then other countries and cities started announcing bans in 2017. By this time the risk category in the EU had turned to ‘Range of Outcomes’ and it was just a question of when the bans would be enforced by country across the EU. Clearly, different types of risk need different option evaluation approaches. Doing additional research and analysis to be able to shift to a clearer set of outcomes can add significant value.
Linked to evaluating resilience responses, a business should be able to see that certain actions can create resilience against several, and often unrelated, risk types. This is clustering. For example, having two manufacturing facilities in two countries rather than a single facility could mitigate risks for floods, fires, geopolitical trade risks and foreign currency risks. Another example would be, moving to an environmentally friendly strategy would help mitigate the risks from changing consumer purchasing behaviour, reduce employee retention risks, get the company ahead of potential new regulations, and reduce the potential of brand and reputation damage from climate action groups.
The other side of resilience response is to evaluate whether or not risk reduction can be coupled with a new business opportunity. Pressure test your resilience thinking to see if you can turn some of the needed activities into opportunities to create deeper strategic advantages and further customer differentiation. A simple example of this, has been the Covid 19 based rush of many retailers to build an online channel for remote ordering and home shopping. Many of these retailers somehow missed understanding that adding a home shopping channel market is a basic requirement today and should have been part of their strategy long ago to grow sales anyway.
These different components can be pulled together into an overall approach to resilience management (Figure 7-6).
Figure 7-6
There are a number of ways to build resilience. The most important starting place is to have the right leadership and team in place that have the knowledge and the capacity to build resilience, and rapidly and effectively respond to risks. This pandemic has shown some stark differences in country and company abilities to respond to risk and significant differences in speed and effectiveness of response.
There are different ways to think of building resilience and some of them are noted in Figure 7-7 Firstly, diversification is a classic way of reducing risk. Points of potential diversification would include raw material sourcing, manufacturing locations, distribution channels, data centre locations, geographic focus, and product range. Secondly digital innovation, which would include adding the ability to work remotely, home shopping, using cloud based systems, remote servicing. Thirdly, product service innovation which would include having a more diversified set of products; but, also being able to rapidly change and adjust products and services for example as new regulations are put in place, software language use changes, and responding to disruptive new entrants into the market. Fourthly, business model innovation is becoming increasingly important to look at. We are now seeing a shift in some areas from single product purchasing models to locked in monthly payment models such as with digital news services vs. daily purchases of a newspaper. Building reliability in revenue flows is a also critical part of resilience.
Figure 7-7
Next is financial capacity management. In times of crisis, a strong balance sheet always wins. It is increasingly hard to insure against all potential risks so residual risk may need to be covered off by a stronger balance sheet. Just like at home, a business needs a cushion for a rainy day! A strong balance sheet is also critical if a company is seeing increasing volatility of revenues and/or increasing seasonality of the business. Private equity owned companies that are tightly financed and highly levered are particularly susceptible to small changes in trend lines. I think everyone would agree that believing that the last line of defense of a business is a rescue by the government is not something worth relying on.
Finally, having partnerships-alliances or reliable third party support to help deal with, or be on call for, certain crisis types is usually a core part of a resilience strategy. In technology based risks, having a specialised help to deal with cyber attacks is a common use of a third party. They can help help reduce the risk of an attack succeeding as well as helping to respond to a threat that occurs. Other examples could include having back up manufacturing capacity and some outsourced service capacity. For many companies, having your data and software in the cloud results in the cloud supplier (eg. AWS, Google, Microsoft) providing the resources and skills to deal with a cyber attack risk.
Against this whole discussion of risk and resilience, it should be clear that resilience is a core component of strategy. As noted in a 2016 HBR article, The Biology of Corporate Survival, companies are disappearing faster than ever before. “Public companies have a one in three chance of being delisted in the next five years, whether because of bankruptcy, liquidation, M&A, or other causes. That’s six times the delisting rate of companies 40 years ago.” If you are focused on long term sustainable performance in a complex and rapidly changing world, resilience, speed, agility and innovation capability will outperform a low cost strategy.
Source: McKinsey wrote an excellent article in the HBR that helped shape some of this thinking. “Strategy Under Uncertainty”, Harvard Business Review, November-December 1997
In Blog 4, I completed the brief discussion on the current global environment.
To summarise the key points I made in Blogs 2 to 4, the thread of the story was as follows:
Covid 19 exposes how little we are prepared for serious disruptive events
We live in a complex world with many interconnected factors that will affect our businesses
There are multiple types of events that can occur over time that can be highly disruptive to businesses
We must move from thinking businesses operate distinctly from the global ecosystem and should only be profit focused.
Businesses need to be part of the global ecosystem, and will be mandated to look this way, so strategy must be looked at from a system perspective.
The perspective of how we fit into a sustainable world is best reflected by the global consensus represented by the UN Sustainable Development Goals.
The nested circles below (Figure 5-1) illustrate that a business needs to not only build on their identified business opportunity but it must do so in a way that is aligned with the sustainability requirements from an economic, social and environmental perspective.
Figure 5-1
There are eight gaps in conventional strategic analysis and thinking that need to be integrated into system based business strategy. The next set of blogs are going to these eight gaps that are critical to strategic thinking going forward. The eight gaps are:
From shareholders to stakeholders
From Michael Porter’s five forces to macro models
From risk monitoring to business resilience
From product-market fit to customer-product fit
From simple to multi-factor business models
From product to company technology, innovation and design
From profit focus to triple bottom line
From medium term strategies to long term scenario based strategies
The place to start is ‘from shareholders to stakeholders’. Some of the early thinking on shareholders, was discussed by the well known economist Milton Friedman. In his 1962 book ‘Capitalism and Freedom”, he stated, “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game”. This was linked to his view that the sole responsibility of management was to its shareholders.
This Friedman doctrine, has been the driving force of thinking and management behaviour ever since. Businesses are run with an intense primary focus on a mix of profitability, growth, and return on investment which are the critical drivers of shareholder wealth creation. We see this every day in the stock markets and is the pervasive thinking in private equity. If you look at the standard structures of incentives for CEOs and their management team, the core wealth generators for them are linked to financial performance and share price performance. This is coupled with the view that stock markets are focused on quarterly performance.
As the world has moved towards and into the 21st century, there has been a growing shift to increasing the view of stakeholders beyond investors to include other direct stakeholders (Figure 5-2).
Figure 5-2
This broader definition of stakeholders has to a large extent been at the core of many ‘family’ owned companies that have been around for decades. It has also been a much more important part of the thinking of the companies situated in the EU and certain Asian countries. The reality of these other direct stakeholders is that stronger relationships with each of them will create stronger and more sustainable economic performance. Alienating employees, not treating customers well to build customer retention, and having unstable relationships with suppliers tends to create financial and operating performance issues over time. In a number of countries including Norway, Sweden, Germany and the Netherlands, company boards reflect the importance of a broader set of stakeholders by having specific representatives for the employees, unlike countries such as the US, Canada and the UK.
Through experience over the years, and as market and consumer behaviour has been changing, it has started to become clear to businesses that there is also a secondary set of stakeholders (Figure 5-3) that can also have a direct impact on the well being of a company and need consideration.
Figure 5-3
These impacts can come from a range of different groups and involve impacts such as regulatory challenges, acquisitions being blocked, government fines or additional taxes, and brand and reputation damaging press from advocacy groups or the media. Clearly, strong relationships with these stakeholders can also have the opposite effects and open doors to opportunities.
Here are some examples that many of you will be aware of and I am sure there are many other examples that come to mind.
Figure 5-4
In May 2017, Facebook (Figure 5-4) received an EU $122m fine for the breach of anti-trust regulations, and then in 2018 the EU started an action against Facebook for privacy breaches which had a potential fine of $1.6bn. In 2019, the Federal Trade Commission imposed a $5bn fine for violating consumer privacy. As well as the fine, the settlement order also required Facebook to restructure its approach to privacy from the corporate board level down, to establish strong new mechanisms to ensure that Facebook executives are accountable for the decisions they make about privacy, and that those decisions are subject to meaningful oversight.
Figure 5-5
In 2004 Coca-Cola (Figure 5-5) launched Dasani, a leading bottled water brand in the US based on tap water, into the UK. The use of tap water and an ‘interesting’ marketing campaign caused a negative media frenzy, and then a Coca-Cola headquarters frenzy, and resulted in Dasani having to be withdrawn from the UK Market and cancelling planned launches of Dasani in certain other regions of Europe. I will let you search this incident on the web if you have time for the more detailed and amusing story.
Figure 5-6
The Volkswagen emissions scandal (Figure 5-6) began in September 2015 linked to a violation of the Clean Air act in the US. This breach resulted in plans to spend €16.2bn in reparations and a $2.8 bn fine (source: Wikipedia – https://en.wikipedia.org/wiki/Volkswagen_emissions_scandal). Another example of the failure to meet regulatory compliance and the need to be on top of all regulations and potential new regulations.
Figure 5-7
We are all aware of the environmental movement (Figure 5-7) and the impact it is having on many companies resulting in damaged brands and reputations, boycotting, or brand switching to more ethical brands. A lot of this pressure has come from a combination of activist groups, such as Greenpeace, naming and shaming companies involved in areas such as deforestation of the Amazon, and public protests including the activities of Greta Thunberg.
Understanding the relevance of these different stakeholder groups is an essential component of strategy. Evaluating the power, risk, legitimacy and urgency of these stakeholder groups will affect strategies, priorities, investment spend and programs for effective management of the key groups.
Fully understanding stakeholders, does not end with incorporating secondary stakeholders into your thinking. There are non-market stakeholders (Figure 5-8) who are outside of the market of the company but can be indirectly deeply affected and therefore affect the company in return.
Figure 5-8
As can be seen in Figure 5-9, these are examples of the types of corporate related activities that have had significant effects on non-market stakeholders. There could be future generations that have severe health and well being problems as a result of nuclear or chemical disasters, or poor and indigenous groups that had been taken advantage of but now have rights. It could be severe economic damage to indirect businesses, such as in the 2010 Deepwater Horizon Oil Spill involving BP. By 2018, it was estimated that this had cost BP $65 bn, including $4.5bn in fines. Finally, with the environmental movement, damage to Flora and Fauna could also have consequences for a company.
Figure 5-9
We have outgrown, Milton Friedman’s view that the sole objective of a company was to increase its profits within the rules of the game. He argued that the appropriate agents of social causes are individuals—”The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so.” Today, charity does not solve the concerns of the secondary and non-market shareholders! Thoughtful strategic integration of the needs of legitimate and valuable stakeholders is essential. Effective management of all material stakeholders needs to be a fundamental part of managing a business. In relation to climate change and the environment, we are already seeing that companies not focused on sustainability are losing access to finance, having trouble attracting and retaining talent, and losing customers. We are only in the early stages of this movement!!
In summary, the landscape of stakeholders is broad and complex and their potential impact on businesses is continually evolving and changing. Organisations not understanding this will have strategic and performance shortcomings, and be remiss in their responsibilities.
‘When the winds of change blow, some people build walls and others build windmills’ Chinese Proverb
Blog 4 of Business Strategy Series
In earlier blogs, we have talked about the broad range of externalities that can impact a business. We can see from our current experience of Covid 19 that a health crisis is an example of the depth of interconnected issues. Most key environmental, geopolitical, economic, technological or societal macro-factors have a heavy set of interconnections which can impact a business.
These factors range from events with little or no warning such as floods, pandemics and cyber attacks, to events that are somewhat visible and require a reasonably quick response such as Brexit, regulatory changes, different forms of financial crises, and at the other end of the spectrum factors that are visible and will require large fundamental changes such as climate change, and perhaps AI and robotics.
At the global level, the 2008 financial crisis and the 2020 Covid 19 crisis has shown real weakness in the overall resilience of companies and the reliance of massive government interventions to backstop the collapse of our economies and way of life through both monetary and fiscal policies interventions. However, it is important to note that the level of interventions that are taken are limited to the capacity of the government to assist. Many governments, especially in low and middle income countries, lack this capacity. For the affluent countries, it looks like that the cost of Covid 19 for the governments to keep the economy alive so it can recover will be up to 15% of GDP. There are many more examples at the national level where crisis have needed significant national and also. international responses. At the company level, too many companies, from multi-nationals to small companies, have not properly addressed the dealing of potential disruptions at the macro level within their strategies to sustain the viability and performance of their businesses.
Behind all these potential disruptions, the one issue that will not go away is environmental crisis. No issue is bigger, more complex, or requires more structural change than the current environmental crisis with climate change at the center of this. This challenge is going to last for decades, if not forever, and we should expect to have major disruptions requiring short term responses as well as longer term fundamental changes.
Figure 4-1
As most businesses have been in denial, are avoiding the issue, or not are not taking action with any urgency, we have seen international organisations, governments, investors, and the public start to demand systems thinking to deal with this issue of climate change and environmental damage. From the 2015 Paris Climate Agreement, 189 countries have signed up to individual targets as of February 2020. A number of countries are starting to commit to net zero carbon emissions targets, including Denmark targeting to reduce their CO2 levels by 70% by 2025 and the UK targeting to achieve Net Zero by 2050 along with a growing number of other countires. Behind these commitments there are/will be a set of policies, regulations, and incentives to achieve each countries targets.
There are also investors who represent $130tn (per Mark Carney) of money under management and central banks requiring climate impact reporting. In addition, a growing set of these investor, including major sovereign wealth funds and pension groups, are setting their own climate targets for their portfolio holdings and will be driving a shift in the investment and funding of companies depending on their climate and environmental impact strategies. Finally, we can all see the public movements on this issue and the consumer purchasing trends taking shape against the environmental issues.
Next to the environmental movement, there has been ongoing focus on social and economic responsibility. In 2015, the United Nations Sustainable Development Goals (SDGs) were announced that covered sustainability across environment, social and economic development. The goals covered 17 core areas of focus, each with a set of sub-goals (Figure 2). These SDGs were signed up to as a global consensus of most of the countries of the world. They are the best universal view of goals and targets that a sustainable world should encompass. These targets are effectively linked to the ESG (Economic, Social, Governance) reporting requirements for large public companies. It’s worth noting that corporates that are looking at their external impact seriously, such as FMCG companies and supermarket groups, have based their strategies on aligning with the SDGs and not just environmental targets and climate specifically.
UN Sustainable Development Goals Figure 4-2
It is clear that companies are operating in a complex world that is disrupting the ideal steady state approach to doing business. Climate change was the big issue that everyone was talking about until we had a pandemic which also triggered our economic crisis. Instability is really the business environment that we need to be designing our businesses to work in. By definition, then strategy must be looked at from a system perspective integrating the externalities of our global economy, society and environment and solving a sustainable way forward. The best guiding light we have on sustainability and what we need to guide our system based strategy at this point in time are the UN Sustainable Development Goals. Businesses need to be designing their strategies integrated with and aligned to also creating external impact economically, at the societal level and environmentally (Figure 3).
Now let’s talk about factors that affect our current global environment other than Covid 19.
Businesses sit within a complex ecosystem. As long as all the factors in that ecosystem are relatively stable then running a business can be relatively straightforward, and if you have been able to build a strong competitive position then you have a good chance of maintaining your position. However, once the number of dynamics affecting your business start growing the challenge can become exponentially more complex.
These dynamics can come in many forms and from many sources, ranging from the development of new or existing technologies, to gradual changes in regulations, to activities that require a rapid response from events such as a pandemic, floods and fires, or a financial crash as in 2008. To make it even worse a number of these dynamics could be happening simultaneously within a short geographic time frame. Just in the last 9 months, we have had the severe fires that affected California and Australia, and now we have rolled into the Covid 19 pandemic that has also caused a financial crisis, a massive disruption to how we work, and there has been an oil price shock. This is without looking in more detail into many countries where there will be whole sets of other ripple effects; such as, social instability being driven by lock down in low and middle income economies.
Figure 3-1
If you just look at the World Economic Forum 2020 Interconnections map below on macro risk factors, it is pretty clear that businesses will have to be continuously managing in an uncertain environment and they will need the flexibility and adaptability to deal with a broad set of challenges.
Figure 3-2
These events can require quick responses such as from cyber attacks/data fraud and the current pandemic, to medium term responses from factors such as changing trade relations, as is happening currently between US and China or with Brexit, to fundamental changes required for example in response to climate change.
Another way to think about this is to look at what types of events can cause economic disruptions or create tipping points. From this perspective, I am thinking of a tipping point as an event or set of events that drive a fundamental change in performance and/or require a material change in how you manage your business. A historic straight line extrapolation of performance as an assumption of how to drive key decisions in a business can only looked at as an assumption of hope over reality. Maybe you will get lucky!
These disruptions can come in many forms including those that are natural, man-made or health based. As you can see from the graph below (Figure 3) on globally reported natural disasters, we are now in the range of 300 to 400 natural disasters per year vs under 100 in the 1970’s.
Figure 3-3
It is worth noting that most of these events are weather related. The extensive science on climate change suggests that the frequency and scale of these weather related disruptions will only increase as the planet is warming. It could also be argued that the economic disruption per event will also be increasing over time as the world is getting smaller from globalisation. For example, our food supply chains reach to all parts of the world and material sourcing for our manufacturing comes from many parts of the world. So a local natural disaster can disrupt businesses all over the world.
There are also multiple sources of potential man-made disruptions as noted in Figure4.
Figure 3-4
Not all disruptions are problems; although, with the wrong leadership they will be. An oil spill maybe a problem for one company or an opportunity for another; or, low cost solar energy maybe be a problem for an oil company and an opportunity for clean energy focused companies. In the digital space, there can be major disruptions from cyber attacks and ransomware, on the opportunity side a whole industry has arisen to help companies deal with these issues.
In 2007/2008 there was a convergence of a set of technologies/digital capabilities that would dramatically change how consumers would run their lives and how we could manage a business. This was a tipping point. The convergence included the ability to use computing power against big data, the emergence of cloud computing, the relatively ubiquitous availability of broadband, the launch of the first Apple smart phone and the large scaling of social media usage started by Facebook (only 58 million facebook users in December 2007). Many companies have changed how they operate as a result of these combinations of technology and many new companies have emerged that are threatening older companies.
In health, this is not the first pandemic we have seen and will not be the last. As of 2 June 2022, we are closing in on 400,000 deaths from Covid 19 and we are still in the first wave.
Figure 3-5
We all know this has also had serious consequences for our economies, how we socialise and our international mobility. We have no idea how long this will economically affect different sectors and how it will shift consumer and purchasing behaviour both temporarily and permanently.
So in our environment, we can see an increasing frequency and scale of disruption, some of which are truly just temporary challenges and others that will question the strategy, structure and key operating assumptions about how a business operates. These disruptions may come as complete surprises, become visible with some element of time to respond or have a long term fuse but still need urgent attention, such as climate change. They will also have different characteristics in terms of being solveable to requiring a fundamental change in the business model of companies that it is affecting. The question for a business is are you going to deal with these disruptions as and when they occur, are you going to be prepared for certain disruptions and be able to rapidly respond to minimise the cost, or are you going to anticipate some happening and be ready to take advantage of them. Recognizing that certain disruptions are really also tipping points and being able to react faster than others should be seen as a source of competitive advantage and a way to outperform in the marketplace.
In my view, business should consider ongoing disruptions as the ‘new normal’ business environment rather than stability as the normal situation. The potential benefits of resilience in a disruptive world may well be a better strategy than a tight manufacturing and supply chain that will be more efficient in a steady state world. More on this as we talk about risk and resilience in later blogs.
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