Tag: UN SDGs

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REBOOT World View

Urgency and Alignment

“If we are to have peace on earth, our loyalties must become ecumenical rather than sectional.  Our loyalties must transcend our race, our tribe, our class, and our nation; and this means we must develop a world perspective.” Martin Luther King Jr.

Hans Rosling said how can you solve major challenges if you don’t understand the facts.  He was a Professor of International Health at the Karolinska Institute and Founder and Chairman of Gapminder Foundation.  As a well known and influential speaker on global issues, he used to systematically ask 10 questions to his audience about the state of the world.  To his dismay he found that no matter the intelligence of his audience their true understanding of the world fell well short of being even adequate.  In fact, their overall scores were worse than what a chimpanzee would score with random picks.  His final book, “Factfulness – Ten reasons we are wrong about the world – and why things are better than you think”, dealt specifically with this issue. He was on a mission to save people from their preconceived ideas.  

This is the tenth and last blog of this World View series.  This series came about as I felt that it was vital to be up to date with the current state of the world across a number of dimensions and develop an integrated world view of where we are and where need to be going.  This series was the result of over 18 months of extensive research across a broad range of subjects learning from the works of Nobel prize winners, professors, researchers and well respected individuals.  It also involved analysing different databases, reading research and using the power of the web to capture information, understanding and alternative perspectives.  I have tried to look at our world in an integrated way and explore a range of perspectives and not just confirm cognitive biases I already had.  It is safe to say that my view of where we are and what we need to do going forward at the global level is different from my initial thoughts.  What is unchanged is that I remain optimistic. To be an effective leader going forward I believe having a grounded world view is essential. Building successful sustainable businesses cannot be done in isolation anymore.  

In the first blog, I laid out what I thought were the three big global challenges that needed to be addressed.  Although being more tightly defined, not surprisingly they were consistent with the UN Sustainable Development Goals and the World Economic Forum Global Risk Report.  The three challenges as I defined them were:

  • Decarbonisation and Biodiversity Regeneration
  • Inclusivity and Fairness
  • Digital Privacy and Collective Truth

In the second blog, I analysed the components of successful societies.  The third blog, set the scene for thinking about the challenges going forward in the context of what should be the social contract for citizens of a society.  The next three blogs covered off different aspects of delivering against the social contract – democracy and the role of government, the market economy and capitalism, and the nine waves of technology innovation.  Blogs 7 to 9 each explored in more detail one of the three challenges, including thoughts on how to solve them.  

This tenth blog explores the keys to unblocking one of the most critical barrier to success, urgency and alignment.  It is not a case of not understanding the challenges, shortcomings in our scientific knowledge, a lack of potential solutions; rather it is a lack of urgency and alignment that will make us fall short. And, don’t forget the consequences are immense!  Together the challenges are solved by underpinning them with policies, incentives and appropriate stakeholder pressure provided on a timely basis.  Given where we are, we know that the current governmental policies and the outcomes of our market economies and capitalism have been inadequate, and therefore, need to change. As Albert Einstein said, “The definition of insanity, is doing the same thing over and over again, but expecting a different result”.

Getting the right balance of incentives, carrots and sticks, across participants that need to change is the biggest challenge.  The shaping of them must take place from the supra-national level, to national/regional/local governments, to the private sector, the third sector and to the public itself.

In the last few weeks, we have seen some critical indicators that we are making progress on this topic of urgency at the governmental level.  In late April, Germany’s Federal Constitutional Court made a judgement on Germany’s 2019 Climate law which set as a target to cut 2030 carbon emissions by 55% from the level of 1990 and emit no net greenhouse gases by 2050. The Court ruled that the younger and future generations are entitled to “fundamental rights to a human future” and the current legislation results in a “radical burden” post 2030 on future generations that would drastically reduce their freedoms.  The government now wants to lift the 2030 reduction target to 65%, and to bring forward the net carbon-neutral date to 2045. In a similar vein, in 2019 the Supreme Court of the Netherlands ordered the government to substantially increase its ambition after it watered down its carbon reduction target. 

In Asia, there has been increasing legislation focused on digital censorship, including fake news, coming from a number of countries including Singapore, Malaysia, India and most recently Indonesia. Although, the focus includes dealing with the critical issues of national security, disturbance of public order and the conduct of elections; it can be said that much of the legislation is overreaching.

In the private sector, there is also progress.  In a landmark climate case in late May 2021, the Dutch court ordered Shell to reduce its carbon emissions by 45% by 2030 from 2019 levels.  This is in comparison to their current targets of 20% by 2030.  In the same week, a small activist hedgefund, Engine No. 1, managed to replace two existing board members at Exxon with its own candidates to drive the company towards a greener strategy; and, Chevron shareholders rebelled against the Company Board by voting 61% in favour of forcing the group to cut its carbon emissions.  Investors are increasingly taking these challenges seriously.

The cornerstone for making this happen is at the country level where government policies, taxes and incentives set the tone for the kind of society that needs to be built.  They need to raise expectations for the private sector, and more diligently think about the social contract which they have with their citizens.  

Supporting this are supra-national pressures to get all countries on board with the overall goals of fighting climate change and environmental degradation, and inequality.  The UN Climate Change Conference in November 2021, COP26, will be a critical indicator of the level and urgency of ambition to tackle climate change at both the governmental level and by the private sector.  There is also the 76th Session of the UN General Assembly in September 2021 which will be looking at the progress against the 2030 Sustainable Development Goals. In addition, ongoing pressure needs to be coming from the G7 and G20 conferences.  

In addition, it is the involvement of financial markets, investors and asset managers that control the flow of funds to and from different sectors.  The broad pressure points are coming from central banks, organisations such as Climate 100+ and ESG reporting requirements. Momentum is growing; however, the rate of change of aligning investment and financing decisions is too slow and the pressure for faster progress by the companies they are investing in is too light.

As long as boards and executive management are driven by short term strategies, thinking and incentives, change will be too slow. In large US corporates, changing the momentum from a continuously growing level of CEO compensation, from 30-40 times average worker compensation in the 1980’s to the current day level of 300-400 times, based on short term corporate performance to more challenging longterm performance with clear and ambitious impact goals is not in the self interest of these leaders. Boards must be willing to rapidly align the structure of compensation with long term sustainability. The Boards must be motivated to do this by the investors and asset managers; and where appropriate or needed by governmental policies, taxes and incentives.  If leaders don’t adopt the need and urgency then nothing will happen.  This is both a question of ensuring they are aligned with the priorities and they are leading with the right time horizons.  

Finally, there are the citizens, who are also employees and customers, who need to use their voice and actions to drive change and must also change themselves.  To do this they need transparency on the environmental and social behaviour of the company that is captured within the ESG reporting requirements. As noted earlier, both the court judgements and the shareholder actions were all triggered by stakeholder activism. More than ever stakeholders (employees, consumers, public, investors, etc.) are increasingly powerful voices that are requiring changes to corporate behaviour and a fundamental shift to responsible capitalism.

If you look at the private sector challenges, at its simplest level there are three dimensions to getting the incentives right and driving impact.  Firstly, rewarding value and impact creators.  Too much of our economy overly rewards value extractors, including profiting from trading and financial engineering, which adds little to the economy and nothing towards addressing these challenges. The question is, are you adding value and moving towards meeting the outcomes required by the challenges, or are you not contributing or falling short of the outcomes required.  For any company or organization, if you have no measurable and relevant impact goals you should be seen as a value detractor regardless of what you are doing. Value creators should benefit in terms of governmental policies, tax levels and incentives in comparison to value detractors. Mariana Mazzucato, a leading economic thinker, has written a seminal book on this topic, “The Value of Everything – Making and Taking in the Global Economy”

Secondly, ensuring a proper balance of priorities across the short, medium and long term horizons.  The challenges of climate change, biodiversity and inequality cannot be solved and be properly addressed in the short or medium term; however, investment in factors that have vital long term outcomes are required now.  Achieving Net Zero for most companies and all countries will take more than 10 years; but, investment almost certainly needs to start now. Longterm investment behaviour should be rewarded vs. short term profit taking and extractive behaviour. Once again, policies, taxes and incentives are needed to assist in biasing investment returns towards impact focused investments.

Thirdly, addressing the challenges with the right urgency.  This defines whether organisations own goals are in line with the timing of the needed/agreed collective achievement of the challenges.

To create urgency and alignment in incentives there are a few key principles. Firstly, the goals and related incentives need to be as simple as possible. Incentives must cover both value creation and impact in a balanced way. Secondly, the goals need to be clear, transparent, timely, measurable and auditable.  Thirdly, programs and incentives must be adjustable to new and preferable technological solutions. Although overall long term targets are clear, interim targets and the set of actions to achieve them are not. Finally, incentive design must understand the heavy human bias towards focusing on easier short term goals and rewards vs. not comprising long term targets. It is a natural inclination to back end load change which often is beyond the work horizon of the existing leadership team. Early investment and impact gains are essential for success.

At the governmental level, it is vital that they set the tone in terms of level of ambition, timing and responsibilities.  As I often say, uncertainty is the enemy of progress.  Clear forward looking and stable policies, taxes and incentives will accelerate the commitment of investment by the private sector.  These programs need to create alignment of the private sector with the goals and urgency of them; bias scale investment to meet these challenges; secure government financing to meet their own commitments; and, ensure the right research, development and innovation is happening to solve challenges where no economic solution currently exists.  

Rightly so, there are concerns about overbearing and overly complex involvement of governments.  However, it is also important to note that pure capitalism does not have a track record of solving these types of problems without the right involvement of governments.  Policies, regulations, legislation, taxes and incentives need to set the direction towards outcomes and define the urgency; but not, specify the exact set of solutions.  Marianne Mazzucato has defined this as “mission oriented” governmental programs.  These activities should be designed to unleash the market power, speed and innovation capacity of the private sector to be the major contributor to the solution of these challenges.

In the second week June 2021, the senate broke their partisanship and agreed a mission oriented spending bill, the US Innovation and Competition Act, of a quarter of a trillion dollars focused on key technology sectors. This was achieved by defining it very much as a way the US can strengthen their competitive and adversarial position with China in key sectors. China has successfully had mission oriented programs to achieve leadership in specific technology sectors, including areas such as solar and electric cars.

So much can be achieved by just putting these frameworks in place, and then allowing innovation, financing and entrepreneurial energy to drive change towards the goals in the most effective way.

Without solving alignment and the creation of appropriate incentives using both carrots and sticks, it is highly unlikely that these challenges can be met on a timely basis.

I hope this series has been insightful to help you build your own World View. In this rapidly changing world, politically, economically and technologically staying abreast of where we are and what is possible is vital for leaders. There are also increasing requirements and expectations in terms of responsibility to have an impact on the key environmental and societal challenges. The need for boards and executives to be on top of the context in which they operate will be an essential component of long term sustainable success. Our collective success and sustainability will be linked to solving the three challenges of Decarbonisation and Biodiversity Regeneration, Inclusivity and Fairness, and Digital Privacy and Collective Truth.

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REBOOT World View

Inclusivity and Fairness

Inclusivity and fairness is the second of the three challenges identified.  The previous blog covered the first challenge, “decarbonisation and biodiversity regeneration’.  The next blog will cover the third challenge of ‘digital privacy and collective truth’.

Can you imagine having a life expectancy of 52 years, 1.5 years of schooling and an average income of $661 per year?  And for your children, looking at a 12.7% mortality rate under the age of 5 and only 4.9 years of expected schooling.  In addition, you may have no shelter, you are undernourished, no clean water and virtual no access to health services.  Is it any consolation that you are better off than the average person in 1800 on a number of dimensions?  This is the worst of inequality – born in the wrong place on the wrong side of the street.

The climate crisis maybe the most existential crisis we have ever face but it does not stand-alone.  Solving the challenges of inequality through a set of initiatives focused on inclusivity and fairness also need to be addressed.  Probably, the best place to capture the overall goals that we need achieve are the United Nations Sustainable Development Goals (SDGs). In 2015, the United Nations adopted 17 SDGs (Figure 8-1) which then had 169 sub goals.  This is effectively the global consensus on priorities. Strong societal foundations and a fair social contract are critical components of the SDGs.

Figure 8-1

Why is it that we need to talk about inequality now after all the developments in the last 50 years?  We have the technologies and the capacities to solve these issues and as I have noted before almost all the trend lines of progress have been going in the right direction with the major exceptions of income and wealth inequality.  

Just looking at extreme poverty, the reduction in the number of poor has been incredible since 1990 (Figure 8-2). The number of people in extreme poverty have dropped from 1,895m to 736m in 2015 and is now below 10% of the population from 36% of the population in 1990.  However, looking behind the numbers we can see that this has been primarily a story of China; and, more recently India has also been making progress. In fact when you move from extreme poverty of $1.90 ($2011 ppp) per day to lesser levels of $3.20/day and $5.50/day China is also making significant progress. The region of most concern is sub-Saharan Africa where across all poverty levels noted above, the number of people is growing dramatically in this high population growth region.  In fact, at $5.50 /day there are 895m people in the region in poverty.  So overall, trends are not expected to continue and solve the problem of poverty.  Additional interventions are required.

Figure 8-2

The core issue as I mentioned in the previous blog is the lack of commitment and pace to solving these issues and the hope that if we just keep on moving forward, as we have been doing in the past, the problems will go away.

Inequality manifests itself in the context of extremes in distribution of income and wealth and the shortfall in access to the basic necessities of life – food, clean water, energy, shelter, clothing, health, education and technology access.  We see the reality of these inequalities in different forms whether in sub-Saharan Africa, China or the US.  Today, 71 percent of the global population live in countries where inequality has grown.  In 2018, the 26 richest people in the world held the equivalent wealth of 3.8bn of the poorest people, half of the global population.  Since 1990, inequality has increased in most developed countries and a number of middle income countries including China and India.  

It is important to note that although there are growing levels of inequality within countries, particularly developed countries, the bigger source of inequality is across countries.  This is contrary to the source of inequality 200 years ago when 80% of inequality was found within countries as opposed to 20% today.

 Class Inequality 
(within a country)		Location Based Inequality(across countries)
182080%20%
Mid 20th Century20%80%

With growth in incomes in the developing world exceeding those of the developed world there has been some narrowing of the inequality gaps between countries especially in Asia and parts of South America; however, there has been little progress across sub-Saharan Africa.

Traditionally, there has been the belief that inequality over time follows Kuznets Curve (Figure 8-3).  Kuznets Curve argued that income inequality tends to increase at an initial stage of development and then decrease as the economy develops, implying that income inequality will fall as income continues to rise in developing countries.

Figure 8-3

Conceptually, this curve appears to make sense; yet, it does not appear to happen in reality (figure 8-4).  In the upward sloping part of the curve, the shape depends on where the developing country was starting from. In the case of China with communism, they started from a low level of income inequality (low GINI score) and the income inequality has risen; however, in South America many countries started with very high GINI scores, perhaps linked to their previous colonial situations, and the levels of inequality have been slowly declining since about 2000.The downward shaped curve for developed countries does not also bear truth.  In the Western world, this did appear to be possible until about 1980 when the curves started to rise again for key countries such as the US, some countries in Europe and overall, in particular, in the English speaking countries.  The down-curve only appears to happen when there are appropriate progressive taxes on income, when tax rates on wealth are not less than taxes on income, and the income growth rate exceeds the average return on capital.  

Figure 8-4

In countries, such as the US, which are now more resemblant of plutocracies than democracies these conditions are not being met and therefore inequality will continue to grow.  In the US, tax cuts are primarily for the top 10%, and especially the top 1%, who benefit from lower income tax rates and lower capital gains tax rates.  As an example, the wealthiest 400 families in America in 1960 paid as high as 56% in taxes, by 1980 it was 40% and in 2018 it was 23%.  The bottom 50% of households in America in 2018 paid an average rate of 24.2%.  Figure 8-5 shows the increasing concentration of income in the US mirroring the declining share of the bottom 50%.  In terms of wealth, in the US the top 1% have over 40% of total wealth and the top 10% comprise about 80% of all wealth. Both of these percentages of wealth are continuing to grow.

Figure 8-5

We have not seen this disturbing trend in many of the successful countries in Europe where across all dimensions their levels of inequality, or lack of inclusivity, are much lower; and, their average GDP/capita is higher than the US.

Inequality is also reflected in freedoms, access to opportunities and economic mobility, and the rights of safety, security and equal justice.  We see these issues every day in the news whether it is about the Uighurs in China, the Rohingya in Myanmar, Black Lives Matter in the US, the unequal treatment of women and girls in Afghanistan, the Middle East and most other countries. 

Growing inequality and mistreatment of groups of people builds political instability and is the antithesis of what is required of building a strong and stable society.  The historic metrics have been focused on watching the growth in averages.  Growing average income, average expected life, average years of education is only good in a society if the growth has some form of distribution.  If most of the benefit goes to the top 10% of society and none reaches the bottom 50% then the average is misleading.  What is needed is a focus on inclusiveness where no one is left behind.  

This is not about being driven by minority interests, it is about practically being inclusive.  It is the practice or policy of providing equal access to opportunities and resources for people who might otherwise be excluded or marginalized, such as those economically disadvantaged, having physical or mental disabilities, or belonging to disadvantaged minority groups.

Inclusivity and fairness is about ensuring that of primacy there are minimum standards and principles that countries need to focus on.  This is about not being left behind and it is about having a minimum set of opportunities for a good life at birth.  It is about minimising the differences in access and treatment across the basic requirements of a strong functioning society including equalising the access to quality education, equivalent outcomes for healthcare (eg. life expectancy), and equal opportunity.  It is about ensuring that we are addressing the unacceptable and then moving forward.  The definition of these items are not my views, they are those articulated within the UN SDGs.  The SDGs articulate where we need to get to nationally, regionally and globally.

The outcome of inclusiveness and fairness should be social mobility.  As can be seen in Figure 8-6, there is a strong relationship between inequality of opportunity and global social mobility.  

Figure 8-6

In the World Economic Forum’s new Global Social Mobility Index, 17 of the top socially mobile societies are in Europe with Denmark being the overall leader.  The US is 27th, while China is 45th and India is 76th.  In Figure 8-7, you can see how the US ranks across the different mobility factors.  The set of factors illustrated shows just some of the complexity of what needs to be addressed.

Figure 8-7

An important context to the solutions is to also address potential negative impacts from changes in how society is developing.  There are five critical dynamics to consider.  Firstly, changes in the nature of globalisation affects both where companies are sourcing their labour and where demand will be generated.  We have seen recently with the Covid 19 crisis and increasing geo-political tensions that the dynamics are changing.  There is also the inevitable shift in economic power towards China and ultimately India away from the US and Europe.  

Secondly, the impact of technology on labour markets.  Technology and innovation are increasing the interchangeability of labour and capital.  The innovative use of robotics, AI and autonomous vehicles will have profound effects on labour markets.  This will cause the need for more comprehensive social security programs and the need for increased levels of continuing education to improve labour mobility.  Without addressing this, there will be further pressures on the decline of the middle class.

Thirdly, the propensity for increased concentration of income and wealth within countries.  Unless countries address the increasing concentration of income, wealth and power, increasing social unrest is inevitable.  The importance of the use of both progressive taxes and taxes on wealth is an essential component to addressing this problem.  This will also provide critical financing for deeper programs to address inclusivity and fairness.

Fourthly, the changing composition of populations within countries.  In the last 40 years, there has been dramatic changes in the composition of populations within countries.  The mixes between pre-work, working, and retired populations have changed dramatically.  In particular, in the developed world solving for managing in situations where the retired population is a major part of the mix of a country raises real challenges. Post 2050, other than sub-Saharan Africa virtually all other countries will have peaked in populations and will be ageing.

Finally, climate and environmental crisis.  All the evidence points to the developing world, especially sub-Saharan Africa and India, being particularly affected by increased temperatures, which impacts food production and water access.  In addition, we know that the increase in droughts, floods, fires, etc. will impact the most disadvantaged.

Moving towards a more inclusive and fair world with base standards of living, freedoms and opportunity can be broken down into 2 areas to address.  Firstly, in-country inclusiveness which is about thinking about the problem within a country at the individual level.  Secondly, across country fairness is about policies and programs that are required to help underdeveloped and developing countries make an overall shift upwards while they solve their in-country problems.  

Starting with in-country inclusiveness, the commitment to this form of social contract starts with governmental programs and policies and then ripples through to the private sector.  In most of the developing world this should include inclusive and affordable access to quality health and educational programs.  Educational access needs to include tertiary education and life long learning and skills development.  There is also need for strong social services programs, for the retired, disadvantaged and those in-between jobs.  There needs to be a continued movement from minimum wage to living wage programs and clear policies for Gig economy workers.  Finally, ubiquitous equivalent access to the internet for all, through mobile devices such as smart phones, is one of the vital components to help move towards equality of opportunity. Financing of these programs can come in different forms including a proper approach to progressive taxes and taxes on wealth.  

Small and medium businesses are vital for employment levels. SMEs (small and medium sized enterprises) comprise 60-70% of jobs in most OECD countries. They also provide a disproportionate number of new jobs creation. In the US, businesses with under 500 employees comprise 48% of all employees. Solving the failing of financial markets for small businesses is critical in a number of countries such as the UK. Governments should also be looking at providing a fair share of their sourcing and outsourcing expenditures to support small and medium sized businesses.  It is a false economy for governments to focus disproportionate levels of their spend on large companies.   In all of the developed economies, a significant portion of private company revenues is from procurement and outsourcing activities by governments at the federal, regional and local levels. 

There are multiple examples of countries that have made progress across a range of the inclusiveness issues. There is the healthcare system in Singapore, Finland’s success in education, Scandinavia’s over all progress on gender equality, Denmark’s model of social security and mobility, and Switzerland’s strength on life-long learning. Of the larger countries, Japan and South Korea have very high scores on health and technology access and Germany is a strong performer in social protection and work opportunities. Good references for this are the WEF Global Social Mobility Report 2020, and R. James Brieding’s book “Too Small To Fail”.                      

Improving inclusivity and fairness in underdeveloped and developing countries is a big challenge.  At the national level, countries must understand that consistent development support from the developed world is earned through strong political, economic, and social structures.  Dictatorial behaviour and increasing concentration of wealth damages economic and social development.

Accelerated progress will only happen with external support.  This includes foreign government policies on aid and assistance, financial support from intergovernmental organisations such as the IMF and Worldbank, and philanthropic assistance to tackle big problems such as what we are seeing by The Bill and Melinda Gates Foundation.  

In the private sector, from multi-nationals there needs to be more rapid progress on progressing proper employment practices with fair pay, education and health support. In more remote locations, there is often also a need to engage more actively with the overall communities.  Secondly, consideration should be given to special pricing, such as in the health sector, to increase the accessibility of critical goods and services.  Finally, technology and innovation investment needs to be focused on solving both development and climate challenges.  This includes ubiquitous access to clean water and sanitation, access to low cost continuous energy (ideally green energy)  and quality internet access with smart devices.  Social impact needs to be high on the corporate agenda as well as achieving a Net Zero carbon position.

Financing of the SDGs and in particular meeting the needs of the developing world is clearly a challenge.  The UN Secretary General’s “Roadmap For Financing The 2030 Agenda For Sustainable Development” published in 2018, estimated a short coming of $2.5tn – $3 tn per annum to achieve the SDG’s in developing countries.  This is against a context of global GDP being $88 tn and global wealth of about $215 tn.  It is particularly challenging in the context of the need for post-Covid financial recovery and for the developed countries to set and meet their own climate and SDG goals.  A majority of this financing will need to come from the private sector.  

To achieve this, new financial thinking is required and alternative financing instruments are needed to improve the flow of finance to these needs. The current global situation of climate warming and increasing stakeholder response to inequities is changing the context of investment decisions creating the need to incorporate related economic and risk factors into long term financing decisions. 

Global, national and local policies and programs drive change and where there is large scale change there will be broad sets of investment opportunities.  The higher the level of clear and certain policy directions the bigger the opportunities in the private sector. Uncertainty is the enemy of growth and investment.

Increasing transparency on the risk and return of not engaging in driving impact will be a vital contributor to shifting investments towards solving these social and environmental challenges we are facing. The increasing requirements for ESG reporting and the movement towards consistent, comparable and auditable measurements will help embed impact into business decision making. However, what is also needed is growing stakeholder pressure to accelerate the incorporation of impact into strategies and business models. Consumers and employees need to help business leaders see that without impact their businesses will not flourish and be leaders in their markets. It needs to become clear that social and environmental leadership can be vital components of competitive advantage.

In addition, the potential of existing and emerging technologies to solve large global issues is real. There is no reason that this should not attract significant investment. Passionate impact oriented entrepreneurs with the latest technological know how have massive opportunities to create great businesses.  Probably the most visible company in this space is Tesla which is focused on shifting the world to clean energy through electric cars, solar technology and battery storage. I am sure there is more to come from them. Other opportunities include the creation of low cost clean energy solutions for remote communities.  Slingshot and Skysource are great examples of companies working to improve the availability of low cost clean water.  Zipline, the leader in drone medical deliveries, developed their business in Rwanda where there was a critical need for remote and timely delivery of critical medical supplies.  Elon Musk, Facebook and Jeff Bezos are all looking at building large satellite networks that have the potential to vastly improve internet access in remote areas. The business opportunities are immense.

There is already a $31 tn ESG and impact investment pool, which is about 15% of global investable assets. This level of money is already increasing the focus on companies that are creating impact as well providing shareholder returns; although, many of the companies in the pools are focusing primarily on ESG reporting first and only just starting on the journey towards to Net Zero carbon emissions and social impact.

New forms of financing at scale are also essential to contribute to filling the financing gap. The term used for the specific new forms of financing focused on generating impact is impact investing. Impact investment financial solutions work on the basis of risk-return-impact equations. A key proponent of this is Sir Ronald Cohen who has recently published a book talking about this, “IMPACT – Reshaping Capitalism To Drive Real Change”. Sir Ronald Cohen is a preeminent international philanthropist, venture capitalist, private equity investor, and social innovator.

The market for impact focused investment products is small today; but, it is emerging. Green bonds in the market today are valued at about $750 bn. These green bonds are being followed by blue (ocean), education, social and gender bonds. The DIB/SIB (Development and Social Impact Bonds) market will become more substantial through the scaling of Outcome funds. To achieve scale this will require some of the growth coming from the $5 tn investment pool comprising private equity, venture capital, real estate and infrastructure investing.

We understand the challenges of inclusivity and fairness. Through the UN SDGs there is global recognition of what needs to be done. It is now up to political commitment coupled with supporting governmental policies and programs, philanthropic support, and most importantly, private sector commitment to move towards risk-return-impact business models and investment criteria.

My next blog will cover the third challenge of ‘digital privacy and collective truth’. This is an emerging and critical challenge that unaddressed affects the conduct of democracies, the level of social instability across all countries, and the violation of the rights of individuals.

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The Market Economy and Capitalism

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

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

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

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

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

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

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

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

Figure 5-1

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Categories
REBOOT World View

Democracy and the Role of Government

fyuDespite the cynics view that the government is a necessary evil and they are bureaucratic and inefficient, the governments play a critical role in the welfare and wealth creation in a society. Strong infrastructure, a well educated and healthy society, good social services, the right to work, economic support in down cycles, and research and development investment all contribute to drive economic growth and well being. Critical questions relate to whether the services are inclusive and fair; is there proper control over the dark sides of capitalism and freedom for the strengths it provides; and, are the services delivered in an efficient way. And, overall is there progress towards delivering the “North Star” social contract. The market economy, and capitalism, may contribute to some of these requirements; but, they don’t solve them against societal requirements. It is a myth that for example outsourcing services to the private sector is always more efficient than direct delivery of services by the government. The US healthcare system which is the most privatised healthcare system of the leading countries is by far the most inefficient healthcare system of the successful economies in terms of cost per person and overall health outcomes. There are many examples of efficient infrastructure and public services systems run by governments. Of course, that is not to say that there aren’t many opportunities to improve what is done, just as there are in most companies. In the UK, privatisation of many of the public service sectors has only caused higher prices, reductions of service levels and imbalanced delivery of services across the whole of society. The motivations of private companies are not aligned to the needs of society. Unprofitable customers are ignored or excluded from service provision. Investors add significant debt to their companies causing high interest costs and then also take significant dividends before any reinvestment. The short-term time horizons of investors do not match the long-term thinking required for the development of infrastructure or public service delivery. The UK government privatised sectors without creating the proper rules and regulations for inclusiveness and fairness, price control, and the right number of service providers to get the benefits of free markets. Finding the right balance of involvement of the private sector in infrastructure and public service delivery is not an easy equation; but, having a principle of outsourcing where ever possible is certainly not the right answer. Operating a government well to deliver on their social contract and create the right conditions for a highly vibrant market economy to drive economic growth is a quantum more complex than running a company; especially, with companies primarily with a short term profit optimization focus. Solving the financing of government service delivery is also a complex issue with many views on fiscal and financing policies. Getting the right balance of legislation and regulations, funding and fiscal policies to move a society forward is a game of continual adjustments interlaced with political agendas. This complexity is then also exacerbated by all the globalisation, multi-lateral issues and the geopolitical challenges that need addressing. There will never be one model to do this; however, that does not preclude looking for best practices to help on the journey forward. In the next blog, I will explore in more detail the role of the market economy. It is the dominant part of an economy and is the engine for innovation and economic growth.

In the last blog, I explored the need for societies to be citizen centric and not government or corporate centric.  In addition, the need for a clear social contract was defined.  I now want to explore the role of a democratic government in a citizen or individual centric society.  

I will take the liberty to deviate a bit from this topic just to reflect on the state of democracy after the unbelievable showing in Washington on January 6.  I am still amazed at how the Trump supporters were able to infiltrate where all the key Federal representatives, except for the President, were sitting to finalise the announcement of Joseph Biden as the next President.  Clearly, there are challenges in a democracy as there is in any political structure.  It reminds me of Winston Churchill’s quote in 1947, “Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time.…”.

The rise of democracy has stalled (Figure 4-1).  We have seen rising populism and the growing visibility of authoritarian leadership including Xi Jinping, Vladimir Putin and Recep Tayyip Erdogan.  In the background, we have also seen a rapid growth in government run tech operations groups, such as in Russia and China, manipulating social media news in democratic countries to influence and discredit the democratic process.  

Figure 4-1

In the US, thankfully we have hopefully seen the end of Trump’s authoritarian style attempt to thwart of the role of democracy.  In the New York Times, 11 December 2020, Michael McFaul, the U.S. ambassador to Russia under President Barack Obama, described the president’s “refusal to accept the results of the election” as “his parting gift to autocrats around the world.”

The V-Dem Institute attempts to assess the commitment of political parties to democracy around the world.  They use 600 political scientists to help them with these assessments.  According to them, the US Republican party has been on the slide since just before 2000 (Figure 4-2).  This is reflected by the growing partisan gap that the party’s actions have been largely responsible.  Trump has taken it to another level and this was before the latest refusal of his to accept the election results and the subsequent impeachment process related to the insurrection activities on Capitol Hill.

Figure 4-2

This partisanship in America is unlikely to go away anytime soon.  In the US, we can see that from the 1960’s, there has been a massive decline in overall trust from above 75% trust at the Federal level to below 20% (See Figure 4-3). This compares with about a 38% average trust level in OECD governments in 2014.  Surely, this decline must also be related to the increasing partisanship of politics in the US in the last 20 years.  The legitimacy of a government comes from the people. With declining trust comes declining legitimacy.  This is the importance of having a clear view on the social contract the government needs to deliver against for legitimacy.

Source: Pew Research Centre Figure 4-3

The social contract “North Star” that was defined in the last blog had 5 components.  The first three components were linked to the themes of basic needs, well-being and decent work.  The fourth component was the right to live in a climate and environmentally sustainable world.  The fifth component included the right to privacy (including digital privacy) and access to facts and truth.

The role of government has evolved over time. There are responsible for three categories of activities (Figure 4-4).  Firstly, core roles linked to the basic functioning of a country.  Secondly, the delivery of public services. Thirdly, contributing to economic development and stability, and the sustainability of society and its environment. It has also included to a lesser extent the management of multi-lateral and long term issues such as climate and environment, humanitarian issues, cyber and nuclear security.

Figure 4-4

Firstly, the core requirements for a country include:

  • Defense, protection and justice
  • Infrastructure for transport, energy, water access, sanitation, etc.
  • Market development and protection – the creation of a market based economy

These factors are the most essential areas of investment of government for the basic functioning of a society.  The maintenance of borders and safety of citizens; a justice system for both social order and ownership of assets; infrastructure for basic health, such as clean water and sanitation, and for the distribution of goods; and, a market system to create economic growth. I will talk more about the government in its role in a market economy in the next blog.

The second phase of services are very much focused on public services for the citizens.  These include education, health and the full range of social security services including unemployment, pensions and disability coverage.  The top countries focus on education and health is a national issue, and their goal is inclusivity and quality for all.  Finland has now been regarded as a top country for education for a long time.  They combine high rankings with only a narrow performance difference between the top schools and the weakest performing schools.  The leading countries also extend their thinking to affordable education for all in post secondary/high school and an emphasis on reskilling of workforces over time to maintain employment and mobility.  

In the US, the local tax intake very much drives the quality of education and the facilities within the school.  Wealthy communities have schools that access the best teachers and have the best facilities.  The US is also renowned for the prohibitive cost of university and the lack of access to the key universities which are vital for strong job opportunities.  Cost is an access and fairness issue.  The level of debt from education in the US exceeds all credit card debt and for many locks them in the poverty cycle. The university participation rate of the lowest decile of income is about 20% vs. the highest decile where participation is at 90%.  

In health, Singapore is often identified as a strong model for low cost – high quality Universal Healthcare.  They blend the understanding of how some paying for services drives efficient use with a primarily employment funded health system. Their health costs per person are about one quarter of the US and are fully inclusive.

For social services there are many different models.  The key factors seem to be an employment system that pays fair wages, understands the need for increasing mobility within the workforce, and the need for proper income protection between jobs.  They also understand the need for gender balance in wages, maternity/paternity time off, and pensions which is a growing need as populations age.

The third category of state involvement is contributing to economic development and stability, and the sustainability of the society and its environment.  Unfortunately, these challenges are not declining over time.  Historically, the thinking has been that economic spend by the government should be counter cyclical in order to smooth out economic cycles in the private sector.  The 2008 great recession, or sub-prime crisis, required unprecedented levels of quantitative easing.  The current pandemic has required economic interventions at levels in excess of 20% of GDP so far, as well as massive interventions in health delivery, education and freedom of movement.  Overall, there has been a growing trend of material disruptions to society over time from a mix of sources including climate, health, economic and cyber.

One of the areas overlooked within society are the commons.  The commons are the resources that should be accessible to all members of a society including clean air and water, and a habitable earth.  These resources are held in common and not owned privately.  Government investment in electric mobility, and wind and solar energy, is linked in to the managing of the commons. The critical right of society to live in a sustainable environment drives the need to deal with climate change, biodiversity destruction and growing levels of pollution.  This requires urgent attention, investment and multi-lateral coordination.  

Another part of the commons that has developed over the last 20 years is the need for ubiquitous access to the internet as a great leveller.  This means full quality coverage of the internet across all countries and fair access and use (including the need for devices such as smart phones).  The internet has already proven to be a great economic enabler in developing countries and the pandemic has reinforced the value of the internet for the economy and also for remote health services and education.  

The other part of driving economic growth and societal development is government role in research and development.  The private sector that is understood to being the source of great innovation, such as we see coming out of Silicon Valley, has not been the core source for research which has driven new waves of growth, such as the internet.  Government investment dominates the discovery of new technologies and early stage market applications.  The private sector tends to drive the innovations once there are visible timelines of economic returns from new technologies (Figure 4-5).

Figure 4-5

In the US, Federal Government R&D expenditures was a as high as 2% of GDP  in the mid 1960’s and now has dropped to about 0.6% of GDP.  The US is no longer the dominant leader in cutting edge research in many areas. China is increasingly the leader in a number of areas of research that drive economic growth, and are expected to become the overall leader in research output in the next decade.

Overall, the total R&D expenditure as a percent of GDP in the US was 2.84% in 2018.  This compares to Japan and Germany who spend 3.26% and 3.09% respectively and South Korea which spends 4.81% of GDP. 

Research spend in the US, underpinned by the government, has generated the internet, and been a major contributor to the nanotech, biotech and the clean energy sectors.  Almost all the core technologies behind the Apple smart phone have started with government spend.  Core government spend has been driven through focused agencies in the US such as DARPA (Defense Advanced Research Projects Agency), ARPA-E (Advance Research Projects Agency – Energy) and the NIH (National Institutes of Health) which is the largest biomedical research agency in the world.

Mariana Mazzucato through her book ‘The Entrepreneurial State: Debunking Public Vs. Private Sector Myths’ and through her work at the UCL Institute for Innovation and Public Purpose, has been championing mission oriented innovation such as the US has historically been doing.  Mission oriented innovation combines research and development expenditure, funding and tax incentives.  This approach is taking shape in the UK and EU.  A great example of this currently is in Denmark, who has become a world leader in offshore wind energy generation and is now the lead external partner helping China cement their position as the largest offshore wind energy market in the world with a capacity goal of about 450 times that of Denmark.  

Aligned to, and integrated with research spend, is the overall need for governments to step up in addressing key global and national issues such as climate change, inequality and digital privacy.  Governments provide the essential leadership on these factors to drive coordinated responses, urgency, risk mitigation, continued economic development and appropriate social protections.  The current state of market economies, and capitalism, on their own have not and will not solve these issues without the right market sector frameworks and economic opportunities visibly in place.  Government policies, regulations, legislation and economic incentives create the conditions to solve them.  The private sector then has the scale, impact and innovative capacity to deliver the bulk of any major solution.

As an example, in November 2020 the UK government announced a 10 point plan to move onto the next phase of addressing climate change towards a 2050 Net Zero target.  This program will mobilise £12bn in government investment and is expected to generate 3 times the amount from private sector investment.  

With the current pace of technological innovation and monetization of it, we are seeing major cracks around the collection and use of private data.  The social concerns linked to the gathering and use of personal data, especially by the dominant technology companies, will only get bigger as everyone is increasingly tracked and manipulated in real time. The abuse of data can only grow as you add genetic, neurological and increasing levels of contextual data as technology becomes embedded in our lives. The moral and ethical parameters of technological innovation and privacy of information protected through regulations should be have been dealt with a long time ago. Slow reactions driven by growing social unrest related to privacy cannot be the answer.

The final area in this category is humanitarian/development aid without which many countries cannot address specific crises and create the initial momentum required to create economic growth.  It is also an essential component of addressing the UN Sustainable Development Goals and the Paris Climate Agreement.  

With these responsibilities it is no wonder the best performing countries tend to have higher government involvement in society, and higher taxes, than lower performing and less developed countries (Figure 4-6).  As countries develop, they are able to finance the provision of additional services.  There is clearly a strong relationship between economic prosperity and the three categories of government activities – core requirements, public services, and economic resilience and growth. 

Figure 4-6

Despite the cynics view that the government is a necessary evil and they are bureaucratic and inefficient, the governments play a critical role in the welfare and wealth creation in a society.  Strong infrastructure, a well educated and healthy society, good social services, the right to work, economic support in down cycles, and research and development investment all contribute to drive economic growth and well being.  Critical questions relate to whether the services are inclusive and fair; is there proper control over the dark sides of capitalism and freedom for the strengths it provides; and, are the services delivered in an efficient way.  And, overall is there progress towards delivering the “North Star” social contract.  

The market economy, and capitalism, may contribute to some of these requirements; but, they don’t solve them against societal requirements.  It is a myth that for example outsourcing services to the private sector is always more efficient than direct delivery of services by the government.  The US healthcare system which is the most privatised healthcare system of the leading countries is by far the most inefficient healthcare system of the successful economies in terms of cost per person and overall health outcomes.  There are many examples of efficient infrastructure and public services systems run by governments.  Of course, that is not to say that there aren’t many opportunities to improve what is done, just as there are in most companies.

In the UK, privatisation of many of the public service sectors has only caused higher prices, reductions of service levels and imbalanced delivery of services across the whole of society.  The motivations of private companies are not aligned to the needs of society.  Unprofitable customers are ignored or excluded from service provision. Investors add significant debt to their companies causing high interest costs and then also take significant dividends before any reinvestment.  The short-term time horizons of investors do not match the long-term thinking required for the development of infrastructure or public service delivery.  The UK government privatised sectors without creating the proper rules and regulations for inclusiveness and fairness, price control, and the right number of service providers to get the benefits of free markets.  Finding the right balance of involvement of the private sector in infrastructure and public service delivery is not an easy equation; but, having a principle of outsourcing where ever possible is certainly not the right answer.  

Operating a government well to deliver on their social contract and creating the right conditions for a highly vibrant market economy to drive economic growth is a quantum more complex than running a company; especially, with companies primarily with a short term profit optimisation focus.  Solving the financing of government service delivery is also a complex issue with many views on fiscal and financing policies.  Getting the right balance of legislation and regulations, funding and fiscal policies to move a society forward is a game of continual adjustments interlaced with political agendas.  This complexity is then also exacerbated by all the globalisation, multi-lateral issues and the geopolitical challenges that need addressing.  There will never be one model to do this; however, that does not preclude looking for best practices to help on the journey forward.   

In the next blog, I will explore in more detail the role of the market economy.  It is the dominant part of an economy and is the engine for innovation and economic growth.   

#public sector #privatisation #democracy #insurrection #Trump #Biden #populism #political regimes #government trust #UN SDGs #paris climate agreement #DARPA #ARPA-E #NIH #DFID #FCDO

Categories
REBOOT World View

The Three Challenges

We have a choice!  Kneel before and be conquered or rise 
above and turn the challenges into opportunities.

In this third series of blogs, I will be exploring the three big global challenges that we need to address and the role and needs of the individual, the market economy and the state to solve them to move towards a resilient and sustainable world.  

As a backdrop to this, and with the most serious threat of climate change to achieve resilience and sustainability, we should see ourselves not as inheritors of the earth from previous generations rather as borrowers from future generations. Our burning platform is the threat to the lives of our children, our grandchildren and future generations. 

Overall you can look at where we are from two perspectives.  If you were a pessimist, you would say that even excluding what is happen to our climate and CO2 emissions our situation is disastrous. We have about 1 billion people in extreme poverty, of which most are in sub-Saharan Africa, and income and wealth inequality is growing not shrinking.  We have an exploding population that started at under 1bn people in 1800 that has reached 7.8bn today and could be as high as 11 bn by 2100.  The child mortality rate for children up to 5 years old is as high as 12% in some countries.  The life expectancy rate in Africa is about 63 years old which is dramatically below the top countries where the expectancy is over 80 years old.  About 13% of our population are illiterate, over 250 million children are out of school and learning outcomes are much lower in countries with low levels of GDP per capita.  The level of pollution and waste is continuously growing. We have been over exploiting our resources – energy and minerals.  We continue to destroy key forests especially in the Amazon for beef and soy, and in Indonesia for palm oil.  People are working too hard.  We have too many wars and too much terrorism. There is a large gender gap and real issues of racism.   And the list goes on.  

The optimist would say, yes but.  Yes, there are lot of challenges in the world; but, on almost every dimension we have made significant progress and therefore we should be confident that we can solve the issues that lie in front of us.  Despite population being 8 times larger now vs. in 1800, world GDP has grown by about 100 times.  In that same period, life expectancy has increased from about 30 years to over 80 years in many countries.  The share of population in extreme poverty has dropped from about 90% in 1820 to 44% in 1980 and is now below 10%.  The average work week was over 60 hours in the late 1800s and is now below 40 hours.  In terms of education, in 1800 about 87% of the global population were illiterate, in 1980 it was 30% and now it is only 13% of the population. School enrolment and attendance is improving every year, as well as mean years of schooling and learning outcomes. Our death rates from pollution, disease and homicides are all dropping.  Our farming yields in grain production have allowed us to cover all the needs of a growing higher income population without needing additional land since the 1960s.  We have been successfully covering off our increased consumption of fish since the 1990’s with fish farming. Our shift in use of energy use from wood to coal, to oil, to natural gas, to nuclear and now to clean energy sources has helped reduce our pollution rates per kilowatt hour.  Just since 2010, solar energy generation has increased twentyfold with wind energy generation tripling.  With technology and asset sharing we are dematerialising our spend.  Our levels of gender bias are reducing. Almost everywhere people’s lives overall are improving.  The optimist would summarise this by saying on virtually every part of our life there is a clear long term learning curve of progress and there is no reason for this to not continue. 

Although the positions look diametrically opposite giving us a perspective of two different worlds, both sets of facts are true.  It is all about which lens you look through at the world.  We have made significant progress however there is still a lot of work to do to make the world a better place.  Solving these issues is not just a matter of economics and technology.  Its complexity is like creating a beautiful symphony, it requires getting a lot of different musicians to play their instruments in an orchestrated way.  The musicians in this symphony, or actors in this play, are us as individuals, the market economy, the state and the third sector.  We should remember as individuals we are consumers, we are participants in the different sectors and if activated we are voters that drive our political systems explicitly or implicitly.  

No matter which lens’ you look at our situation, there are three big challenges in a peaceful world that need to be significantly progressed to continue our slow climb towards a better place – Shangri-la. If we don’t address them with the right urgency we could be on the slippery slope to an inferno.  We are at an inflection point!

I think of myself as an activated optimist. We can solve the problems in front of us if we have the will and commitment, because we do have the wherewithal.  To a large extent we already have all the knowledge and capabilities we need; and, for the areas we don’t the technologies and solutions are in sight.  Sitting back and naively expecting these challenges to be solved and with the right urgency is irresponsible.  Taking the view that these challenges are all someone else’s problem and they will solve it, is misconceived.  Everyone can contribute at a minimum by being more thoughtful in their consumption of food and energy, generation of waste and participation in recycling programs, and involvement in their community and society.  

So, what are the challenges.  Firstly, and with urgency, global warming and collapsing biodiversity.  These are two highly interconnected issues and effectively part of the same family of challenges.  Global warming is well documented and confirmed to be largely human driven by virtually all scientists.  It can be measured in terms of CO2 parts per million (including equivalents for GHG gases such as methane) and the short term impact can be felt in terms of average increase in temperature vs. the industrial average temperatures and the level of weather extremes.  We are now sitting at CO2 levels of about 415 ppm (part per million), with the world having fluctuated between 150 ppm and 300 ppm for over a million years.  Also, up to early 20th century we have been in a unique 12,000 year period of climate stability – seasons, weather and temperature predictability – that has provided optimal conditions for the human race to spread around the world and develop.  Slowing down climate warming also helps to significantly reduce the release of C02 and other GHGs from what will occur from melting ice, melting permafrost and warming oceans.  The land, oceans, and ice are large carbon and methane sinks that hold multiples more of these gases than currently exist in our air.  

Biodiversity comprises the genetic, species and ecosystem diversity that has developed and helped created this stable environment.  It is also what has created the environment for effective carbon sequestration in the land and sea.  We are now running at an unprecedented loss rate of flora and fauna which is affecting our food supply, carbon sequestration and environmental stability.  The current rate of diversity loss is estimated to be 100 to 1000 times the naturally occurring extinction rate.  David Attenborough effectively describes this in his latest book and documentary, “A Life on Our Planet”.  The solutions include shifting to regenerative farming, regenerating fishing stocks in the seas, and rewilding land and seas. 

The second challenge is inequality.  Inequality manifests itself at one level in terms of the extremes in distribution of income and wealth, and the shortfall in the basic necessities of life – food, shelter, clothing, health and education.  However, it also is reflected in freedoms, our access to opportunities, and our rights to safety, security and equal justice.  Unfortunately, the absolute levels of inequality are significant both within and across most countries and continue to persist.  It is no wonder that there appears to be rising social unrest across many countries, LGBTQ+ and BLM movements and many other areas of social concern. Clearly, our market economies and governments have not been effectively addressing these issues.  A focus on these issues and adjustments to how governments and market economies operate can solve this situation. There is global consensus that this is a critical issue that must now be solved.  

The third challenge is digital trust and mass manipulation.  At its base level, this is about privacy and the need for enlightenment and truth in a society.  These components are key drivers of freedom, transparency and trust.  For a period now we have seen increasing levels of theft of private information, expansive monitoring and surveillance (accelerated during this pandemic), rising populism and increasing distrust of governments.  We just have to look at the US elections, and other recent elections, to see evidence of this.  

The digital world has provided us with some amazing levels of progress and benefits; but, unfortunately it can have a dark side.  This includes the program to monitor, manipulate and control the Uighurs in China and the building of their overall digital social credit system.  The Western world has a somewhat equivalent system that gathers all forms of data to make credit evaluations of individuals; good and bad behaviours are judged on risk, reliability and trustworthiness of individuals with respect to financial transactions.  The dark side also includes the targeted delivery of fake news to drive votes in democratic elections as is shown in the movie ‘The Great Hack’ describing the use of social media in the US 2016 election and the Brexit vote, among others.  A growing number of countries have tech ops groups to drive misinformation and manipulate election outcomes among other clandestine objectives. The targeting and selection of news/fake news comes from intimate analysis of people’s use of social media.  The ease with which you can micro target the delivery of real or fake information through social media to shift people’s thinking and behaviour is growing.  The fragmentation of truth, the growth of conspiracy theories, a missing common base of facts and increasing levels of misinformation for a population will cause growing problems.  Democracy has been an essential component of social progress across the world and needs to be protected.  The value of democracy has not been helped by the shambolic display of US 2020 presidential election; thankfully, it appears that is has held up this time.   As well as an economic recession we now appear to be in a democratic recession with rising populism and the growth in power of China; 

Extensive problems are caused by  the social media companies (Facebook, Twitter, Instagram, etc.) which are driven by their advertising business models which are fed by building addictive dopamine generating behaviour for billions of users.  Their success is based on gathering every conceivable piece of information about you and combining it with AI to serve you content and create the desired outcomes/behaviour shifts that provides a return to their clients for the money they spend on the social media site.  You are the product and the information they have on you includes – every piece of content you generate, every piece of content you look at and for how long, the web of friends and people you interact with, likes, follows, comments, reactions to content you look at and is served up to you, every website you visit, all the times you are on each site, GPS coordinates, etc., etc., etc.  At the same time, there is very little control and no direct responsibility for the content they serve you, which may also be content from foreign trolls and bots, conspiracy and extremist groups, and false advertising.  The implications on the individual of social media addiction, misinformation, distortion of the real world, breach of personal privacy and freedom is significant and the accumulation of this across whole societies is extremely concerning.  

These challenges can be translated into the need to focus on three things.  Firstly, decarbonisation and biodiversity regeneration.  Secondly, inclusivity and fairness. Finally, digital privacy and collective truth.  The first two challenges are well covered off by the UN Sustainable Development Goals (SDGs).  The third challenge is recognised and looked upon with increasing concern around the world and is highlighted by the World Economic Forum as one of the key risk factors we are facing.

There are three critical issues to solve in addressing these challenges.  Firstly, ensuring there is clarity on the potential solutions for each of the challenges.  This concerns having clear solutions that will drive us to address the challenges within the required timeframes.  Inevitably, this will be a combination of existing solutions that are already in place but not pervasive enough; existing technologies that are proven but only in early stages of rollout and need to cycle through further generations of development to increase their effectiveness and drive down their cost position; and, emerging technologies and applications that are in sight to be available within the next 10 years or so. 

Secondly, to be clear on roles of the individual, the market economy, the state, and the 3rd sector to drive the implementation of solutions.  This is very much about finding the right approach that does not disrupt the ongoing innovation and development that has progressed us to where we are today.  Probably, the most critical issue is to find the right balance between the role of the state and the reliance on the market economy and capitalism.  Within the state there are the supra-national activities and then the roles of the government at the state, regional and local levels.  Within the market economy, investors, asset managers, and corporate boards and executives all have vital roles. And, there is also an important role of the individual as a member of the public, a consumer, a worker/contributor, and a voter who has a stake in the outcomes.  Finally, there is also the 3rd sector which includes charities, voluntary and community organisations, social enterprises and cooperatives, advocacy groups, think tanks, private research institutes and large philanthropic organisations.  We are seeing a growing role of philanthropic groups, such as the Gates Foundation, that are focused on large global problems including health, education, poverty and now climate change. 

Thirdly, implementing the incentives and checks and balances to ensure progress is being made to time.  The most critical challenge in this regard is to maintain a focus on the actions and time frames agreed in the 2015 Paris Climate Agreement which is to try to keep climate warming below 2 degrees centigrade and targeting 1.5 degrees.  We are already well behind the goal as we are currently trending towards a 3+ degree Celsius outcome, so there is a lot of work to get back on track.  These incentives, checks and balances need to be keeping the pressure on each set of participants to meet their responsibilities, solve how to make adjustments, and have back-ups to shortfalls. 

I think we have a pretty good idea of what we could do for ‘Decarbonisation and Biodiversity Regeneration’ and ‘Inclusivity and Fairness’.  The challenges have been understood, potential solutions have been identified and quantified, and the goals have been set within the 17 UN SDG’s and the Paris Climate Agreement.  What is missing is a well thought through program accompanied by the commitment, mobilisation, resourcing, incentivisation and monitoring that is required to ensure we meet the goals within the timeframes identified. 

‘Digital Privacy and Collective Truth’ perhaps sits as a different type of problem given that is likely viewed more at a national level and within the purview of each country’s political system; yet, it sits within the global scope of the internet and the global footprint of the large social media companies.  Privacy and the need for facts and truth are a human right, they are also vital for the effective long term development of a society; however, cyber and all its manifestations are also seen as a new form of, cross border and internal, warfare and mass manipulation.

I will be exploring in more depth, these three challenges – decarbonisation and biodiversity regeneration, inclusivity and fairness, digital privacy and collective truth – along with the roles of the individual, the market economy and the state in subsequent blogs. 

#climate change #global warming #decarbonisation #biodiversity #species extinction #regeneration #rewilding #carbon sequestration #regeneration #rewilding #inequality #inclusivity #fairness #privacy #digital trust #cyber #mass manipulation #truth @David Attenborough @Gates Foundation @Bill Gates

Categories
Covid REBOOT

Post Covid

“Follow the leaders”, sculpture by Isaac Cordal, Berlin, Germany April 2011  
Also known as “politicians discussing climate change”

Blog 4 on Post Covid disruption, resilience and innovation.

This blog will explore the role of the government and how it needs to change to be effective in the ‘living with Covid’ or ‘post Covid’ world.  

As I have talked about in other blogs, the context to talk about the governments role is against an individual centric world, which is not a company or government centric view.  Individuals are the building blocks of societies. As depicted in Figure 4-1, from the individual in the centre there are concentric circles going out for the economy, society and the environment.  Defining the social contract between individuals and their societies, or countries, sets the parameters within which the different actors must operate and the goals they must strive to achieve. The actors are the market economy, the government, the 3rd sector, and the public themselves. For a longterm sustainable world there must also be a social contract with the earth. We must live within the resource constraints and operating system of the earth to keep it in balance – clearly an area where we are currently failing at on most fronts. Finally, this model implies that the sum of the country/societal models rolls up into an aggregated view which then ideally operates sustainably from an earth and climate viewpoint.

Figure 4-1

The role of the government (the state) that I refer to is against the the model of advanced countries, which are both democratic and market economy driven.  Against almost any set of comparative measures analysing country performance, these two factors are key descriptors of success.  It is worth noting Winston Churchill’s famous quote on democracy, “No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time”. The majority of what I discuss would apply in different forms to all countries.

To start, one of the key questions is what is government for?  Lee Kuan Yew, Prime Minister of Singapore from 1959 to 1990, stated, “the ultimate test of the value of a political system is whether that society establish conditions that improve the standard of living for the majority of its people.  He always stated that the proof is in the pudding; rising incomes for the broad middle class, health, security and economic opportunity.  Based on the United Nations Sustainable Development Goals (SDGs), I would overlay onto this the concept of social inclusiveness on core human rights.  These rights would include minimum rights related to income, shelter and food; equal access to quality health and education; equal treatment, rights and opportunity; and, freedom of speech and movement.  
 
Based on this definition, we can all see shortcomings in our own countries.  This pandemic along with other challenges, including economic, the ‘black lives matter’ and ‘me too’ movements, and the climate and environmental challenges bring to light shortcomings.  
 
It is worth looking at what the roles of the government are in the advanced countries (Figure 4-2).  Broadly, there are three different sets of activities.  The first set are core roles typically linked to the base functioning of a country.  The second set are government roles associated with the provision of public services to individuals.  The final set are roles linked to the goal of contributing to the development and stability of the economy and protection of the environment.  Not all advanced countries effectively cover all these roles.  For example, the US does not have universal healthcare and the provision of education to all children is highly imbalanced.

Figure 4-2

Effective government is complex and challenging at the best of times.  We all worry about whether or not the government is focused on the right things, whether or not they are spending their money wisely against the priorities they have set, and what is the true impact of their spend versus the rhetoric we hear.  

As I see it, and have noted before, the strategic framework that I set out for businesses is also the same framework for the government (Figure 4-3).  This is required of a system based framework.

Figure 4-3

For each role of the government, it ideally should be able to define the economic, social and environmental impact they want to achieve, the delivery model for achieving the impact and the way that it is financed fiscally and/or through debt financing.  Wouldn’t it be great to have a government report card against each of its roles so that there was clear accountability!

The pandemic has affected all parts of the governments in most countries in profound ways.  Healthcare, welfare and education systems have been deeply affected, tested and come up short in many ways.  Public transport systems usage has collapsed. Police forces and the military have been asked to perform different tasks. The levels of economic support provided and demanded are at unprecedented levels. The level of cross border cyber attacks have grown.  The need for multi-lateral coordination has increased.  And, the list goes on!

As we move, to ‘living with Covid’ and, hopefully then a post-Covid world, reverting to governments previous modus operandi will not be adequate in most countries.  There are also other large disruptive factors that have not been effectively addressed; these include, climate change, social fairness and growing geo-political tensions; and in each country, they will have their own additional lists, such as Brexit for the UK.  All of this creates a complex cocktail of challenges for governments to focus on going forward.

There are four overall areas for the government to think about (Figure 4-4).  Firstly, their role in the welfare of the public, their key constituent. This includes being ready for the next equivalent pandemic, making sure that at all times normal medical treatment can be provided, and solving how to continually improve the quality of healthcare services with an ageing population and tight financial requirements.  

There are big concerns over the quality and impact of education during Covid.  There is a lot of work to do in understanding digital education delivery and putting in capabilities for either fully remote delivery (for emergencies) or ongoing hybrid education.  The opportunity should also be taken to see how education impact can be enhanced vs. the current normal in-person education delivery.  

Restoration of freedoms. The pandemic has resulted in significant restrictions on individuals and in many cases undue use of private information. There have been losses of freedom of movement and of socialisation. There have been restrictions on the ability to work with remote working being mandated in many areas. Many countries have put in curfews in locations with high outbreaks. Last but not least, in a number of countries, individuals have had to sign up to apps so that the health authorities can track their movement. There have been requisite loss of freedoms for businesses and organistions to operate. Eliminations of these restrictions and restoration of normal rights is a critical part of moving to a new normal; no one wants a full time ‘nanny state’.

In addition, across all parts of the government, they can make a big impact by ensuring the optimum levels of employment in the supply chains related to their services; this includes, having a careful look at the role of local vs. international sourcing. 

Figure 4-4

Secondly, restoring the performance of the market economy.  Universally, the performance of the market economy is the key driver to economic growth and the improvement of the welfare of the population of a country.  One of the key roles of the government in advanced economies has been to reduce the impact of a recession and contribute to its rebound – economic smoothing.  In the post pandemic environment, this includes helping sound economic companies and sectors to recover; looking at challenged sectors and thinking how to assist them in reconfiguring into a successful relevant sector going forward; and, providing stimulus in the form of research and development, and financial support, to key strategic and growth sectors going forward – including driving the green agenda. 

Thirdly, investing in infrastructure and public goods to get them appropriately focused for impact going forward and to improve employment levels.  With a ‘new normal’ being driven off changes in consumer behaviour, the government needs to incorporate this into the specific requirements and capacities needed for each service they provide.  There is also a period of excess resources required for catch up in areas such as the health sector where diagnosis of ailments and treatments have lagged during the crisis.  

Building resilience against future disruptions (including pandemics, fires, flood, tornados, etc.) should also not be forgotten. It is very clear that a number of countries were highly unprepared for a pandemic despite everyone knowing that it was a possibility.  Just look at the preparedness of countries such as S Korea, Singapore, Japan and Germany and the superior outcomes they have achieved vs. the woeful performance of the US, UK, Spain, Belgium and many South American countries among others who were caught unprepared.  

Linked to resilience is the need to shift services to include the use of digital capabilities to improve the efficiency and effectiveness of service delivery as well as resilience.  Improved administration efficiency, digital and hybrid healthcare and education delivery are other clear areas.  Japan, under its new prime minister, Yoshihide Suga, has just announced a minister responsible for the digitisation of government services.  

The other area governments should look at is bringing forward investments that create a multiplier effect on employment and the economy.  Climate change is one of these areas, where accelerated investment is critical in any event to help countries meet their Paris Climate Agreement commitments. As with this pandemic, climate change also demands each of the governments to improve levels of global cooperation.  Global problems need global solutions.  

There are limits to investment capacity, so governments need to make tough choices on where to focus their efforts and then what combinations of the 3 Fs (frameworks, financing and fiscal) they use to stimulate the market economy.  Frameworks are regulations and other non-financial mechanisms that the governments put in place to shape markets, drive consumer behaviour, deliver public services and protect individuals and organisations.  Clearly, financing and fiscal are the financial mechanisms for funding different activities.  To the extent that the government can find ways to help the economy recover without always reverting to financing, then we are all ultimately better off.  This could be as simple as re-zoning roads to provide plenty of room for outdoor seating for cafes and restaurants to help them rebuild their businesses.  

One of the leading modern economists, Mariana Mazzucato, has been pushing to create/recreate dynamic public-private interaction and the creation of mission oriented industrial strategies.  She clearly identifies that the state is instrumental in many parts of our economy, including helping to stabilise and grow the economy, yet the spoils of their involvement is never appropriately compensated vs. the risk. Virtually all the upside where the government is assisting accrues to businesses and their shareholders despite the public (through taxes) taking the risk.  Whether the government is helping businesses to recover, helping sectors to reconfigure or stimulating the growth of new sectors, through R&D or investment, the government should be looking for a fair reward structure for their successful involvement.  This should help reduce a governments debt burden, and the consequent public tax burden, over time.  It should also help drive improved corporate responsibility.

In summary, for each government this is a complex equation of where to spend and how much.  The three categories of potential spend are addressing fundamental shortfalls in public services, providing market economy recovery and growth support, and bringing forward government programs that will create a job multiplier effect.   Some example areas are shown in Figure 4-5.

Figure 4-5

Integral to the development of a ‘new normal’ is also a society aligned with accelerating progress against our critical environmental challenges of addressing climate change and biodiversity. Clear focused programs on these must be included. As an example see Figure 4-6.

Figure 4-6

Behind all these factors and potential initiatives to restore and progress economies, is the simple truth that uncertainty is the enemy of progress. Having clarity on government actions and programs, confidence that they won’t unsuspectingly change and some forms of longer term certainty that individuals and the market economy can plan on and rely on is critical.  This gives individuals and companies confidence, horizons they can plan against, and an improved ability to raise further financing.

#Covid 19 #pandemic #post Covid #strategy #disruption #resilience #innovation #WHO #McKinsey #Accenture #EY #UN SDGs #WEF #blacklivesmatter #metoo #DoughnutEconomics @Kate Raworth @Mariana Mazzucato #biodiversity #remote working #strategic framework #climate change #government role #social contract #public #infrastructure #fiscal policy #monetary policy

Categories
Covid REBOOT

Post Covid

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

Blog 2 on Post Covid disruption, resilience and innovation.

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

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

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

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

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

Figure 2-1

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

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

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

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

Figure 2-3

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

Key components of Gen Z behaviour include:

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

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

Figure 2-3

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

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

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

Figure 2-4

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

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

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

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

Figure 2-5

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

Figure 2-6

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

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

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

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

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

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

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

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

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

Looking now at each of the 6 themes:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Categories
Covid REBOOT

Post Covid

Blog 1 on Post Covid Disruption, Resilience and Innovation

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

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

Source: Visual Capitalist,
Figure 1-1

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

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

Figure 1-2

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

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

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

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

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

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

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

Kate Raworth, Doughnut Economics
Figure 1-3

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

Kate Raworth, Doughnut Economics
Figure 1-4

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

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

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

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

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

Categories
REBOOT Strategy

REBOOT Business Strategy

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

Blog 15 of the Business Strategy Series

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

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

Figure 15-1

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

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

Figure 15-2

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

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

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

Figure 15-3

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

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

Source: Unilever Website,
Figure 15-4

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

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

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

Figure 15-5

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

Figure 15-6

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

Figure 15-7

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

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

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

Figure 15-8

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

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

Figure 15-9

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

Figure 15-10

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

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

Figure 15-11

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

Figure 15-12

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

Figure 15-13

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

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

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

Categories
REBOOT Strategy

REBOOT Business Strategy

Blog 13 of the REBOOT Business Strategy Series

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

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

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

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

Figure 13-1

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

Figure 13-2

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

Figure 13-3

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

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

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

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

Strategic Framework
Figure 13-4

There are six tests of a business strategy:

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

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

Figure 13-5

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

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

Orsted

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

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

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

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

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

Orsted

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

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

Novo Nordisk

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

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

Unilever

Vision – “to make sustainable living commonplace.”

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

Tesla

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

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

Ikea

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

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

Microsoft

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

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

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

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

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

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

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

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

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

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

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