In my last series for 2degrees, I looked at how capitalism itself might evolve, in order to create a framework within which sustainable business can become a practical reality.
In this new five-part series, I drop down a level, to explore the development of genuinely sustainable business strategies – from the compelling need, through an integrated board agenda, new business and ownership models, frameworks for change, to re-booting the business mindset.
In this first part, we see business strategy at the crossroads, and how the sustainability strategy and the business strategy should be one and the same – totally integrated.
PART 1: Is business strategy fit-for-purpose?
“Insanity: doing the same thing over and over again, and expecting different results." Albert Einstein.
What is the shelf life of your business? What factors will impact on your business model, and how long will you be able to keep on delivering good levels of return, or still be around, even?
At what point might you become a stranded asset – no longer attractive to investors? Ten years? Five? Just the one?
Perhaps it is difficult to say. But, given the precarious and changing world we live in, certainly questions worth reflecting on.
The age of easy business, if it ever really existed, is over. Many businesses have been able to succeed during the previous thirty years or so, not just through hard work, determination and innovation – although these traits have been much in evidence – but also by virtue of a largely benign business environment, involving much de-regulation, and underpinned by a range of key assumptions – an endless supply of resources, limitless capacity of planet to absorb our wastes, and where consumer demand and economies grow forever, aided and abetted by cheap credit. Nice while it lasted.
But as we know, this landscape is changing, and we face an unprecedented set of challenges at the intersection of climate change, rising energy prices, increasing resource scarcity, and economic/debt restructuring. Many business strategies will be tested to the limit. I really do wonder at how many will be fit-for-purpose in this new era? And like the parable of the boiling frog, they may not realise it, until it is too late.
Climate change economics – adaptation to the increased frequency, intensity and impact of environmental disasters takes on greater significance. In 2012 we experienced a wide range of climate change events, although perhaps the most devastating was Hurricane Sandy – estimated to have caused between $30bn and $50bn of damage.
And as we have seen in UK, it’s not just the obvious and direct impacts we need to plan for; there are often hidden impacts too, like the gradual loss of customers and staff over the extended periods through which the businesses are unable to trade.
Energy availability and affordability - anything linked to rising fossil fuel energy prices is likely to become inherently unaffordable. In 2011, the IMF identified likely scenarios for price increases of +60% in the short-term, and +200-600% within 20 years. The question is not if, but when oil becomes unaffordable. How sensitive will your customers, suppliers and your own businesses be to this key factor?
Resource scarcity – the world’s natural ecosystems and resources are being degraded at an unprecedented rate. Mankind currently extracts 50% more natural resources than was the case only 30 years ago, amounting to around 60 billion tonnes of raw materials – equivalent in weight to 41,000 Empire State Buildings – each year.
And in terms of our ecological footprint – according to WWF – we are already using around 1.6 planets to maintain our current consumption patterns. Our combined ecological footprint – the demand people place on the natural world – has more than tripled since 1961.
In the West, the picture is worse still; we are already living a three-planet lifestyle.
All of this is fundamental stuff, and can only add further tension to an already volatile picture – in the post financial crisis era of economic re-structuring – with major implications for our businesses, our customers and suppliers.
Slowly, inexorably and irresistibly, the context for business is changing beyond recognition. And with this, the contingent circumstances that enabled us to deliver business success in the past, no longer exist. Can we really say our business strategies are still fit-for-purpose?
Is the business strategy fit-for-purpose?
When you boil it down, the conventional paradigm for business strategy is fairly straightforward; it relies almost exclusively on the narrow pursuit of short-term growth and profit, selling as many goods and services as we can, maximizing the price commanded in the market, by virtue of leveraging our customers (usually branding seems to works well here), minimizing resource costs (through consolidated sourcing, negotiating hard with our suppliers, and extending payment terms for as long as we can), and by fending off our competitors – by fair means, or foul.
And all of this activity, regardless of whether it leads to a sustainable outcome or not, is justified on the basis of our singular responsibility to shareholders.
In support of this model, businesses have tended to deploy a range of strategies and tools, in pursuit of market domination.
Porter’s generic strategies get us to adopt an emphasis on cost leadership, on differentiating our proposition, or perhaps focusing on a niche market. We can also develop strategies to help us penetrate, consolidate, or withdraw from markets, develop new products, diversify our sources of income, grow our businesses organically (although not necessarily in the ecological sense), or through acquisition, strategic alliances, and so on.
These conventional approaches were designed to give us useful models, to help us think through and frame our business strategies. All good stuff – the stock-in-trade of our business schools for a number of decades – and as a recovering MBA myself, I can certainly appreciate their value.
Broader and deeper
Many of these strategies and tools remain valid, to a point, but they need to be adapted; made broader and deeper in their considerations, in their meaning, and in their execution – more responsive and inclusive of the factors that are now changing our world.
Of course, environmental and other external factors can get a look in, through PESTEL and SWOT analyses, to help identify the risks and opportunities in the business environment. But rarely do these make any significant inroads into the core of the business and its fundamental strategy, and how we make money.
In any case, to get the most out of these tools, we rely heavily on the vision and insight of the participants engaged in the strategic review; if narrow, partial, or conventional perspectives are applied, it may be difficult to detect and synthesize the true threats and opportunities for the business – let alone be bold enough to act on these signals.
But, there are several inherent limiting assumptions, as much to do with mindset as with our outmoded strategic tools.
And as we continue to experience the fallout of the financial crisis, many conventional sectors, including financial services, construction and retail, have all struggled. Some big names in retail have been hit, including Comet, Jessops and HMV, and more than 30 chain stores are closing each day. And one wonders, especially watching TV this time of year, how many new sofas, beds, TVs or washing machines we really need?
Even with the shift towards online retail, the bloated age of debt-fueled consumerism is surely over. We need to look at growth in a new way.
'We stick to what we’re good at'. Strategy seeks to answer what markets should we be in, and yet so often we seem to cling to the same position we have today, regardless.
The oil company: should we stay in fossil fuels, or make the transition to become a renewable energy company? For many years, Shell showed much promise in making the transition to a more sustainable business model. It's Signals and Signposts report earnestly warned about the 'zone of uncertainty' for our energy future - and end to cheap energy and recognition of the need for more work on renewables.
And yet, more recently, the company pulled out of offshore wind power in the UK, as it couldn't make the numbers stack up. It would be interesting to unpick the real issues here, as others seem more able to make it work.
And one wonders at how long Shell's business will thrive, based on its reliance on an inherently unsustainable product. For any energy company to stick doggedly to oil and gas, is a rational strategy, or are they stuck because of vested interests, short-term thinking, or is it too hard to kill the golden goose? Anyway, that day of reckoning for stranded assets is near.
'We just need to differentiate'. Of course, in our highly crowded markets we turn increasingly to differentiation strategies, adding more bells and whistles to help our products stand out against the competition. Over time, the room for genuine competitive advantage narrows; cost, time, quality, all become givens. We are on a treadmill to oblivion.
The ubiquitous mobile phone provides a prime example – our obsession with the latest styles and features means that gadget suppliers keep offering us new and improved models – and while they attempt to reduce costs, margins narrow, and scarce resource become, well, even more scarce. By 2009, more than 2.5 billion mobile phones were in use worldwide, with an estimated stockpile of 500 million obsolete handsets, weighing in at 56,000 tonnes – almost enough material to manufacture as many new phones. Less than 1% of mobile phone materials are recycled.
So, where do you go next? Branding can be a useful approach, but will this add real and lasting value to your customers in a debt and resource constrained world? How do you provide genuine thick value, to your customers, to people and society, and in universally-affordable and sustainable ways?
The 'nature’s bounty is free' issue. We could perhaps get away with ignoring so-called externalities in the past, but now the chickens have come home to roost. BP has learnt much in recent years about the real cost of unsustainable business operations. The Deepwater Horizon disaster could ultimately cost the company and its shareholders up to $90bn.
According to a study commissioned by UNEP in 2010, environmental damage caused by human activity in 2008 was estimated to be $6.6 trillion – equivalent to 11% of global GDP. This points to the coming transparency on the ”total cost of ownership” of our business strategies – and the need to include so-called externalities in our pricing model, such as carbon and water. We will need to get smarter here, too.
'We exist to maximize profit'. Perhaps we now also need to think through the higher purpose of each of our businesses.
The late Ray Anderson had a great phrase here: "Business generates profit to exist; it exists to serve a higher purpose.” The implication is that while business is still about making money, it is also about how we make money that is important: the source, quality and legitimacy of our earnings and how long we are able to sustain these for.
Are profits generated in a way that does not deplete natural resources and create adverse impacts for the environment, society or people? For example, we have to question the wisdom of Barclays Bank, and a business model that makes up to £340m a year from agricultural commodity price speculation – an activity that has the impact of driving up food prices and exacerbating poverty worldwide.
'We’re aiming for global domination'. The drivers that enabled the rise of globalization in the first place are changing irrecoverably, meaning that this model is unlikely to continue in its present form. The cost of transporting goods is rising, climate change is already starting to impact on what you can do and where, the exploitation of resources in different parts of the world is unsustainable, and cheap credit is no longer available, impacting on the notion of want-based consumerism.
And while globalization has enabled large corporations to dominate, it has done little for regional and local economies. It also promotes an ecologically wasteful form of trade. In 2008, the UK imported 22,000 tonnes of potatoes from Egypt whilst exporting 27,000 tonnes back again. This is not a sustainable strategy going forward, and we need new models.
Doing well by doing good?
It is true that CR programmes have emerged and proliferated, especially during the last ten years, to help develop a more responsible approach to business – and to balance the triple-bottom-line of environmental, social and economic interests.
And there are some genuine signs that suggest business leaders are starting to prioritize sustainability. Indeed, 81% of CEOs claim, in a recent UN Global Compact survey, that sustainability is now embedded in company strategies and operations. Ah, would that it were so.
But as we know, these business critical factors still have little impact in many boardroom discussions and investment decisions, and many are slow to take advantage of the business opportunities offered by the green economy.
The reality is that CR and sustainability programs are mainly run separate to the main business strategies. And as such, there is often a wide gap between the rhetoric and the reality of corporate sustainability behavior.
In effect, many businesses can be seen to operate on two seemingly contradictory agendas – on the one hand looking to benefit people and planet, and on the other, the singular focus on maximizing profit, often at the expense of the former. I’m not sure if a tobacco company could ever reconcile these two agendas.
And it is entirely possible that many companies intuitively get the idea of eco-efficiency, without questioning the more fundamental aspects of the business, its strategy, and its true impact. Consider the relative merits of Shell, an oil company investing in solar energy to enable a 'cleaner' approach when drilling for fossil fuels.
In any case, eco-efficiency only gets us so far; it slows down some of the issues, buys more time. But it doesn’t solve fundamental problems we face.
We also have to be mindful of the rebound effect, whereby resource depletion can still increase, despite, and because of our increased efficiency, due to our desire for growth.
We now see more and more evidence that sustainability-focused companies significantly outperform traditional firms, in both stock market and accounting performance. This makes sense, and is good news.
But given the universally-poor performance of stock markets in recent years, is being the best of a bad bunch good enough?
While there have been significant advances towards more responsible and sustainable business, we are not really making the desired impact across the business world. As Peter Bakker, the president of the World Business Council for Sustainable Development reminds us: "If you were to add up all the current sustainability plans of all corporates, it would not start to make a dent in the problems we face.”
A provocative statement, perhaps. But when one considers the reality of our position in the natural world, it does look somewhat precarious, to say the least.
Levels of greenhouse gases are higher than the worst-case scenario outlined by climate experts just four years ago
According to the IEA World Energy Outlook, the world is headed for irreversible climate change by 2017
If the recent PwC report is right, we have already passed the eleventh hour – and even if we double our current rate of decarbonization every year to 2050, we would still only limit global temperature rises to +6°C.
And in terms of living within our planetary limits, we will need the equivalent of two planets by 2030
Each one of these issues on its own will have a devastating effect on the business model and ability to make money. But add them together and the implications are enormous, as we drift towards this perfect storm.
So severe, in fact that, if the Buddhist monk Thich Nhat Hanh is right,the human race could be extinct within 100 years. A very sobering thought as we start 2013, and one that might become increasingly visceral, as we (and our businesses) experience the continuing wake-up call.
A way out?
But there is a way forward. We can redesign and transform our companies, integrating sustainability principles right into the very heart of our business models and strategies – creating one integrated agenda for genuine and lasting business success in the 21st Century.
Businesses will increasingly start to realize this opportunity, as there is little to be gained in trying to cling on to an old dysfunctional paradigm. The conditions that enabled old models to work will never return, and CR and eco-efficiency initiatives are not going deep enough, far enough, or fast enough to enable long-term business success, let alone support the transition to a sustainable future.
We are at a crossroads. We now need to go deep and ask ourselves: Do we continue on the race to the bottom, or is it time to lift our sights, and transform our businesses to deliver sustainable business success in a new and sustainable economy.
And back to our original question: What shelf life do we have left?
Next time we look at the key models and pioneering businesses that are taking this agenda forward.