This is part 1 of a 2-part series.
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The rules of business growth have changed. The increased attention to how businesses address environmental and social issues enabled by the digital connectivity and "frictionless" access to information by stakeholders. Anyone with a social media account and access to information is a stakeholder. No longer is business growth solely tied to how businesses relate to their customer base.
While these changes are disruptive to traditional business models, we view these changes as positive. The promise of the digital revolution is being fulfilled as consumers and civil society reap the benefits of greater access to information, services, products and a global voice. This digital revolution, coupled with an increase in the value placed on environmental and social performance, is re-writing the rules of business growth.
Awareness of global and local environmental and social issues is enabled by access to data and information. The internet and social media is connecting the world, and this connection is allowing civil society to unite and have a voice as to how business operates.
To capture the growth potential of the developing world, companies must begin to engage in both traditional and new ecosystems that are addressing resource, environmental and social issues.
There are several high profile examples where civil society has withdrawn companies’ social license to operate due to perceptions of how these companies have affected water resources. In some cases, local opposition has scaled to a global boycott of products resulting in loss of sales revenue and brand impact. The voice of stakeholders has been amplified and both the private and public sectors are under increased scrutiny.
This is most apparent in emerging markets. To capture the growth potential of the developing world, companies must begin to engage in both traditional and new ecosystems that are addressing resource, environmental and social issues. The new ecosystems will consist of governments, non-profits and even competitors (small and large) and in many cases will need to be built to unlock the business innovation and growth potential.
This view is central to the Coca-Cola Company’s sustainable business growth strategy as framed by Muhtar Kent, CEO:
"Our success in these priorities is directly linked to our system’s sustainable business growth. We advance toward our 2020 sustainability commitments by unlocking the collaborative power of the 'Golden Triangle' of business, government and civil society."
Coca-Cola is not alone in the view that business growth requires a different, or at least modified, growth strategy in emerging markets.
For example, Unilever’s CEO, Paul Polman, recognizes that "building a better society and a better business goes hand in hand." This view translates into Unilever’s Help a Child Reach 5 campaign and Lifebuoy Handwashing Behaviour Change Programme (PDF) to educate over 1 billion people on health and sanitation practices. Educating the 1 billion will happen through digital solutions — access to information via mobile applications.
While historically companies have focused on "social license to operate" in emerging markets, they are moving towards a "license to grow" strategy which incorporates programs to address complex environmental and social challenges by working with governments, civil society and other companies.
Key activities in this "license to grow" strategy consist of proactive engagement with diverse stakeholders, including working with competitors in a precompetitive framework along with integrating environmental and social sustainability strategies into business strategies. This new way of thinking about growth is a departure from a more traditional risk mindset (social license to operate).
This shift from a risk to growth strategy is gaining traction. In a recent survey, 43 percent of companies surveyed noted that they are addressing sustainability issues due to "alignment with the companies’ goals, mission and values" — up from 31 and 30 percent in 2012 and 2013, respectively. For example, these leaders of Fortune 500 companies are making the resolution of these issues a top business priority.
The reason we are seeing more companies embed environmental and social sustainability strategies to their business growth strategies in emerging markets is in response to several global trends outlined below.
Global trends
First, let us examine a few of the environmental and social issues challenging businesses’ "license to grow."
The energy-water-food nexus
There is an increase in competition for water, energy and food due to population growth. The world’s population is increasing, projected to add 2 billion people over the next several decades. This in itself will put significant additional pressure on water, energy and food resources.
According to the International Union for Conservation of Nature, "By 2050, a global population of 9 billion will increase water demands by 55 percent, energy needs by 80 percent and food demands by 60 percent." Add to this the rise of the middle class in emerging economies and the associated demand for goods, and the increasing strain on the world’s water, energy and food systems becomes clear. Consider these projections:
Population growth — The global population recently crossed 7 billion and is increasing by about 70 million people per year, with most growth in emerging economies. Total global population is expected to reach 8.1 billion by 2025 and 9.6 billion by 2050.
Energy demand — Global primary energy consumption is projected to grow by 1.6 percent per year from 2011 to 2030, adding 36 percent to global consumption by 2030.
Water demand — By 2030, assuming an average growth scenario without additional efficiency gains, global water requirements will grow from 4,500 billion cubic meters to 6,900 billion cubic meters — about 40 percent above current accessible and reliable supplies.
Food demand and changing diets — In the last 3.5 decades, food consumption increased from an average of 2,370 kcal/person/day to 2,770 kcal/person/day. This growth was accompanied by significant dietary changes, as diets shifted toward more livestock products and vegetable oils and away from staples such as roots and tubers. Total food consumption globally, as measured in kcal/person/day, is projected to increase from 2,373 in 1969/1971 to 3,070 by 2050.
Climate change
Climate change is resulting in shifts in agricultural production, extreme weather events, changes in the marine environment and geopolitical risks. The two major sinks of CO2 within the atmosphere and the ocean are both showing signs of saturation and major change. The current atmospheric carbon saturation level is the greatest in human history, and issues such as stronger, more damaging storms and increasingly anomalous weather patterns are beginning to emerge.
Additionally, increases in carbon saturation in the oceans is causing marine population shifts and changes to species interactions. Shifting weather patterns and species migrations will offer new challenges and opportunities for companies, but the uncertainty that these changes inject into the planning process will represent a new challenge and risk for the private and public sectors.
The public and private sectors are addressing this issue. The December COP21 agreement was a milestone event and to a large degree was only possible with the active particpation of the private sector. The commitment of the private sector in addressing climate change is impressive with support from about 6 million companies including the 412 companies and investors who committed to specific climate action ahead of COP21.
What needs to change?
As businesses focus their growth, strategies on emerging markets they will have to re-evaluate some fundamental assumptions.
Social impact
The boundary between public and private sector always has been blurry.
There long have been "company towns," where companies have been responsible for the social welfare of their workers and their families. However, in the 1960s under the economics of Milton Friedman, many companies began to believe that the role of the company was not to make philanthropic or "public-sector" decisions.
Indeed, many companies viewed — and some still view — their sole mission as returning profits back to their shareholders so that they could make "societal" decisions. While there are still some adherents to this line of thinking, more companies are realizing that by limiting their interaction as a global citizen, they are also limiting their long-term growth potential.
It is also important to note that Friedman’s interpretation of fiduciary responsibility does not translate in all parts of the globe. New demands in the West and cultural differences in the rest of the world make it imperative that companies adjust to accommodate social impact.
Innovation
Innovation and product development traditionally have been closely held within business. In fact, many companies pride themselves on the secretive nature of their product development process.
For example, some companies are known for their "secretive" product design and manufacturing processes, leaving their customers with only rumors about the actual product until it is "revealed." While this method of design may be suitable for building marketing hype and brand desire, many companies are challenging this process through organic and open design.
Because wicked problems are unable to be solved by a "silver bullet" product, and the solutions are too diverse and unknown for one company or product team to solve, these closed methods of innovation will become increasingly ineffective. The traditional process of R&D is expensive and as a result, stakeholders along the product value chain are increasingly participating in the process. This can free individual companies to focus on specific parts of the R&D cycle rather than shouldering the burden of lab-to-market innovation.
Ecosystems as a way to address complex issues
Ecosystems in the natural world co-evolved over millions of years to gracefully solve problems. Within an ecosystem, organisms create and share resources, compete and collaborate, interact and co-evolve, all while moving toward a common goal with a minimum of waste.
While partnership between businesses is not a new idea, James Moore brought the concept of business ecosystems into modern business strategy in his 1993 Harvard Business Review article. Delivered on the cusp of the digital revolution, which rapidly and easily connected market players who had never had access to each other, the concept of ecosystems quickly was adopted by those working in the technology sector.
What to do?
The above case studies illustrate the necessity of how companies need to think about their strategy to fuel business growth in emerging markets. The key dimensions of these companies’ strategies to fuel business growth in the 21st century are summarized below.
1. Identify your internal levers
Leadership commitment: It is necessary to have the C-Suite be engaged and communicate its company’s strategy and position on key resource, environmental and social issues.
Scale: Companies with a global footprint are in a better position to have a global impact through their existing consumer and supplier connections. However, this does not mean that companies without scale cannot have impact; size your impact to the scale of your company.
Trusted brand: Having a trusted brand helps establish goodwill with potential partners, consumers and suppliers alike. This established goodwill will bypass questions of intention and allow the ecosystem to focus on issues that are more important.
Exercise scale: Positively influencing your value chain on resource, environmental and social issues while maintaining a sustainable financial relationship. There is no long-term value in "squeezing" suppliers to address these issues if they are not financially viable. True partnership aligns values, strategy and financial success.
Ability to invest: Long-term problems will require long-term investment. Be prepared that investment in these ecosystems will be significant and the return will be long.
2. Identify the priority and develop a comprehensive approach
Target: Identify where you can have the biggest impact. You will be able to most directly and easily work with those suppliers, customers, governments, NGOs and other partners that are directly adjacent to your current business. Start there and expand as you can provide value.
Build partnerships: Identify and engage the stakeholders already working with the selected issue and begin building the ecosystem. All stakeholders should work together to develop and build and understanding around why a particular initiative or project is in the best interest of the business, its customer base and the local populations.
Establish a platform: If one does not already exist, establish one for an organization or forum that will serve as the platform for collaboration and co-creation. This common platform will allow for increased communication and expedite innovation throughout the process.
3. Identify the priority and develop a comprehensive approach
Working with your established partners, specifically define the goal of the ecosystem and the approach for solving it. Each partner will have a different role in the approach, with some potentially competing against each other. Make sure that the approach is both broad enough to allow innovative solutions, but also grounded in a real timeline for delivery.
4. Commit resources
In order to be involved in a solution ecosystem and potentially reap the rewards from involvement, all partners must be willing to commit the resources required for the time period needed.
5. Develop, pilot, evaluate, iterate
Solutions developed within these ecosystems are often non-linear and organically derived. By collectively arriving at solutions quickly, testing them through pilots and evaluating the results, you will be able to innovate and arrive at solutions or collections of solutions faster than trying to anticipate all possible challenges before release.
6. Scale
Every situation is different, and solutions will vary in their global or even regional applicability. Constantly evaluate to see if a particular solution could succeed on a larger scale.
Companies that are bold enough to participate in the solution to complex environmental and social problems will find they are not only granted a social "license to operate" within emerging markets, but also a "license to grow."