By Greg Lavery
Our work with business and thought leaders has identified a profound change in the way that businesses are run in the after-financial-crisis (afic) world. This discussion identifies the causes of the change and how businesses are responding.
On the input side, capital is scarce, resource prices are increasingly driven by constraints and becoming more volatile, externalities (such as carbon dioxide and water) are beginning to be priced into the economy, new technologies are emerging with increasing rapidity and talent is becoming increasingly discerning - motivated by a ‘higher purpose’ that most companies did not provide before the financial crisis (befic).
The output side of the equation is changing as well, with volatile and uncertain orders, increasingly demanding customer mandates (e.g. Wal-Mart, P&G), and consumer and community pressure to improve corporate responsibility.
The business context is changing as well, with increasing shareholder activism, greater corporate transparency demanded by the community and regulators in the light of recent events such as phone hacking and LIBOR fixing, emerging new business models, and expectations that business drive the reduction of the world’s footprint to within the carrying capacity of the planet now that the Conference of the Parties and Rio +20 have demonstrated the inability of global politics to develop workable solutions.
The most thoughtful – and usually most profitable – companies and a range of clever start-ups have already begun to develop new approaches to the afic world. They use six themes for success:
1. Low cash. Afic leaders recognise that cash is scarce and use a range of approaches to minimise their need for cash to improve their businesses, including revolving funds, leasing, vendor financing, PACE funding, asset sharing and virtualisation.
2. Resource efficiency. Many companies are not even aware of the cost savings available from more efficient resource use and even those that are working on it have low satisfaction thresholds. For example, most companies settle for 10% energy use and waste reduction, when Toyota in the UK is at 70% reduction and still finding economically attractive opportunities.
3. Local production. There is a trend towards re-onshoring manufacturing due to increasing transport costs and in-transit inventory draining cash and risking obsolete products in a world of rapidly changing and volatile demand.
4. Partnering with suppliers and customers. Fighting a win-lose battle over pence per unit misses much larger value opportunities for both suppliers and buyers. For example, some agricultural buyers are helping their farmer suppliers to improve their productivity and harvests – and share this prosperity through reduced prices and lower risk.
5. Servicising. Most customers want light and paper copies, not light bulbs or photocopiers. Afic companies realise this and are providing services not products – and recognise that this reduces the cash requirements for their customers as well as enabling them to manage the products through their (prolonged) lifetime and, via remanufacturing and recycling, into new products, saving commodity costs.
6. Non-consumption. Some of the more radical afic companies are vigorously encouraging customers not to buy products. For example, Patagonia is encouraging repair and recycling, while car sharing clubs such as the E-Car Club encourage communities to adopt a shared vehicle between them avoiding private car purchase.
The financial crisis, and these new business parameters that have resulted, create the stage for the reinvention of existing firms and the growth of new ones. Consider the companies that began and flourished in economic downturns thanks to their innovation in a time of change, including GE (1890), General Motors (1908), FedEx (1973), Microsoft (1975), and CNN (1980).
In 20 years’ time, we will look back and see a profound change in how business is done – and admire the rapid growth of new companies who grasped the afic opportunities. We may not remember those household names from 2012 that fell by the wayside.
Dr Greg Lavery is a Director of Lavery Pennell, a strategy consulting firm assisting companies to unlock extraordinary value. Lavery Pennell is currently working with Cambridge University’s Institute for Manufacturing and 2degrees to lead a ground-breaking study into the untapped value in the UK Manufacturing sector called the Next Manufacturing Revolution. For more information, see www.laverypennell.com.