When we think of the links between business and the environment, it is important to distinguish between operational and strategic issues. In my view, strategic issues are those that have a material impact on at least one of the following:
- the medium and long term viability of the firm
- the financial health of the business and returns to shareholders
- the basic size and scope of the business in terms of geographies and market segments
- the safety and well being of employees and other stakeholders such as local communities
In order to conceptualize some of the issues which have come up in this space over the last year, I wanted to devote this week’s post to raising the five strategic issues I feel are most relevant and require the attention of a firm’s Sr. Management. They are:
License to Operate
In its broadest sense, a License to Operate indicates civil society’s acceptance of a business or a project and a distinction is often drawn between a regulatory license to operate and a social license to operate and while the two concepts are clearly linked there are two important factors which can lead them to be quite different.
This was the subject of a post in September in the context of Minas Rio, one of Anglo American’s Iron ore mines.
Catastrophic Risk Management
Risk Management is a normal part of doing business. A crisis, by definition is something out of the ordinary and deals with risks beyond those that are normally discussed, planned for and taking into account in financial projections.
When such a crisis has the potential to destroy or profoundly alter a company, it needs to be considered in a separate category which could be called Catastrophic Risk and managing such risks or even acknowledging their existence is a critical task for Sr. Management.
Willingness to Pay
For economists who study business strategy, a company creates value by creating goods and services for which people (or other firms) are willing to pay more for than the cost of producing the product or service. Once value is created, then one can set a price that shares the value between the seller and the buyer. The amount of value the firm actually gets is often referred to the value that it captures.
While it has become fashionable for marketing people to introduce sustainability into an enormous range of products and services what has not been demonstrated in any category besides food, is a sizable market segment willing to consistently pay more for products and services which are perceived to be more environmentally sustainable.
There are a number of linkages between technological innovation and the environment at the strategic level which require the attention of Senior Management regardless of the capability of the Chief technology Officer, Chief Scientist, or Vice President of Research & Development.
The most critical of these in my view is the power of new technology to fundamental alter the competitive landscape of an industry through the introduction of what Harvard’s Brower & Christensen referred to as disruptive innovation. Innovation is considered disruptive when the leaders of a given industry do not, for a number of reasons, embrace a new technology when it first comes out. When that technology becomes the new normal, those companies find themselves disrupted or pushed aside by newer players which have embraced the innovation and can provide similar products or services but can do so satisfying a different definition of value.
The link to environmental sustainability is that there are a number of technologies available, such as electric cars, which do offer a perceived lower environmental impact than conventional solutions but do so at a trade off against performance attributes that are considered critically important.
One of the biggest issues facing many companies is how to manage operations in different regions and countries around the world. Regardless of whether a firm operates in 2, 10 or 50 countries and territories, once it leaves its home market, the strategic issues discussed above take on additional dimensions. Should a company, for example, choose to comply with the environmental regulations in each country or region it operates in, it can open itself up to criticism form interest groups and activist who accuse it of environmental dumping.
These issues will be explored more deeply in the weeks ahead.