SUSTAINABILITY AND SHARED VALUE CREATION

Corporate Sustainability has assumed greater significance in most organizations around the world today. Most companies focus on activities on larger scale which are more often than not controlled from the corporate headquarters. These organizations should also capitalize on the opportunity to drive the concept of "shared value creation" as central theme of corporate sustainability to foster synergic relation between the company and interacting community. This also underlines the importance of decentralizing the efforts directed towards corporate sustainability by driving the actions through various layers in the organization. The ultimate aim should be that sustainability should be reflecting in actions of CEO as well as in those of the staff in frontline or on the shop floor.

First step in this direction would be an individual function or department in the organization to identify the key external stakeholders they interact with and group them into broad categories. For example, this may be truckers involved in transportation and farmers cultivating cotton for a garment manufacturing company and for a mining company, the key external stakeholders may be surrounding village community.

Then ; each function or department should look at ways in which they can actually enhance value to their key external stakeholders ( For ex : Donating funds for famers aimed to improve cultivation methods of cotton for the garment manufacturing company or Improving education facilities in the village community for the mining company)

This approach would have multifold advantages including but not limited to below:

 I) We are directly affecting the people/community at large who form integral part of business value chain 

II) Betterment of these communities would mean incremental business to us and hence it would be easy to demonstrate to our shareholders rather implicitly the concept of Responsible Social Investing often termed as RSI

III) This also means that the long term growth aspirations of the organization would be more of inclusive model by also lifting up the community status quo. The inclusive growth model is of high relevance as most of the multinational companies are increasingly investing in emerging markets. Through smart communication strategy; companies can showcase through media on how the company is being integral part of the growth story of a country (Ex ; Turkey/Russia/India etc) which would subsequently result in good will ; brand image  enhancement etc.

BUSINESS MODEL OF SOMALI PIRATES

The Business Model of Somali Pirates is an eye opener especially when you realize that they incorporate elements of Shareholder Management; Vendor Manageemnt and Operational Cost Management seamlessly into their business model. Doubt whether they teach this even in Harvard or INSEAD ?

1. Introduction:

A basic piracy operation requires a minimum eight to twelve militias prepared to stay at sea for extended periods of time, in the hopes of hijacking a passing vessel. Each team requires a minimum of two attack skiffs, weapons, equipment, provisions, fuel and preferably a supply boat.

2. Investment and Shareholder Management:

The costs of the operation are usually borne by investors, some of whom may also be pirates. To be eligible for employment as a pirate, a volunteer should already possess a firearm for use in the operation. For this ‘contribution’, he receives a ‘class A’ share of any profit. Pirates who provide a skiff or a heavier firearm, like an RPG or a general purpose machine gun, may be entitled to an additional A-share. The first pirate to board a vessel may also be entitled to an extra A-share.

At least 12 other volunteers are recruited as militiamen to provide protection on land if a ship is hijacked, In addition, each member of the pirate team may bring a partner or relative to be part of this land-based force. Militiamen must possess their own weapon, and receive a ‘class B’ share — usually a fixed amount equivalent to approximately US$15,000.

3. Supplier Management:

If a ship is successfully hijacked and brought to anchor, the pirates and the militiamen require food, drink, qaad, fresh clothes, cell phones, air time, etc. The captured crew must also be cared for. In most cases, these services are provided by one or more suppliers, who advance the costs in anticipation of reimbursement, with a significant margin of profit, when ransom is eventually paid.

4. Operational Cost Management and Dividend Determination:

When ransom is received, fixed costs are the first to be paid out. These are typically:

• Reimbursement of supplier(s)

• Financier(s) and/or investor(s): 30% of the ransom

• Local elders: 5 to 10 %of the ransom (anchoring rights)

• Class B shares (approx. $15,000 each): militiamen, interpreters etc.

The remaining sum — the profit — is divided between classes-A shareholders.

Extract from Annex III (http://somalitalkradio.com/2010/mar/un_report_somalia.pdf

BUSINESS MODEL INNOVATION : KEY TO DIFFERENTIATION STRATEGY

In the current global scenario; the number of variables in the business equations has been exponentially increasing leading to complex situations which more often than not result in outcomes beyond the scope of traditional business analysis. Post recession, one of the key changes is the increased involvement of governments or regulatory bodies across the globe in financial decision making. The competition landscape has also been constantly evolving with disruptive innovations and traditional demarcation lines between the industries now stand blurred. Mobile companies like Nokia, Apple are competing with music companies like Sony; Video conferencing companies like CISCO are competing with Singapore Airlines; Banking companies like HSBC, ICICI now are partnering with mobile companies as Vodafone in Asia; Google and Microsoft have forayed into Wind Energy ---- All these are testaments to the fact that the traditional demarcation lines between the industries no more exist. All industries are bracing themselves to be ready for “new normal” in which growth is projected be stagnant in western economies and on upward trajectory in emerging economies (BRIC; Africa and ASEAN countries). These changes also make it complex for corporate decision making. The growth expectations for 2011 seem to be simmering off with debt issues of US; Increasing Debt/GDP ratio of Italy (127%), Greece (167%) and Inflation in emerging economies.

From business perspective; it is no more sufficient for companies to be efficient only on operational effectiveness as it was the case in the last two decades. Total Quality Management, Unit Cost minimization, Productivity optimization, Agile Manufacturing and host of other initiatives under the scope of operational effectiveness have now been integrated into day to day operations of many companies across the world. According to the article from Harvard Business Review, `` What is Strategy`` by Michael E. Porter, ´operational effectiveness is no more a strategy´. What is needed to really succeed in today’s ruthless business world is the bold vision to look beyond the normal, to produce ground breaking technologies, to challenge the obvious, hunt for the black swans and to continuously foster culture of innovation in the organization. This article aims to present the concept of Business Model Innovation which can be used as a tool to leverage the organizational effectiveness and be successful in current corporate world.

Business model in simple words describes the rationale of how an organization creates, delivers, and captures value¹. It is the basic skeletal framework on which every organization operates and delivers value to their stakeholders. A former divisional CEO at GE liked to tell a story about the time he sat next to a dot-com entrepreneur on a commercial flight during the height of the internet bubble². After listening to the budding cyber king babble excitedly for ten minutes about his site’s explosive growth trajectory of “eyeballs”, hits, and click-through funded by an incineration of adventure-capital, he was asked to draw out his business model ….on a paper napkin. After looking at his seatmate’s business model, the CEO quickly realized that the would-be entrepreneur was competing on price alone in a commoditized industry. He had negative margins funded by investors with no barriers to entry. He predicted that once the Venture Capital money burned up, prices would increase by necessity and customers would switch to other substitutes. A few months later he was proven right – which shows the power of cutting through pulpy marketing spin and buzz to hit hard bone of business fundamentals when evaluating any new opportunity. As per survey conducted by IBM, Business Model Innovators have higher CAGR than others as shown below:

The simple version of business model would be combination of Inputs (Costs, Resources); Key Processes; Customer Value Proposition; Customers; Competitors and Profit Margins.

Fig. 1: Basic components of Business Model

The components of Business Model shown as above are basic building blocks just like the building blocks in architectural designs. There are numerous business models from that of BCG; Alex Osterwalder to the one used by Somali Pirates! Yes; Somali Pirates have a fantastic business model which incorporates best practices from Investment Portfolio Management; Performance Management; Shareholder Management and Operational Cost Management. Please refer to Appendix A for details on the Somali Pirates business model extract from UN dispatch. Among the available business models; the one by Alex Osterwalder and Yves Pigneur provides comprehensive framework which can be further customized as per the individual business unit or company´s requirements.

Fig. 2: Business Model framework suggested by Alex Osterwalder and Yves Pigneur

The Business Model is simple but effective tool and need to be continuously looked at to innovate various dimensions involved in the framework. Google has interesting business model in which the search engine is used by free users and the revenues are generated from customers buying keywords for search advertising. Apple has revolutionized music industry; computer industry and will possibly revolutionize television industry in foreseeable future by placing utmost importance to customer value proposition delivering superior customer experience. The new spate of smart phones which are competing with each other ( based on cheap hardware and Android operating system) do not have sustainable business model and can only hope to maximize their returns in short to medium time horizon. It is important to look at each building block and ways to unleash ground breaking advancements combing core competencies of the company and ever changing market dynamics with value addition to customer being central theme.

1) Strategic Partners:

This deals with: What partners do we have (or) should we have to optimize our business potential and extract synergies? In emerging business world; strategic alliances are extremely crucial to deliver superior returns compared to competition and building sustainable business model. Google´s acquisition of Motorola Mobility is significant from this perspective as it would enable Google to supercharge the Android ecosystem and enhance the competition in mobile computing. BASF, world´s leading chemical company has improved its EBIDTA margin from 4% in 2001 to 10% in 2010 with active portfolio management coupled with building powerful partnerships with companies like Gazprom, Monsanto and Total³.

Fig. 3: Active Portfolio and partnerships of BASF from 2001 to 2011

It is important not only to select partners from perspective of business potential, but also to consider the strategic fit between the organizations, how the partnership would fit into planned business portfolio and how would the partnership act as catalyst in achieving the long term strategy of the organization.

2) Key Processes

It is of paramount importance to have streamlined processes in the organization especially in large multinational companies. According to Leif Edvinsson, former Director Intellectual Capital Management at Skandia: Performance of organization is also function of structural capital which is all those intangibles left behind, when people go home including internal processes and structures, databases and customer relationships. With structural capital, organizations can enhance the productivity of human capital by smarter ways of working. Execution as defined by famous consultant Ram Charan is the summation of People, Process and Strategy. The Key Processes of the organization should aim at cascading strategic objectives from the top level through multiple layers to people in frontline (or) shop floor who ultimately are responsible for execution.

3) Key Resources:

Resources are the combination of people, technology, products, facilities, brand, capital investment and other elements required to deliver value proposition to the targeted customers. Resources can be classified broadly into generic resources which every company has and Key Resources which can be used as source of competitive differentiation. The way companies optimize allocation of resources which is integral part of corporate portfolio management can be also source of differentiation as in the case of BASF.

The only company that was included in the original Dow Jones industrial Index in 1896 that is still listed today, GE, is so widely recognized and respected for its leadership talent comes from the fact that measuring and developing talent has always been at the forefront of GE business strategy discussions. Companies can launch themselves ahead of the competition by looking more closely at the Key Resources and formulating action plan in short, medium and long term on how to leverage these resources into source of ´sustainable competitive advantage´.

4) Customer Value Proposition:

Customer Value Proposition articulates the value that a firm provides through its products and services to the targeted customers. Offering compelling customer value proposition is the centre piece of strategy setting for any organization. Interesting way of viewing this would be to identify the business unit as a system and to design value proposition for each of the customers the system interacts with which would be key suppliers, partners, distributors, shareholders and importantly to the end customers. All the other building blocks of the business model framework must be blended together to deliver customer value proposition in optimal manner possible. 

Customer Value Proposition should also be able to clearly emphasize the difference between the firm´s offerings and those of competitors. If this cannot be established, then we need to understand that the business model of the company or the industry at large is not sustainable and result would be ferocious price war as we see in today´s mobile, electronics, transportation and host of other industries. Companies like Wal Mart, Toyota, IKEA and APPLE produce great shareholder returns with consistent growth in spite of lower ratio of marketing spend to revenue ratio because of their extraordinary value proposition.

5) Customer Relationship:

Evaluation of existing channels of Customer Relationships can often reveal interesting details. With the advent of globalization and internet revolution, it has become important for companies to embrace new technologies to enhance their customer relations like using social networking.

Social Media can also enable companies to lower their costs and provide better service levels using Twitter or Live Chat. It can also enable companies to have open platform to have feedback from the customers directly which can be incorporated into the business model framework. Companies can also look at reconfiguring existing customer interface (touch points, systems, processes etc.) to improve customer relations. It also may be pertinent to have different approach with reference to different customer segments or different geographies.

6) Distribution Channels:

Companies can differentiate from the competition on the basis of Distribution Channels which is the delivery interface between the company and the customers. Sales Channel Strategy and Marketing are also two important components in the distribution channels. An automobile company had experienced success by designing sales channel strategy focused on i) New Customer acquisition to focus on competition customer base and ii) Farming of existing mature customers to increase the share of wallet from these customers. Brioni, Giorgio Armani and Louis Vuitton are three brands in Apparel and Clothing which have achieved considerable success with their channel differentiation.

7) Customer Segments:

In simple terms, customers with similar needs are grouped into one customer segment. Segmentation is important to customize the value proposition of the firm´s offerings, establish relevant channels for customer relations and distribution and optimize the resource allocation. It would also enable to differentiate between the customers basis operating margins being generated by different customer segments which would then translate into action plan for customer portfolio management. This can also be used by companies for prioritizing new product development efforts, determine appropriate product pricing and better identify opportunities in each segment. Consulting company Top Mark Inc. identifies that customer segments resulting from segmentation should be 1) Discriminating 2) Profitable 3) Measurable 4) Sustainable and 5) Identifiable.

8) Revenue and Costs:

The key aim of the corporate organization should be to maximize the net operating margin by maximizing revenue and minimize costs. While competitive price can no more be source of differentiation, it is key to continuously identify new or alternative sources of revenue and also to maintain cost competitive advantage. Revenue model innovation is innovating how the company makes money by changing the value proposition (product/service/value mix) and the pricing model. 

While revenue model innovation is not sustainable, it is best utilized during economic turmoil when new customer preferences and spending patterns are changing affecting the pricing model and value proposition of a business4.  Xerox used revenue model innovation when introducing its first copier, model 914.  After realizing that the copier was overpriced and was not affordable compared to similar technology, Xerox decided to lease the copy machines and charge a fee per page after the free 1,000 copies were used.  As a result, Xerox sustained a 41 percent annual compound growth rate over a 12 year period. Gillette innovated the pricing model by giving away razors and making money on the blades.

While the above is just a basic framework, other blocks can be added basis their relevance to the company or industry such as a) Competition and Barriers to Entry and b) Technology advancements. With increasing competition in all industries, business model innovation has been assuming significance in efforts to sustainable business model. News that HP which has 18% market share leading in PC business will wind away the PC business because of lower operating margins around 5% and instead focus on software services through acquisition of UK firm Autonomy only reflects the pressure on margins even for the leading industry players. The business trends are changing, fundamentals are changing, industries are merging, and companies are vanishing now and the situation would only be more bizarre in times to come. Now the only question is: Are you ready for these changes and embrace the new normal?