Creative Disruption: Strategies for the new paradigm

Monday, August 01, 2011

18:00 - 20:30

The August Green Monday is for those working a Sustainability framework into their core business strategy. That includes the Main Board, and the Strategy, Operations and Sustainability Functions.

We will look at Sustainability as the next major disruptive economic force - similar in impact to the internet. Over the past 15 years, companies that underestimated the power of the internet, such as Kodak, HMV and Waterstones have seen their value decline by over 90%; those who understood it, including Apple, Google and Amazon, have been on exponential growth journeys.

Many are now seeing the new economic paradigm being shaped by resource scarcity. Companies that recognise this are building different strategies to their competitors, particularly around the efficiency of their products, and there are already major success stories. Some examples:

  • Nissan: Gained competitive advantage in the Electric Vehicle (EV) market - see below
  • M&S: Plan A generates £70m in profit, around 10% of its Net Profit.
  • Philips: 30% of revenues come from Ecovision, with a plan to get this to 12bn Eur by 2015
  • Siemens: 27bn Eur revenues from Energy Efficiency & Renewable Energy products in 2010
  • GE: Ecomagination revenues reached $18bn in 2010, 12% of  GE's total revenues.

Nissan
Expecting rising energy prices to shape car demand, Nissan was the first major car maker to switch its R&D focus to EV's. It recently-launched "Leaf" which travels 100 miles on a £2 charge, and its electric knowledge helped Nissan to win the $1bn New York taxi contract in April. With the market now following Nissan, its Sustainability framework has given it a major strategic advantage.

Your panel
Our panel comes at the subject from a variety of angles, designed to give us a thought-provoking debate.

  • Simon Waldman, author of "Creative Disruption", an excellent book on how the internet disrupted the corporate landscape.
  • John Miles, Chairman of HaloIPT. HaloIPT are working on technology that allows cars to wirelessly recharge batteries whilst driving - the implications for the car industry are profound.
  • John Elkington, Chairman of Volans. A long standing green business guru, John is an expert on the scale of the disruption to come.
  • Tony Gale, Director of Infrastructure GE. Tony will give the perspective from the Corporate side; articulating the scale of change ahead – and how disruptive the future is likely to be.

The event will be chaired by Jim Woods, who has 8 years of CEO experience, including CEO of the YO! Group (YO! Sushi and YOTEL).

Speakers

John Miles Arup Board

See bio

Simon Waldman LOVEFiLM

See bio

Tony Gale GE

See bio
Round Tables

Built Environment

Do sustainable buildings generate higher rents or better occupancy?

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SUMMARY:
Given that a significant proportion of commercial real estate is held by institutional investors how can sustainability issues be placed in context with the financial drivers of holding real estate as an investment?
Is there any evidence that rents increase? Is there any evidence that occupancy increases?

KEY POINTS:
• It was acknowledged that we are in a transitional period in the UK in relation to sustainable buildings and measuring performance. There is anecdotal evidence coming from both the USA and Australia that rents are higher for buildings classified as sustainable.
• However, value is not driven by sustainability. Incentive packages bring down the net value of buildings and therefore in the UK we can not prove statistically the impact of sustainability
• However, is a building more marketable? Without doubt. Therefore, this should mean investors are prepared to pay at lower yields as all things being equal a sustainable building will have a greater chance of being re-let down the line.
• Participants believe that rents have the potential to be higher if there is a tangible benefit to occupying that building, i.e. a saving on service charge.
• However, in other industries there is not a “green premium”, why should anyone pay higher rents for a product that saves them money. You would pay no more for an electric car, so what is different here?
• Most landlords see this as a great way to engage with their tenants, and if they don’t they should.
• However, the marketing for sustainability needs to be different for different people. Investors have different agendas to occupiers. The tenant needs to be convinced that operational cost can be saved and the investor needs to be convinced that the building offers a premium over other stock.
• The point about leases getting shorter in the UK is a moot point as in many other markets such as the USA and Australia there is already a culture of short leases, these however operate more like a licence and not an FRI lease.
• Investors have however started to change what is fundable based on their institutional specifications.
• A sustainable building should attract better quality tenants and therefore value will be driven accordingly
• Regardless of whether rents or occupancy increase sustainability should, and is increasingly being seen, as a proxy for quality and therefore we are simply redefining prime property.
• However, is there a paradigm shift required in the real estate industry? Instead of a rent can landlords start to examine the model of a all charge that differs depending on how the tenant uses the building? i.e less electricity = less “rent”. An example of this is from the hotel industry where a major chain is trailing a similar system for customers staying in hotel rooms. The less utilities you use the less you pay.

CONCLUSION:
* The discussion concluded with a straw poll:
* Do sustainable buildings currently achieve higher rents? No
* Do sustainable buildings have the potential to achieve higher rents? Unanimously Yes
* Do sustainable buildings achieve better occupancy? To a degree

Supply Chain

Using strategic life cycle analysis to identify new market spaces

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SUMMARY
The group examined the conditions required for successful innovation, building on the themes of the plenary session.

KEY POINTS
* The question was asked how do you innovate without demand? There was a perceived need to educate and lead customers to new choices in some industries. A case study was offered whereby the retail and FMCG industry has provided a clear demand signal to the manufacturers of HFC free refrigerators by a joint declaration of commitment to the new technologies through the consumer goods forum. This provides a solid base for investment: http://supermarketnews.com/news/green_pledges_1129/
* It was also suggested that willing customers and capable suppliers are constrained in their ability to innovate by rigid procurement conventions around RFP’s. Some thought this was driven by risk aversion in procurement cultures and required personal bravery to overcome it. It was suggested that these gateways were mainly an issue for new suppliers whereas relationships developed into collaborations where innovation could flourish. Others felt that collaboration was becoming the norm but initially only with strategic suppliers. It was suggested that companies needed to be flexible enough to consider all perspectives of protection/price/ and opportunity when taking procurement decisions. At present price was under significant short term pressure with potentially constraining consequences.
* The group confronted the implications of the plenary that innovation often happens around the edges, and explored whether to remain innovative large companies would therefore need to maintain a high diversity of suppliers and improve their collaborative abilities.

CONCLUSION:
Prove a better Sustainability performance
http://www.centriaperformance.com/education_center/white_papers.aspx
Collaborate to innovate http://www.goldenforsustainability.org/
Align with standards and market movements
http://www.verdantix.com/index.cfm/papers/Products.Details/product_id/60/case-study-better-place-electric-vehicle-system/-

Carbon Strategies

Achieving the low carbon transition; how should we adapt our business model?

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SUMMARY
This month the Carbon Management Strategies table discussed whether the trend toward low carbon transition is real, and how we should respond. We had a great set of participants drawn from many industries; retail, construction, software, government and healthcare.

KEY POINTS:
We all agreed that we were facing pressure to start the low carbon transition. The drivers for change vary between the industries represented, and include:

1) Large customers requiring information and performance improvement from their suppliers
2) Consumers who have a preference for sustainable products (although they’re not prepared to pay more!)
3) Government legislation such as CRC EES, and mandatory reporting.

And, while it’s clear that there is pressure, it is equally clear that there are barriers to achieving the transition and to making business model changes.

To better understand these barriers, we explored the attempts made by retailers to reduce the number of single use carrier bags. This is a particularly difficult challenge as it involves moving from something very convenient, to something less so. Convenience is king.

We identified a number of specific strategies to overcome this barrier;

1) Engage in a campaign to persuade consumers to willingly re-use their bags because it’s the right thing to do (Education)
2) Offer a reward for re-using bags (Carrot)
3) Charge a fee for each single use bag (Stick)
4) Legislate (Choice Deletion)

We also identified some techniques to improve the effectiveness of the Education approach. These techniques are benchmarking and best practice sharing... essentially trying to nudge people toward the behaviours we want.

Having considered the relative effectiveness of the four approaches in terms of changing consumer behaviour, we ranked the approaches as follows;

Choice Deletion -- Stick -- Carrot -- Education
Most effective <-----------------> Least effective

CONCLUSION
In reality, it is often the case that those we’re trying to persuade would not accept some of the more directive approaches. We need to make the best choice for our stakeholder base, but with the knowledge that our choice may be more expensive and less effective

Finance & Corporate Sustainability

How the environment is impacting share prices

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There is a general expectation that companies should doing the ‘right thing’ with respect to sustainability but it is not high profile until things go wrong (e.g. BP Gulf of Mexico incident). Therefore it is an important aspect of any business from the point of view of risk management. However, the profile of sustainability is not high because at present there is no mechanism for accounting for the full external costs of a business. With the introduction of carbon taxes this is changing, albeit very slowly and it will be some time before these taxes fully reflect the full cost of the environmental impacts.

Where sustainability is high profile it is aligned with the key financial goals of the organisation e.g. M&S Plan A has achieved operational cost savings and has created a positive brand image which is important for a retail business; and GSK markets low cost drugs to developing companies which has expanded the market (thus increasing sales) and has earned praise from ethical investors.

Ryanair is an interesting example –sustainability is not a high profile issue yet they are the most environmentally sustainable carrier when measured on an index of CO2 emissions per passenger km due to their high loading factors (they have also been successful in changing behaviour to benefit of the environment since their charging structure encourages passengers to minimise baggage). However, their business model is based around offering the lowest priced fares and promoting sustainability credentials would bring no immediate benefits. However, long term this attitude will expose them to risk given that fuel costs will inevitably rise in the future.

This short term attitude is prevalent in the investment community that demands quick financial returns which is generally inconsistent with the sustainability agenda which is concerned with more long term issues.

There is also a difficulty in understanding and interpreting sustainability indicators – the development of more comprehensive and detailed suite of indicators would not be helpful (investors are confused enough already; local authority pension fund managers were cited as a particular example who are often under resourced and generally do not understand the issues.) A number of sustainability indicators were mentioned e.g. Dow Jones Sustainability Index and FTSE4GOOD but were felt to be too broad and of limited use (note; one participant felt that the Stewardship Code had proved to be very useful and had a positive influence on investors).

A more useful route would be to strengthen company governance structures and establish strong sustainability committees to advise company boards. In terms of incentivising senior managers; achievement of sustainability targets is rarely (if ever) a component of remuneration packages.

SUMMARY
In summary, sustainability is not a key consideration for the majority of investors who are driven by financial returns. Sustainability is only a high profile issue where there is a clear and strong link to short term profitability; generally sustainability is about long term issues. More reporting of sustainability indicators is not the answer and stronger governance combined with the introduction board advisory committees on sustainability was seen as the preferred route.

Communications

What do customers want to know about the Sustainability of your business?

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SUMMARY:
Discussions centred on the expectations of customers with regard to what they expect to know about a company’s Sustainability credentials. We looked at what really interests them in the context of a rapidly changing and disruptive arena.

KEY POINTS:
• Communicating sustainability messages to consumers must be done in a clear and simple manner – it is easier to communicate more complex and detailed messages to business audiences.
• There are positive opportunities for brands that can communicate their sustainability credentials effectively – in terms of brand differentiation, and building trust and loyalty.
• It is important to communicate your credentials – a good “rule of thumb” is to try to keep the perception of your work and the reality at about the same level (don’t inflate or sell yourself short).
• The damage to reputation from a sustainability crisis or scandal is not just about the impact on sales or share price. Although less obvious, the impact on recruitment, staff morale can be just as significant.

CONLCUSION:
• To engage customers effectively, companies need to communicate on issues that are relevant to them. They need to “make it easy” for them, to provide incentives to do the right thing.
• Companies can engage their customers most effectively by making it easy for people, giving them incentives to make more sustainable choices.

Technology

What are the big technologies that will transform the new economy – smart grid, electric cars etc

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SUMMARY:
We explored the behavioural and financial incentives needed to take potentially transformative solutions to scale, within the context of disruptive change for a sustainable future. We focused on three areas, according to the interests of participants: smart grids; education for behaviour change, and new business models.

KEY POINTS:
- There’s a lack of clarity as to how smart grids will develop. Will consumers, and consumers-as-producers, be key? And how far will machine-to-machine interaction play a part? Will the existing grid be overtaken by smart IT solutions?
- Energy storage remains THE big question. We thought about wind bags, vehicle-to-grid and the rise of ultra-efficient batteries. The other ‘big’ question is where the energy will come from in the first place.
- If consumers are to play a role in smart grid management, then it needs to be made easy and attractive for them.
Education for behaviour change: Our starting point was the sentiment that the vast majority of people don’t realise what a mess we’re in.
- People will realise when resources run out, when their purses are hit. But we can’t afford to wait for that to happen.
- Governments must play a role through incentives: a combination of tax, pricing and penalties
- Sustainability should be high on the national curriculum to generate support for such incentives
- The language we use to talk about sustainability to the public is key. We must make it relevant if we’re going to press the right buttons.
- The ‘internet of things’ could be key to raising awareness.

Business models: Our starting point was a discussion of service-based business models, such as the Dow Chemicals leasing scheme.
- Loyalty can be bought through ‘bring it back and upgrade’ models, but can the ‘rebound effect’ (unnecessary waste due to the desire to upgrade) be avoided? What role can technology play in avoiding consumer waste? We talked about upgrade-able hardware.
- Mobile technology opens many doors, helping consumers to access what they need, when they need it.
- Peer-to-peer lending may prove a threat to incumbent business models
- The key is to aim for absolute efficiency: less impact on the planet, despite likely growth in take-up of technologies. Can we decouple economic growth from our draw on resources? What solutions can systems thinking offer? Can fundamental needs (such as proximity to green space) reduce our desire to travel?

Energy Effeciency

A retail study: A move to distributed energy

Corporate Strategies

What can we learn from dot com? Drawing up a business strategy during times of disruptive change

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SUMMARY
Two tables explored this theme, identifying sources of disruptive change for Sustainability as: resource efficiency, population growth, climate change, regulation and transition to emerging economies. Pertinent questions were also raised challenging the theme of Disruptive Change; is business as usual actually a guise for adaptation to change?

KEY POINTS
• Companies noted regulation as being key with weak but discernible consumer signals particularly for ethical supply chain and some evidence for the growth of ethical consumerism. Many of the companies present were therefore operating within a risk and reputation management framework for Sustainability. Sustainability strategies designed to keep the business out of trouble by focusing on ethical supply chain risks and regulatory compliance. There was a clear recognition that ethical supply chains are essential whether or not customers appear to care. The business case particularly in retail for addressing this issue is compelling and is driving significant change across the sector even for new entrants.

• There was agreement that the Sustainability triggers for disruptive change would not be consumer led as convenience and price would continue to be important drivers. However triggers could be created, companies such as Co-op, Marks & Spencer and Unilever through demonstrating Sustainability leadership have raised the bar across their sectors. There is evidence that this has triggered disruptive change in their sectors. The strategy has been to relate key global issues such as resource scarcity, poverty and the environment to consumers buying decisions and provide product options that allow people to make differentiated buying choices that support their values. Lessons can be learnt from dot-com where companies failed to see a new paradigm and let their competitors shine.

• Regulation also provides disruptive change by costing external factors such as environment or ethics e.g. bribery, thus changing the economics of business as usual. This is having a significant impact in the regulated utilities sector as significant climate change and energy efficiency strategies have been driven by regulation.

• Looking at a “set in stone” industry, the built environment is conditioned to resist revolution in the face of disruptive change. An industry more concerned with risk management, confused by endless proposals and tinkering to regulations.

CONCLUSION
Sustainability is already changing business strategies across a number of different sectors. The drivers for the pace of change are uneven: there are discernible consumer signals but still weak, there are clear regulatory drivers but some sectors are more impacted than others, there are supply chain pressures but enforcement is patchy. The direction of travel for Sustainability is evident in the global economy but leadership by business and government remain crucial. Companies should look at taking incremental steps to challenge what your business is, and what opportunities can be created.

Energy Policy & Strategy

The Green Deal – what are the new business opportunities, and who is likely to win?

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SUMMARY
DECC has put forward proposals for the ‘Green Deal’ a new policy aiming to promote the uptake of energy efficiency measures in homes, and also business. This roundtable considered which measures the scheme would cover, whether householders would engage with it and the response of different businesses to the proposals. Following the discussion of creative disruption during the plenary session, we discussed whether the scheme will create a shift in business strategies and individuals’ attitudes.

KEY POINTS
• Which technologies will be funded – building fabric measures or e.g. renewables too? The latter may be more engaging for homeowners - insulation is seen as ‘sensible, but boring’. Yet the former are the first step for many existing dwellings in the UK; compared to best in class new build like Passivhaus, there is work to be done on the existing stock’s energy efficiency.
• The scheme’s ‘golden rule’ states that the value of savings installed must be greater than their cost over their lifetime. It might be possible for Green Deal providers to offer a package of different energy saving measures in order to meet this.
• Does the scheme do enough to make energy efficiency ‘exciting’? Some of the trials proposed (e.g. loft clearance) that address factors in addition to cost sound interesting. Perhaps community schemes e.g. that create a competitive environment online or pay for streetlighting through the savings could help keep people interested.
• The data behind the outcomes is important and the Green Deal is therefore linked to the roll out of smart meters. Will householders know how much they are saving? Can we benchmark what they use? Might they start to use more energy for other things?
• Individuals will want firm details on the costs and expenditure possible. How will the financial side work for tenants and landlords? Is there scope for and energy performance contract (EPC) model in the domestic sector or is that too complex?

CONCLUSION
• Energy suppliers are expected to play a key role in the Green Deal; whether particular companies see it as an obligation or an opportunity depends on where energy services sit in the individual company’s strategy.
• The scheme could be a useful tool for Local Authorities and registered social landlords who have sufficient buying power to reduce the costs of equipment (similar to where their scale has been applied to reduce the unit costs of solar panels).
• Raising awareness and understanding of the Green Deal will be important. Which companies will people trust to tell them about it? The ready availability of information on the internet reduces the potential for greenwash. Winners might include those that develop innovative ways to engage customers and demonstrate how much energy they save.

Venue Detail

Bank of America Merrill Lynch: King Edward Hall

King Edward Hall | 2 King Edward Street | London | EC1A 1HQ

Directions

Bank of America's offices are a very short walk from St Paul's tube station (Central Line). Exit the station at Cheapside/Newgate Street. Go past the BT centre, with it on your right-hand side and take the first available right down Edward Street. Continue down this road for 80m and the entrance to the venue is on your left-hand side.

Do not go to the main reception desk at their offices when you arrive. You are looking for an entrance that leads you directly into the King Edward Hall.