Corporate leaders can be forgiven for not thinking too far ahead. The length of time that investors hold stock has fallen. Share-holders want fast rewards—and quick fixes when performance flags. Moreover, given the upheavals and macroeconomic uncertainties of the past decade, many CEOs and CFOs have been preoccupied with firefighting.
Companies that are looking only as far ahead as the horizon risk falling victim to long-term challenges resulting from economic, social and technological change. In five years Nokia went from mobile-telecom market leader to also-ran before being acquired by Microsoft; Sears Roebuck has fallen steadily down the Fortune 500 list because it has failed to adapt to changing consumer habits. Pierre Nanterme, chairman and CEO of Accenture, points out that “digital is the main reason just over half of the companies on the Fortune 500 have disappeared since the year 2000.”
And digitization is just one long-term challenge. Others include terrorism, global warming and changing human physiology, as well as other technologies, such as robots. Some must be addressed primarily by governments, but all have profound implications for corporates: They could overturn business models, destroy existing competitive advantages and erode consumer bases. As Dean Dalla Valle, chief commercial officer at mining firm BHP Billiton, notes about the impact of climate change: “Companies in all sectors will… need to find new ways of working.” His words apply to every kind of business risk.
Dealing With Terrorism
Terrorism is a defining issue of our time. The Institute for Economics and Peace’s 2015 Global Terrorism Index, shows that deaths from terrorism increased 80% in 2014—the largest increase ever recorded—to a record high. Terrorism cost the global economy an all-time high of $52.9 billion in 2014, according to the report.
For firms such as security consultants, increases in perceived risk are good for business; each attack also boosts demand for the airport scanning equipment made by companies like L-3 Communications. For other companies, the prevalence of terrorism requires a change in mind-set: Corporate security must be treated as a core management priority rather than a peripheral concern.
Companies at risk must adopt long-term strategies to mitigate the risk of terrorism. Business continuity planning is critical. Post-9/11, every Wall Street bank now has detailed arrangements to relocate staff as well as geographically remote real-time data backup. For companies that produce a physical product, supply chain resilience is similarly important (although it may take longer to implement) and may be achieved by using suppliers in different locations, according to research by Andreas Akratas of the Institute of Management Specialists. Important too, notes Akratas, is developing long-term cooperative relationships with governments, so they can access intelligence about imminent threats and react accordingly.
Resilience is about more than preparedness, however. Diversification is also crucial. Not all companies can easily diversify: Smaller firms may have a single office, for example. But for larger companies (which are more at risk from disruption caused by terrorism), diversification is essential.
In February, travel firm TUI Group, which has a turnover of €20 billion ($22 billion) a year, reported a 40% fall in bookings to Turkey following a series of attacks by ISIS. Diversification was the company’s salvation. “[Our] scale business model … means that we have been able to act quickly to remix capacity to alternative, profitable destinations,” says Friedrich Joussen, CEO. Similarly, when a terrorist attack killed 40 gas workers in Algeria in January 2013, BP’s share price was notably less impacted than that of its partner Statoil, partly because of BP’s greater diversification. Indeed, despite the incident, BP increased shareholder value through a buyback and dividend increase
that year.
Accommodating Global Warming
The economic implications of climate change are stark. A Citi report, published in August 2015, estimates a cumulative 0.7% to 2.5% of global GDP—or $44 trillion—could be lost because of climate change by 2060. This threat has prompted governments to act. In December 2015, more than 190 countries signed the COP21 agreement in Paris to limit average global warming to 2°C (3.6°F) above pre-industrial levels. It has been hailed by some as ending the fossil fuel era.
Global warming affects companies in many ways. It might discourage housing developers from building on floodplains because of increased risks. Equally, it might offer opportunities for companies tackling climate change through bio-engineering (using algal blooms to absorb greenhouse gases, for example) or for firms like Monsanto, which makes genetically modified seeds that can withstand a harsher climate. Melting ice at the North Pole is opening up quicker shipping routes between Asia and Western Europe.
However, governments’ responses to climate change—such as COP21—could cripple firms with high carbon emissions. They must work out how to create value in a carbon-constrained world. In September 2015, BHP Billiton did just that. It modeled the implications for the company of a requirement for emissions to decline to levels consistent with a so-called “2°C world” after 2030 and also looked at a number of alternative scenarios based on divergent ranges in global growth and trade, geopolitics, technological innovation and responses to climate change. The goal was to test BHP Billiton’s portfolio and investment resilience. “By sharing our analysis of BHP Billiton’s portfolio in a 2°C world, we believe investors will be able to decide how well BHP Billiton is equipped to manage climate risk,” says Dalla Valle.
To ensure its success in various scenarios, BHP Billiton is reducing its emissions, improving its energy efficiency, investing in low-emissions technologies and supporting market mechanisms that provide financial incentives for emissions reductions and sustainable development. Still, its portfolio management skills are what will ensure future profitability, according to Dalla Valle. “As the energy mix changes, copper, gas and uranium could see stronger demand than otherwise would have been the case,” he notes. “Measures to reduce emissions in steel manufacturing could also increase prices for the company’s higher-quality iron ore. Together these factors would help offset weaker demand, lower prices or higher costs in other areas of our portfolio, such as energy coal.”
Tackling Health Crises
Globalization, urbanization and increasing prosperity are creating human health time bombs. People are crowding into smaller areas but traveling more, facilitating the spread of viruses such as Zika, while intensified farming practices have exacerbated the impact of SARS and other infectious diseases. Meanwhile, improvements in medicine and living standards are lengthening lifespans, creating challenges for society.
These developments present vast opportunities for companies such as healthcare providers. They can also have a silver lining for other firms. Initiatives such as the STEM (science, technology, engineering and mathematics) Re-Entry Task Force, by the Society of Women Engineers, are helping to put skilled older workers back into the workforce, potentially boosting productivity, with pilot “mature” internships at IBM, Intel, General Motors and other firms.
As with global warming, it is often government responses to disease and changing human physiology that pose the greatest challenges for companies. For example, according to the World Health Organization, 39% of adults worldwide were overweight and 13% were obese in 2014. Governments are concerned about healthcare costs associated with obesity and the negative implications for long-term growth via productivity losses, according to research on sugar consumption published by Morgan Stanley in March 2015.
Over half of the companies on the Fortune 500 have disappeared since the year 2000.
—Pierre Nanterme, chairman and CEO of Accenture
As a result, many countries are now considering following the example of Mexico, a country with extremely high levels of obesity and diabetes. Mexico imposed a 10% tax on sugar-sweetened beverages in January 2014 in a bid to induce healthier drinking. Some food and beverage producers fear that their products will be penalized, causing demand to slump: Mexico’s soda consumption fell by 12% in the year after the tax was introduced.
In his blog, Jon Woods, general manager of Coca-Cola Great Britain and Ireland, acknowledges that obesity is a serious problem that must be urgently addressed and that “there are debates about whether a tax is the answer.” However, he emphasizes the role of physical activity and the importance of choice in tackling obesity “rather than adding to the cost of a weekly shop[ping trip] and hitting people’s wallets.”
Coca-Cola has adopted a multifaceted strategy to address the threat to its business posed by obesity (and a potential sugar tax). Part of the strategy is conspicuously opting to do the right thing: The company has signed on, for example, to the UK government’s voluntary color-coded labeling scheme to help people make an informed decision.
But Coca-Cola is also adapting its product mix. “Already 43% of the cola we sell is sugar free,” says Woods. “By 2020 we’re aiming for 50% to be lower- or no-calorie.” Industry observers believe that this strategy, as well as the reduction of sugar and calories in other sodas and increased marketing of waters, juices and other no- or low-sugar options, should benefit the company, however the obesity debate evolves. It will help beverage producers demonstrate they are acting responsibly and could head off a sugar tax; alternatively it will position them advantageously by building low- or no-sugar brands that will benefit from the imposition of such a tax.
Coming To Terms With Technology
According to some observers, we are entering a fourth industrial revolution, which will draw on artificial intelligence, autonomous vehicles, biotechnology, energy storage, the Internet of Things, materials science, nanotechnology, robotics, quantum computing and 3-D printing. This revolution, which was the focus of this year’s World Economic Forum in Davos, will change society.
Technology will enhance consumers’ lives in myriad ways but might also result in social upheaval. Two-thirds of jobs in developing countries—and 50% to 60% of jobs in the US and Europe—could be at risk from automation in coming decades, according to the World Bank’s Development Report 2016. Governments will have to ensure that change is carefully managed and citizens have the skills to find alternative employment (not least so they can continue to pay tax and drive consumer demand).
For companies, technology is also disruptive. DVD rental chain Blockbuster’s failure to buy Netflix and its subsequent demise are legendary. Protests by taxi drivers across the world highlight the threat posed by sharing economy apps such as Uber (as well as the new employment opportunities for thousands of people). A paper on the sharing economy by Georgios Zervas, from the School of Management, and Davide Proserpio and John Byers, from the computer science department, at Boston University estimates that in Austin, Texas, where Airbnb supply is highest, hotel revenue has fallen 10%.
Other traditional industries, such as logistics, are already being transformed by new technology. To ensure its market position is not threatened, one of the sector’s largest firms, Deutsche Post DHL Group, has opened innovation centers in Germany and Singapore to collaborate with customers, experts and academics on new solutions. “The DHL Trend Research team continuously analyzes and identifies new developments and their potential impact on the logistics industry along the entire value chain,” explains Bill Meahl, chief commercial officer.
So far DHL’s endeavors have produced a Parcelcopter drone delivery service, a robot that can independently unload loose parcels from containers, and other robots that can collect parcels and place them on autonomous vehicles for delivery to another part of a warehouse. Augmented-reality smart glasses are also being tested for warehouse order picking. More prosaically, DHL is investigating adjacent markets to seek new opportunities. Its analysis has prompted it to create ADAC Postbus—a Germany-wide bus network—as a first step into the mobility segment.
Face The Future
There are encouraging signs that companies’ horizons are broadening. Fifty-eight percent of respondents to PwC’s 2015 Annual Corporate Directors Survey of 783 public-company directors had a time horizon of more than five years, compared with 48% in 2011. Only 39% of directors said they had a one-to-three-year time horizon, compared with 52% in 2011. Corporates need to capitalize on this changing mind-set: Complacency about long-term threats is not an option. They must find suitable acquisition targets or new markets or adopt new technology if they are to thrive—while not losing sight of their core expertise.
A recent string of acquisitions by global snack company Mondelz of health food companies, such as allergen-free producer Enjoy Life Foods, seems to have got the balance right. The targets have a differentiated business (that adds operational resilience) but will benefit from the acquirer’s expertise and scale. Similarly, once-troubled businesses such as UK catalogue shopping firm Argos have leapt into the e-commerce vanguard by developing sophisticated logistics capabilities. Change is tricky. But given the alternative—potential extinction—it must be pursued.
