This article first appeared on Paris Innovation Review, an online-only magazine inviting authors combining business and academic expertise to guide decision-makers around the world. Paris Innovation Review’s articles reflect independent thinking and rigorous analysis.
A significant part of the debates at the Davos 2019 forum focused on the role of business in society. Five profound societal changes are underway and will shake up business. Understanding these changes and their implications can help companies fuel innovation capacity and create value for customers and other stakeholders.
1. The meaning and purpose of products and services increasingly determines performance
Take the example of the energy sector: a pioneer of new technologies, capable for decades of attracting the best engineers. The energy sector plays a key role in the geopolitical affairs of any country and will be central to our societies’ efforts to secure a sustainable future. Yet the sector faces increasing criticism: oil and gas are responsible for high carbon emissions and pollution, while nuclear has been rejected in many countries following the Fukushima disaster. Societies are simultaneously becoming ever more energy-intensive and increasingly concerned with decarbonization. Is the energy sector part of the problem or part of the solution?
For more and more employees, including the most highly-qualified, loyalty to a company is no longer a given. This comes at a time of unbridled competition, when quality of service can create customer loyalty and margin around products. The question of employee engagement is therefore paramount.
The energy sector achieves low margins on its finished products (the retail sale of energy in all its forms). The ability of a company’s management to give a strong societal meaning to its business – “being part of the carbon-free energy transition rather than being part of the problem” – is crucial.
For other industries, the quality of the customer experience can give meaning to a job that is generally perceived as a relationship. In this case, customer satisfaction refers to that of the employee as well as that of the customer, both of whom enjoy a “job well done.” The exchange is not limited to a disembodied transaction quantified in a price. This point is crucial in the service industry but also applies increasingly to the industrial sector, where a service aspect is more and more present.
Once it is linked to the meaning of work, the customer experience can become a key competitive advantage. This notion has important consequences. Any company that identifies the customer experience as a key lever for building loyalty and creating value must develop a social contract linking the company’s activity to its societal ecosystem (employees, partners, customers), clarifying how its products and services present a benefit to society.
2. The environmental (and above all climate related) situation is exerting exponential pressure on business
In 2018, Starbucks – the leader in take-away coffee – made a revolutionary decision for an industry characterized by both low margins and low customer loyalty: to charge for the plastic packaging of a take-away coffee. In theory, this decision makes the product less attractive. It also constitutes an effort to include in the price of the product the environmental cost of the production and disposal of plastic packaging that is closely linked to the company’s business model. The decision therefore highlights a major societal shift: pressure to act for the environment has become so intense that companies are choosing to adapt to or even anticipate it rather than face it.
Regulation on environmental (and above all climatic) issues has been exponentially tightening for the last twenty-five years. Increasingly, we see a systemic mobilization of a range of actors – civil society, investors, lawyers, economic leaders, cities and regions –to encourage companies to decarbonize their activities and safeguard biodiversity.
Energy companies are on the front line. However, Starbucks’ initiative illustrates a much broader domino effect, progressively impacting actors within every industry and sector. Questions around climate change and energy raise corresponding questions around carbon budgets. All economic actors may face increasing demands to limit fossil fuel use to essential operations. From this perspective, the twentieth century’s predilection for plastic packaging suddenly looks out of date and irresponsible. Consumer expectations are increasingly aligned with this point of view.
More broadly, this exponential environmental pressure on businesses will play out not just in relation to the major themes mentioned above (energy transition, pollution) and not just from a regulatory standpoint. This is becoming a systemic pressure, manifesting in news forms that are not always readily identifiable because they relate to diverse challenges: water usage, biodiversity loss, circular economy, and public health issues currently beyond the scope of regulation. The issue of plastic is a good example. For some companies, this plays out in relation to the company’s carbon footprint. However, there are broader ramifications that companies must consider: for instance, how micropollutants are increasingly affecting human health.
Environmental pressure is exponential and cross-cutting; companies may find themselves facing the issue without having seen it coming. If companies fail to anticipate the questions by asking them internally, they risk having to answer more aggressive questions from external stakeholders. Redesigning production and services to place climate and environmental issues at the heart of these processes is becoming a necessity to remain competitive, to create value, and to reengage your economic partners.
3. Growing social inequalities demand greater business involvement on inclusive growth
The issue of inequality is not just impacting global trade but undermining large developed countries, who are faced with a return of inequalities that can have devastating effects on their institutions and economies.
The Rana Plaza tragedy confronted textile brands with the raw reality of a globalized economic model that takes maximum risks to ensure the lowest costs, even though this very model is increasingly unprofitable. In an international context of growing inequality, identified as a major factor of geopolitical instability threatening even the most established democracies, the Osaka G20 in 2019 will no doubt remind leaders again of the need to create the macroeconomic conditions for growth to become more inclusive.
Business—the undisputed motor of wealth creation—is in the eye of the storm. Certain practices are suddenly becoming controversial or undesirable: tax optimization, the constant hunt for cheaper production in the face of incessant competition, and the lack of visible long-term benefits for individual countries from private-sector growth.
The expectations raised by inclusive growth issues invite decision-makers to take a fresh look at their companies.
Companies bound up in the globalized economy are therefore facing major dilemmas that call into question the fundamentals of existing economic models in a rapidly changing world. For these companies, a new model with the capacity to share wealth along the value chain must include several components: decent wages, access to products and services for the most vulnerable, job creation, wealth sharing with economic partners, tax collection and contributions deemed fair by the parties, and so on.
The expectations raised by inclusive growth issues invite decision-makers to take a fresh look at their companies. Companies are being asked to move from a short-term cost model to a longer-term competitiveness based on the ability to become a driver of economic development for the entire ecosystem. They have the opportunity to find competitive advantages by identifying new markets within this model; to understand and manage the true costs of production by factoring in all external costs; and to develop into a leader within the ecosystem, becoming a point of reference for others and a trusted partner.
4. The digital revolution is a game changer for wealth distribution across geographies and among economic actors
The mobile phone is a very concrete illustration of what is currently at stake. The money that customers pay to use a mobile phone mainly profits the company that gives its name to the device (Apple, etc.) and the ISP that provide users with data exchanges. But the services themselves are much less profitable: two-thirds of Android developers are considered below the poverty line. Yet these developers create a large part of the value offered by the phone to the customer: information, networks, proximity tools, games. The value as perceived by customers is not reflected in the wealth distribution generated by their transactions. And the geographies in which wealth is collected are very different from the geographies in which the transactions take place.
This highlights how the ongoing digital revolution is a game changer for most social and trade models established after the Second World War. It also calls for a radical overhaul of fiscal models, if only to identify a tax base consistent with globalized value chains. Tax systems and redistributive mechanisms must also be redesigned: they currently focus on company employees, yet the number of self-employed workers is increasing significantly. The recent Digital Tax discussion led by OECD in early 2019 is illustrative of the transformation of tax systems underway and shaping different decisions driving tax optimization – in context where Yellow Vest Movement in France and other similar movements across the Globe are indeed strongly challenging tax optimization as well.
In response, companies must find the best possible compromise between, on the one hand, innovating to reach and satisfy customers by investing more and more in digital channels and, on the other hand, finding business models capable of capturing the value produced by these innovations, showing greater inclusion in the way they are sharing value with their employees, value chains and communities from where they operate.
These dynamics are fascinating as they encourage companies to actively integrate the aforementioned societal changes along the three axes of the meaning and purpose of products, exponential environmental pressure and demand for more inclusive growth. For example, various studies show how offshoring in low-cost markets is being seriously questioned today. These studies suggest that relocation models can strengthen competitiveness and the capacity to create value and maximize margins. One of the major contributing factors for this reversal is the awareness of a loss of skills on the design side, which happens when the link with production is broken. Knowing your industrial tools is also a factor of innovation.
These societal changes also invite companies and governments to find new ways of cooperating: in particular, business and the state must work with each other to adapt to today’s three major challenges: the environment (energy transition), work (employment), and society (e.g. providing social security and health care, including to the most vulnerable, in a context of strong social tensions that are bad for both business and political stability). Tax and redistribution are obvious levers to enable governments and business to adapt. Tax optimization and the fiscal warfare between nations have a major consequence: the loss of wealth available at a macroeconomic level to allow business and society to adapt to microeconomic dynamics.
5. The complexity of these societal changes necessitates new governance models for business
How can the implications of these complex societal changes be integrated in companies’ strategies and decision-making? How can companies ensure better coordination between internal stakeholders, decipher the implications of current societal changes, take consensual decisions, and launch relevant concerted actions?
A best-case scenario is a race to the top. The current game will create winners and losers; companies that do not equip themselves to manage the coming challenges and seize the opportunities will fall behind.
A more modest argument for less ambitious companies is that they should create safeguards and governance to manage growing risks. A topic like Artificial Intelligence, for example, raises many questions around commercial applications that rely on algorithms whose underlying mathematical theories are ultimately poorly understood. How should topics be prioritized? How can companies ensure they have the required internal expertise and coordinate effectively? What ethical or environmental consequences, for example, should be considered? And what are the legal, commercial, and reputational implications?
In all domains, these looming societal changes are being widely debated because for company executives, they have enormous financial, societal, and potentially legal consequences. It is not by chance, and certainly not for ethical or image-related reasons, that the Davos summits are increasingly focusing on environmental and social issues. This is an emergency. In France, the Notat-Senard report opens the door to renewing the very principles of governance, inviting a formal, methodological and documented analysis of the environmental and social implications of decisions. In the United States, Mark Zuckerberg has just lost more than 50 billion dollars on the stock market after stubbornly failing to recognize these societal changes and their implications. The societal changes presented in this article will not be new to anyone, but their recent acceleration and the magnitude of their impact may surprise us.
Author of several books and resources on business, sustainability and responsibility. Working with top decision makers pursuing transformational changes for their organizations, leaders and industries. Working with executives improving resilience and competitiveness of their company and products given their climate and human right business agendas. Connect with Farid Baddache on Twitter at @Fbaddache.