Environmental shift: which innovation strategy for your sector?
Climate change and environmental shift are becoming one of the most discussed topics in the business world. Yet, unlike past shifts and transitions, the impact and urgency of the situation is no longer just business-based.The challenges caused by environmental and climate degradation have been scientifically proven to be crucial to the survival of not only businesses, but our societies and humanity as a whole.
Bigger challenges require solutions of a grander scale
When being confronted with challenges of such grandeur, we are being asked to solve problems on a different scale. The environmental shift, therefore, is not the job of some innovative companies alone. It must be examined and studied on a sectoral level, first because regulatory objectives are often defined at this level. Most importantly, because profound changes require the involvement of the entire value chain of a sector - from outsourcing, manufacturing process, anticipation of product’s end-life, business model evolution etc. These changes can only be achieved by breakthrough innovations - which allow the reinvention of historical products, services and processes.
Different sectors, however, are not facing the same level of urgency as well as the diversity of innovation options when it comes to the environmental shift. Therefore they do not face the same challenges: the Oil and Gas industry is facing problems with a degree of urgency and complexity different from those of the Automobile or Food & Beverage industry.
In this article, we will address the challenges & bottlenecks faced by different categories of industries, based on the urgency to which a sector must respond to the environmental shift and on the availability of innovation options that they have come up with. We categorise these situations into 4 different zones: the Anticipation Zone, the Hazard Ahead, the Chaos Zone and the End Zone.
These different situations generate different needs. Therefore, we propose secondly, a set of innovation options to respond to the situation faced by a sector, including different innovation strategies (exploring, mapping, deciding, accelerating) and innovation mindsets (Derisker, Performer, Differentiator, Game-Changer).
The End Zone- Build the way out as fast as possible
The situation faced by the Oil and Gas industry, for example, can be considered in the End Zone, where there is an absolute urgency to come up with transformative business & technological offers. Yet, there are not many viable options due to the inherent dependence of this sector on fossil fuels across their value chain. How should they make the switch towards different activities? Do too many changes create completely different businesses with completely new assets and know-how, or is it possible to leverage existing ones?
Being in the most dire situation of all, the stakes for companies in this situation are extremely high, but not impossible to overcome. In order to progress, one must put the invention activity back to the center, since only radically new business models and offers can help open new pathways to survive the situation.
It is worth noting that, despite the high level of urgency, one should make sure to have an exhaustive overview of all existing options. Jumping straight away on the first seemingly “good enough” idea is risking investing energy and resources on less-optimal options, which will lead one to a dead-end.
One remarkable example in the situation of End Zone is DONG Energy - now Ørsted, initially an oil and gas company in Denmark. In 2009, around the time the COP15 was hosted by Copenhagen, Ørsted prepared a strategy called "85/15 vision" - shifting from 85% of their fossil fuel-based activities to a 85% renewable energy base. The chosen new core business is their minor offshore wind activity. To raise capital, Ørsted sold eight of their historical businesses - including all gas companies, hydro and waste-fired plants, as well as issuing debts. In parallel, through strategic acquisitions as well as quick tests and implementation of a “cost-out” program allowing a 60% cost reduction of offshore wind, the company was able to scale up their new core business incredibly fast. In only 10 years, they became the world’s largest offshore wind company, with 88% of their produced energy being renewable. Its finances benefited greatly from this shift as well, coming from a deficit of 1,6 billion euros in 2012 to a stock valuation of 56 billion dollars in 2020.
The mindset needed to power this fast shift is that of a Game-Changer, whose mindset aims at designing a radically new model that fundamentally transforms the business and orchestrating ecosystem transformation. As the ambition is high, this work must be done by the joint force of the whole company - from strategy teams (COMEX, Strategy…) to operational teams (Innovation, R&D, Marketing…).
The Anticipation Zone - Identify your future playgrounds
The opposite of the End Zone, companies in this situation do share a desire to take a stand in the environmental shift. Yet, due to the lack of urgency and hence viable options, they struggle to balance between communication and concrete actions and risk being trapped in a winless “greenwashing” race.
To get out of this race, it is often the responsibility of the Strategy, Innovation, Marketing or CSR director to identify the ambition of the company towards the environmental shift. This can be done by closely monitoring potential disruptions that could put it at risk in mid and long-term, and by exploring new playgrounds to create key future offers.
An interesting example in this situation is Kering, a French-based multinational corporation specialised in luxury goods. Since 2015, the Group has prepared a 2025 Sustainability Strategy, with the reasoning that any paradigm shift will take time, and a 10-year exploration and development will allow them to create compelling playgrounds. The strategy includes: a commitment to reduce raw materials’ environmental footprint by the initiative Environmental Profit and Losses accounts (EP&Ls); an effort to explore technological breakthrough innovations by investing in R&D with universities, and most importantly, an effort to design new business models driven by breakthrough innovations. The aim is two-fold: to reduce their environmental footprint by 40% across the entire supply chain by 2025 and to lead the industry standards and secure their leader position.
This is the position of what we call a Derisker, where one must obtain a very good understanding of the upcoming transformations and their potential impacts on its ecosystem, in order to carry out an effective technological and trend watch. This extensive understanding also allows one to detect as early as possible the weak signals - consumer awareness, changes in regulations, positioning of new players etc. - which would indicate an exit of the whole sector from the Anticipation Zone to a more pressing situation.
The Hazard Ahead - Take down your invisible wall
In the Hazard Ahead, there is not yet an immediate urgency but not yet viable options. This case can be applied to the situation of the Packaging or Manufacturing sector, where the regulations to reduce their environmental impact are on the way to arrive in mid-term. To keep up with the increasingly ambitious environmental performance objectives, their R&D and Innovation departments have long been developing solutions, but are facing what we call “the invisible wall of R&D”. This happens when we keep optimising incrementally a product or service or process throughout the years. Yet, the more we advance, the lower the optimization gains, until we exhaust all possibilities of significant optimisation.
To break this wall and obtain another high level of optimisation, disruptive innovation is the only solution. Meanwhile, as the development of new disruptive systems often takes years, the design of radically new options must be started now, or actors in this situation risk not meeting upcoming regulatory constraints imposed by the Government and other regulatory bodies.
This work is advised to be assigned to Innovation, R&D and Strategy directors, who are at the forefront to observe future’s disruptions. That being said, before this reinvention effort, one must assure that everyone in the company understands that a collective effort is required, and therefore prepare adapted organisational models to put these breakthroughs on the market as fast as possible.
This was the situation of Turbomeca (now Safran Helicopter Engine) in 2008. Driven by European Objectives to reduce Greenhouse Gas Emissions, the CEO then set a target of reducing the fuel consumption of its turbines by 35% by 2030, initially criticised as an unattainable target as "beyond the laws of thermodynamics”. Despite strong internal reluctance, he launched the “Propulsion 2030” program, piloted with the C-K Method, involved more than 30 experts over the period of 6 months and gave rise to a “commando team” of innovators. As early as 2009, the exploration phase led to the emergence of concepts with promising potential, varying from 12% upto 40% of reduction in fuel consumption.
A mindset to adopt in this situation is that of a Performer, who develops and implements cutting-edge technologies that drastically improve the performance of their core activities. They do this by assessing the potential options in a fast test-and-learn cycle and creating suitable landing zones for the most viable options based on their singularities.
The Chaos Zone - Decide and accelerate the most valuable path
In the opposite situation from the Hazard Zone is the Chaos Zone, which is characterised both by the urgency and the confusing abundance of options. The Automobile industry can be one of the examples in this zone. There is an immediate urgency while there exists lots of different viable options. Actors in this industry are juggling a wide range of technological topics: while electrical vehicles seem unavoidable, plug-in hybrid, natural gas, hydrogen and fuel cells are tempting nonetheless. As these options are based on very different technologies and infrastructure, companies cannot invest in all of these directions at the same time. On the other hand, the answer might also lie in a shift of business models, such as car-sharing, mobility-as-a-service or car-on-demand. It is not an easy task to know which should be the right direction to invest in, or if they are still missing out on more disruptive ideas.
Actors in this zone find themselves having many projects at hand to invest in without a global vision, while constantly afraid of missing out. The situation is delicate because while it is not advised to put all eggs into one basket, it is impossible to invest in everything at the same time. To get out of this situation, it is necessary for the Innovation, R&D and Strategy directors to map all the existing options to date, test their viability as quickly and economically as possible and then select few most valuable paths, according to their company’s ambition and positioning.
Coming back to the example in the Automotive industry. As individual vehicles represent 60,7% of all C02 emissions in transport in Europe, automotive companies are under pressure to abandon combustion engine vehicles and quickly develop new alternatives out of many technological and business model choices at hand. So far, safe bets are being made in this sector. For example, Toyota continues their hybrid fleet, while investing in electric vehicles with batteries, rechargeable hybrids and hydrogen. Meanwhile, Volvo took a step further and made an announcement in March 2020 to go fully electric by 2030, while phasing out hybrids and not investing in hydrogen fuel cells.
Looking back at the recent history of this sector, one can find inspirations with the example of Tesla, who paved the way for electric vehicles and Uber, who created the most successful car-on-demand platform. A common trait of these two companies is a clear and innovative value proposition, which allows rapid scale-up to take the lead in the playground they created. Can the same stories be replicated in the case of established automotive companies?
To be able to get out of this Chaos Zone, the mindset of a Differenciator is much needed, whose focus is to position itself in a new value chain or an emerging ecosystem. Rapid development and industrialisation is also a driving force behind this strategy, obtained by leveraging their current assets in order to quickly launch high-visibility innovations.
Conclusion
Despite the increasing efforts, we are only in the beginning of an exhaustive and long-haul transition towards a more sustainable future. As proven in previous periods of human history, innovations and mindset leap are what needed to shift the status-quo. To replace the short-term and fragmented vision in which our industries have been operating since the 19th century, industries must aim at creating breakthroughs - a leap - towards a more long-term and holistic change that our time calls for.
This starts first with a clear understanding of where your sector and your company is located and precisely how the environmental shift is affecting the future of your business. In a second time, comes the effort to adopt the right ambition mindset and most importantly, deploy focused actions to bring about breakthrough innovations to meet environmental objectives in the fastest way possible.