The Cornerstones of Sustainable Business Development

Why was this report created? Economy develops in cycles, and try as it might, economics has not yet found an effective remedy for this phenomenon.

This is because we search for ways to avoid crises in the world of rational behaviours, whereas investors often take unreasonable decisions and markets are rarely effective. Cyclical development is the nightmare of every business, as it comes with unused production assets and losses at the time of economic downturn, and with lost opportunities due to insufficient production capacity during market booms. As cycles cannot be avoided, different measures are used to strengthen companies’ resilience to crisis shocks. In a long time horizon, these efforts are focused on new markets and new products, and in the short run – on maintaining an appropriate liquid assets buffer. Companies pursuing diversification strategies spend substantial amounts of money on research and development, not knowing when or to what extent they can expect a return on their investment.
Meanwhile, liquid assets generate lower profits than physical assets. Seeing as a reduction in R&D spending and partial violation of the security buffer (as no crisis looms near) bring an immediate benefit in the form of higher profits, companies may be tempted to go down this path. Few managers are willing to sacrifice current profits for the sake of the greater future benefit of protecting the company against economic downturn effects or even bankruptcy (should a crisis erupt). It is hard to blame them, as the human mind has an innate tendency to respond more strongly to current stimuli (real threat) rather than distant risks (potential danger).

Vision for development

This is because we search for ways to avoid crises in the world of rational behaviours, whereas investors often take unreasonable decisions and markets are rarely effective. Cyclical development is the nightmare of every business, as it comes with unused production assets and losses at the time of economic downturn, and with lost opportunities due to insufficient production capacity during market booms. As cycles cannot be avoided, different measures are used to strengthen companies’ resilience to crisis shocks. In a long time horizon, these efforts are focused on new markets and new products, and in the short run – on maintaining an appropriate liquid assets buffer. Companies pursuing diversification strategies spend substantial amounts of money on research and development, not knowing when or to what extent they can expect a return on their investment.
Meanwhile, liquid assets generate lower profits than physical assets. Seeing as a reduction in R&D spending and partial violation of the security buffer (as no crisis looms near) bring an immediate benefit in the form of higher profits, companies may be tempted to go down this path. Few managers are willing to sacrifice current profits for the sake of the greater future benefit of protecting the company against economic downturn effects or even bankruptcy (should a crisis erupt). It is hard to blame them, as the human mind has an innate tendency to respond more strongly to current stimuli (real threat) rather than distant risks (potential danger).

Vision for development

Representatives of business, administrative and scientific circles have been debating on the dominance of short-term actions over long-term thinking (vision for development) in companies since the Great Depression of 1929. Back then, it was believed that the crisis had been caused by rapid economic transformations and the short-term perspective of entrepreneurs and financial institutions alike, which had neglected the symptoms of an upcoming financial storm. The topic of resilient business strategies was revisited after the global financial crisis of 2008. Today, there is an emphasis on securing business models that do not take potential crises into account against their unexpected occurrence. Therefore, corporate risk management strategies are focused on financial aspects, and current ownership structures transfer a substantial part of that risk to financial intermediaries. Instruments enhancing company resilience to (financial) shocks fall outside of their business models.
The current pace of economic, political and social changes is much faster than before the 2008/2009 crisis and the problem of finding resilient business strategies has gained a new meaning. Apart from unpredictable events, such as market collapse, companies must prepare for confrontation with the inevitable effects of demographic, social and economic processes, of which much can be said. The global population growth and the Fourth Industrial Revolution have pushed the rate of social and technological changes to a level where the current business models can no longer be continued.
Today, companies are generally aware of the risks related to pursuing traditional business models. Take the demographic trends, for example. The world population is projected to grow by 3 billion by 2050! This corresponds to the total population of China and India today. Can we meet the needs of a global population of more than 10 billion people without changing our development model? The answer is: no. This would inevitably push up the prices of rare raw materials and costs of mitigating various risks connected with exploitation of the natural environment, and lead to deterioration of the standards of living of customers and pressure from investors and shareholders to modify the business models.


Companies are starting to see the benefits of designing new products and business models to recover used products from end recipients so that they can reuse the assemblies, components and materials in production. This is a totally new approach to raw material and input management, which is consistent with the concept of the closed-loop economy, but goes further than waste recycling. Business models are designed in a way which ensures that as little waste as possible is generated throughout the product lifecycle. Products are built in a way which guarantees their repair and the regeneration of replaced assemblies and components. Digital technologies allow us to upgrade products and enhance their functionalities through software updates, which is common practice for laptops or smartphones. Once computer hardware becomes morally worn-out, it is replaced with new devices, and the replacement cost charged to the customer is reduced by the value of the recovered components for the manufacturer. Appropriate product design ensures a fast and effective recovery of raw materials and inputs. For instance, BMW i3 is made in 95 percent from recyclable materials. The introduction of a new closed-loop business model reduces or eliminates the company’s exposure to environmental and climate risks and leads to higher regulatory costs, lower consumption of raw materials and better resilience to rising or changing prices. But only few companies manage to achieve this. How come?
If the trap of short-term perspective, as explained above, is not detected on time, it starts to impede business development. For instance, without expanding the organisation’s strategic horizon, it is difficult to recognise the weaknesses of a linear (open-loop) economy and resolve the conflict (struggle for funds) that exists in almost every company between production (current business model) and development (new business model). How to design business models and strategies that will allow us to overcome the barriers to sustainable development?

Business model

Business models are defined in different ways, depending on their purpose. In the case of companies that already exist and operate successfully on the market, business models are usually the stories of their success. Companies that went bankrupt can be used as examples of inefficient business models. There is a reason why Michael Lewis in his book titled The New, New Thing describes business models in terms of art. Many people feel that they can recognise a work of art when they see it (especially an amazing or a horrible one), but are unable to define it.
The report is based on the business model approach proposed by Peter Druckner. Druckner emphasises the role of the market assumptions we adopt thinking about profits. A good business model must clearly address the traditional questions: Who are our clients? What do they like? What exactly are we going to make money on? What is the economic rationale behind our business, or explanation how we will deliver value to our customers at acceptable cost? Drucker also points out that a good business model is a dynamic concept, as: “…sooner or later, some assumption you have about what’s critical to your company will turn out to be no longer true”. History abounds in examples of smart companies, such as Kodak or Nokia, which did not adapt to changing market conditions only because they failed to formulate clear, explicit market assumptions.
Back in the 1970s, Herman Daly, an ecological economist, put it like this: the entire economic activity depends on the resources provided by our planet and the Sun. Without energy and resources, economic life will cease. The Earth is a closed ecological system (circular in nature): everything we take goes back to it. The economy, on the other hand, is an open (linear) subsystem of the Earth’s closed system. It feeds on the resources taken from earth and emits waste. Because you cannot emit anything out of the Earth’s ecosystem, the waste goes into a waste retrieval machine created by nature. When we start taking from the planet more than we can give, and expect it to absorb more waste than it is capable of, we will find ourselves in a world which Daly calls a “full world”, and there will be no more room for our activity. Actually, Daly believes that we already live in a full world. The Earth cannot replenish all the vital resources as fast we we consume them, because it is full of waste. This is enough reason to change our thinking about the economy! Our open (linear) economy must become a circular, closed-loop system, just as nature.

Circular economy

The paradox of contemporary development lies in the fact that manufacturers, with the clients’ approval, have been pursuing a different path for decades: from durable, reusable goods (washing machines or telephones that could be repaired and used for several years) to non-repairable, disposable products that can simply be thrown away. A closed (circular) economy means that we will need to start “cleaning up”, inventing new production methods that will use waste as a raw material. The example of plastic is quite striking. As we know, it has only existed for 60-70 years, but it has managed to revolutionise our way of thinking about everything around us: from clothing, cooking, dining, to product design and retail. One of the biggest practical advantages of plastic is its durability, which means that all plastic goods that have ever been made still exist today. The total volume of all plastic goods ever produced has been estimated at 8.3 billion tonnes, of which around 6.3 billion are waste and 79 percent are on landfills or in the environment. The production of such large volumes of waste is the driver of our contemporary life, whereby plastic is used to make a broad range of disposable goods: from bottles to nappies, cutlery and cotton pads.

Key conclusions

The next three chapters of this report present examples of specific companies and their actions. We identify three key dimensions of the adjustments: extending the strategy and action horizon; eliminating production waste throughout the product lifecycle; and engaging employees in designing and implementing new business models. The action horizon should be of sufficient duration. The world is changing and new business models that are being developed today should continue to evolve, so that they are equally feasible in 15-20 years’ time. The natural resources used in production will shrink in relation to the needs growing together with the population size. The current model under which companies procure raw materials on the market and “sell waste” outside will not stand the test of time when confronted with growing raw material prices, costs of emissions and waste disposal. Due to the inevitable rise in external costs, companies find it beneficial to design products so that their elements are reusable to the greatest extent possible, and to design the production and distribution system in a way which ensures that used products can be retrieved from consumers (closed-loop economy).

The human factor

The third area that has been emphasised covers people, human resources and employees. Success is not possible without ensuring that all of them can use their talents to the full. They are the most important element of defining the new business models: they think, predict, design, execute, make mistakes and start over. All three of those dimensions form the basis for each of our chapters.
This report stems from our belief that the strategic and operational perspective of companies needs to expand to alleviate potential shocks and manage the new niches surfacing as result of the current megatrends. Companies that favour long-term goals over short-terms tasks generate nearly 50 percent higher revenues and 80 percent higher profits than their competitors. What do they do differently?
First, they eliminate the short-term-focus of their own organisation by creating a strategy that should work in a time horizon of no more than a few decades, depending on the industry. Moreover, they have a specific operational plan to execute that long-term vision, implemented today.
Second, they successfully block the ambitions of shareholders striving to improve quarterly earnings at the expense of long-term advantages. This is a big challenge for global CEOs, requiring them to be truly determined: 87 percent of management boards of global corporations struggle with shareholder pressure to deliver short-term results. On the other hand, 1/3 of the capital financing company development is long-term capital. They must also engage in a dialogue with investors, showing them the benefits of the new models.
Third, by building lasting relationships with key decision-makers from the company’s business environment based on full trust: with local communities and their own employees. Apart from human resources, confidence in the company’s actions is the key capital of a 21st-century digital organisation; the company’s focus on that kind of relationships encourages it to act in a reasonable and responsible way in the long term.
Fourth: the customer is always right. This old-time rule is particularly important in the world of new technologies and business models. If the company fails to diagnose the customer’s needs correctly, they soon shift to competitors. The age of the social media also brings the risk of reputation loss. It is very difficult to build an organisation that can remain profitable in the long run without the effort of predicting the customer’s new needs. In these circumstances, the user experience manual has become the new business bible for challenging times.
Fifth, an agile corporate culture. Today, innovation comes from… anywhere. Successful companies are fully open to new ideas. This means that they are ready to experiment and spend on R&D and innovation. One zloty spent on research and development translates into several zloty of revenue from new business streams at a time when they are much needed by the company to withhold market turbulences challenging all of the company’s previous solutions. One zloty saved on research leads to materialisation of a scenario in which the company loses liquidity and goes bankrupt.

Access to raw materials

Since 1970, for the last fifty years, the annual consumption of basic raw materials has nearly tripled. The fast pace of consumption of the key natural raw materials is not only a problem of the environment, but first and foremost a real economic challenge. Due to soaring prices of raw materials and growing availability problems (e.g. cobalt used in the manufacture of lithium ion batteries) many companies are forced to change their approach to raw material activities, which is one of the most urgent challenges in the context of long-term development. In this case, it is not only about limited supply and high material prices. More and more often, customers expect companies to add value on all stages of the production chain and investors, recognising the risk inherent in upholding the existing linear business model, do not want to engage in business areas that neglect the problem of overconsumption of raw materials (which may have been the reason behind the decision of a big bank to withdraw from coal energy investments). The new approach to raw materials must be treated not as a CSR or PR exercise, but a targeted business investment. If companies continue to operate under the linear model, they will incur excessive financial costs in the long run, discouraging investors oriented towards long-term profits from financing their business.
As part of changing their approach to raw materials, companies implement different strategic solutions, such as building their own raw material base (quality control, guaranteed delivery and prices, longer value chain) or “doing more with less”, which means lower consumption of raw materials and use of alternative resources (lower manufacturing costs, lower supply risk, green marketing). Moreover, companies strive to reduce waste through appropriate product design so that elements of the products can be reused in the production process. To this end, they organise the sales process and customer relationships in a way which allows them to recover products that our morally or physically worn-out. The resulting benefits are multidimensional: limited purchase of raw materials, lower regulatory costs of waste disposal; higher efficiency; lower reputation costs; green marketing; meeting investor expectations; easier access to capital. All of these new approaches to raw material strategies entail high investments, which are not economically feasible in the short run. They are implemented, because they are necessary to make the business more immune to inevitable cost increases in the existing models. Their profitability will become evident with time, when the costs of raw materials, emission permits and environmental fees start to grow, which is inevitable.

Sustainable development

Organisations want to operate in a mature way. To this end, they need to adjust their business models to the sustainable development strategy in the form of a “doughnut”, which means operating in the space of human needs and the limits of the environment. Such organisations must have the courage to grow through spin-off: developing small innovative initiatives, which are regenerative by design. In order to create a resilient company, we need talents: staff potential unrestricted by fixed corporate rules. Talents work only in teams: the responsibility of each person results from his/her individual capabilities.
Talented staff should hold key positions in the organisation, but this does not mean advancing up the corporate ladder; what is important is the development of expertise. In order to coordinate a team like that, you need agile project work methods, oriented towards fast knowledge accumulation and flexible adjustment to the changing reality.

Resilience to threats

Higher dynamics, intensity and scale of economic, business and social processes forces companies to formulate business development strategies that are resilient to potential shocks and turbulences caused by long-term megatrends. The resulting pressure reaches businesses through four channels: the consumers, with their changing preferences and behaviours, the employees, seeking to give their work a deeper meaning that goes beyond making a living, the regulators, and the investors, as they become less willing to finance projects exposed to environmental and climate risks.
Such strategies, oriented towards customer/employee needs, should extend at least 10 years into the future, or even more, in the case of many branches of the economy. What products and services should be introduced to maintain the desired level of long-term profitability? What assets should a company have to achieve competitive advantage in the next 20-30 years? How to ensure access to financing, talents, raw materials, to execute new projects? How should a company evolve organisationally to stay in tune with the changes? The main difficulty is connected with the gap between short-term financial profitability and the need for long-term value creation3.
However, it turns out that when long-term goals are translated into specific actions, the revenue and margin targets can also be sustained in the long term. Companies that prefer long-term goals over short-term tasks generate better financial results. This is reflected in the results of empirical studies on the profitability of 650 American large and mid-sized companies conducted by McKinsey & Company.
Between 2011 and 2014, companies that operated under a 5- to 10-year strategy (“long runners”) had a higher capitalisation (on average by USD 7 billion) and a lower debt level. Shareholder return was also higher. Despite dwindling profitability after the 2008 crisis, companies with a long-term strategy were able to rebuild their market value faster.
In 2014, the long runners’ revenues were 47 percent higher than the revenues of companies without a long-term vision. The net profit of the long runners was 81 percent higher than that of the short runners, and their capitalisation was 58percent higher.
Between 2001-2015, the long runners created on average 12 thousand more jobs per company than the short runners. If all of the 650 surveyed companies had had an equally solid long-term strategy, the US economy would have gained around 5 million new jobs and generated additional USD 1 trillion in GDP.
Companies with a long-term vision reveal higher investment spending. In 2001-2014, the long runners invested on average 50 percent more in R&D activities than short-term oriented companies. This was during the economic crisis: between 2007-2017, investments of long-term oriented companies grew by 8.5 percent a year compared to 3.7 percent in the case of short runners. Companies pursuing long-term strategies generated better financial results and were able to restore their value faster after the market collapse in 2007-2009.
The shareholder structure of the largest listed companies in the world also reveals the long-term focus of corporate investment strategies: 75 percent of US stock is held by long-term investors, such as index funds, value funds, private investors. 70-90 percent of company value, based on the discounted cash flows (DCF) approach, is clearly generated in a time horizon of more than 3-5 years.

Shareholder education

A long-term vision will never be more than just a vision, if it is not converted into a sequence of very specific tasks with a short implementation horizon. The costs of such tasks weigh down on reported quarterly earnings. This is why companies that set long-term goals are not appealing to investors interested in short-term wins.
However, not all investors favour short-term profits. Long-term financial investors hold assets worth around USD 60 trillion, which represents one-fifth to one-sixth of global financial assets. They are interested in companies pursuing long-term strategies. They include financial, public and private institutions whose mission is to ensure a fair return on the capital entrusted to them in a long time horizon. This group also includes pension funds, insurance companies and state-owned funds.
Larry Fink, founder and CEO of BlackRock, a trust fund managing assets worth USD 1.7 trillion, believes that the short-sightedness of the stock markets is a problem, especially in the context of investors’ increasing use of index funds. BlackRock can choose to sell the securities of a company if it is doubtful about the company’s strategic direction or long-term growth. However, in managing its own index funds, BlackRock may not express its disapproval by selling the company’s securities as long as that company remains in the relevant index. How to solve this dilemma? In his letter to CEOs this year, Larry Fink proposes a new model for corporate governance, based on engagement with companies included in the indices. “In order to make engagement with shareholders as productive as possible, companies must be able to describe their strategy for long-term growth. I want to reiterate our request, outlined in past letters, that you publicly articulate your company’s strategic framework for long-term value creation and explicitly affirm that it has been reviewed by your board of directors. This demonstrates to investors that your board is engaged with the strategic direction of the company. When we meet with directors, we also expect them to describe the Board process for overseeing your strategy. The statement of long-term strategy is essential to understanding a company’s actions and policies, its preparation for potential challenges, and the context of its shorter-term decisions. Your company’s strategy must articulate a path to achieve financial performance. To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends – from slow wage growth to rising automation to climate change – affect your potential for growth”.

Reasonable priorities

Long-term strategies add value for investors due to appropriate prioritization of activities, a clear strategy for allocation of resources (funds, people) and creation of new skills and organisational mechanisms to achieve long-term success. The long-term strategy, apart from maximising profits for shareholders, should also address the expectations of local communities, employees, lenders, environmental groups and, last but not least, customers. Happy customers, environmental movements, local communities create a positive atmosphere around the company, adding value and appeal to its products, which ultimately translates into higher revenues.
Coca Cola operates on more than 200 global markets, managing nearly a thousand water and carbonated drink bottling plants. Many of them are based in countries with very limited drinking water resources. In 2002, there was an outbreak of protests against Coca Cola in the Indian province of Kerala: the protesters accused the company of contaminating soil water and privatising water resources. In 2003, the management board of Coca Cola stated that limited drinking water resources were a threat to the company’s core business on key global markets. In 2004-2005, a dedicated team drafted a comprehensive strategy for water risk management both inside the company (use of water in the production process) and in its external environment (e.g. access to water for inhabitants of local communities). As a result, Coca Cola defined a range of KPIs which help eliminate the risk connected with lack of access to water for operational reasons (depleted sources) and from the perspective of managing relations with decision-makers (protests). Starting from 2015, Coca Cola has “returned” to the natural environment as much water as it has used. In 2016, in collaboration with local communities, it “returned” 221 billion litres of pure drinking water into the global water system in the form of treated rainwater or maintenance of water intakes, which represents 133% of its annual water use in the production process. Moreover, in 2004-2016, Coca Cola significantly reduced its water-related operating expenses, using 1.96 litres of water per 1 litre of manufactured product in 2016 compared to 2.7 litres of water per 1 litre of manufactured product in 2004. By 2020, water use per 1 litre of product at Coca Cola factories will drop by another 0.26 litres to 1.7. It should be noted that when the project was established in 2004, Coca Cola had a long-term business vision for a period of around 15 years, which definitely exceeded the horizon that investors are usually interested in.

Customer needs

Most of the world’s biggest companies were established in the 19th or 20th century, during the Second Industrial Revolution. Therefore, without new strategic and operational models, such companies struggle to succeed in the era of the Fourth Industrial Revolution: rapid transformations, low operational barriers, vanishing advantages based on fixed assets, new business models, growing customer and employee requirements. Customers expect companies to address their needs in a faster and more efficient way: a consumer that is dissatisfied with a particular element of customer service is likely to shift to a competitor (in some sectors, customer migration due to dissatisfaction exceeds 50 percent).
As of 2000, more than 50 percent of Fortune 500 companies have been subject to acquisition, merger or bankruptcy. In the digital “war of the species”, the greatest chances of survival belong to companies established in the wake of computerisation and “smartphonisation” of the global economy, i.e. companies with a totally new DNA: Amazon, Facebook, Uber, Netflix and others. According to John Chambers, CEO of Cisco Systems, 40 percent of today’s businesses will disappear over the next decade, 70 percent of companies are trying to carry out “digital restructuring”, but only 30 percent will succeed.
In order to escape the list of companies doomed to perish in the next 10 years, you must remain close to customer needs and predict their evolution. The digital tools used to analyse actual needs include neuron networks that study customer satisfaction on social networking sites. A more proactive tool is to create “distributed wisdom” in response to customer issues. One of the principles applied by Google is to develop user-friendly products. Such products do not need to be excessively advertised; the customer chooses intuitive, easy-to-use solutions offering added value at a reasonable cost. Android, Google Maps, YouTube are just some of the products built around customer needs and sometimes by the customers themselves. Resilient strategies are strategies focused on ensuring a unique product experience to the customer.

Corporate culture

An organisation planning to build long-term value should be agile: flexible, innovative, non-hierarchical, open to challenges.
The biggest challenge in developing resilient long-term strategies is connected with changing the corporate culture. Concerns about potential failure and low risk appetite are the key barriers to implementing business ideas that could flourish in the future. The fears connected with leaving the company’s comfort zone – its short-term-focused, business-as-usual (BAU) model – blocks projects that could allow the organisation to build long-term value. One of Google’s nine innovation rules is that innovation comes from anywhere. This means total openness to ideas both from the outside and the inside. Every Google employee can spend 20 percent of their time (one day a week) on developing new concepts and products. Even though many of those ideas are discarded and several teams may be working on the same solutions in different corners of Google labs, it pays off to experiment. Google holds nearly USD 90 billion in cash – being an agile organisation that stays close to the customer and is not afraid to innovate. Just as Apple and Microsoft, which together hold nearly USD 400 billion in cash reserves – which is more than the capitalisation of ExxonMobil or Samsung.

The trap of overexploitation

The dynamics and the scale of the changes generally described as the Fourth Industrial Revolution are particularly important for businesses operating in traditional sectors of the economy, where the transformation has been evolutionary in nature, occurring over a span several years or even decades. The volatility of the economy is a major challenge for companies whose production models are based on tangible goods. Hence, it is particularly important to create long-term development strategies for raw materials, also in the case of companies for which the prices and availability of key raw materials as well as the costs of waste treatment and disposal determine their business profitability. On the other hand, the implementation of a sustainable development strategy offers the biggest benefits to companies for which raw materials are the key operating element.
According to a large sustainable development survey conducted by McKinsey & Company in 2017, a change in the approach to raw material activities is one of the most urgent challenges facing businesses. First of all, this referred to the need to improve energy efficiency, product (and service) design optimisation as well as better waste management.
The optimisation of consumption is necessary in the context of extensive exploitation of natural raw materials and inevitable growth in raw material prices as well as costs of emissions and waste disposal. Why are raw materials becoming a major topic of the debate on long-term development? So far, in the history of the economy dominated by a linear production model, it was not necessary to implement radical changes in raw material strategies. A prime example of this is the post-war economy of Western Europe, driven by growing demand and unlimited access to cheap energy and raw materials. This is clearly reflected in classic production models, which do not consider the barriers to availability of raw materials and feedstock. But times have changed. The global economy has achieved a stage of development where simple evolutionary change of business models will not be enough.
New raw material strategies should not be seen as a PR or CSR exercise. It is rather a necessity to adapt to uncertain times and search for business opportunities in an ever-faster changing world, where the prices and availability of raw materials are becoming a daily challenge to many industries. Hence, raw material strategies based on the “do more with less” principle enjoy growing support of investors. However, investor concerns about further development without considering environmental risks stem not only from the growing prices of raw materials, but also rising emission and environmental costs. It is also about customer and regulator expectations for companies to withdraw from unethical investments as regards the use of natural raw materials. A clear example of the new approach of large investors is provided by various own indicators, published for years by such institutions as Bloomberg or Thomson Reuters, which evaluate the activity of business entities in the area of environmental protection, social responsibility and corporate governance, total consumption of biomass, fossil fuels, minerals more than tripled. This was mainly due to the dynamic demographic growth, which nearly doubled the population. The use of raw materials is simultaneously driven by the global growth of the middle class – and increasing consumption – as well as changes in the consumption models, e.g. as regards packaging and inefficient waste management.
A radical population growth and change in consumption models coupled with limited resources are already transforming the seemingly distant environmental risk into a tangible challenge for the global economy. In recent years, the rate of consumption of the key natural raw materials – including air, water, rare earth metals and fossil fuels – has become a serious economic challenge.

Worse, more expensive

Hence, continued operation in the traditional, linear business model which does not include a sustainable development vision is risky in the long run and leads to a rise in real financial costs. The traditional linear business model in the “take-make-dispose” format is not only harmful for the environment, but just more and more expensive.
Long-term raw material strategies must be based on activities that allow companies to avoid current (and future) costs by shifting from the traditional linear production model to a closed-loop (circular) system which ensures a clear reduction in raw material consumption.
One of the ways to adjust the raw materials’ supply chain to growing demand is to invest in one’s own raw material sources. Development of the company’s own base gives assurance of supplies, improves control over material costs in the future, and allows the company to extend its value chain (boosting margins). On the other hand, own raw material sources consistent with the innovative “do more with less” concept of savings ensure greater control over technical quality (e.g. own tree plantation means greater control over material specifications).
In 2014, IKEA, the leading global manufacturer of household furniture, presented plans of an almost twofold increase in sales over the next 6 years (from EUR 28.5 billion to 50 billion in 2020). The key element of those assumptions included the new sustainable development strategy People & Planet Positive (adopted by the company 2 years earlier), which encouraged IKEA to revise its entire value chain: from raw material sourcing to customers’ use of the products, so that it could gain better understanding of the weaknesses of previous sale models.
There is a general conviction in the extraction business that there are enough oil deposits to satisfy the future demand at reasonable cost in a long time horizon. To this end, we will have to find and commission new deposits (so-called yet-to-find deposits or YTF). They are needed, because the current sources are becoming depleted at a rate of around 2.5-3.0 million barrels a day. This is how much oil must be extracted today to keep the demand at a constant level. While the oil sector seems to believe that demand has currently plateaued, the financial sector, which offers funds for the extraction activity, does not share that conviction.
Concerns arose in 2015, when oil prices dropped and were not likely to increase any time soon. There were predictions that oil demand would cease to grow and prices would remain low in the foreseeable future. Seeing as oil prices are the basis for valuation of oil companies and many financial assets, the financial sector was worried. It all started with Mark Carney, governor of the Bank of England, who pointed to the long-term risks for financial stability during a meeting of Lloyd’s insurance and reinsurance companies on 29 September 2015 in London. The risks were to be connected with the decreasing value of energy sector assets due to climate changes.
Next, on 4 December 2015 in Paris, Mark Carney – then as chief of the Financial Stability Board, an international body monitoring the global financial system and issuing recommendations – announced the establishment of the Task Force on Climate-related Financial Disclosures (TCFD) headed by Michael R. Bloomberg. In June 2017, that Group issued recommendations concerning disclosures of climate-related risk exposures, which in fact became reporting standards for companies with revenues in excess of USD 1 billion. In December 2017, 230 organizations adopted the TCFD recommendations, including 150 financial firms with assets above USD 80 trillion, many big energy companies, governments of European countries and the London Stock Exchange. According to TCFD, the energy sector is exposed to climate risks due to changes in demand for fossil fuels, mining and technologies, as well as with regard to restrictions in emissions and water availability.

Problem of waste

We could say that the challenge connected with waste is a problem only à rebours. Looking at that challenge only from the business perspective (irrespective of environmental issues), it is not difficult to see that waste is a measurable product cost which does not add value for customers; more and more often, it becomes a factor driving reluctance and squeezing sales.
In January 2018, the UK food chain Iceland Foods was one of the first big retail companies to declare full withdrawal from plastic packaging of its own brand articles by 2023 and its replacement with fully recyclable, paper packaging. By that time, Iceland Foods had already abandoned all disposable plastic straws in its own brand products. It justified its decision with pressure from customers, with their increased focus on the natural environment and the environment of other communities, which is fuelled by the Internet and social networking sites. As a result, more and more customers demand from companies that they generate added value at every stage of the production chain, both for the customers and for the suppliers as well as for their own employees and the environment. Customer expectations have a real impact on incorporating long-term development into company strategies. Iceland Foods’ decision to withdraw from plastic packaging was preceded by a survey on a group of 5 thousand respondents. It showed that 80 percent of customers supported full withdrawal of plastic packaging from the chain.
Products manufactured in the spirit of sustainable development are not only more popular with customers; people are also willing to pay more for them, which generates a growth in sales. Sale projects consistent with the idea of sustainable development allow companies to boost sales and profitability through green marketing.
In 2016, Adidas – in collaboration with Parley with Oceans, which promotes environmental protection in oceans – launched the first series of UltraBoots Parley shoes, manufactured from plastic recovered from seas and oceans. The first line was available in a limited edition of 7 thousand pairs. Adidas declares that 11 plastic bottles are used to manufacture one pair of Parley shoes. These “environment-friendly” sneakers, supported by a skilful campaign, proved a big marketing and sales success. Today, shoes from the first limited edition of Parley (initially sold for EUR 200 a pair) are the most expensive sports shoes on the market (they cost up to several thousand dollars), and sales of shoes from recycled bottles have recorded unprecedented growth. In 2017, a year after the first pair had its market premiere, Adidas sold more than 1 million Parley shoes. The company expects to sell 5 million environment-friendly shoes in 2018 and 11 million in 2019. Today, 2 years after the launch of the first model, the company also offers more than 100 products made of recycled plastic.

Flexible organisation

A resilient organisation must also be flexible. It should quickly respond to changes ad have a long-term action plan: a compass allowing it to maintain its strategic development direction despite the surrounding turmoil. This is reflected in the number of successful start-up companies, but it is not the only evidence. Large enterprises can generate an appropriate number of ideas and adapt their organisation in a way which allows their implementation.
The European and the global economy are about to experience a tectonic shift towards renewable raw materials and energies. No chemical or energy companies will be able to avoid the shock. Products in the sustainable economy will be regenerative by design – upon creation, they must have a pre-programmed ability to be processed and scaled so that they can reach new consumers from the developing economies. If products and entire value chains are not restructured, it will not be possible to shift from a linear economy, generating heaps of waste, to an economy with a closed loop of raw materials and energy.
As a result, the energy and raw material revolution will impose changes in the corporate culture and force companies to adopt a different approach to projects: not only in the sense of work management, but also in the case of new business models. The author of the famous book entitled Doughnut Economics points out that “sustainability” is about operating in the zone of basic human needs and the planet’s environmental limits. They form a “doughnut”, in which makers of sustainable business models must find their place.
It should be emphasised that the portfolio of many smaller, experimental initiatives is well-adjusted to the digital and globalised world, where the winner (almost) takes it all. Today, the scaling of digital bots is dead simple, and there is only one winner. In these circumstances, broad experiments executed at lower cost yield better results than a portfolio of moderate initiatives of which none turns out to be above-average.
Growing through spin-off does not need to occur inside the company. Companies operating in the real zone can also use the experience of IT projects and provide an open source interface (as shown by IBM’s acquisition of RedHat, which delivers Linux systems, for USD 34 billion). This is how OPEN MOTORS start-ups operate; these entities offer, on an open source basis, the possibility to use a certified, modular electric car chassis together with the underlying R&D documentation in order to create one’s own EV prototypes. Since the project is made available to a large group of recipients, the R&D expenses of a company that wants to design a new vehicle are drastically reduced. The cost of a single platform (without battery) is USD 12 thousand, or USD 4 thousand, if 500 platforms are purchased. Digital CADs are available free of charge. The modular structure of the vehicles means that the same platforms can be adapted to many purposes, which reduces raw material wastage and facilitates economies of scale.

Sustainable business

In the case of designers of new business models, a circular economy means that it is necessary to satisfy needs using a minimum quantity of materials: both biodegradable and man-made ones. A systemic approach to satisfying needs with a minimum quantity of raw materials may seem like idealism at start-up level, but becomes the cruel reality for corporations engaged in the global game. The global population is growing rapidly, accompanied by a growing demand for raw materials. Customers live longer and are developing a long-term perspective: they become interested in the environment. The new game for the global market is about limiting raw material consumption and generation of waste, because this is the only way to satisfy mass needs.
For these reasons, designers use five models of sustainable business: extension of product lifecycles, creation of service provision platforms, recovery of raw materials, exchanging products for services or use of renewable raw materials. In order to make the company immune to demographic shifts and to stabilise the customer base, subscription and loyalty solutions are also developed.
In order to capture these five business models, designers often use design thinking methods, which focus on precise identification of customer needs, usually based on how the customers behave in the environment. This automatically leads to incorporation of the product’s impact on the environment. In this way, the solutions created are more environment – and community-friendly. Hence, the chairs produced by IKEA are lighter and lighter, and the company itself engages in forest management. For the same reason, GE announced a crowd-sourcing contest for elements of a 3D-printed aircraft engine, and Airbus uses algorithmic design to create quasi-organic crate patterns with computer modelling, which reduce the weight of plane interior, e.g. seats, by 45 percent, and cuts the quantity of consumed raw materials by up to 95 percent to reduce the emission of CO2 needed to lift the heavy machine into the air. In reference to F.G. Junger we could point out that technological development allows us to successfully solve the problem of poverty, which in the case of a sustainable economy is connected with a shortage of raw materials. In order to share the consequences of “raw material scarcity” relatively fairly, increasingly simple products must keep their basic utility features. Such activities are consistent with the frugal design system, or concentration on simple functions, and are globally scalable due to low resource requirements, generating extraordinary profits from embedding the company at the heart of the design network.
The enumerated design strategies may be used by a company in response to economic shocks only if they first manage to build deep human competences. While the first innovation rule of Google has it that innovation comes from anywhere, the company’s practice shows that innovation does not appear out of the blue: first, the creativity factor must be present within the company, before it can be incorporated into a product. The necessary facilities must be secured first.

Talented staff

Having a vision requires courage, appropriate organisation and talented staff to carry the idea of change. The reserves of human potential lie not in imposing a greater number of tasks on the same organisation, but in talent management and “agile” work mechanisms. Talented employees have broad capabilities that limit the risk of crushing into an iceberg and agile methods create a fast response system in the company’s tissue. The company does not “break down” at any incident.
2019 will be the 20th anniversary of the day when Steve Jobs changed Pixar’s office design from a place promoting organisational hierarchies and divisions to a common collaboration-inducing space, creating one of the most innovative film studios in the world. It changed the way talents interacted and the ingrained ways of thinking were replaced with more creative communication. The resulting organisation started to fully use the benefits of the digital revolution, releasing such blockbusters as Toy Story or The Incredibles. This is what ‘antibrittleness’ means. As N.N. Taleb points out, the term ‘anribrittle’ can be used to describe organisations that not only become immune to changes in the environment (simple neutrality), but are also able to use shocks as an opportunity to generate business. This is what Pixar did.
Organisations that want to develop resilient tissue must manage talents that organise their work themselves. Why?
As Ed Catmull from Pixar said: “Smart people are more important than good ideas”. According to the traditional corporate logic, candidates are matched to jobs, which is reflected in the multi-stage recruitment process maximising the probability that the candidate will fully meet the company’s expectations. When the environment becomes unstable and talents are a scarce good, this no longer makes sense; it is better to capture talents and adjust the work to them. In the fast-changing economy, it is necessary to give employees more responsibility, but due to the pace of the changes the limits of that responsibility become blurred. It is more difficult to match candidates to jobs that are not fully formatted; every employee has different talents.
Talent management can be described by analogy to football. This shows that talents – the most scare resource for which companies compete – can only be controlled to a limited extent. They must be given a direction. The leading football clubs and their coaches – Manchester City or Juventus Turin, Pep Guardiola or Massimiliano Allegri – are not building a fixed system centred on formation, number of defenders or strikers. What is more important are the roles assigned to particular team members, situational playing, the way individual players use their talents. The coaches base the system on strong, complementary personalities. The players’ predispositions, their style on a given position, differ, even compared to another player usually occupying the same spot, but they must also complement the skills of the other teammates. By analogy, a position in a talent-oriented firm is shaped by the person that holds it. Their skills determine the future evolution of that job. Just as in football, working with talents is based on teamwork. It enables spontaneous coordination of tasks between positions with competences which, in the world of talents, are rather blurred and have so far been inscribed in the corporate structure and strict division of roles. The leading companies have recognised this. A few years ago, PepsiCo implemented an initiative which tied the annual bonus not only to individual performance, but also to teamwork and the development support offered by the given employee to their colleagues. In this way, PepsiCo eased competition among staff and curbed their efforts to fulfil their personal goals at the expense of common targets.
Given the acceleration of economic growth in Poland after 2015, many companies have realised the need for long-term talent management. The employee market, with unemployment falling from 10 percent in July 2015 to less than 6 percent in 2018, was quickly used for transfers, wage rises, horizontal and vertical promotions and a significant inflow of foreign workers into Poland, for the first time in decades.
Giving more responsibility to employees and teams has twofold benefits: a growth in loyalty and innovation, whereby both these factors are of key importance to building long-term resilience. This requires a certain degree of effort. The most important thing is to overcome fear and instil a corporate culture which is not afraid of failure. Ideas such as AirBnB, carsharing or e-hailing were born in the minds of company employees. In other cases, companies’ reluctance to risk and lack of ability to implement their ideas, forced talented minds to leave crowded conference rooms and set up their own businesses – without hierarchies, bureaucracy and limitations arising from short-term investor expectations.
Talents allow companies to adapt to the ever-changing world, where know-how becomes a valuable asset. They carry a greater amount of knowledge incorporated into products and more innovation. In case of market shocks, the knowledge contained in products works as a shock absorber: a company with deep competences can remodel this “hidden knowledge product” rather easily, creating innovation. In order to do this in a timely manner, it needs appropriate project work methods.
In order to develop sustainable business models, new work technologies are needed. Approaches such as agile, lean start-up and design thinking focus on working in interdisciplinary teams and quick access to the Minimum Viable Product (MVP), which allows them to build more effective solutions in terms of raw material efficiency. On the other hand, by experimenting, they avoid wastage by keeping on a failed project for too long. Their focus on utility and dialogue with the customer and even ethnographic observation of customers help them define needs that must be fulfilled.

Basic rules

Contemporary business models are dominated by solutions based on three basic rules: growing sales, limiting expenses and complying with regulatory requirements at the lowest possible cost. They are supported by digital technologies, which allow producers both to quickly upgrade standard products (by adding new functionalities) and to pursue aggressive marketing activities, influencing customers’ shopping decisions.
Higher demand for energy, raw materials and feedstock leads not only to price increases, but also to accumulation of harmful emissions and waste, which contain used products. Coupled with the demographic forecasts, it leads to one conclusion only: it is impossible to continue development based on the linear model of converting raw materials and feedstock into utility products and waste. Such business may only be sustainable, if the loop is closed.
For several years now, action plans concerning the closed-loop economy have been a critical element of sustainable development strategies in a growing number of countries, both in the European Union and beyond. Social pressures and growing environmental requirements coupled with increasing penalties for violating agreed norms are not only affecting companies, but also shaping the strategic directions of development. It pays off to eliminate or significantly limit these costs as part of on-going operations. Companies deploying sustainable development strategies look way into the future and – instead of adjusting to applicable regulations – aspire to build resilience to their inevitable future tightening.
It is nearly certain that both raw material prices and the costs of adjusting to growing climate and environmental protection norms will be rising. The size of the population is growing exponentially, and earth’s deposits of raw materials necessary to satisfy consumption needs are limited and finite.
There is only one direction: business should be designed in a way which ensures satisfaction of customer needs while ensuring the lowest possible consumption of raw materials. It is not only about recycling (which in itself can be quite profitable) or reducing emissions or production waste, even though it is important. The company must manufacture things that consumers can quickly consume, dispose of and replace with a new purchase.
Companies try to reduce raw material consumption through appropriate product design with a view to reusing the components in the production process. To this end, they organise the sale process and customer relations in a way which allows them to recover a product that is morally or physically worn-out. The resulting benefits are multi-dimensional: limited purchases of raw materials, lower regulatory costs connected with waste disposal, higher efficiency, improved customer relations, satisfying investor expectations and easier access to long-term capital. This is supported by the social mega-trend, already present in the mobility area, which could be transferred to all durable goods so that services can be received without acquiring their ownership.

How to build long-term resilience to shocks connected with costs of raw materials and regulations?
• have a long-term strategy: for the next 5, 10, 15 years and more;
• monitor megatrends such as demographics or urbanization, and their negative environmental effects: use your observations to predict future price increases for raw materials and the shape of effective regulations;
• review your business and think what adjustment costs you could incur and what you might be able to do with your orphan assets – which you are bound to have in your portfolio;
• remember that financial investors are more flexible than you: as soon as they spot early signs of risk materialisation, they leave;
• think about how to navigate your company (not the current business, because that is not possible) from point 0, where you are now, to point 1, when you start producing in a closed-loop of raw materials and waste;
• use the staff potential available inside and outside your company (visions are created ad executed by people);
• take care of talents – allocate an appropriate budget to R&D, adequate to the strategic targets you want to achieve (a vision without investments will never materialise);
• develop fund-raising mechanisms: talk to investors and shareholders and test your ideas on them (more than 1/3 of capital invested annually around the world is long-term capital);
• remember there is no time to lose; the clock is already ticking.

Report prepared by the Executive Director for Strategy and Executive Director for Corporate Communication at PKN ORLEN S.A.