Rethinking strategy for the net zero transition

Traditional tactics are no longer enough, say Yassir Ahmed, Principal, and Johann Franke, Director at Marakon.

Transitioning the world to net zero will require successfully rewiring the global economy to function with carbon emissions as a constraint. The changes needed across economic sectors will be extensive. While the net zero destination is clear, the pathway and timeline for getting there is highly uncertain. In this context, non-traditional approaches for formulating strategy are likely to be more effective, preparing companies for what will undoubtedly be an era of structural change.

“Prediction is very difficult, especially about the future.” – Niels Bohr

At this stage of the transition, we are seeing “big” questions being raised that could fundamentally change where and how we do business:

1. Manufacturing location – should some energy-intensive industries be relocated to regions of abundant low-cost renewable energy?

2. Locus of work – could further adoption of remote working reduce the scale of the challenge in decarbonising transport systems?

3. Emissions abatement vs. direct-air capture – if direct air capture has the potential to become commercially viable sooner than expected, is it still     worthwhile investing in new process technologies to decarbonise hard-to-abate industrial emissions?

The implications of some of the answers to these questions are profound. Demand patterns will change, new centres of advantaged supply will emerge, and global supply chains and services will shift.

Accordingly, this is all happening in the context of fundamental trends such as an ageing global population and the rise of AI and automation. Taken together, we see that the net zero transition has implications for all industry sectors, not just the heavy emitting ones.

Deliberate vs. emergent strategy –       or perhaps a hybrid?

Strategy theory, and largely practice, takes a binary view to uncertainty. Where there is a high degree of market and competitive evidence a “deliberate” strategy is optimal, and organisations are focused on delivering a singular vision of the future.

 In the inverse situation, an “emergent” strategy is regarded to be better. If things are less certain, organisations adapt by trial-and-error. Unsurprisingly, the second model is more commonly observed in start-ups and sectors with limited capex requirements, with the scale and agility to rapidly pivot strategic focus, rather than large corporations in established markets.

The transition to net zero creates a tension between these two approaches. On the one hand, the information needed to make fact-based strategic decisions is still developing, it can also be flawed, such as not accounting for (uncertain) trends, making decisions risky and potentially (very) expensive in the medium to long run.

On the other hand, keeping a wide range of strategic options open can be expensive – if purchasing optionality with flexible infrastructure and/or a broad portfolio of technology platforms. Furthermore, waiting for robust economic signals in new arenas creates a risk of moving too late to win new customers and travel down the industry cost curve.

In lieu of an accurate prediction of “what winners do” in the net zero transition, the way forward is most likely a hybrid approach. We must become comfortable in making strategic decisions with less facts than before.

At the same time, it’s important to pay close attention to learnings from the front line of businesses and developments in the external environment and have the ability to re-think strategy quickly.

Evolving the strategic toolkit

Incorporating net zero into strategy development requires embracing challenge and creativity into the thinking, as well as resisting inertia. For example, when setting a company’s vision, there is a need to go beyond generalisations of trends and consider what curveballs could drive a radically different answer.

In a similar vein, when looking for opportunities in the emerging net zero economy, there is a need for more nuanced conclusions than simply “is or isn’t attractive”, and a view on what it would take to nurture a viable commercial opportunity. Bringing more challenge & insight to the debate is key, and often requires closer collaboration of business functions which typically operate more independently, such as R&D / Technology and Procurement.

Making change happen

Making changes to how strategy is developed inside organisations can be hard in and of itself. Furthermore, net zero can feel like a peripheral topic for some businesses, and the natural tendency will be to fixate on the “here and now” challenges. It is not unusual for senior executives to disengage from the discussion around net zero, especially if it has the potential to negatively impact currently successful lines of business.

However, effectively navigating through a period of disruptive change requires understanding and addressing issues that are not necessarily within the comfort zone.

The challenge lies in being able to envision alternative scenarios for the future, what it will take to be successful in each one, and being mindful of these when deciding on how to allocate business resources day-to-day. Being ready for the net zero transition should be about establishing new institutional capability, rather than having a one-off workshop, the outcomes of which are usually quickly forgotten.

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