Adapting business for the green era.

Successful companies are changing their business models as  commodities become more expensive.

We are living through perhaps the most important economic event since the Industrial Revolution, according to Boston investor Jeremy Grantham. He is referring not to the economic crisis, but the rise in commodity prices. Population growth, rising incomes in the developing   world and climate change have combined to produce a perfect storm.

The prices of many important commodities – including iron, wheat and cotton – have tripled since 2002. Mr Grantham says this “is the rarest of rare birds: a paradigm shift”.

Research by Ernst & Young found 29% of profits warnings by FTSE350 companies in the first half of 2011 resulted from rising resource prices.

In the United States, a survey of chief financial officers recently found 59% felt their companies had been directly affected by rising prices. Most   importantly, this looks like a trend. Peter Voser, CEO of Royal Dutch Shell, has said: “We will probably see rising energy prices for the long term, and we should just get used to that.”

The challenge for businesses is to adapt. As Mr Grantham notes, dryly: “There will be some great fortunes to be made in resource efficiency. It would be sensible to participate.” And a small but growing number of companies are participating: they are recognising the megatrends, investing in better margins and less price volatility, and are pursuing more market share.

For them, environmental responsibility and profit maximisation become synonymous. Last week, the South Korean conglomerate LG said it would invest   $7bn (£4.3bn) by 2015 in a Green New Business strategy, following the   success stories of Siemens and GE. Siemens delivered €28bn (£24.6bn) in environmental product revenues in 2010, or 37% of its total revenues.

GE’s seven-year old Ecomagination programme generated $18bn in 2010: 12% of   total revenues.

But it is not just technical industries that are changing their business models. Marks & Spencer’s eco programme Plan A contributed £70m to   profits in 2010, around 10pc of pre-tax profit, mainly from energy and other resource efficiencies. For a company like PepsiCo, making bioplastic bottles from potato off-cuts and cutting water use by 50% makes business as well as environmental sense.

Nissan’s bet on electric cars may turn out to be one of the most striking new paradigm strategies. The move was much derided by the car industry at its 2008 launch, and shows how a consciousness of Mr Grantham’s megatrends can generate what can look like a radical strategy to the competition.

In 2008, when auto efficiency was being driven by increasingly stringent   emissions requirements, CEO Carlos Ghosn and his team saw a compelling   business case for the electric vehicle (EV). By factoring rising petrol prices and declining battery costs into their calculations, they concluded EVs would become cheaper to run than conventional vehicles on a “whole-life   cost” basis. EVs became the heart of its development programme.

Since then, Nissan has led the EV industry, investing $4bn in conjunction with sister company Renault. It has launched the zero-emission Nissan Leaf, is making batteries and chargers, and has 140 agreements with organisations from governments to utility companies. Nissan is changing its business model, and building barriers to entry.

Nissan’s strategy rests on an assumption of rising oil prices – a bet that is looking good three years on. It is too early to judge its success, but   momentum seems to be heading its way. Electric technology played a critical role in Nissan winning the $1bn contract to supply New York’s taxis from 2013. And in the past two years every other major car company has announced an electric programme.

These strategies have all been led by an enlightened CEO who has recognised the relationship between their business and the environment. “How will your company fare in an era of rising resource prices?” may become an increasingly frequent question from investors.

An excerpt of article as written in the London Telegraph, November 10, 2011 by Jim Woods, Director of Green Monday.

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