Although it’s still early days for most companies’ strategic reinvention, one message is already clear: as the context within which business operates changes rapidly, so too must the strategic journey. Leaders need to establish a constantly iterating process, underpinned by high-quality data, to assess, adjust, and flex strategic priorities and milestones that ensure resilience and success in a highly dynamic world. To bring that dynamism to life, we’ll describe the experiences of a chemicals company and an industrial company that have been revisiting their strategies with ESG in mind.
Reformulating a chemicals company’s product portfolio
Over the course of a decade, a global chemicals company changed many of its products and operations following the realization that its processes, which are carbon intensive, and its products—literally thousands of chemical components—could end up being outlawed or shunned by customers, even though the bulk of what the company produced was beneficial to society. (One example: biodegradable and bio-based packaging for consumer products.)
To reformulate its strategy in the face of this threat, the company undertook a massive product portfolio review with several purposes: to establish where it was hurting the environment and what needed to change, to identify which products to reengineer, and to pinpoint where it was adding the most value and how it could remain competitive in its field.
As a means of better informing strategy formulation, the company now uses an impact assessment tool that brings together tailored economic and operational data to determine the effects of a decision—such as its product portfolio changes—on ESG criteria including pollution outputs, CO2 emissions, labor practices, social welfare, and more. This creates the kind of granularity that helps leaders make strategic decisions, understand trade-offs, identify opportunities, and tell their story to all their stakeholders. The tool has also enabled the company to develop and regularly refine a road map for refocusing R&D, overhauling operations, changing incentives, and evolving hiring practices.
Resetting an industrial company’s carbon strategy
Consider next the experience of an industrial company that has begun taking far-reaching steps to put itself on a more sustainable trajectory. The company began by defining a clear ambition centered on bold targets, initially aiming for short-term operational emissions reduction and becoming a net-zero company by 2050. To achieve these goals, the organization elevated sustainability to a strategic priority and identified a set of supporting management interventions, starting with a revamped planning process with sustainability at its core.
To inform its strategic priorities, the company studied new energy technologies in areas such as wind, solar, batteries, and hydrogen, along with emissions reduction technologies such as carbon capture. Using the insights from those findings, the company developed a portfolio strategy out to 2050, showing the rate at which it would need to divest traditional businesses and power sources, and how quickly it would need to replace those with greener options. Then, to generate early options, the company created a venture fund that could identify and invest in promising technologies, through straight investments or joint ventures with others.
Next, the company began applying a sustainability lens to future capital investments. For example, before constructing a new facility, the organization had previously used traditional financial analyses such as net present value to determine whether that facility represented the best use of capital. In that analysis, the carbon component was relegated to an afterthought (an internal carbon-pricing mechanism). The company realized that this approach was no longer sufficient to deliver on its strategic goals. When it began to factor in carbon in a more explicit way, the company actually changed the design and construction methods for new sites, expressly to reduce emissions. As it reallocates capital as a result, the company is evolving its strategic commitments.