We are heading into earnings season, and the business world is laser-focused on quarterly reports and whether we will see sustained growth in the stock market. That can make chief executives reluctant to address a looming long-term concern: the idea that business model innovation is lagging behind global consumption. Here's what we'd tell a hypothetical CEO about that issue.
To the Chief Executive Officer,
We know that you are in the middle of reporting Q2 earnings and tracking the earnings of your peers. You’re focused on framing performance over the past three months and setting expectations for the three months ahead.
But what about the next three years? Or the next decade?
Your company and our research teams are looking at many of the same long-term social and environmental challenges. We aim to see the global economy grow in a way that meets the needs of people now and in the generations to come.
As we pursue growth, let us offer a strong note of caution on a difficult topic for many businesses, one we’ve found to be the “elephant in the room” for the C-suite and the board: the fact that business model innovation is not keeping pace with global consumption.
Consider the combined effect of population growth and poverty reduction: rapid expansion of the middle class, particularly in developing markets like India and China. In the two decades between 2009 and 2030, the global middle class is expected to increase by 3 billion people, which is 10 times the population of the United States.
These demographic shifts represent a human development milestone and a rich market opportunity for businesses, but it will not be possible to meet soaring consumer demand with business models that depend on increased consumption. The amount of materials needed could triple by 2050 compared to 2000 under current projections. This is pushing the world towards -- and probably beyond -- the point where it can provide the raw materials, energy and water societies need.
Better technology and improved efficiency will help bridge the gap, but business growth purely through increased consumption is a risky strategy in such an environment. Some industries will be better served by business models that allow customers to share and repair products, rather than dumping and replacing them. Apparel companies such as Rent the Runway and ThredUP are embracing clothing rental and re-commerce. Others may find that they can meet or exceed customer expectations through services rather than through the sale of goods. Philips, long a seller of light bulbs, has shifted to selling the light itself as a service to commercial buyers at a time when light bulbs last for decades, keeping the company profitable. Each industry may explore its own solutions, but we expect that the common denominator will be unprecedented business model innovation.
However, that innovation cannot happen unless business leaders address the elephant in the boardroom. We find that most companies’ sustainability teams can comfortably talk about climate change and improvements in efficiency, but not about consumption, because it speaks to the heart of the business model that has been so financially successful for the past century.
Our advice: ask your sustainability team to look at our recent research on natural resource consumption and its implications for business, and encourage a frank discussion on the risks of your current business model and opportunities for transformation. These conversations are necessary to ensure that business can continue to be the engine for economic growth.