Since the industrial revolution, we’ve lived in an economic system predicated on high growth. For the last 20 years, that growth has relied on an abundance of capital and other external resources and has benefitted from tailwinds like global economic integration. Today, however, that model is at risk — we can see the limits of resource abundance encroaching on multiple timescales. The acute constraints we’ve experienced since the COVID pandemic began, including supply chain disruption, workforce availability, and energy shortages, are slowing the rebound to normal rates of growth. Furthermore, slower rebound can be an early warning indicator of deeper systemic change, in this case signaling an era of protracted scarcity of labor, capital, and natural resources that will make growth harder and require new strategies.
This new scarcity could threaten the successful business models of today’s large companies, which are built on virtually unlimited access to resources such as labor, raw materials, and energy.
But threats to current business models need not threaten business itself, so long as firms embrace new constraints, leverage them to advantage, and perhaps, in the process, uncover new sources of abundance. Recall Michael Porter’s “The Competitive Advantage of Nations,” which argues that a nation’s competitive advantages sometimes stem precisely from those areas with the tightest bounds; Japan, for example, pioneered lean production techniques in part because it was a mountainous island nation with very little excess land. Singapore is another example of a prosperous but highly resource-constrained economy.
These advantages may include more integrated approaches to sustainability, new types of resource efficiency, and innovation around new inputs. They may also include more radical approaches such as de-materialization or a greater emphasis on well-being over physical production and consumption. Ultimately, the ability to navigate this environment can be a significant competitive differentiator, giving rise to a new set of possibilities for thriving in a new context.
The end of abundance?
Three major global trends are driving resource scarcity for businesses:
- First, capital is becoming less abundant as interest rates rise, ending a two-decade streak of nearly free capital. In the medium term, interest rates are projected to settle well above the last 20 years of near-zero rates. The tailwind of global economic integration has also played out.
- Second, pandemic-induced labor shortages are merely a prelude to more widespread and persistent labor scarcity. Compounding pandemic-related shortages, WEF estimates that by 2025, half of all workers globally will need to reskill to meet changing labor demands. And the long-term challenge of population aging and decline will take hold in the coming years, with two-thirds of the global population already living in countries with births below the replacement rate. Migration into those countries is likely the only way to prevent population decline.
- Third, the supply chain woes of recent months are also merely harbingers of more persistent resource depletion, scarcity, or price increases. Resource scarcity is already apparent for some inputs like water, which will be insufficient for two-thirds of the world’s population by 2025. Depletion of other inputs may occur within the century, including 12 chemical elements. Further, as the breaching of planetary limits pushes countries to begin pricing in externalities like climate change, current business models will likely come under pressure even before depletion is fully apparent.
For businesses, it will become harder and harder to find easy growth by relying on traditional notions of abundance. Instead, businesses will need to innovate to create new types of abundance, whether that comprises novel sources for talent or types of input to create new offerings with fewer harmful externalities.
Prosperity without easy growth
Farsighted leaders will counter the global trends tightening boundaries by rethinking business models to navigate and even exploit scarcity in the short term and to find new abundance in the long. This will require leaders to take various strategic actions on different time horizons.
Today, adapt your market positioning and stance on innovation to mitigate and exploit scarcity to your advantage. These actions will be familiar to most companies from other contexts and the challenge will be to take sufficient action, with sufficient speed.
- Reposition for growth. In each economic crisis, demand patterns shift, and winning formulae for growth change. Even in times of low aggregate growth within a sector or an entire economy, there is always growth somewhere, so reposition in product and market segments that are growing. The 2008 financial crisis significantly shifted demand patterns. So did COVID-19, which significantly increased consumer appetite for digital shopping and consumption. Dell had done big business selling desktop computers to companies. But when the pandemic hit and work-from-home materialized, companies no longer wanted desktops; instead, they had an increased need for laptops for their employees. Dell was able to capitalize on the shift and is now better positioned to support enduring changes in the pattern of work. Now, an impending crisis of scarcity is priming consumers to shift their demands towards sustainable and long-lasting products, as well as to experience and entertainment services.
- Expand talent access. Adapt your talent strategy for advantage today and tomorrow. Create a “bionic organization” by focusing human talent where it is needed most, in areas requiring imagination, empathy, or ethics, and leveraging AI where it is especially adept. Further, broaden your talent search, in order to find the best talent and the freshest perspectives. Expand the search at home by developing upskilling or reskilling capabilities to support evolving talent needs and reach underrepresented populations. For example, Amazon must rely on non-traditional IT and tech workers to staff its rural data centers, so they train talent by partnering with local community colleges to create purpose-built vocational programs.
Expand supply by making your talent search global, and by creating a culture and structure that supports borderless collaboration. Africa and South America will have the most population growth in the next century and will therefore be a potential source of labor. Start building an international culture in your company now. Rakuten, a Japan-based E-commerce firm, made the transition early and mandated that the company become English-first in 2010, in order to become globally relevant. The transition took two years, but since then, it has reaped the rewards, growing revenues from US$3.9 B in 2010 to US$15.3 B in 2021.
- Build resilient supply systems. We know from physics that there are often early warning signs of critical phase transitions (like collapses) in complex systems, which include increased variance, and slowing down of return to normal after disturbance. We have seen both occur in supply systems since COVID, requiring a more holistic approach to enterprise resilience. For example, during the pandemic, Totino’s faced a rotating list of ingredient shortages for their frozen snack, so they developed a modular set of 25 recipes that allowed them to continue producing despite such shortages. Diversity (in this case of recipes) is one of the six principles that form the pillars of system resilience.
Adaptability, another pillar of resilience, can be very valuable in adjusting production capacity in volatile markets. This is relevant in all businesses - even in aluminum smelting, with its notoriously inflexible manufacturing systems. For example, TRIMET, a German aluminum producer, invested in new technology to allow its smelters to vary energy consumption and aluminum production by up to 25% in either direction (from a usual range of 5%). This allows TRIMET to adjust consumption to produce at off-peak hours, saving money and energy. In the new volatile and resource constrained context, companies will have even more reason to tap into each of the six biological principles for creating resilient systems: diversity and adaptability, discussed above, as well as redundancy, modularity, prudence, and embeddedness.
In the medium term, find new abundance through innovation and by making environmental sustainability a durable competitive advantage. It’s a challenging task, but one that has the power to be a true differentiator —currently one that only 20% of businesses even claim to be able to realize.
- Innovate for growth. A stagnating industry or economy is not a death sentence for an individual company. If you can’t find growth passively, make it happen. To that end, innovate to defy the industry average growth rate. In scarcity constrained, low-growth environments, innovation becomes more important as companies compete more viciously for limited resources. By creating offerings using new inputs and business models, innovators can find reprieve and new abundance.
- Practice disciplined innovation. Continued evolution in technology, shifting economics of input resources, and demands for more sustainable business models require innovation at the very same time that an elevated cost of capital makes this more expensive. A new, more disciplined approach to innovation is therefore necessary. One such approach will be the adoption of “co-ambidexterity,” wherein the assumed trade-off between exploration and exploitation is broken. Customer interactions are mined more effectively to learn and shape emerging preferences with shorter learning cycles, and more targeted innovation.
- Leverage “sustainability scarcity.” When many companies simultaneously attempt to shift to environmentally sustainable and renewable materials, a new (more temporary) scarcity takes hold in the market for sustainable goods. Build advantage by getting one step ahead of such cascading shortages; embrace the bottleneck, and then work to help solve it for yourself and your industry. Do this either by securing your own supply of sustainable materials, as both Coca-Cola and Pepsi have done through investments in recycled plastic R&D and infrastructure, or by contributing to the formation of sustainable resource markets by advocating for advantageous policy, investing in early innovation, or forming coalitions to address supply chain constraints.
- Build sustainable business models. Business leaders will also have to reinvent business models so that companies can thrive even as consumers and governments become more concerned with preventing degradation to the planetary systems that support life. We have found that the most successful sustainable business model innovators have reimagined their core business models around new environmental, societal, and financial priorities, rather than simply adding sustainability as separate consideration. There are a dozen archetypal strategic moves that businesses can make to transform current business models into sustainable ones, including: owning the origins, owning the whole cycle, expanding societal value, expanding value chains, innovating in ecosystems, re-localizing or regionalizing, energizing the brand, or building bridges across sectors.
For example, Cotopaxi made a name for itself in the outdoor gear market with its colorful bags and clothing by expanding societal value, energizing the brand, and expanding value chains. The zany and mismatched fabric combinations come from the company philosophy of using fabric scraps from other, bigger bags. They have made sustainability and limiting waste synonymous with their brand, and in doing so found market success with a model that minimizes the raw inputs they require.
In the long term, prepare for a world where material growth may be severely constrained in aggregate. The growth hockey stick, which began with the industrial revolution and created modern business and society, cannot continue indefinitely for reasons of both simple arithmetic and ecological sustainability. We currently have few answers as to how continued prosperity can be reconciled with these escalating constraints. But we can reasonably suppose that the path forward will involve both reducing the material intensity of production and consumption and realigning economic value with what we as humans will value in a resource constrained future.
- Stop relying on material growth. Dematerialize your product offering by taking “reduce, reuse, recycle” to the next level; embracing the service and experience underpinning product offerings; or innovating in the digital realm. Selfridges, the British department store, has set a goal of having half of customer transactions based on resale, repair, rentals, or reuse by 2030. This benefits customers, who have more options for how to engage with the brand, and Selfridges, which will create durable business lines with lower material intensity. Importantly, it will also benefit the earth.
When it comes to experience, luxury clothing brands are also pioneers. The luxury sneaker brand Golden Goose differentiates itself in a crowded space by promising the highest level of shoe repair. It fits the company’s brand of quality shoes that are built to last and creates an immaterial business arm and differentiator. Another tack that luxury fashion brands could lead is expansion into the metaverse; Morgan Stanley projected in 2021 that luxury fashion in the metaverse could be a $50 billion industry by 2030. Whatever method a business takes to dematerialize, the result is both lower cost and a decoupling of revenue from scarcity-induced instability.
- Change your metric for success. Become a company that experiments with your metrics for success. Daniel Leventhal, a leading thinker in corporate strategy, posits that leaders might reimagine corporate exploration as experimentation with new metrics of performance. As we value more and more our shared context, it is logical that we will measure and manage it with new metrics that reflect this. The proliferation of ESG and impact investing firms has also resulted in an abundance of success metrics from which to choose, though of course, at the highest level the goal of the company must be dictated by its values. At the level of a nation or society, we could also change our goals. We could, for example, adopt inclusive well-being as an umbrella goal. Or we could adopt inclusive wealth, which is a macroeconomic concept that includes natural capital and human capital, in addition to the more familiar production capital. The US plans to start publishing inclusive wealth metrics in the next couple years alongside GDP. Such a development would naturally have implications for how companies are taxed and regulated, and therefore how they ought to measure success. Some companies are already experimenting with different ways of measuring value. Everytable, a fast-casual food chain, and delivery service, uses economies of scale and central kitchens to beat competitor prices for their healthy meals. They also use a variable pricing model to reach disadvantaged neighborhoods, capturing customers in more areas precisely because they prioritize fighting food insecurity as part of the business model.
Ultimately, it will be the companies that use these new cascading constraints to their advantage that will succeed by creating new abundance.