US President, Joe Biden recently signed an executive order authorising the launch of a 100-day review of supply chains for four critical products: semiconductor chips, large-capacity batteries for electric vehicles, rare earth minerals and pharmaceuticals. The purpose and politics behind these reviews are not up for debate here. For the corporate strategy practitioner there is however a clear message; it is to adhere to the need to be conscious of a loss of strategic alignment between the firm and outer components of the external environment (Level 1); before it becomes a problem. Although an obvious statement in many ways, the consequence of this eventuality is one that is often missed as most other issues of alignment tend to focus on Level 3 and occasionally Level 2. A brief description of each of these levels are described as follows:
Level 1: Outside In, external indirect environment (many to many): the firm and the universe.
Level 2: Outside In, external direct (many to one): the firm and its industry, markets, customer segments.
Level 3: Inside Out, internal (one to one): Internal operations; examples include Strategy formulation and implementation, Business Unit and Corporate strategy, Business Unit and Department strategy (HR vs Business Unit).
Finding a way around the masses of content that can be found in the external environment at Level 1 especially has never been easy or clear cut. For many years governments and corporations alike gave up trying to capture such information in its entirety. In hindsight for example, we can appreciate the incidents and associated consequences of the monumental episodes presented by the Global Financial Crisis (GFC), the Covid – 19 pandemic, climate change, mass migration of refugees and so on. All are examples of eventualities that were highly predictable, but unexpected once they became a reality. What wasn’t predictable was the timing, intensity and duration, but there is no surprise in that.
Recent examples where a Level 1 threat became a Level 2 nightmare are Shell and Exxon. Just this week Shell was forced by the courts to take affirmative action to exit the high carbon producing fossil fuel industry at a much hastened pace. Ironically, Shell is highly renowned for its use of scenario analysis as a tool used to help them ‘see’ into the future. On this occasion, a Dutch court found Shell had missed the significance of one very big assumption, the strength of the popular voice. Essentially, The International Court of Justice in The Hague ruled that the company must hasten its planned carbon emission reduction scheme to a level that is 45 per cent lower in 2030 than it was in 2019. In Exxon’s case a little known hedge fund, Engine No 1, managed to persuade shareholders to back the election of two 'environmentally conscious' directors to the board even though it held a mere 0.02 per cent stake (or $54m) in the company. Their presence will no doubt have significant consequences for Exxon's continued involvement in the fossil fuel industry also.
Many other examples of consequential decision making events that were made in similar circumstances in recent times include HSBC Banks decision to raise its support for and presence in Hong Kong, while exiting the (albeit loss making) USA. Potentially not a decision of choice, but one that became an inevitability once the USA, China trade wars erupted some four years prior. Another is the entire automotive industry that has suffered a huge slump in sales due to a lack of availability of microchips. Admittedly a major fire in a Japanese chip manufacturer as well as changes in supply formats from suppliers in Taiwan were major influencers in the slump. Some pundits have suggested however that global capacity for chip production has been nearing its upper limit for some time making a shortage of supply inevitable at some point.
Is there a solution? There is at least one managerial based solution. It requires the strategy practitioner to elevate their awareness of all major assumptions and potential areas of risk, at all three levels as a key part of the strategic management system. Once identified, a strategic risk monitoring and alerting mechanism can be built in a form and format that is similar in construct to a risk management capability. This, along with a formal strategy implementation program (a program of continual strategy renewal) can be integrated with the regular monthly management reporting regime. In the alerting mechanism levels of reaction can be nominated -and monitored. An immediate response to threats to key suppliers (such as micro chips for example) are flagged and brought to the attention of the CEO and board immediately. Consequences from the gradual onset of climate change could also be flagged, but not necessarily tagged as an item requiring immediate attention.