Moving out of the Death-Zone Quadrant? Introducing the Sustainable Futures Matrix
The next decade will see historical business models requiring significant overhaul and reinvention.
TLDR: Over the coming decade there is going to be significant upheaval throughout the global economy. Existing business models will be upended, with new winners taking over as the impacts of changing community standards and exponential technology trends propagate.
The thesis of this post is that companies who find themselves in the “Death-Zone” quadrant with an extractive business model that externalises their global impacts, are rapidly going to find themselves out of business — likely long before the 2050 carbon neutral targets arrive.
A way to characterize a business is to consider how it uses resources and whether or not the costs (or benefits) associated with their use are fully captured on their balance sheet.
This concept can be set up in a 2x2 matrix, which I have dubbed the “Sustainable Futures Matrix” as follows:
Let’s unpack this a bit.
Business Model Impact
On the vertical access we have the source of wealth for a business. At the bottom this comes from extractive and non-renewable sources. This might be include:
- reliance on fossil fuels,
- a once through model where all waste generated is disposed of in landfill,
- a chemical process that produces hazardous by products through the various reactions, including CO2.
- an obsolescence model where profits come from relying on users of a product to frequently upgrade perfectly functioning items to the new generation, or pay exorbitant fees as users are unable to freely repair “proprietary” products when minor issue occur.
At the other extreme a business might have a regenerative model, one that:
- distinguishes between technical and biological cycles,
- uses renewable sources of energy and
- in all areas, leaves the world around it enhanced.
Balance Sheet Cost Accounting
The horizontal axis, plots how the business accounts for its impact on the world. At one extreme, are the companies that fully externalise their costs. Waste products, social impacts, economic risks and benefits are not captured by the business on their books, instead relying on the broader environment and community to ameliorate any impacts. Think here about the tragedy of the commons.
Of course an entity might not just be distributing negative externalities — there are positive externalities as well. Employment, environmental improvements, distributive economic wealth. A business may be happy in allowing positive externalities to be given away without fully monetising them.
On the other extreme, are businesses that fully internalise the impacts they have, capturing costs and benefits on their balance sheet. In the case of non-renewable businesses this might come about in the form of a tax or end of pipe treatment (for example carbon capture on a coal fired power station). In a circular regenerative business this might be a capital investment in new technology that gets away from the negative impact an older technology might have had — think here about the transition car companies are making from internal combustion engines (ICE) to electric vehicles.
The Four Matrix Quadrants
With the parameters of this matrix established we now have 4 zones to investigate:
- Ongoing Viability
- Wealth to the Commons
- Buying time
- Death Zone
Naturally it is the objective of business to stay profitable. Understanding where a business sits on this matrix helps define the path forward to have a fighting chance of survival.
If we were to plot the types of business models that fall in each quadrant it might look something like this.
The thesis of this post is that companies that find themselves in the “Death Zone” quadrant with an extractive business model that externalises its global impacts, are very rapidly going to find themselves out of business — through a combination of impacts relating to Paris agreement commitments, government policy shifts, social activism and technological advances.
Let’s first examine the top half of the matrix which will see two types of businesses and institutions set themselves up with the best chance of remaining viable into the future.
1. Ongoing Viability
Businesses in this quadrant leave the world better in every sense. They use circular principles, sustainable resources and renewable energy. They will be positioned to flourish in the world of the future as profitable businesses that tread lightly on the earth.
2. Wealth to the Commons
This is an interesting category of institution that sustainably operates, but decides not to montetise all of the benefits its generates. This category includes governments and non profits, who have missions to serve a broader cause or population. Interestingly it will also include businesses who see that their business is not a zero sum game and beyond their own self interest, they may actually make more money by leaving value for others to capitalise on, further enhancing the ecosystem they are operating in and making it even more valuable for everyone. Think of sustainable natural environments like farms, fisheries or forests; or other examples like platform economies where companies like Amazon and Shopify have found that by opening up their digital ecosytems for other vendors to build on top of and monetise, the growing user base that this has generated has let them to becoming the largest companies in the world
4. Death Zone Companies (and those 3. Buying Time)
These companies rely on taking resources from the earth (burning capital) and not accounting for the life-cycle costs these have on their balance sheet. These businesses will not survive past 2050.
The trouble for them however is that they are highly profitable today and changing their business model is a massive gamble that they also might not survive. So they have a choice to either canabolise their current business with the hope of landing on a profitable, sustainable model or eke out the last decade or two of profits (maybe even less) before oblivion. Two interesting case studies at either end of this spectrum are AGL and Glencore.
AGL is currently Australia’s largest emitter and has seen coal fired power generation assets go from cash cow to unprofitable in under a decade. Rapidly loosing shareholder value they are looking to split the business into two, in the hopes that their increasingly valuable green assets don’t get dragged down by their carbon generating assets.
Glencore have long made their profits from coal assets and believe there is still strong money to be made selling coal for at least the foreseeable future. In fact they are betting on lots of money being made anticipating that as others rapidly leave the industry to avoid stranding assets, a supply gap will be created as coal demand stays strong and supply dries up. Just this month they have doubled down on this position with the purchase of a new mine.
Increasingly we are seeing that the choice is also being taken out of the hands of these businesses as courts, governments and even their own shareholders are changing the economics of the business model for them. Recent court actions against Shell and shareholder votes against Exxon are but two examples of this.
A Forced Move to the Right
Where there is very little change to the underlying business but the true costs are more accurately captured on the books. This might be in the form of a tax (eg carbon tax or border adjustment tariff) or an end of pipe technology improvement (eg CCS) .
For many companies the free riding profits are rapidly turning into company killing liabilities as governments are forcing transparency around decommissioning and cleanup costs, creating a double whammy for businesses left standing when the music stops. As an example the Bass Strait oil rigs are estimated to cost $76billion in clean up to 2050, aging assets that can’t be sold, are increasingly unprofitable and will become a bottomless pit for the owners to clean up.
A Rebirth Diagonally Up
Another option is to completely change their technology or business model base to move diagonally into the top right. The AGL example of splitting up the business into two is an attempt to do this — a sacrificial company that remains in the death zone and a new entity with ongoing viability. Many carmakers are attempting a rapid shift with the move from ICE to electric (See Volvo or VW). Oil majors are currently running a major greenwashing campaign that would have you believe they are already in the top left Navara, while they work on plan B.
The Shift From the Death-Zone is an Unlikely One
History might suggest that the companies that attempt the move out of the death zone will struggle for two reasons.
Firstly, when the full impacts of their business model are appropriately captured on their bottom line profitability will dramatically reduce. Profits which will be required to be reinvested into making the vertical move. The reduced profits might mean the business does not have the cash flow to survive. This is exacerbated further by a rapid exit of shareholders, who seeing the declining profitability, will not provide capital critical in building the future infrastructure. Declining profitability and reducing access to capital guarantees a business is stuck.
The second reason is a mindset one that has repeated many time over history. Where a large incumbent business that is still highly profitable see an existential threat from a disruptive technology, history will say they don't have the agility to be able to canabolise their profits and pivot in this new direction. Think Kodak or Blockbuster or Nokia— highly profitable business, that were well aware of the competition that was coming for them but could not move their business in the required direction fast enough to save themselves.
For some companies- say the car industry - the pivot is significant but manageable. Going from ICE to Battery Electric Vehicles (BEV) is not a massive stretch (at least when you say it quickly). For others like the fossil fuel giants this switch means walking away from every element of their existing business. A challenge many are unlikely to survive.
They will be disrupted by startups who have a completely new model. James Allworth writes about this with Intel and Mac, with Intel on a fast track to nowhere as other chipmakers, especially Apple with the newly released M1 chip, blow them out of the water — a classic disruptor curve Clayton Christensen, back in 1995 wrote in his very first article on disruptive innovation:
And look at this chart from Anandtech:
Many incumbent business’s are about to experience the existential impact of this chart.
It is also worth briefly noting that a move vertically up from the Death Zone to the Wealth of the Commons is unlikely to happen in any scenario I can conceive of (but would love to hear from you if you think of one!)
The direction is clear, so let’s just go there already!
I like a thought experiment where you imagine what the world will look like at the turn of the next century. Looking this far ahead it is not a leap to expect that we are no longer relying on fossil fuels, we have technology and systems that respect the technical and biological cycles, and the worst impacts of climate change have been mitigated. In many cases the only thing stopping us implementing known technology solutions today to get us there is the short term social and political will. Given that vision, the obvious question is why wait? Let’s change the economic reality so that externalities are properly accounted for and move there starting today.
*Thanks to Henry for providing edits to this post.
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More like this from 10x Curiosity
- Moving to an economy within the earths limits — Donut economics — Is it time to begin moving to a more sustainable model of running the world?
- Life Implications of Exponential Growth — “If somebody describes the world of the mid-twenty-first century to you and it doesn’t sound like science fiction, it is certainly false. We cannot be sure of the specifics; change itself is the only certainty.” — Yuval Noah Harari
- Systems Archetypes- Places to intervene — An advantage with using systems archetypes as a problem solving methodology is that places to intervene in the system can be thought through and played with.
- Swarm Intelligence — Can managers develop simple rules to shape the behaviour of their organizations and replace rigid command-and-control structures?
- Wealth for Future Generations — Are you burning capital or spending currency?
- Antifragile — Becoming stronger with failure — Antifragile. A thought provoking concept developed by Nassim Taleb in a book by the same name.
