A Better P/E Metric for the Future: Platforms & Ecosystems

Salesforce.  Apple.  Facebook.  Google.  Alibaba.  Linux.  Digital platforms that spawn and enable ecosystems that, with proper and ever-evolving design, benefit a more broad and inclusive set of valuable participants.  Technology – distributed, mobile, embedded - enables reach unprecedented, both physical and geographical, as well as in use case and impact.  Development of such platforms – secure, while open, flexible and scalable – and catalysis of ecosystems of this scale require incumbents (intrapreneurs) and disruptors (entrepreneurs), as well as both collaborators and competitors.  Success hinges on trust: belief in shared prosperity and the opportunity for growth inclusive of all participants.  Ecosystems represent the collective eyes, ears, and opportunity for growth and expansion, with direct access inherently limited. Customers previously out of reach become active collaborators, crowdsourced ideas get implemented.  Public and private sector team to deliver tackle the real global challenges.  

Business and organization models have and must change. Lifetime value of a customer becomes paramount.  Values-based leadership wins in the face of hyper mobility of all – customers, workers, partners.  Gone are the days of ecosystems as channel - integrators, resellers, referral partners – in which one primary partner aligns exclusively its supporters along lines of commitment, often maintaining unilateral power over the network.    Diversity of actors drives growth rather than undermines it – just as in nature.  Think activation of assets versus control of assets.   Think of both the market efficiencies realized  in the on-demand economy and represented by companies like Uber, and - simultaneously - of the stakeholder returns and profitability of the German Mittelstand.  No model is yet perfect: the former, as example, carries controversial impact to labor dynamics and wages, while the latter may be more siloed, but together, these elements of leadership begin to showcase the piece parts of evolved and more efficient business models.

According to the Interbrands Global Brand Report for 2015, four of the 5 top global brands lead with platform-based business model.  The image below demonstrates the incredibly impressive reach of Salesforce’s achievements. 

And the the blurring of the digital and physical world platforms are coming.  Just contemplate for a moment the difference in the massive and vertically integrated GE of the mid 20th century versus the firm of today, in which GE Digital employees 25K people globally and seeks to connect and service the entire Industrial Internet with it’s Predix platform, which may in turn enable wholesale migration to product-as-a-service business models.

Ecosystems are not a new idea, but we can now envision platforms and enabled ecosystems in radically more interesting and dynamic ways than ever before.   In the future, the ecosystem enables reach, innovation, efficiency, the circular closing of the market and product loops, and even the more inclusive and impactful economic opportunity at hand.

Going Circular with Plastics: Startup ByFusion Spinning Into Production

One of the great ironies of our time is the fact that one of the few permanent materials on the planet makes up the majority of our single-use, "disposable" packaging.  Indeed, a volume of plastic equivalent to the Empire State Building flows into our global oceans weekly, with an estimated 8 million tons of plastic flooding waters annually.  While some private sector innovators, as well as countries, states, and municipalities are working very hard to both avoid and stem this flow (e.g. San Francisco currently diverts ~80% of waste from the landfill; plastic bag bans have been implemented in regions across the globe, innovative packaging such as the edible 6-pack rings from Saltwater Brewery are emerging, and numerous other examples are promising,) less than 8% of the 300M tons of plastic produced each year is recycled.   I've spent the better part of the past year studying this problem, both first hand in Latin America and with experts at UNEP and other leading institutions.

Top of the funnel, "closed loop" circular business models and solutions are essential; we must work to slow, minimize and stop the flow of plastic waste into oceans, landfills and incinerators.  Manufacturers must increasingly design products for disassembly, repair, remanufacture, and return plastics to the supply chain.  Packaging strategies must evolve to minimize plastic waste and drive consumer behavior change.

Until then, enter ByFusion.

ByFusion has created a process and machine for capturing plastic waste and turning it into a construction asset, a material called RePlast, which is effectively blocks that can replace traditional concrete or other materials in numerous development applications.  This is not the first time innovators have thought to use plastic waste in construction - there are small scale efforts in the developing world such as the one led by my friend, Andreas Froese, and also awe-inspiring, high end design proofs as seen in the EcoARK created by the team at MiniWiz in Taiwan. But this one is different, going beyond the reuse of bottles alone, and expanding the potential impact and applicability across numerous infrastructure use cases.  While early, this innovation has the potential to solve many of the specific challenges we face in plastics recycling, (beyond the obvious sheer scale of the problem):

  • current processes require separation of the 7 types of plastics, only 3 of which are broadly recyclable - this is costly and inefficient
  • the significant majority of plastic currently recycled globally gets transported to China for processing into down-cycled materials and then subsequent return to local areas in the form of products, incurring significant cost and negative externalities associated with transportation and processing
  • current collection of plastic waste from beaches and oceans is gated by the presence of waste pickers, beach cleanup crews, and skilled marine teams and equipment

The ByFusion process is portable, enabling local collection and processing.  It is green, operating in a carbon neutral model and free of toxins and adhesives.  It eliminates the need for sorting and pre-washing and accepts and uses all type of plastic waste.  Key questions on my mind include how the actual collection process works and any related environmental impact, as well as the intended business model - how the economics will flow and whether this also represents opportunity for local job creation and economic development in region.  The company is early and has all the typical, early-stage execution challenges ahead of it, but this is one worth applauding and supporting - you can do so directly via their IndieGogo campaign.   

 

What do Software-as-a-Service, Custom Denim Jeans, and the Hard Drive Industry Have in Common?

.... Surprisingly, quite a bit.  Collectively they help to illustrate both the incredible resource waste and inefficiencies of traditional manufacturing and the possibility of a better path.  And they directly inform this author's knowledge (having run businesses in all three spaces) and desire to effect a more circular economy.

Circular economic models are inherently about business processes that involve physical materials - the idea is to use less virgin raw material, expand maximum utility of goods, and recapture as much as possible for return into the manufacturing process, thereby moving toward a zero waste manufacturing and production cycle.  Indeed, waste becomes an asset, an asset with multiple levels of value.  The circular model is inherently regenerative and restorative of resources, while also offering a path to profitability... long-term, sustainable profitability.  To achieve it requires the following innovations: 

  • product design that targets extended lifetime, as well as ease of reuse, repair, remanufacture, and disassembly
  • manufacturing processes that use minimal and clean energy, and promote materials practices that facilitate recapture and recycling
  • business models focused on product use or performance that are designed not only to maximize profits but also to extend lifetimes, (including both initial and those realized as a result of cascading products into secondary and tertiary markets,) as well as to enable the recapture of goods and materials for reuse in 'new' product manufacturing   

While there are numerous potential models that facilitate the transformation to circular in part or in whole, (see the excellent report by Lindsay Clinton and the team at SustainAbilityModel Behavior: 20 Business Models for Sustainabilityhere), the Product-as-a-Service construct may represent the best opportunity to achieve a fully integrated, global, closed loop process.  In product-as-a-service, physical goods are sold not by the unit, but according to some metric of usage or performance, ownership of the product is not transferred to customers, but maintained by the company, values of both company and consumer are aligned around long-term value, and expectation is pre-established that end-of-lifetime products are not thrown away (or even recycled,) but instead returned to the manufacturer as part of the service.

I've spent the majority of my career building software-as-a-service (SaaS) companies in San Francisco and Silicon Valley.  Indeed, SaaS models have become the de facto standard for software delivery, for several important, if obvious, reasons:

  • streamlining code development and maintenance (each customer uses the same infrastructure, which can be continuously updated behind the scenes);
  • lower cost of goods (no physical product, no shipping, no on site integration services);
  • ongoing and direct customer interaction and touch points (visibility into environments, usage data, ability to provide customer service on the single system);
  • lower operations costs; higher profitability (per customer costs decline as users scale due to shared infrastructure, efficiencies gained from sales and services managed largely over the cloud); 
  • predictable revenue (multi-year, monthly increment subscription contracts v. one time license + services fees);
  • ability for customers to pay as they grow (lower barrier to initial sale, easier and more fluid scaling);  
  • controllable investment vehicle - known cost of customer acquisition (CAC) and lifetime value of customer (LTV) metrics enable companies to dial up/ down marketing engines and make investments, knowing they can return to target profitability margins as needed via the same dials.  

But what does this have to do with circular economy?  SaaS is inherently circular, using zero raw materials and producing zero waste from the outset.   Isn't it therefore irrelevant?  

No.  Indeed, the model directly can serve to directly inform entrepreneurs, intrapreneurs, and investors thinking about the need for, and opportunity in, driving efficiency in the production of manufactured goods that is essential to a sustainable, next era of industrial development.

Here's a look at how the SaaS characteristics outlined above might apply to this new model:

 Take-away: 'yes to all' belies opportunity for product-as-a-service opportunities and evaluation.

Take-away: 'yes to all' belies opportunity for product-as-a-service opportunities and evaluation.

The critical enablers of the SaaS model are technology (cloud infrastructure, performance, analytics) and a fundamentally transformed culture that recognizes and rewards customer experience and long-term relationships.  These will be paramount in the analogous move from unit-based product sales to true product-as-a-service business models.  Investments are necessary in infrastructure to enable the 'loops' of circular materials flows, as well as to track physical location of both goods and local service providers and facilitate cascading markets and reverse logistics, and the customer relationship management including new sales, pricing and billing systems.  Think of this as "thinking like a software company," as discussed here in the Harvard Business Review.  

Radical operational and cultural shifts are also paramount, along with education/ reeducation of investors as to the opportunity for improved long-term profitability AND broader stakeholder value that arises from the new model.  Imagine for example, that a hard drive manufacturer was not valued solely on 'units shipped per quarter' (the current metric,) but rather total storage deployed, durability of storage, resale of down generation products into markets desperately in need of technology infrastructure, and the recapture and reuse of the precious rare Earth materials currently dug anew, in full, for every new drive produced.  

Of course, one needn't look far to see exceptional examples of technology-enabled 'everything as a service' already in action... in part.  Uber facilitates 'cars as a service', while Airbnb enables 'homes as a service.'  (Among numerous others.)  But, these are adaptations of the taxi and hotel service offerings; they are innovations on transportation and lodging service industries, despite that the underlying asset is a product (e.g. car.)  Nonetheless, they are illustrative and impressive as indicators of what technology can enable in the creation of exchanges and of max utilization values.  

Also importantly, true product-as-a-service is also here, and has been for quite some time in at least a couple of industries.  Perhaps the longest running is the Rolls Royce 'Power by the Hour' program, more than 50 years old, that 'sells' jet engines-as-a-service based on flight hours.  But what about smaller commercial and consumer goods, those characterized by the fastest make/ waste cycles and greatest volume of non-recyclable materials?  Let's revisit that comment above about custom denim... I lived first hand through the tremendous waste that characterizes denim manufacture - both biological and physical materials used in production, as well as unsold, returned, and discarded product.  For a better way, see Mud Jeans in Europe, which launched recently offering jeans-as-a-service and a wholly circular model.  

It is these latter, comprehensive models to which we need to strive  with manufactured goods, large and small, commercial and consumer.  Fortunately, the value to the bottom line in doing so seems it can be additive and attractive, not something to be begrudgingly considered to appease the social do-gooders.  The technology platforms that enable Uber and the rest of the sharing economy lay important groundwork.  

Next up... the entrepreneur v. intrapreneur opportunity, and facilitating the 'last mile' loops of local product repair, recapture, and the new ecosystems necessary to do so.

Defining [a More Human] "Circular Economy"

According to the Ellen MacArthur Foundation, the leading think tank on the topic, "A circular economy is restorative and regenerative by design, and aims to keep products, components, and materials at their highest utility and value at all times. The concept distinguishes between technical and biological cycles.... [and it] is a continuous positive development cycle that preserves and enhances natural capital, optimises resource yields, and minimises system risks by managing finite stocks and renewable flows. It works effectively at every scale."  This is - clearly - distinct from our global, overwhelmingly linear model of take/ make/ waste, designed intentionally following WW2 to foster consumption and the 'disposable economy' and drive industrial productivity.

No question, Ellen MacArthur is the bomb, arguably the most influential team working to drive transformation across sectors and the globe, delivering ground breaking research with partners like the World Economic Forum, McKinsey, and others, and influencing both public policy and private sector action.  But I contend that this definition omits one key element of a truly circular economy, in which 'resources' must also include human resources.  Analogously, B-Corps seek to move from a model of prioritization of shareholder value to one in which the return to all stakeholders - people, planet, profit - is demanded.  A circular economy should also advocate an inclusive model which aims to keeps people, along with 'products, components and materials at their optimal level of utility and value at all times,' assuming of course that human utility and value is also correlated with individual prosperity (think: wage share, among other critical components).  

Fortunately, it turns out that while manufacturing from raw materials (dominant in a linear economy) is characterized by ~75% materials cost, with only ~25% labor cost, in at least several of the loops of circular economy, this ratio can be inverted.*  Indeed transformation to more circular models has the potential to create jobs, while expanding profitability and preserving our planet.

More to come on job creation and the roles of technology and human capital in circular economies...

*Data cited by Hunter Lovins, a lifetime scholar, influencer, thought leader, and author in her presentation during the Disruption Innovation Festival 2015.  

 

Five Core Contentions

Welcome to the Rethink: Circular blog and community.  I look forward to building a highly engaged community of thought, business, and political leaders engaged in this important work. 

We begin with the following 5 assertions:

  1. Income Inequality is Institutionalized. A combination of factors has led to the evisceration of productivity in the US in recent decades, and with it real wage growth and the middle class.  We contend that primary drivers include (a) the prioritization of shareholder value over stakeholder value, short-term stock price over long-term enterprise value, (b) a few critically flawed economic assumptions made in traditional, laissez-faire economics and exacerbated by policy over the past 3 decades, (c) cheap credit markets that have fueled irresponsible over-consumption behaviors, and (d) a financial market system in which 85% of capital remains perpetually in the financial market itself, rather invested in the real economy.  
  2. The Environment is Trashed, Literally. Coincident with the human tolls, the systems described above have imposed far reaching negative externalities on our physical world under the growth at all costs prevailing scenario.  The ramifications of dirty energy are better understood, but the impact of our linear, take/make/waste production and consumption models that gouge our planet of its resources, with the inherent objective to use/ exhaust/ replace them as quickly as possible is less discussed and addressed by many.  Recycling - albeit insufficient still - needs to be the last resort, not our best answer.
  3. Challenges are Significant, but Definitely Surmountable.  Fundamental, structural business model changes can provide a path forward for both challenges.  A circular economy values processes that measure value in lifetime extension, durability, serviceability, use, and performance, rather than top line unit growth. New models that reward product extension versus planned obsolescence, facilitate creation of new markets for reuse, followed by refurbishing and remanufacture, and only then recycling, are working already. These models align corporate, consumer and social goals.  These models leverage technology to facilitate the 'future of work' versus undermine it, to enable the combination of technology and people to do things previously impossible.   
  4. Public Collaboration with the Private Sector Leaders is Essential.  Not only must business leaders and models adapt as above, but new metrics, valuation methods, investor rationale and an expanded view of returns will become paramount.  And policy must be implemented to facilitate the evolution of flawed incentive schemes to reward short-term investment as a path to long-term, stakeholder value, as the transformation occurs.  
  5. And personally, I believe... The Possibility Exists to Bake Social Justice Goals into Solutions Early.  Beyond the wage share and income inequality discussion above, any quick look at unemployment data by sector reveals endemic higher rates in certain communities.  The same communities that are all too often also held back by the persistent disadvantage - even racism - that we cannot ignore in the US.  I believe that we can, as we develop new models, as we create businesses that facilitate local recapture of goods or in new 'as-a-service' models facilitated by technology, selectively include these communities, especially youth, and contribute incrementally along this increasingly visible and important aspect of advancing true social prosperity.  

This blog will investigate both the problem statements posed here, as well as dive deeply into the potential solution hypotheses.  We will also use case studies and interviews to highlight the existing, emerging and exciting leadership happening already in the field.  And my commitment is to make this productive, forward thinking, tangible, and inspiring  - the challenges are significant and deeply entrenched, but the opportunity and its implications are massive and beg for engagement, execution and passionate pursuit.