14 Jul 10 The New Deal

Those of you who are regular readers of my blog will be familiar with my view that the real impact of any recession is felt when the economists call the recession over. It’s only after a recession is technically closed that the real driving forces of change (I’m talking primarily political and socio-demographic drivers here) come into play. If you’re interested in the phases of change that I think come after the economically declared end of a recession – take a look at this post – Navigating the Waves of Change.

Martin Wolf makes a good job of focusing our thinking on the post recession world in his article Three Years and New Fault Lines Threaten[1]. Apart from supporting the view that there is more turbulence ahead (especially for the developed economies), he draws attention to:

(a) The fact that the “deals” that we have been used to in the developed world are bust – permanently bust. These deals are, in Europe, the great social safety net and in the US the goal of full employment.
(b) Potential problems with the “export panacea”. There are calls, particularly in the developed economies of the UK and US with a high financial services sector dependency, to go back to a tangible goods export-based economy. But the point that Wolf makes is that this in turn exposes the exporting countries to a range of risks (not just economic) within their foreign target markets.

So where could we be going?

Wolf points to the real dangers of deflation and the double-dip recession.

If these do events occur, then many, if not all, of the assumptions that we have made about globalization will seem like a Panglossian dream.

Consider:

• New political and economic alliances
• Economic “iron curtains”
• The prospect of significant political change especially in the hardest hit of the developed economies.  If the “deals” that consumers in the developed world depended upon are dead then consumers will look for new sources of security.  In the dim light of a slow, largely jobless recovery, even the sight of a centrally state planned economy  could look like an attractive New Deal.

And who said that we just had to sit this one out?

References
[1] Wolf, M. Three Years on and New fault Lines Threaten. Financial Times. July 13 2010.

Tags: communism

07 Jul 10 To trust or not to trust?

Arguably two books, published over the last twenty years, have made a profound impact on the way that business leaders see the future world. One is Fukuyama’s The End of History and the Last Man[1] arguing that western-based liberal democracy will spread across the globe. The other is Friedman’s The World is Flat [2] making the case for “corporate globalisation”.

Both have been interpreted as predicting a world free of conflict and the emergence of a new era of trust. Indeed, if we look back at business plans prepared before the Great Recession, it would probably be hard to find reference to conflict, protectionism and mistrust. And an unprecedented era of global economic growth appeared to give weight to the argument that history had ended – the world was entering a new phase of trust, co-operation and wealth for all.

Of course, if we had looked at the world from more than an economic perspective, then a different picture may have met our eyes.

But the above writings only represent one end of a continuum of thought regarding the future path of international relations and therefore globalisation. Others took a more questioning perspective found in Emmott’s Rivals[3] , Cooper’s Breaking of Nations[4] , Bobbit’s Terror and Consent[5] and finally at end of the continuum, Huntingdon’s Clash of Civilizations[6]. In varying degrees, these writings paint pictures of suspicion, mistrust and conflict.

So, what will the future hold?

Can we look forward to a new era of co-operation and trust spurred on by the need to mitigate the catastrophic effects of climate change and the eradication of poverty?

Or is this just a Panglossian wish? Will, for example, resource shortages and, in the developed world, the need to fundamentally restructure economies and industries lead to a fragmented world characterised by mistrust?

NB: For those interested in the negative pressures of globalisation from the perspective of the developed economies, then Andy Grove’s[7] – the co-founder of Intel – article provides an interesting perspective.

References
[1] F. Fukuyama, The End of History and the Last Man, New York: Avon, 1992.
[2] T. Friedman, The World is Flat: The globalized world in the twenty-first century, London: Penguin, 2006.
[3] B. Emmott, Rivals: How the power struggle between China, India and Japan will shape the next decade, London: Penguin, 2009.
[4] R. Cooper, The Breaking of Nations: Order and chaos in the twenty-first century, London: Atlantic Books, 2003.
[5] P. Bobbitt, Terror and Consent: The wars for the twenty-first century, London: Penguin, 2008.
[6] S. Huntingdon, The Clash of Civilzations and the Remaking of World Order, London: Simon & Schuster, 1997.
[7] A. Grove, How to Make an American Job Before It’s Too Late, Bloomberg, July 1, 2010.

Tags: mistrust, protectionism, trust

15 Jun 10 Waiting for change

My proposition has always been that it is the period after a recession that is most relevant for business strategy. Typically, changes in, for example, consumer behaviour that we witness during the recession are merely short-term reactions.

The time to get out and find out how customers’ needs are more permanently changing is after the recession. In the past I have predicted at least two waves of permanent change in customers’ needs and behaviours during the months and years after the official end of the recession. The first change being the realisation that we are not returning to the pre-recession halcyon days of debt-fuelled growth, the second wave taking place when the macro economic structure of countries (such as the highly financial services dependent UK) changes, again to reflect the new reality.

Recent research[1] tells us that this first post-recession wave of change has not yet started. This survey reveals that under 1 in 4 (23%) feel that the UK’s government’s impending austerity measures will affect them. So a surprise is in store for many.

It is also the time for astute businesses to identify the emerging needs and behaviours that may shape business strategy for the next decade.

Reference
[1] Eaglesham, J Pain message yet to be heard, says poll. Financial Times. June 14, 2010

Tags: business strategy, consumer behaviour, customers needs

11 Jun 10 Recession, change and the heroic leader

John Kay (Beware the cult of the heroic chief executive FT, June 9) provides us with an excellent summary of the failings of the dominant, heroic leader.

My research, conducted after the 1990s recession, shows that a special type of leadership is required if organisations are going to successfully pick their way through a changed post-recession business landscape.  Notably:

• Leaders must be strong enough to sweep away the blockers of change – those that believe “that the old ways will win through”.
• Leaders must also be prepared to admit that even they do not have enough knowledge of the new landscape to craft a new competitive strategy.
• Experimentation and learning.  Leaders need to focus their organisations on a period of experimentation and learning to fill this knowledge vacuum.
• Short-termist stakeholders – leaders must be strong enough too to resist the demands of those with only a short-term agenda.  Giving the organisation a breathing space to learn is an essential task.

Barking orders, vision statements and grand plans from the top, based on a dated and flawed view of the new world will have disastrous consequences.

My response to the above article, in the form of a letter to the FT, is here.

Tags: chief executive, competitive strategy, leadership, recession, vision statements

10 Jun 10 The danger of thinking in straight lines

Unfortunately, the world never moves in straight lines.  That’s why predicting the future, especially when making business plans, is so difficult.

A recent review of one long-term projection, Britain in 2010[1], a study prepared in in 1990 looking at the features of the UK in 2010, emphasizes this point.   If we compare the projections made in 1990 with the world that we live in today we can notice:

• An absence of the internet (and therefore social media)
• No mobile technology
• Peace – with the UK enjoying the fruits of a new-found global stability and …
• A buoyant economy.

To maintain balance, the 1990 work got a lot of things right but the major point made by the reviewers is:

… that non-linear or disruptive change was underestimated or completely missed. For example, the 1990 report predicted two decades of ‘important incremental progress’ in technology. They considered the internet (which, like climate change, was waiting in the wings in 1990, preparing to jump centre-stage) but didn’t anticipate its startling, planet-wide impacts …

Which is why scenario planning is so important.  A well constructed process encourages:

• Pluralistic thinking looking at more than one future world.
• The consideration of uncertainties as opposed to certainties and
• The exploration of extremes – especially when considering what might happen as opposed to what will.

After all, the future of your business is too important to bet it on just one view of the future isn’t it?

Reference
[1] Goodman, J. Britain in 2010. The Forum for the Future. May 21, 2010.

Tags: business plans, future world, predicting the future, scenario planning

10 Jun 10 More on the Perfect Storm

The perfect storm awaiting businesses in the developed world and the research that I have been conducting with a team drawn from Cass Business School and the Chartered Insurance Institute are summarised in the FT Adviser.

Tags: Cass, chartered insurance institute, insurance, perfect storm

09 Jun 10 Interview: The Perfect Storm

Many businesses face the prospect of a “perfect storm”.

For those in the insurance industry, this is a combination of catastrophe losses followed by the challenges of a “W” shaped recession that could bring social upheaval and political change in many countries that we have historically considered as “stable entities”.

But the perfect storm is not limited to the insurance sector – it could sweep across all sectors in many developed economies and reshape the business landscape.

I talk more about the perfect storm and what it means for business in this interview which includes findings from the research project I conducted with Cass Business School and the Chartered Insurance Institute:

Tags: insurance industry, insurance sector, perfect storm, recession

01 Jun 10 Challenging the Tenets of Management: #1 Shareholder value

The maximisation of shareholder value has been hailed over the last decade as managements’ central and ultimate driving mission or purpose in life. On the surface, it’s one that makes sense too. The shareholders are the ultimate owners of an organization, so the maximisation a business’s financial value (variously defined to include dividends, capital gains, proceeds from buy-back programs and other payouts*) to shareholders should be managers’ primary objective.

Or should it?

Over recent weeks and months the concept of shareholder value maximisation as one of managements’ “holy grails” has come under attack. Even Jack Welch, largely attributed as being the founding father of the school of the shareholder value maximisation movement, has taken a pot shot at it saying “on the face of it, shareholder value is the dumbest idea in the world.”[1] [2].

The CEO of Unilever, Paul Polman, added to the debate[3] when he stated that he was driven primarily by the customer saying “I’m not driven and I don’t drive this business model by driving shareholder value …” This led some to re-assert the dominance of the shareholder value focus[4] and others to question if it was indeed possible to focus on both the customer and shareholders[5].  Others note from research that a total and exclusive focus on shareholder value creation can produce highly questionable decision-making[6].

Stefan Stern[5] probably identifies the route cause of the current dilemma by pointing out that the real danger of focusing upon shareholder value creation is when one takes a short-term focus and decisions are centred upon immediate value maximisation for shareholders as opposed to long-term value creation.   If a long-term view is held, then this reinforces the view that the day-to-day job of management is to build a great business. And if you have a great business then by definition you will be maximising shareholder value in the long-run[7].

But does the argument end here?

Well, the answer to this question depends upon how capitalism is defined. Or, should I say, is being redefined. One of the products of the Great Recession is that the locus of power, in terms of who the architects of capitalism will be, is shifting. And if we look at recent events in Europe, the speed of the handover may be faster than most of us expected. New emerging powers are jockeying for position.

It may be worth reflecting upon the following words of President Lula of Brazil at the end of the second BRIC summit[8] earlier this year:

“The real baptism by fire of the group [the BRICs – Brazil, Russia, India and China] occurred during the financial crisis of the past two years … the sound response of the four countries to the crisis of the developed world opened up new alternatives to the shabby dogma inherited from the past.

The collapse of financial markets revealed the failure of paradigms previously considered to be unquestionable. Truths about market deregulation collapsed. The ideal of a minimal state also collapsed. The easing of labor rights is no longer a mantra to fight unemployment.

When all these orthodoxies collapsed, the visible hand of the state protected the economic system from the failure created by the invisible hand of the market.

While some of the major countries let speculative excesses flourish, BRIC countries promoted growth focused on work and prudence.”

These words could well give us a snapshot of the capitalism of the future. A definition that recognises not only the long-term but also the dominant interests of more than one stakeholder. It is a future that could be rushing our way and events such as the oil spill disaster in the Gulf of Mexico may well be powerful catalysts.

The problem is that many of the tools that we use now – such as the balanced scorecard – may not be geared to help us to take both the long view and the multi-stakeholder perspective.  So here are some questions to consider when looking at your organisation’s approach to performance management:

• What is the time horizon?
• Does the approach focus on just one year or are there longer-term goals?
  
• Is there a focus on developing long-term enduring benefits for stakeholders?
• Is the ULTIMATE focus just one one stakeholder (usually shareholders)?
• Are outcomes for other stakeholders included? If we look at the above quotation we can identify three further stakeholders – employees, regulators and society in general.

References
[1] S. Stern, “Personal Goods – Unilever warning on ‘shareholder value’,” FT.com, Apr. 2010.
[2] F. Guerrera, “Welch condemns share price focus,” FT.com, Mar. 2010.
[3] S. Stern, “The Monday Interview – Outsider in a hurry to shake up Unilever,” FT.com, Apr. 2010.
[4] K. Lever, “Letters – Misunderstanding shareholder value,” FT.com, Apr. 2010.
[5] S. Stern, “Judgment Call: How can you focus on both customer and shareholder?,” FT.com, Apr. 2010.
[6] L. Heracleous and L.L. Lan, “The Myth of Shareholder Capitalism,” Harvard Business Review, 2010, April, p. 24.
[7] D. Reece, “Professor John Kay on why the direct approach doesn’t pay,” Telegraph.co.uk, Mar. 2010.
[8] L. da Silva, “Brazilian President Lula: BRIC countries must forge a transparent system of global governance,” The Christian Science Monitor, Apr. 2010.

* See http://www.investorwords.com/5960/shareholder_value.html

Tags: capitalism, shareholder value creation, shareholders

27 May 10 Creative Destruction: The political dimension

Get a group of people in a room and ask them what the drivers of change are  – the forces that could reshape the world we live in.  I would hazard a guess that the list of change drivers that we would generate would be headed up by:

• Climate change
• Energy supply
• Sustainability
• Technology, e.g. Web 2.0
• Economic prospects
• Food supply

The problem is that, at least in Europe, there is another force staring us in the face that has the potential to drive through change that just 3 months ago would have been inconceivable.  And that is the force of New Politics.

This issue has surfaced in earlier posts.  For example, New Politics is on my list of trends to watch. Other posts include The Seeds of Change and Greece, Debt, Contagion and Political Change.

The scale of change that we could see across Europe and other members of Bloc #3 – the losers of the great recession – could be immense and the position with regard to Europe (or rather the end of Europe as we know it) is summarised by Etienne Balibar[1]. The major points in Balibar’s article are:

1. Europe does not consist of a series of aligned economies. Efforts to do so have failed. I would also add that the concept of aligning states around their  geographic proximity is a dated one and does not reflect the global value chains that have emerged over the last 10 – 15 years.  The idea of geographic proximity as a mustering point goes back way before the Internet age to the early 1950s.
2. A sound economic system relies on “trust” and trust is a product of (i) a stable currency, (ii) a rational system of taxes and (iii) policies aimed at ensuring full employment (Europe in its present state could fail all three of these tests).
3. We are facing a new economic order that fundamentally challenges the macro-economic structure of most, if not all, developed economies. In my view, the coming decade could well be “The Great Battle for Jobs” as employment in both the public and financial service sectors shrinks in the developed world. In Balibar’s words “Europe, or most of it, will experience a brutal increase of inequalities: a collapsing of the middle classes, a shrinking of skilled jobs, a displacement of “volatile” productive industries, a regression of welfare and social rights, and a destruction of cultural industries and general public services”.
4. It is the last point, The Great Battle for Jobs, that could well stimulate political change driven as Balibar puts it “from below”.
5. The real problem is that Europe faces at least in part a political vacuum – the politics of the last decades have lost credibility – so what will fill the vacuum?

These are critical issues to consider now.  Here are some potential questions that should be debated:

(a)  Could Europe dissolve?

(b)  Could a two-tier Europe (with possibly separate currencies) emerge?

(c) Could a new economically aligned group appear – with members not limited to mainland Europe?

(d) Which countries are exposed to the risk of political change and unrest?

(e)  What form could “New Politics” take in such countries?

(f)  What impact could New Politics have on the business environment and your organization’s strategy?

These are not just questions of theoretical intellectual interest. The forces of change are staring us in the face.

Reference
[1] Balibar, E. Europe is a dead political project. The Guardian. May 25, 2010.

Tags: europe, neo-libralism, new politics, political risk

26 May 10 Fragmentation or Sustainable Recovery?

Every morning I spend about an hour or so scanning news feeds from a range of sources with the primary of objective of updating my database of world trends – and of course getting ideas for blog posts!

Living here in London we have a saying about buses. When you’re waiting for a bus (sometimes longer than anticipated) they arrive together at the same time. Sometimes articles and thoughts in news feeds are the same.

This time it’s the turn of commentary on the prospects of failed globalization and the emergence of a fragmented world – something that regular followers of my blog will be familiar with.

The first to hit my screen was a piece by Robert Kagan[1] pointing towards the signs of increasing US isolationism and more particularly a feeling in some countries that if the going gets tough in terms of future military stand-offs, then the US might not be there to back them up. Incidentally, if you want a view of the challenges facing globalization try reading Kagan’s book The Return of History and the End of Dreams.

The second[2] was the issue of North Korea and the implications of a regime collapse fuelled, interestingly, by failed attempts at state controlled capitalism. Apparently, East Germany went down a similar route immediately before the collapse of the Berlin Wall. The process of North Korea’s collapse could of course bring the first test of the US’s willingness to open a third front bringing us back to Kagan’s point. For those of you interested in looking a a range of scenarios around the collapse of North Korea, please see O’Hanlon’s work[3].

The third article[4] took really the same underlying perspective as the second, of nations and interests seeking recognition on the world stage, warning that a failure to find a lasting settlement in the Middle East could spawn a new wave of international instability.

So, what has all this to do with business and strategy?

Well quite a lot. The President of the World Bank, Richard Zoellick[5] points out that the challenge for us all, but particularly the developed economies, is securing sustainable growth. From the perspective of the developed economies (and arguably even more so for those in my bloc #3 – the Great Recession’s losers), sustainable growth depends upon investment in and demand from the developing world.

So a sustainable recovery depends upon a largely united world.

References
[1] R. Kagan, “A hollow ‘reset’ with Russia,” The Washington Post, May. 2010.
[2] I. Bremmer, “Dangerous Insecurity,” The New York Times, May. 2010.
[3] M. O’Hanlon, “North Korea Collapse Scenarios,” Brookings, Jun. 2009.
[4] S. Hariri, “Mideast peace: It’s a global issue, says Lebanon’s prime minister,” Los Angeles Times, May. 2010.
[5] R. Zoellick, “Look to the developing world,” FT.com, May. 2010.

Tags: capitalism, fragmented world, globalization, north korea, world trends