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

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

14 May 10 Euro and New Politics

In my review of major trends to watch I talk about New Politics – in short the prospect of quite fundamental change in the political environment due largely to the toxic confluence of the end of consumerism and austerity.  If you want to explore this concept further Kagarlitsky[1] paints a succinct, but challenging, scenario. Broadly, the main points made are:

1. Greece’s loss of economic determination (when joining the Euro) eroded the power of the electorate. The electorate therefore feels distant from the true economic decision-makers.
2. Even if the current levels of unrest can be managed, with the prospect of more economic problems ahead, there is bound to be more social unease.
3. With other European economies in doubtful positions such social tension could spread.

Ultimately, the impact will be felt in the political arena. A trend to watch.

Reference
[1] Kagarlitsky, B. High Price of Losing Economic Sovereignty. The Moscow Times. May 14, 2010

Tags: euro, greece, political risk, scenario

29 Apr 10 Greece, Debt, Contagion and Political Change

Unlikely bedfellows you may think, but two articles from the Institute of Fiscal Studies[1], [2] can help us to see the type of future that may await us, particularly for the losers of the Great Recession, those that I call the “bloc #3“.

The key points from the above articles are:

(1) Public sector spending has risen strongly in bloc #3 (and the so-called PIIGS with the exception of Italy) 1997-2010 as is illustrated below:

Source: [1]

(2) In view of the crisis in Greece (and potentially many others) interest rates on sovereign debt are rising – the cost of borrowing is increasing beyond that envisaged.

(3) Just as interest payments on national debt are rising, so are welfare payments as, for example, the Generation X “baby boomers” age and retire.

(4) In the UK, the massive injection into public services has not delivered, as Chote puts it, the “bang we get for each buck”. In other words, the return on investment is lower than would have been expected from the private sector.  This observation may apply in other countries too (although I have not yet researched this point).

All four combine to produce pressure for the so-called “austerity measures” to reduce debt levels.

But we must couple these observations with those of Caldwell[3] who notes that in the above countries there may not be the stomach for massive spending cuts – the “austerity measures”.

So, we must look beyond the well-publicised spending cuts to see the true long-term  impact, which could be felt not on the economic stage but the political stage.  Could this  even embrace the total rejection of capitalism and the re-emergence of – wait for it – communism[4]?

Hopefully this will start a debate.

References
[1] Chote, Robert Two questions the leaders must answer tonight. The Times. April 29 2010.
[2] Crawford, R and Emmerson, C The axe is coming soon and it will hurt, warns the IFS. Public Service. April 21 2010.
[3] C. Caldwell, “The Weekly Standard,” The Weekly Standard, Apr. 2010.
[4] N. Lezard, “First As Tragedy, Then As Farce by Slavoj Žižek,” guardian.co.uk, Oct. 2009.

Tags: contagion, cost of borrowing, Innovation, recession, sovereign debt, welfare payments, welfare state

22 Apr 10 Who will be the new Masters of the Universe?

The current debate on the size of bankers’ bonuses and new regulation approaches emerging from both the US and EU may miss the most important point. The most important point is that the developed economies’ grip on the international institutions that shape the working of the global economy will weaken and faster than you may think. Just take a look at a new 40 year study of economic prospects published by the Carnegie Endowment[1]. If we look at their low growth scenario (and being a contrarian I think that may be the one to look at) we can see that:

(a) Only the BRICs exceed an average annual GDP growth rate of over 2% during the period 2010-2050.

(b) Some of the developed economies actually go into reverse post 2030 (Japan, Germany, Italy) – the remainder of the developed economies barely growing at all post 2030. The UK manages only some 6.7% total real growth during the period 2030-2050, France 4.7%. The US is the only battle-hardened survivor to achieve significant growth in this period. Brazil, India and China are all achieving stellar growth rates of over 60% whilst all this is going on.

Ah, but 2030 is too far ahead for the warning bells to be ringing you may say. Well, let’s look at growth rates projected 2010-2030. Here we see this picture emerging:

(I) Italy, Germany and Japan’s total real GDP growth 2010-2030 is in the region of 12-15%.
(II) Brazil, India and China all enjoy at least 60% growth.

Using the proposition that economic growth rates are a good leading indicator of the balance of political power, there are some big changes going to occur over the next decade. The BRICs will emerge as the true architects of regulation and as this article reveals[2], they are on a mission. To quote Brazil’s President:

“At the Group of 20 summit, we [the BRIC members] proposed anticyclical policies, market regulation, curbing tax havens, and renewal of the Bretton Woods institutions. On this last score, we are determined not to let the incipient signs of recovery in the global economy serve as an excuse for abandoning a democratic remodel of these organizations. The BRIC members have not injected nearly $100 billion into the International Monetary Fund just to leave everything as it was before.”

“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.”

So, we had better listen to what the BRICs have to say now if we want to get a glimpse of what regulation and the global business environment will look like 5 plus years from now.

There are three messages here:

Message #1: The real influencing architects of the business world will be China, India, Brazil and potentially Russia. Those developed economies in bloc #3 (see this post) will fade quickly in terms of influence.

Message #2: Are the above views of  “Capitalism 2.0″ considered in your strategy?

Message #3: What growth assumptions are in your business plan?

References
[1] U. Dadush and B. Stancil, The World Order in 2050, Carnegie Endowment for International Peace.
[2] L. da Silva, “Brazilian President Lula: BRIC countries must forge a transparent system of global governance,” The Christian Science Monitor, Apr. 2010.

Tags: economic growth rates, economic prospects, gdp growth rate, IMF, international institutions

08 Apr 10 Thoughts of an L-Shaped Recovery and Future Worlds

Overview
This post considers the implications of a long , slow L-shaped recovery in the developed economies. The outcome could be a divided world, with the developed economies split into two groups or blocs. In the scenario presented here, the lasting effects of the Great Recession are felt as seismic changes in both the political arena and consumer behaviour. There are material implications for businesses ranging from choice of markets, definition of customer segments through to sources of competitive advantage.

Introduction
The dominant thinking at the moment is that there is a real risk (at least in many parts of the developed world) of an L-Shaped Recovery, in other words, a protracted period, possibly measured in decades, of very low levels of economic growth. And all this will take place whilst the emerging economies power ahead.

The voices supporting this view include, for example, Butler[1] Johnson et al[2] and Wolf[3].

The arguments underpinning the L-Shaped “risk” range from (I) the high levels of national debt that weigh-down the developed economies[1],[4], (II) the real danger of another consumer-debt fuelled boom if confidence returns too quickly[3] to (III) the need for economies with a heavy dependency upon the financial services sector to return to a more traditional, export-led, foundation [5].

So, economically, what might an L-Shaped recovery look like? The National Bureau of Economic Research[6] is looking at a four-year recovery period for employment here in the UK – a situation that may well apply in other economies too[7].

The research arm of one major bank[8] is looking at GDP growth for the UK averaging 1.8% 2010-2015. And that’s the middle-ground scenario. The best scenario produces a six-year average annual growth rate of 2.4%, the worst scenario an average of a mere 1.4%.

The Carnegie Endowment’s scenario of the world order in 2050[9] points to relatively low average growth rates for the developed economies during the period 2009-2050:

UK 2.1%
France 2.1%
Italy 1.3%
Germany 1.4%
Japan 1.1%

The US does somewhat better in this projection, averaging 2.7% GDP growth, but all these projections must be contrasted with annual average growth rates well in excess of 5% over the next 40 years for India and China.

Other observers talk of the “W” – another period of economic contraction following an all too brief recovery. The new banking sector stress tests announced by the FSA[10] that factor in unemployment rising to 13.1%, give us a snapshot of the worst probable outlook for the UK.

With so many brains pointing towards, at best, a prolonged period of sluggish growth, we must ask the question “what will this mean for business?”

A conventional answer might be “belt tightening” and “preparing the business for real strong recovery – whenever it appears”.

But the implications of a slow, lumbering L-Shaped Recovery are far, far deeper.

The problem is that talking about the future in purely economic terms clouds our eyes and takes our attention away from what the real emerging issues actually are.

Two Elephants
I will argue that standing in the darkness, right in front of us, are two elephants. And we really need to consider, right now, the messages that these elephants bring for businesses in the developed world.

Elephant #1: The Political Scene
Both elephants are very closely related in terms of their DNA, but I will start with implications for the political environment. I will write here largely with reference to the UK, but the broad implications hold, I will argue, for most developed economies – including large swathes of Europe.

Some interesting research has been published here in the UK during the past few months that strongly indicates growing political ambivalence[11] on the part of the general public. In other words, a lack of faith or confidence in the established political parties.

Other observers[12] argue that the financial crisis has dealt a final death blow to the liberal views that have under-pinned both the western political establishment and the rush to globalization over the past decade or so[13].

There is already some evidence that support for new political groups is emerging.[14]. Some even say that communism could fill the space left by capitalism[15].

Without doubt a vacuum is forming. If nature abhors vacuums, we must ask what will fill it. Here in the UK we now face the real prospect of either a hung parliament or, at best a winner with the slimmest of majorities. Both outcomes would return us to a period of short-lived governments and provide, probably in two – three years time, an opportunity for new voices to fill the vacuum and punch above their weights.

But be under no illusion, this is not just a problem for the UK. As I have noted in an earlier posting, the developed economies are fragmenting into two groups – those that have weathered the storm in a reasonable shape (US, Canada and Germany for example) and those that emerged with higher levels of debt and a reduced level of public support for the necessary corrective measures[16], [17], [18] The so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain) come to mind, with the real risk of sovereign debt default[19].

But there could be other nations queuing up to join this club too.

It is in these developed countries, the real losers in the Great Recession, that the most fundamental of changes could be witnessed.

Rather than producing a united world, in this scenario, the Great Recession will have produced very much a divided world with the developed economies split into two distinct groups.

So, the ground is set for some major changes in the political environment in elements of the developed world. As an example, the long-awaited May election here in the UK could be the last to be dominated by three long-established parties. The landscape for the post-2010 election could be far different, with new entrants taking influential positions and, potentially, the place of one of the traditional “big three” parties.

Elephant #2: The Socio-Demographic Scene
All this brings me directly to the second elephant, which shares much of the DNA of the first.

In the final analysis, the shape of the post “Great Recession” world will be decided by the public, not economists’ projections, and the going will be challenging for the consumer during the L-Shaped Recovery:

• There is the prospect of a jobless or a near jobless recovery as developed economies face the challenges of industrial re-orientation and competitive employment pressures from those emerging economies that continue to power ahead[20].

• Getting credit will be difficult (as it will for businesses in this scenario). This applies especially in the UK where doubts have been raised regarding capital availability to fund a recovery[21].

• Social bifurcation becomes an increasingly significant issue in developed economies. In short, the gap between the “haves and the have nots”. This is again a notable problem in the UK where some areas have not yet recovered from the late 1970s recession, let alone the current challenge[22]. Some argue that the demise of industry and the rise of financial and professional services have only added to this divide[23],[24].

Again, we are faced with an emerging vacuum. The L-Shaped Recovery signs the death warrant for debt fuelled consumerism and everything that went with it. In the eyes of many, free markets and globalization will have failed to deliver. So again we have a question, this time “What will replace consumerism?”

When faced with the task of visualising the effects of a potential seismic shift, it is often helpful to look at a position that is the exact opposite of the one that we have enjoyed. So where could the pendulum swing towards? John Quelch of Harvard Business School[25] got part of the way there when he talked of the importance of experiences and personal contact replacing material purchases, but the real opposite of consumerism is valuism, a term that I will loosely define as an environment where individuals focus upon and gather around guiding moral principles and standards of behaviour. Perhaps Adam Smith had a glimpse of this writing some 200 years ago when he referred to the solid virtues of “prudence, restraint, industry, frugality, sobriety, honesty, civility, and reliability”[26].

A concern for values and moral standards replaces a concern for material displays of wealth and assumptions of unbounded growth.

Some implications
The product of the Great Recession could be significant changes in the political landscape and consumer behaviour in parts of the developed world. So what are the implication of the L-Shaped Recovery scenario for businesses in these economies? Well, here are some thoughts for starters, contrasting what we have been used to what an L-Shaped Recovery presents:

If “consumerism” and “debt” were the words of the last decade, “values” and “security” will be the words of the next.

But this is just one view
To conclude, it is important to note that it is impossible to predict the exact course that the global business environment will follow. We are still in uncharted waters.

In times of change it is best to consider several views, or scenarios.

Remember that the L-Shaped recovery is just one picture. Others are more hopeful, pointing towards the prospect of a sound recovery[27] and resilient political systems that can weather all storms[28].

So plan for a minimum of two worlds, not just one.

References
[1] E. Butler, “The boom and bust,” Adam Smith Institute, Mar. 2010.
[2] S. Johnson, P. Boone, and J. Kwak, “Get Ready for an L-Shaped Slump,” Peterson Institute: Real Time Economic Issues Watch, Dec. 2008.
[3] M. Wolf, “The world economy has no easy way out of the mire,” FT.com, Feb. 2010.
[4] U. Dadush, “The Future of Europe and the Euro,” Carnegie Endowment, Mar. 2010.
[5] A. Posen, “The Path of True Recovery Is Never Smooth,” Peterson Institute, Oct. 2009.
[6] C. Reinhardt and K. Rogoff, “The Aftermath of Financial Crises,” The National Bureau of Economic Research, Mar. 2010.
[7] H. Shierholz, “A massive jobs gap,” Economic Policy Institute, Mar. 2010.
[8] S. Hayes, “The Economic Outlook and the Risks of a Sterling Crisis,” Feb. 2010.
[9] U. Dadush and B. Stancil, The World Order in 2050, Carnegie Endowment for International Peace, .
[10] B. Masters, “Turner orders tougher bank stress tests,” FT.com, Mar. 2010.
[11] S. Wilks-Heeg and D. Ellis, “The state of a politically ambivalent nation,” OurKingdom, Mar. 2010.
[12] S. Zizek, First as Tragedy then as Farce, Verso, 2009.
[13] Y. Hatoyama, “A New Path for Japan,” The New York Times, Aug. 2009.
[14] P. Giddy, “MPs WANTED: FOR CRIMES AGAINST DEMOCRACY,” OurKingdom, Mar. 2010.
[15] N. Lezard, “First As Tragedy, Then As Farce by Slavoj Žižek,” guardian.co.uk, Oct. 2009.
[16] C. Caldwell, “The Weekly Standard,” The Weekly Standard, Apr. 2010.
[17] G. Andrews, “Italy still unable to see beyond Berlusconi,” FT.com, Apr. 2010.
[18] “Greeks take to the street over austerity plans,” FT.com, Feb. 2010.
[19] W. Munchau, “Greece will default, but not this year,” FT.com, Apr. 2010.
[20] R. Freeman, “What Really Ails Europe (and America): The Doubling of the Global Workforce,” The Globalist, Mar. 2010.
[21] D. Smith, “Honey, I’d shrink the banks,” TimesOnline, Oct. 2009.
[22] Cities Outlook 2010, London: Centre for Cities, 2010.
[23] J. Manzi, “Keeping America’s Edge,” National Affairs, Feb. 2010.
[24] M. Brewer, A. Muriel, and L. Wren-Lewis, “More unequal – but why?,” Institute for Fiscal Studies, Dec. 2009.
[25] J. Quelch, “The Next Marketing Challenge: Selling to ‘Simplifiers’ — HBS Working Knowledge.”
[26] Y. Levin, “Recovering the Case for Capitalism,” National Affairs, Jan. 2010.
[27] D. Bowers, “Corporate recovery could take investors by surprise,” FT.com, Mar. 2010.
[28] Z. Davis and T. Carothers, “The Economic Crisis and Democracy: A Year Later,” Carnegie Endowment, Mar. 2010.

Tags: consumer behaviour, developed economies, emerging economies

01 Apr 10 Old Strategies for a New World?

A recent McKinsey survey Economic Conditions Snapshot, February 2010: McKinsey Global Survey results[1] is interesting reading – especially Exhibit 2.

Exhibit 2 looks at how executives propose to deal with a new economy. It is heartening to note that a large proportion (48%) plan to introduce new products and services to take market share from weakened competitors. An interesting feature of this research is that replies are analysed in two categories – (a) those who are optimistic in terms of the prospects for economic recovery and (b) those who are not. Of the survey sample, nearly three-quarters – 74% – were in the optimistic camp.

52% of the optimistic plan to introduce new products or services but only 29% of the pessimistic are new product orientated.

However, productivity and cost cutting and other inorganic activities still predominate in both camps and overall only 2% plan to increase spending on “philanthropic activities” (11% plan to reduce spending in this area).

This makes one wonder if businesses are applying old world strategies (most notably cost-cutting) in an emerging new world. I have argued elsewhere[2] that the deeper the recession runs then the deeper will be the change in customer needs, behaviours and preferences and this observation applies particularly in the “B3″ group – those developed economies that have been badly wounded by the recession[3].

It would be interesting to see the proportion of corporate leaders that are encouraging their organizations to actively go out and explore how these emerging needs, behaviours and preferences are actually manifesting themselves – and in turn what are the implications for the organisation’s offerings, distribution routes and competences.

Notes
[1] Economic Conditions Snapshot, February 2010: McKinsey Global Survey results McKinsey Quarterly, Feb 2010.
[2] See: Your clients: Who will be the winners and losers?
[3] See: The B3: The new face of globalization?

Tags: cost cutting, economic recovery

31 Mar 10 The B3 – The new face of globalization?

Markus Jaeger makes an interesting observation in his article The Great Risk Shift[1] noting that the Great Recession has had another unexpected outcome.

In summary, the terms “developed economies” and “emerging economies” are now anachronisms – part of the vocabulary of the pre-Great Recession world that are now of limited value. Jaegar’s main point is that the by-product of the Great Recession has been to produce new economic groups – or blocs – each with different risks that are yet to be fully recognised. The so-called emerging economies (that we should really re-label as the emerged economies), have now demonstrated their fiscal stability and therefore present a reduced risk of a sovereign debt default. However such economies do, the article observes, still face political risks.

Critically, a sub-group of the “developed economies” (most notably the so-called PIIGS[2]), have emerged with an increased debt burden.

So, looking towards the future shape of the economic world, we could be concerned with three blocs (the B3 in the title):

Bloc #1 as I will call it, represents those developed economies that have weathered the storm with, for the time being, their credit risk profiles intact. Obvious members of this category include Germany, US and France.

Bloc #2 represents the emerged, and now in most cases, decoupled economies of China, Russia, Brazil and South Korea that have come through with generally low government debt to GDP ratios.

Bloc #3 is a new club with a potentially expanding membership. These are the former developed economies that have fared the worst and come out of the recession with increased debt levels. These countries face a challenging future and could be, in relative terms, in long-term decline. There may be other “developed economies” that could join this club.

Jaeger suggests that each bloc faces different risks.

Arguably Bloc #1 is best positioned, followed by Bloc #2 where political risk replaces the declining risk of sovereign debt default.

Bloc #3 is the most interesting in view of increased debt levels. In future postings I will argue that in certain scenarios these countries could face volatility on the political front too.

Certainly, the “bloc” concept is an interesting way to perceive where the power to reshape the global economy will come from as it focuses upon potential groups of influence rather than individual countries. In the new post-Great Recession world, “countries” too could become an anachronistic term when considering where power really lies.

Notes
[1] M. Jaeger, “The “Great Risk Shift” – or why it may be time to re-think the developed-/emerging-markets distinction. See Illustration for the G3.,” DB Research: Talking Point, Mar. 2010.
[2] Portugal, Italy, Ireland, Greece, Spain.

Tags: emerging economies, g20, sovereign debt