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

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

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

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

13 May 10 Consumerism is Dead

Nothing like an attention grabbing headline. But it is a headline that raises serious issues.

Now that a pathway (of varying lengths and gradients, depending upon where you are located) is appearing leading us out of the Great Recession, a common picture of hope is emerging. The picture of hope is that, broadly, increasing consumerism and a ballooning middle-class in the emerging economies will save us all (or at least provide some of our industries with export markets)[1],[2]. At the start of the crisis we used to hope that the engine of perpetual growth (the Western debt-fuelled consumer) could be quickly restarted, but both the depth of the crisis and the damage to the banking system has put paid to that.  The picture of hope tells us that consumers in the emerging economies will fill the gap.

So, is the proposition that demand in the emerging economies will help drive global growth a realistic one? Well, there is evidence that it might work. As Geoghegan[1] notes, the middle classes in the emerging economies are due to swell from around 250m to some 1.2bn by 2030. But this is only one possible scenario, and one that largely relies upon the principle of ceteris paribus – fine so long as no other factors intervene.

An alternative view of global economic progress has been put forward a few days ago by Buiter[3], examining the medium and long terms effects of the sovereign debt issue that first raised its head in Greece. I will now attempt to summarise the main points made by Buiter:

1. It is not just Greece that is in poor shape. The whole of the developed world is affected, with arguably the exceptions of the Nordic States, Australia and New Zealand.

2. Of the developed economies, arguably the US is in the best shape although in about three years time it may have lost its AAA rating will be tested by increasing interest rates.

3. The austerity packages will have an impact on GDP – in Greece’s case a decline of about 6%. Default cannot be ruled out.

4. The emerging economies will continue to grow for one or two years and then the growth boom will turn to bubbles which will burst. At that point, some three years from now, we will have another global recession. The “bubble” issue is shared by others, for example Bowring[4].

Buiter’s message is that consumer demand wilts both in thedeveloped and emerging economies.

Buiter of course majors on the economic risk here. But there are other factors that we should be concerned about. The most notable of these is the issue of political risk in the emerging countries, a message flagged up both by Emmott[5] and Jaegar[6].

To conclude, forecasting the direction of the recovery in a globally inter-connected world is very, very difficult. There are far too many independent variables at play. The view put forward that the emerging economies, followed later by the US, will provide us with consumer-fuelled growth should be regarded as the “Golden Scenario”. Businesses must urgently consider at least one alternative scenario, where consumerism wilts and we enter an extended low growth environment. More of that here.

The immediate priorities are to:

(I)  Create a response strategy for each scenario supported by a central strategic plank that will succeed in both. You may well wish to consider other alternative scenarios too.
(II)  Set up an environmental tracking system so that management gets an early warning of which scenario we are headed towards.

References
[1] M. Geoghegan, “The Future Of Finance Shifts From West To East,” Forbes, Apr. 2010.
[2] D. Abney, “Tackling Tough Times and Delivering Results,” Knowledge at Emory, May. 2010.
[3] W. Buiter, “Sovereign Debt Problems in Advanced Industrial Countries,” May. 2010.
[4] P. Bowring, “Is China Headed for a Crash?,” The New York Times, May. 2010.
[5] B. Emmott, Rivals: How the power struggle between China, India and Japan will shape the next decade, London: Penguin, 2009.
[6] M. Jaeger, “The “Great Risk Shift” – or why it may be time to re-think the developed/emerging-markets distinction,” DB Research: Talking Point, Mar. 2010.

Tags: austerity, emerging economies, global growth, sovereign debt

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

14 Apr 10 Recovery Tip #2: Who are your most profitable customers?

Tip #2: Who are your most profitable customers?

It’s surprising the number of businesses that cannot answer this question. A simple activity-based costing exercise, linked to the expected longevity of your client relationships, can produce rich results. You should aim to be able to populate this matrix:

This is a valuable exercise as you will probably find that:

(1)There are too few customers in the top right quadrant.
(2)The profits made by customers in the top right quadrant more than cover the losses in the bottom two.
(3)The profile of the most profitable may not follow accepted industry definitions.

Also, it’s a great way of prioritising recovery actions as different actions and questions apply to each quadrant:

Obviously, start with the top right hand box, then move to address the remaining three. Note how different actions are needed for each quadrant.

A simple, but effective way of thinking about recession recovery planning.

If you use distributors you can apply the same type of analysis too.

Tags: client relationships, losses, profitable customers, profits

13 Apr 10 Recovery Tip #1: Decision makers

This is the the first in a series of tips or suggestions to help you and your business make the most of the economic recovery.  The first tip is aimed specifically at business to business organizations:

Tip #1:  Do you understand who are the new decision-makers and what they want?

Chances are that the recession has changed the critical decision-makers in your clients’ (and potential clients’ too) organizations.  The real decision-makers are now higher up the hierarchy.  So have you found out who they are, what they want and how they make their purchase decisions?

Tags: economic recovery

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