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

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 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

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

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

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

10 May 10 Recovery Tip #4: Recession Leadership – Embracing the negative

Harvard Professor James Heskett makes a relevant observation in a HBS Working Knowledge blog post[1] where he makes the point that leaders in organizations may have the tendency be in denial when it comes to recognizing bad news. Drawing upon the work of Richard Tedlow, denial is defined as “seeing but not seeing“.

This is a critical point. Many of the organizations that I studied during the recession of the 1990s were blind to the changes emerging in the post-recessionary environment. There were two broad reasons for this. Firstly, building on the point that Heskett makes, leaders don’t want to see bad news, particularly if it presents a view of the world that the strategies that leaders have crafted over the years can’t now cope with. Secondly, the systems that have been built to help organizations see the outside world may be defective, assuming mere incremental, evolutionary change in the outside environment.

Recessions always bring a wave of creative destruction with them. In a perverse way, this wave is the silver-lining. If this apparently negative wave is recognized embraced, it is a great source of innovation. If its existence is denied, it could swamp you.

Embracing, not denying, the negative is therefore a critical part of recession recovery management.

Looking at the bad news face on could well help you craft tomorrow’s strategy.

Reference
[1] Heskett, J Is Denial Endemic to Management? HBS Working Knowledge May 05, 2010.