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

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

17 Feb 10 The Post-Great Recession World: Four future views

Introduction
A new term has entered our vocabulary, “The Great Recession”. A period of turmoil and shock that started, at least publicly, with the demise of Lehman Brothers on 15 September, 2008. Whether of not we are still in the grips of the Great Recession depends largely on where you are located.

But before the Great Recession I would argue that we (at least those of us in the so-called developed economies) broadly assumed two things:

(1)That globalization would continue, unchecked, and bring wealth to all.
(2)That the emerging economies, including China, would eventually come around to accepting Western-based definitions of capitalism and eventually democracy.

The Great Recession has done more than just economic damage, it has brought these two fundamental assumptions into doubt. Great doubt.

Global businesses have been built on the back of these two assumptions. Now that these assumptions are crumbling, we need to look carefully at what the future post Great Recession business world might look like.

The purpose of this post is to start building a framework for seeing what forms this future world might take.

Two competing perspectives
In the years immediately before the Great Recession, the business world appeared to be largely separated from events on the global political stage. Despite conflicts in Iraq and Afghanistan, the pace of globalization and the spread of capitalism seemed just to accelerate, reinforcing the view that the world would gradually accept democracy and a Western-based form of capitalism.

Now things have changed. Capitalism’s credentials are tarnished.

We have now entered a period when events on the global political stage will be, I propose, the major driving force for change. Now traditionally accepted drivers of change, such as technology and even climate change, will pale in significance.

Interestingly, an article in the current issue of International Affairs[1] can help us to identify the range of possible outcomes that we could face. Professor Buzan concentrates in this article on the future of international society and I will attempt to summarise the propositions and conclusions here. I will also add some of my own inferences too.

The broad question to be answered is:

Can a global society that is made up of a number of different cultures develop and unify in a stable manner?

Interestingly, there is no clear answer to this question from the literature examined in the above article and this observation therefore demonstrates that globalization is currently very much in untested waters.

If we look at the literature in this field, there are two broad views as to how international society (i.e. globalization) could develop. The first view (called Vanguardist), assumes that to provide stability, an international society has to accept a common culture or set of values. For globalization to progress peacefully, we need to accept some common cultural norms. If we do not have these shared cultural values then international society will only be weakly integrated. The emergence of common cultural values is now required to encourage the onward march of globalization. If it doesn’t appear, then things could get unpleasant.

The second view (called the Syncretist view), assumes that different societies can co-exist and can in fact rub along quite well together, learning from each other in the process. But even within this apparently benign approach there are potential problems. These problems appear as societies progress and change from natural states (where power is centralised and there is very limited tolerance of those who don’t want to comply) to what Buzan describes as open access societies. Open access societies are where power is spread to all. I would suggest that a good example would be Europe, with its particular emphasis on a society that stresses the rights of the individual.

The problem is that natural states can find a move to open access societies quite threatening:

But since the transition from natural state to open access order remains difficult and dangerous, resistance to this mix in natural states is perfectly rational.

And Buzan goes on to provide an example:

The great experiment in China, where a natural state has, up to a point, embraced the market, hangs in the balance: will the market destabilize the natural state or enable it to make the transition to an open access order?

So, even taking the more benign Syncretist view, we could be in for a bumpy transition.

Importantly, Buzan ends the article by proposing four potential paths and I have applied my own labels and commentaries here:

Scenario 1: One World
This scenario is based on the Vanguardist view – that globalization requires one unifying dominant culture. This is a world where we see a resurgence of capitalism, possibly fuelled by a rapid and sustained job creating economic recovery. Here we see a progressive spread and acceptance of Western-based definitions of capitalism and business practices. This also is a world that evolves peacefully into a series of liberal open access societies.

Scenario 2: The G4
This is a world where different attitudes and approaches are shared and respected.  Capitalism evolves to embrace the views of the emerging economies (the G4 in the title refers to the US, China, India and Brazil as being the dominant influencers, but there could be others). Again, progression and absorption takes place in an orderly manner.

Scenario 3: The Jigsaw
I have used the title from one of my earlier scenario sets to describe this outcome. Here, divisions appear, especially as the economic and political power of the West declines and a vacuum appears. Disparate economic recovery rates with Asia forging ahead and the West foundering introduces tension.  A series of new iron curtains descend. Protectionism rises.

Scenario 4: Flash Points
This represents a complete breakdown with different cultures exaggerating their differences. Communication deteriorates at the international level and conflict ensues.

These four future worlds are illustrated below:

Four Future Worlds

My future writings will expand upon this scenario set and the business implications. As a first step, my next major posting will focus upon the implications of the emergence of the mooted “L” shaped recession.

References
[1] B. Buzan, “Culture and International Society,” International Affairs, vol. 86, 2010, pp. 1-25.

Tags: capitalism, economic damage, emerging economies, future world, global businesses, globalization

15 Feb 10 Be careful in what you take for granted

Especially when it comes to assumptions that underpin your business and its strategy.  Most businesses have assumed that (a) global warming is happening and (b) we are approaching an energy supply crisis.

In the past two days both of these tenets have been challenged:

Firstly, a report challenging global warming[1] (observing that many weather stations that were once in rural areas now find themselves next to airports or urban developments so naturally recorded temperatures will rise).  Secondly, we have an observation that our ability to innovate and find new energy sources will outstrip increasing demands for energy[2].

In a changing world be careful in what you take for granted.  It will probably change.  Remember the unbounded spread of capitalism?

References
[1] Leake, J. The world may not be warming, say scientists. Sunday Times 14 February 2010.
[2] Worstall, T. The problem with calling an end to the world. Adam Smith Institute. 15 February 2010.

Tags: capitalism, energy supply, global warming

09 Feb 10 A New Iron Curtain?

It was surprising to note that, apparently, the hot topic in Davos was the discussion of the merits of State Socialism[1].  This infers that China has got it right and represents a considerable swing in attitudes from previous Davos summits.

It is worth remembering that the current State Socialism model is barely out of the laboratory and has yet to prove itself.  As Dr Eamonn Butler explains [2], capitalism in the form of a post September 2008 variant may still be the best bet.

What we may be able to glimpse in the shadows however is the sight of a new curtain, somewhat more permeable than the old “Iron Curtain”, that may delineate the world for the next decade or three.

References
[1] Rachman, G. How the bottom fell out of ‘old’ Davos. Financial Times 2 February, 2010
[2] Bulter, E. Capitalism or Socialism? Adam Smith Institute 8 February, 2010

Tags: capitalism, future scenario, iron curtain, state socialism

14 May 09 Time to test some axioms

Download pdf

Or, how to avoid the blindfolded bus driver’s syndrome.

Overview
This briefing takes the position that the current crisis is at least partially due to the acceptance of certain assumptions or rules about the way that the world works.  The problem is that these assumptions may have passed into common usage as they sound plausible.  However, they have not been subject to rigorous testing and may be be misleading in a future, post recession, world.

An approach to start this process of testing is introduced here.

Avoiding the Blindfolded Bus Driver’s Syndrome
Before going any further, I should warn you that this post is rather longer than normal, but there is a pdf version to download for you to read at your leisure. This post also includes a small, but I think informative, exercise that you might like to try with your business colleagues to ensure that you avoid the blindfolded bus driver syndrome.

On the 7th April Nassim Taleb (the author of the Black Swan) published a range of pointers in the Financial Times[1] in an endeavour to help the world avoid another meltdown.

The problem is that I feel he missed one out – the need to bust some paradigms – or stress test some axioms.

But possibly it’s unfair to say he missed something out as (a) he was writing in the context of preventing another financial or banking sector meltdown – I’m going to be focusing on the broader issues of strategic meltdowns here – and (2) he did mention “blindfolded bus drivers”.  By blindfolded bus drivers, Taleb means the “experts” who were responsible for getting the financial sector into its current state.

I am going to borrow this term and use it in a slightly different way to refer to a culture in business and arguably in broader society whereby our actions are driven by a commonly and almost universally accepted series of “new rules” or “axioms”.

I will argue that these “new rules” that I will now call “doubtful axioms” are applied widely to guide behaviour in business.

The problem is that the doubtful axioms may lack any real foundation.  I would propose that they have received common acceptance as:

(a) They sound plausible.

(b) The doubtful axioms reflect our desired outcomes.

(c) The doubtful axioms are widely applied. Group behaviour is naturally attractive.   It makes one feel secure to be “one of the crowd” using the same rules or assumptions.

(d) In some cases they reflect an all too comfortable world.

(e) They, that is the doubtful axioms, appear to have been “tested”.

But, dealing with the last point, the “tests”, if they were applied, were conducted over a relatively short period of time. A period when, in hindsight, the world was going through an uncharacteristically stable period. Too short and too unrepresentative a period to now bet the company’s future on.

There is an emerging proposition that the doubtful axioms are largely responsible for the mess that we’re in. Doubtful axiom followers apparently range from the London G20 protesters[2] to the banks themselves[3]. The latter reference holds that, in effect, sophisticated models designed to guide decisions actually were based upon a false reality[4].

A false reality that encouraged false confidence.

Let us take one doubtful axiom as an example. This is the assumption that globalization will lead to the benefit of all – those in both the emerging and developed economies alike. It sounds sensible and reflects the desires of any decent thinking person. But is globalization really feasible? Some think that it may not be[5], [6].

The true reality may have been that we have created a vast inter-connected world that is far far too complex and irrational to either predict or to manage. Which is probably why no one knows how the global economy will react as new emergency measures, including quantitative easing, are applied.

It may also be a world too that is all too easy to disrupt.

Another example of a doubtful axiom is decoupling.

About 12 months ago many held that the emerging economies could stand on their own two feet. If the established economies of the developed world went into recession, the emerging economies would not be overly troubled. In other words, the emerging economies were decoupled from the developed economies. This “rule” now looks as if it will be consigned to the bin[7], [8], [9].

We don’t know which of the many doubtful axioms that underpin our business plans hold water and which don’t.

If you were to talk to academics (like me) who study why organizations fail they would tell you that success is potentially a fatal enemy for an organization as it can breed the development of an “enacted world”. The term “enacted world” means an artificial world that does not reflect reality but the shape of the world that we would like to see. Because we were successful we like to protect and return to the formula or strategy, that created this success. In time this affects the way that we choose to see the outside world. Over time therefore we could end up looking at a false reality. I have dealt with this issue in an earlier briefing – Success – Your Biggest Problem? – it is a very common trap – one that without certain safeguards we are all capable of becoming ensnared in.

The Priority
The immediate priority appears therefore to be to check that we are not exposed to “doubtful axioms”.

I will suggest that you question the broad assumptions that you may have used in strategy making over the last few years. Some may be “true rules” others may prove to be either “doubtful axioms” or axioms that are too fragile to bet the company’s future on.

An exercise
So how do we check our assumptions for exposure to “false rules”?

Try running through this exercise with your team and business colleagues:

Activity Step 1: Rule Identification
Individually, as preparation work, list out all the assumptions made when preparing your business plan. Remember that such assumptions can be both both written and “subliminal”. By subliminal I mean “rules” that we and our colleagues just take for granted. A good example is the view that globalization is unstoppable.

I looked at a good few business plans that were prepared around 6-12 months before the meltdown of 2008 and here are examples of common “rules” or axioms:

(a) “Globalization is good for all – and is an unstoppable force.”
(b) “What gets measured gets done”.
(c) “If we have an economic slowdown – it will be short – a year or less.”
(d) “Our primary quest is to maximize shareholder value”.
(e) “The boom bust cycle is dead.”
(f) “All the BRICs will win through.”
(g) “China will overtake the US economically but US-led definitions of capitalism will prevail.”
(h) “Service based economies are a sustainable platform for developed economies”.

I’m sure that you will find more.

Activity Step 2: Axiom Testing
Readers will now be familiar with my set of four scenarios from 2009 – Signposts to Where? reproduced below:

Let’s now take two of the more challenging scenarios, Capitalism II and The Jigsaw.

In Capitalism II, the following extreme picture could unfold:

• The global recession continues into early 2010.

• Further toxic debt and derivative based losses are largely avoided.

• The US government bails out GM, but the recovery plan heralds a slow dwindling death for western car makers.

• The US and most EU economies emerge from recession in early 2010 but a period of low economic growth – between 1% to 1.5% of GDP – follows for these economies over the next 2 years. The world enters a period of low, but stable growth. The UK in particular faces difficulties. Employment in financial services slowly declines as a result of a mix of continued offshoring and contraction in investment banking.

• The G20 establishes itself as a powerful body for economic reform, but the roles of the US and the UK in particular diminish. France and Germany initially become the architects of regulation in the financial services sector, but India and China steer the long-term shape of capitalism.

• The “57 state” initiative[10] is successful and heralds a period of conciliation in the Middle East and Asia.

• In summary, a new, arguably more mature and aligned world emerges. The ravages of protectionism and conflict are largely avoided. The migration of economic and political influence shifts more quickly that previously envisaged from west to east. Capitalism is redefined over a 10 – 15 year period.

The Jigsaw is more demanding and, illustratively, could unfold as follows:

• Further write-downs appear in the banking sector. Total write-downs exceed the $4.7trn estimated by the IMF in April 2009[11].

• Economic contraction in the developed countries continues through 2010. A slow recovery period emerges with GDP growth not exceeding 1.5% over a 4 year period.

• Eastern Europe suffers. Political instability ensues. One or more of the so called PIIGS (Portugal, Ireland, Italy, Greece, Spain) defaults on  sovereign debt.

• The US government bails out GM, but the recovery plan heralds a progressive death for western car makers. Further employment cut backs are made beyond the scale estimated in the current GM recovery plan.

• Despite their best efforts, the NATO intervention reaches stalemate in Afghanistan. Politicians lack the stomach (and the funding and public support) for the continuance of this venture. A withdrawal is negotiated. The Afghan government falls and instability progresses through Afghanistan, Pakistan and into India and Southern Russia.

• US attempts to “reset” relationships with Russia falter.

• The world starts to divide. Globalization dies. History shows in this scenario that a globally inter-connected world is just too unstable and too vulnerable to survive in the long-term.

Both these scenarios challenge established views.

But they can help you to “stress test” the axioms that guide your business.

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References
[1] N. Taleb, “Ten principles for a Black Swan-proof world,” FT.com, Apr. 2009.
[2] M. Livermore, “The age of stupid or the age of gullible?,” Adam Smith Institute, Apr. 2009.
[3] D. Brooks, “Greed and Stupidity,” The New York Times, Apr. 2009.
[4] J. Muller, “Our Epistemological Depression,” The American, Jan. 2009.
[5] R. Florida, “The World is Spiky,” The Atlantic Monthly, Oct. 2005, pp. 48-51.
[6] J. Bivens, “Everybody wins, except for most of us,” Economic Policy Institute, Nov. 2008.
[7] J. Bajoria, “Financial Crisis May Worsen Poverty in China, India – Council on Foreign Relations,” Council on Foreign Relations, Nov. 2008.
[8] S. Johnson, “Testimony: The Economic Outlook and Options for Stimulus,” Peterson Institute, Nov. 2008.
[9] M. Wolf, “The world wakes from the wish-dream of decoupling,” FT.com, Oct. 2008.
[10] R. Beeston and M. Binyon, “King’s Ultimatum: peace now or it’s war next year,” The Times, May. 2009, p. 1.
[11] “IMF Global Financial Stability Report — Responding to the Financial Crisis and Measuring Systemic Risks,” International Monetary Fund, Apr. 2009.

Tags: capitalism, globalisation, meltdown, recession, stress test

27 Mar 09 Navigating the Recession: The waves of change

A clear point emanating from my earlier posts and, importantly, discussions with business managers and leaders is that we cannot afford just to “sit this one out” and expect the business world (and in fact the world in general) to be in exactly the same shape as it was before when this recession comes to an end.  It is becoming clear now that we are at the threshold of a new world and things will be very different.  The recession scenarios provide us with a mechanism to see what the new worlds could look like, but in this post I would like to start to explore what the process of transition to the new world itself might look like.  When looking at the transition process, I will adopt the perspective of your businesses customers and clients, in other words the phases of change that your clients and customers will go through.

In this post I am going to put forward a proposition for debate that as we go through this journey from recession to recovery there will be multiple behavioural and structural shifts to look out for.  Each will provide challenges but also, and more importantly, will provide new opportunities for your business.  I will describe 5 of these waves of change in this post.  Remember that some will run sequentially and that some will run concurrently.

Phase 1:  Shock and Horror.

Whilst there was some talk about 24 months ago of an impending economic “blipage”, nobody thought it would ever be this bad.  The accepted thinking appeared to be at worst that we would have say a slowdown period of 12 months and then we would get back to growing in a predictable world.  Nobody thought that capitalism might be brought to its knees.  Therefore, when the news broke last year – particularly when Lehman Brothers went down on 15 September – we were all thrown into a state of shock.  It was as if the bottom of our worlds had been pulled away.  A good way of looking at this is to think about that old, but classic, motivation model Maslow’s Hierarchy of Needs.  It was as if the bottom layers, the foundations, had been stolen.  For this reason, people and organisations act a little irrationally during this first phase.  As security is threatened, we need to do something to protect ourselves and this usually means making immediate cost-cutting decisions many of which might not be in the long-term interest of either the individual or the business.  In shock there is the over-riding desire to do just something.  An example is that 74% of Americans intend to cut back on eating out and entertainment [1].

So this is where we are now. In an irrational period.  From a business perspective, it is a period to make temporary adjustments to match these new behavioural patterns.  But it certainly is not the time to make long-term irreversible decisions.  As I try to show in the first illustration below, this is a temporary phase.

And my guess is that we will come to the end of this phase in late 2009.

Phase 2:  Acceptance

Phase 2 is important for three reasons.

1. It represents almost certainly a longer period than the first phase.
2. It is the period when customers adjust to accept the fact that we are (probably) in for the long haul.  Expect therefore more reasoned decision making that will hold for the medium term.
3. During this period the behaviours of Generation Y (the children of the “baby boomers”, Generation X) will be shaped permanently.  Remember that in the last real downturn, Generation Y would have been in nappies (diapers).  What they see and feel during this period will have a permanent impact.  It is the first time that their world will have been shaken and their beliefs and assumptions challenged.  Long-term behavioural changes will appear, such as a move away from external, tangible displays of wealth.

At the time of writing this entry I would say that we are just about to enter this phase – a phase that may last for 3 or more years, but as I show in this second illustration, the impact is far more permanent.

Phase 3:  Emergence

At some point the stimulus packages and measures that are now being put in place will bear fruit.  Confidence will be restored.  Demand will increase.  New demands and needs will appear, but these will have been materially shaped by experiences (that are now largely unknown) that will have occurred during phase 2 – Acceptance.  New customer segments will appear. But the effect may not be so dramatic in the long-term in terms of customer needs.

Phase 4:  Restructuring

I opened this post by saying that we can’t just sit this one out.  One of my propositions is that certain developed economies need to undergo second order macro economic changes.  The UK is a good case in point as I have observed earlier with its near 22% of employment in financial services.  These macro economic changes should produce new opportunities and needs to meet as new employment champions appear – just as financial services did in the early 1980s when manufacturing went into decline, at least here in the UK.  This phase, as new employment sectors appear, will be more permanent in its impact.

The first 4 waves of change are all shown with a subjective view of their period of influence in the illustration below:

Phase 5:  New Influencers

Here we go out into the medium to long-term, beyond the illustration above.  And I have in mind 3 to 10 years out from now.  During this period the winning BRICs (the emerging economies of Brazil, Russia, India and China – if any of them do make it) will really have the position to reshape both the business world and capitalism itself.  The mechanism to do this (G20) is already being put in place and remember that by 2019 China could control 13% of the world’s banking system and 16% of the global stock markets[2].

Conclusion

So now is not a time to sit back and wait – it is a time to sense, inter-act with customers and learn.  I propose that our customers will go through 4 – 5 waves or phases of change.  Of these 2 will probably have a permanent impact.  The first of these is the “Generation Y” effect within  Phase 2:  Acceptance. Here, attitudes and behaviours could be shaped for a lifetime.  Finally, the second phase to have a permanent impact is Phase 4: Restructuring when new (as yet unidentified) employment sectors emerge.

So now is the time to sense and explore these proposed waves of change.  Before your competitors do.

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[1] The Daily Stat. Harvard Business Publishing. April 1, 2009

[2] DB Research (2009) China’s financial markets: A future global force? March 16

Tags: business strategy, capitalism, customer strategy, economic recession, lehman brothers, marketing strategy, recession, scenarios

26 Feb 09 New Regulation: Implications for Capitalism II

On 23rd February Jean-Claude Trichet, President of the European Central Bank, gave a keynote presentation to the Committee of European Securities Regulators (CESR)[1]. Whilst this presentation was a clear signal of the shape of “regulation to come for the banking sector, there might be some important clues from this presentation, if we couple it with Federal Chancellor Merkel’s address to the World Economic Forum’s 2009 Davos meeting[2], as to the future shape of at least Europe’s view of “Capitalism II.

We could start by looking at Chancellor Merkel’s speech.

There are certain key phrases that can give us clues as to what the pillars of “Capitalism II might look like.

These are:

The crisis is as a result of irresponsible speculation …
Trust is an indispensable cornerstone of the economy.
… we need a credible means of limiting new debts once we have seen off this crisis.
We must not however leave it at these quick and decisive crisis measures. As politicians of great responsibility we are obligated to learn the lessons we need going forward we must shape the ‘post crisis’ world.

It is clear that an agenda is being assembled that will embrace more than a stiff dose of regulation for the banking sector. The final section of Chancellor Merkel’s speech was devoted to the introduction of five elements of central importance. The elements, which might form the pillars of “Capitalism II, are:

Element #1: Restrained Capitalism. The state is seen as the guardian of social and economic order. Whilst market forces must operate, there are clear limits, capitalism must act with social responsibility in mind. This is a clear middle course between total deregulated market forces capitalism and traditional socialist models.

Element #2: International Financial Stability. A globally coordinated regulatory system to stamp out less restrictive regulatory regimes. One approach is needed to stop organisations seeking out the most favourable regulatory regime.

Element #3: Global Openness. A clear drive against protectionist practices. As I have argued in earlier posts, this will be easier said than done if, and when, industrial contagion spreads.

Element #4: Sustainable Consumption. Care for the environment.

Element #5: Defeating global poverty. The responsibility that developed countries owe to the under-developed.

This paints a clear picture of what some would call “responsible capitalism.

Whilst Trichet’s address is aimed squarely at the financial system, there are some potential parallels, notably in the call for:

• incentives that encourage profitability in the medium to long term, not the short-term.
• risk minimisation and
• stress testing to ensure the long-term viability of the enterprise.

If we couple Merkel’s “Five Elements, especially Element #1, with Trichet’s themes we could see a situation where the new regulations, or at least expectations, extend beyond the banking and financial services sectors.

This is the main theme of this posting.

It may be unwise to assume that the focal point of new post crisis regulation will remain restricted to the banking and broader financial services sectors. If we do experience substantial industrial contagion in other words the collapse of substantial employers outside the banking and financial services sectors regulation or new disclosure requirements may extend to such substantial employers”.

What could we expect?

Well, the emerging menu may include:

• Restriction of short-term focused remuneration packages.

• Publication of long-term objectives.

• Demonstration of stress testing business plans.

• Extension of the responsibilities of non-executive directors to embrace resilience management.

• Measures to ensure employment stability.

• Formalised social responsibility objectives – that are to be reported against.

But that’s just after a couple of minutes reflection. No doubt you will have other ideas!

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References
[1] J. Trichet, Remarks on the future of European financial regulation and supervision, Feb. 2009.
[2] A. Merkel, Special Address, Jan. 2009.

Tags: capitalism, economic recession, recession, regulation