11 Feb 10 What do Greece, Google, China and NPT have in common?

So how are:

(a) The emerging sovereign debt crisis in Greece
(b) Google’s disagreement with China
(c) The 2010 Non-Proliferation Treaty Review Conference (due to start on 30th April)

linked together?

Well, they are all what I call “shaping events“.

The big question in every business leader’s mind must be “Will Globalization really work, or will we return to a divided world?”

Shaping events are events that we know, with a reasonable degree of certainty, will come to fruition. When they do, we can see the reaction. And the world’s reaction will give us powerful clues as to which way the world is moving and how business and private lives may change.

Other examples of shaping events are

• Emerging food shortages
• An energy supply crisis
• Aging populations in the developed economies
• The success of Nato’s military operations in Afghanistan.

There are more, and tracking shaping events in a world that is in a state of flux is now a critical activity for any business – as important as tracking your competitors.

Tags: globalization, scenarios, shaping events

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

27 Feb 09 Strategy and the Future World: Why the next three months may hold the key

Those of you who have been following my scenarios will know that I hold that future, not the past or even current events associated with the current financial crisis, will determine the shape of the the future business world.

In my scenarios as described in 2009: Signposts to where? – I refer to a range of shaping events that will separately, or in an inter-related manner, form the shape  of the future world.

These are the events to actively monitor.

In all, there are five shaping events.

The Real Issue
The real issue is that a range of these shaping events could be triggered over the next three to four months and alone or together they could have a tumultuous effect.

The five shaping events, which over time work together in an inter-related manner, are:

#1: Industry Contagion a widespread domino effect as the crisis spreads from the banks into the major employers of at least the developed economies.  The loss of an iconic employer could place massive pressure onto politicians to impose what others would see as protectionist policies.  Such a move would be a big step to a divided world – The Jigsaw in my scenarios.

#2: Banking Future Shocks the view being that not all of the bad news is behind us. More is to be revealed.

#3: Global Fragmentation in other words the emergence of protectionism.

#4: Energy arguably one for the medium term. At some point we will face an oil supply crisis following a lack of investment in production infrastructure.

#5: Conflict The unhappy fact is that there is a correlation between recession and social and national – upheaval.

My point is that three of these shaping events could be triggered in the next quarter.

Firstly, industry contagion. Both GM and Chrysler stand on the edge of an abyss. By the end of March, Chrysler must demonstrate progress to viability if it to received more state loans[1]. Massive corporate failures in Detroit could result in over 3m additional unemployed in the US alone[2].

Secondly, some observers feel that there is even more bad news to emerge for western banks especially from Eastern European operations[3], [4].

Thirdly, we have the spectre of conflict in the form of social unrest particularly in Eastern Europe that could, at an extreme, challenge democracy[5],[6].

These, I suggest, are the events to monitor now.

Each has the power to reshape our world for a generation. Ultimately, it may well not be the economists that define the future shape of our world but public reaction to these shaping events.

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References
[1] J. Reed, GM future in doubt after $31bn loss, FT.com, Feb. 2009.
[2] R. Scott, Automaker bankruptcies would cost up to 3.3 million U.S. jobs, Economic Policy Institute, Dec. 2008.
[3] N. Roubini, Roubini Interview On The Severe Global Recession And The Risks Of A Financial Crisis In Emerging Europe, RGE Monitor, Feb. 2009.
[4] A. Evans-Pritchard, European banks’ toxic debts risk overwhelming EU governments – Telegraph, Telegraph.co.uk, Feb. 2009.
[5] A. Aslund, Baltic Protests and Financial Meltdowns, Peterson Institute, Feb. 2009.
[6] S. Wagstal, Analysis – Variable vulnerability, FT.com, Feb. 2009.

Tags: economic recession, financial crisis, meltdown, protectionism, recession, scenarios, social unrest

11 Feb 09 Davos 2009, Recession and Business Strategy: Quo Vadis?

Davos: Are the muddied waters clearer? [Updated 25 February 2009]

I thought that I would save my next blog entry on the strategy implications of economic recession until the conclusions of the World Economic Forum meeting in Davos emerged.

I wanted to use the output from Davos to review my trajectory of change, introduced in the 23rd January blog entry.  Regular readers will know that I have produced four scenarios that, I feel, encompass the broad range of futures that lie ahead of us in the current financial crisis. These scenarios were introduced in my Executive Briefing 2009: Signposts to where? and you can download the full working paper here, after registering, which is incidentally regularly updated as we progress along the bumpy road that is the future.  I have released the latest version on 25th February which includes more implications in respect of recession and business strategy that should, I feel, be debated at senior management and board levels.

The scenarios are reproduced again below:

The scenarios are driven by two forces that act along a continuum. Running from north to south we have the degree of global co-operation that actually appears to solve the current crisis, and running west to east we have industry contagion, broadly how far the crisis creeps out from the banking sector to infect other industries.  The fate of GM and particularly Chrysler is a good example of “industry contagion”.

My last trajectory of change proposition (published on 23rd  January) is shown below:

Looking at Davos and associated events (including the latest losses in the UK banking sector), it is clear that we are now standing at the edge of, or starting to wade into, the River Rubicon. The Rubicon is the divide between the two left hand scenarios (Focused Change and Globalization Ahead) which imply a relatively quick economic recovery and the two on the right Capitalism II and The Jigsaw – that imply a deeper, longer economic recession. We currently have two views on how wide the Rubicon really is. The IMF has scaled down its 2009 forecast for world economic growth from 2.2% to 0.5%. However the IMF is in the (relatively) optimistic camp, forecasting a significant turnaround in 2010 with even the UK moving into positive growth[1]. In the other camp, we have the view that we are in for a longer slump[2], [3] supported by the prospect of more bad news from the banking sector[4]. There is growing evidence that this may be the case, with some arguing that the UK is positioned to experience the great depression[5]. The view, that we are in for a long-term recession, has received some support with the Bank of England’s 11th February announcement that the UK’s economy will probably shrink by 4% year on year in quarter 2 2009.

Possibly the bad news is being fed to us in reasonably digestible doses?

We can also see the first troublesome shoots of protectionism from workers’ protests in the UK to the Buy American content of the American Recovery and Reinvestment Act[6], [7], [8].

These observations, coupled with continued ambiguity of the level of global co-operation emerging from Davos[9],[10], has led me to the rather unfortunate conclusion that we may be heading broadly towards The Jigsaw as an outcome scenario. I have updated my trajectory of change as shown below and you can see that I have added a broad landing zone:

So what does this mean for strategy?
It is still too soon to judge with any certainty what the outcome will be. As described in my working paper, we need to experience the world’s reaction to one or more shaping events to know where our ultimate destination will be. This means that we have to consider seriously what life will be like in both Capitalism II and The Jigsaw.

However, at least one action is on the immediate agenda and that is to consider the impact of a prolonged economic downturn and I’m talking about a period of negative or very low levels of economic growth over a 3 to 5 year period within the developed economies. Just going back 12 to 18 months, many organisations had formed their strategies on the assumption that the developed economies would suffer a brief, 12 month period of shallow growth or stagnation. Pinning one’s hopes on such an outlook now looks surprisingly shaky.

We now have to look at how watertight our boat is to cross the Rubicon, a journey that could take 3 to 5 years.

This means that you should consider stress testing your business strategy.

To start, consider these questions:

Issue #1: Core Customer Resilience: In a prolonged recession how resilient will your core, most profitable customers be? Will geographic differences emerge? What leading indicators of resilience can you put in place? Will you have to consider a new, more resilient customer group to focus on?

Issue #2: Customer Needs: Do you anticipate that your customers’ needs will change as we progress through an extended downturn? What are the implications for your products and services? Remember that currently most consumers and organisations too are just entering the initial shock phase. Their medium to longer-term buying behaviours will not yet have emerged. So you will have to be particularly adept at tracking changes. It could be that your customers’ needs will move through four cycles of change:

(a) Shock as customers face the reality of a protracted period of contraction, an experience that many will not have experienced before. Expect short-term, knee jerk decisions.

(b) Adjustment as customers change, after a period of reflection, both their businesses and lives to the new reality.

(c) Recovery as national stimulus programmes start to bite and

(d) Emergence as customers adjust to the new employment and economic landscape (to use my scenarios – life in The Jigsaw or Capitalism II). This observation, especially for the UK,  is based on the view that ultimately a new employment white knight will appear to fill that gap left by a reduced financial services sector.

Issue #3: Distributors: If there are others in the supply chain between you and the customer the final user of your product or service how well positioned are they to survive the onslaught? Do they need additional help from you? Should you consider other channels? Will, for example, Internet based distribution enjoy a further boost if customers look for a cheaper alternative?

Issue #4: Suppliers: Again, how resilient are your suppliers? Can they help you to keep up with changing demands from your current customers? Can they support you if you focus upon a new sector?

These are just four introductory questions to start the process of recession testing your strategy or seeing how watertight the boat is for a long distance river crossing.

But this only covers how we get across waters of the Rubicon. I will explore what the land looks like on the other side in later postings.

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References:
[1] IMF World Economic Outlook (WEO) Update — Global Economic Slump Challenges Policies, January 2009, International Monetary Fund, Jan. 2009.
[2] M. Wolf, Why Obama’s new Tarp will fail to rescue the banks, FT.com, Feb. 2009.
[3] P. Boone and S. Johnson, “Speeches, Testimony, Papers: Baseline Scenario, February 2009, Peterson Institute, Feb. 2009.
[4] Roubini: Anglo-Saxon model has failed, FT.com, Feb. 2009.
[5] N. Walayat, UK Recession Watch- Britain’s Great Depression?, Global Research.ca, Feb. 2009.
[6] G. Rachman, When globalisation goes into reverse., Financial Times, Feb. 2009, p. 13.
[7] G.C. Hufbauer and J. Schott, POLICY BRIEF 09-2: Buy American: Bad for Jobs, Worse for Reputation, Peterson Institute, Feb. 2009.
[8] E. Prasad, Buy American?: Global Considerations for the Proposed Stimulus Plan Clause, Brookings, Feb. 2009.
[9] C. Giles, P. Larsen, and G. Tett, Lack of inspiration unites Davos delegates, FT.com, Feb. 2009.
[10] A. Edgecliffe-Johnson, No consensus on restoring trust in business, FT.com, Feb. 2009.

Tags: business strategy, economic recession, economic recovery, marketing strategy, recession, scenarios, slump, world economic forum

23 Jan 09 Recession and Strategy: Tracking the path to a new world.

In my January 2009 Executive Briefing I argue that we are dealing with far more than a recession.  We are on the edge of a tipping point where the business world will probably undergo the biggest shift that we will witness in our lifetimes.

If we thought that in the mid 1990s the emergence of the Internet was a tipping point for business strategy, then what we will witness is a wholesale earthquake.

My position is that the current recession (in the developed economies) and slowdown (in the emerging economies) is not the end game.  The recession is a catalyst to a new world.  The twist is that nobody knows for sure what the new world looks like.  If you read the above briefing you will see that I put forward four different scenarios or snapshots of what the new world could look like:

Broadly, the two scenarios on the left assume a relatively short recessionary period and we then return to life very much as it was back in 2007. In “Focused Change” we see some new regulatory activity to reduce the systemic risk in the banking sector. In “Globalisation Ahead” we see the BRICs (the emergent economies of Brazil, Russia, India, China) emerging to take a dominant role on the world stage – China and India in particular win through.  However, even these two optimistic scenarios have their downsides for developed economies.  For example, this recession has brought under the spotlight the fragility of financial services led economies (like the UK’s).  Even in the optimistic scenarios these sectors shrink – so what will fill the employment gap?

The two scenarios on the right are even more challenging and assume a further banking crisis and failure in a major employment sector – e.g. automobile manufacturing.  The outcomes could go two ways – globalisation does continue but the emerging economies assume a position of global influence faster than has been previously envisaged.  The result could be the decline of the primarily US led definitions of “Capitalism”.  New views appear as to which is the “best way”.  In “The Jigsaw”, the final scenario, we see the emergence of protectionism and effectively the death of globalisation.

I use two shaping events to track the possible trajectory of change – where we are going – industry contagion and global co-operation.  Using views on where these shaping events are going, we can form an indicative view of where the world is going.  My personal view is shown below and it can be seen that we may be rapidly approaching the Rubicon, or the point of no return:

I will be continuing to track and comment upon the trajectory of change in this blog.  If you would like to received the underlying working paper describing these propositions in more detail please click here.

Tags: banking crisis, business strategy, emerging economies, globalisation, recession, recession strategy, scenarios

25 Apr 08 Strategy and Uncertainty: Traditional planning systems don’t work anymore

A quick review of just one edition of the Financial Times (Friday 25th April 2008), reveals that we now live a world of sudden, unforeseen shocks.  Thumbing through the pages of this edition over a cup of coffee reveals the following potential headaches for businesses, that probably were not on the strategy radar screen last September, when many companies would have been embarking upon the well established annual planning and budgeting cycle:

• The prospect of a long-term recession led by failings in the financial sector.
• Capital rationing.
• Global food shortages.
• Question marks over the wisdom of turning to biofuels as an alternative to fossil fuels.
• Fragmenting consumer values.
• Ever shortening product life cycles especially in consumer electronics.
• The rise of national protectionism in the face of the “sovereign wealth fund”.
• The rise of anti-Western sentiments in China with Western brands taking the brunt.
• A wave of increased and possibly draconian regulation.
• Banks looking to raise liquidity.

The point is, that working with one picture of the future, which is probably an extrapolation of the past, won’t work any more.  Neither will the annual planning cycle.  Both are too slow, blinkered and cumbersome.

We have spent so much time over the last decade in building measurement systems (e.g. the Balanced Scorecard) to help us monitor the internal status of our businesses that we have forgotten to monitor the outside world.  And this is the area that must change.

Arguably the first challenge is to broaden the corporate mindset.  We have all been trained to focus on one path, one picture of the future.  Now we need to take a different course and develop a wider awareness of the range of possible futures that could face our businesses.

Take a piece of paper.  Draw a central vertical line marked “business impact” down the centre of the page.  Label the top of this line “high” and the bottom “low”.  Now draw a horizontal line across the middle of the page – with the left end labeled “high uncertainty” and the right “high certainty”.  You now have for boxes.  We need to concentrate on the top two boxes.  The top right will show us events that we know a lot about and are fairly confident that they will happen.  But if they do come to fruition, then our businesses will be really hurt.  Events in the top left hand box will really hurt us too – but we may not know much about them and we can’t say with certainty that they may happen.

The trick is to think about, as I call them, “macro” forces that can produce the type of sudden shocks described above.

Review the list of shocks that I have extracted from the FT again.  You should be able to identify these macro forces behind each:

(a)  Economy
(b)  Environment
(c)  Legislation and regulation
(d)  Politics
(e)  Technology
(f)  Demographics.

Why not spend time over a coffee every month with your work colleagues to think about how each of these six forces could produce “future shocks” and “future opportunities” for your business.  And don’t then stop there.  Your strategy must change to directly include the entries in the top right box – and you must use the entries in the top left box to test the resilience of your strategy.

The challenge for the coming decade will to become as good at scanning the outside world as we have become at assessing and measuring our inside world.

Tags: PESTEL, planning systems, recession, scenarios, strategy, uncertainty

26 Feb 08 Strategy Tools: Are you using the “Killer Apps”?

There are a few tools that I use when working with clients that have the capability to deliver really highly geared results – these approaches really do change people’s attitudes about their customers, the power of their competitors and how their businesses really work. The frameworks for these tools can be found in most strategy textbooks – but the problem is that many organisations seem to just have run out of the time needed to even think about using them.

Even during the ubiquitous annual planning cycle there seems to be a temptation just to jump into creating financial targets without taking a more fundamental look at both the health of the organisation itself and what’s going on in the outside world.

Some of the “highly geared” tools that I have found are worth making time to apply include:

(a) Scenario Planning. Not as commonly used as one would expect – especially now that we’re in a more uncertain economic climate and working in a globally connected – and therefore potentially more fragile – world. Projecting a range of possible future business environments challenges the status quo, changes minds and helps to develop more resilient business plans.

To be fair, there are good reasons why scenario planning isn’t used more widely. There is a range of methodologies and traditional approaches to scenario building involve a lot of time on the part of key personnel. Just how these obstacles can be overcome will be tackled in one of my next Executive Briefings. But just taking a look at publicly available scenarios and projections can quickly change thinking. Take a look at Shell’s scenarios and the work of the World Economic Forum’s Global Risk Network to start you off.

(b) Product Portfolio Analysis. Yes, I’m talking about some of the dear old friends such as the “Boston Box” with its “Cash Cows”, “Stars”, “Question marks” and “Dogs”. The Boston Box still has its place now – emphasising in quite simple terms the need for a balanced portfolio of products and the fact that all products usually have a lifecycle. Like any tool, it’s best used in conjunction with others and I frequently apply a portfolio tool examining market prospects, internal capabilities and profitability in a year on year visual display. It’s an excellent tool to summarise the results of the various workstreams that together make up the strategy process. But these visual tools really come into their own as decision making aids and communication tools.

(c) Competitor analysis. Practically every time I take a client or a group of delegates through a structured competitor modelling workshop they admit that their view of the competition has changed as a result of the analysis. As a twist to conventional competitor profiling, take a look at the real decision makers in a competitor organisation (usually the executive directors). Read up about how long they’ve been in position, what they’ve done and importantly where they were before, what they achieved and who they may have worked for who could in turn have shaped their thinking. Now you have got inside their minds and got a grip of their personality you can second-guess the boardroom conversations.

(d) Activity based costing (ABC). I like to include simple ABC exercises when I’m helping an organisation. Yes, I know it’s an old tool, but again it’s one that may be gathering dust on the shelf. I like to understand costs and customer lifecycles – this helps me to get a view of which products and customers are the most profitable. In the vast majority of cases I find that the products and customers that managers think are making money aren’t the real contribution generators. Using the 80/20 rule, the strategy process needs to find the 20% of customers that make 80% of the profits (and the ones that we pay to do business with!).

So these are four of my “killer apps” – are you using yours?

Tags: planning tools, portfolio analysis, scenarios, strategy tools