Overview: 2009 – Signposts to where? Potential recession outcome scenarios and their implications for business strategy
This briefing argues that from the perspective of business strategy, we are concerned with much more than an economic recession or downturn.
The business recession is a catalyst to a new world. Unfortunately, nobody knows with any degree of confidence what this new world will look like after the economic downturn and how it will impact our businesses.
This briefing presents four recession scenarios that could represent the range of futures that are ahead of us. Each of the four scenarios describes a post recession world that has fundamental implications for business strategy.
A methodology for both building economic recession scenarios and tracking where current events are taking us is also presented to help you develop your business strategy.
A working paper providing more information is also available.
Into a bright new global future or a dark, fragmented world?
Whilst the columns of newspapers and business magazines are devoted to talk of economic recession and how long it could last, the real issue that should be at the top of the strategy agenda is where is the business world headed – into a bright new global future or into the darkness of a fragmented world? The central message in this briefing is that it is not just the depth or length of any recession that should be our primary concern, but additionally what the business environment and the world in general will look like when economic recovery finally appears.
Recession, downturn and recovery are not therefore the end games in themselves; they are merely catalysts to a new world.
The principal recommendation of this briefing is that as we enter 2009 we should stop to think what will our business marketplaces might look like after the recession. We need to consider how our strategies and the shape of our organisations need to change now.
To illustrate the range of possible forms that our business environment could take, I will present four different future snapshots or scenarios. Each has fundamentally different implications for strategy and leadership. A methodology for building post recessionary scenarios and tracking the impact of emerging events is also introduced.
Understanding the Conundrum
The conundrum is made up of two parts. The first consists of driving forces, the second, shaping events.
The driving forces are those forces that can change the shape of the global business environment. Typically, they are captured by the PESTEL model taught in business schools. This model puts driving forces into six categories:
Legilslation and Regulation.
Some driving forces, such as regulation, may well take a dominant role in forging the new world. Others, possibly including technology, will take a secondary role.
Arguably it is more important to identify and track shaping events – the second component of the conundrum. Shaping events can be thought of as potholes in the road – the future – that lies ahead of us. Think of the six driving forces as a wheel. What we have to do is to consider how this wheel, the driving forces, reacts when it falls into one of these potholes. Just how the driving forces react to the shaping events or potholes will help to determine the shape of the future, post recession, business environment.
The Shaping Events
I have identified, from my perspective, five inter-linked shaping events or potholes in the road ahead. A key role for business leaders is to look into the future and identify potential shaping events that are relevant to their operations. My shaping events (I shall probably add more as my research and analysis continues) are as follows:
(1) Industry contagion: The degree to which the current crisis spreads beyond the banking and financial services sectors. Will the US automobile industry be allowed to fail for example?
(2) The fate of the derivatives market: Have we seen the back of the banking crisis or is more to follow?
(3) Global fragmentation: The way countries pull together to solve our problems. Will the wishes and intentions of the new G20 group come to fruitition or will protectionism prevail?
(4) Energy. Research tell us that at some point in the future we will face an energy crisis that will send oil prices spiraling. Will such a crisis stimulate collective action or fragmentation and conflict?
(5) Conflict. A review of the 2009 WEF Global Risks Report reveals that there is more to worry about than just economic issues. Declining growth could stimulate conflict and social unrest in both developed economies and emerging economies.
To conclude, the over-arching proposition presented here is that it is not merely the duration of any global recession that must be at the forefront of our minds when looking towards the future business environment, it is the impact of “shaping events” that must also be monitored. Indeed, the real drivers of the form of our future marketplaces will not be localised issues such as the appearance of new entrants, products or distribution routes but by events on the global stage.
Therefore the time has come to monitor events beyond our industry boundaries.
Scenarios: Snapshots of the Future
To illustrate the range of possible futures that we could face, I have isolated two shaping events or areas of uncertainty from an analysis of the conundrum that may be relevant when trying to develop outcome scenarios. These are:
(a) Uncertainty #1 Industry Contagion (Economic): The breadth, in terms of industry impact of the impending recession. How far will the recession spread to threaten sectors beyond banking? For example, will the US motor industry fail?
(b) Uncertainty #2: Global Fragmentation (Political): The dominance of global or nationally centred recovery plans. Do we enter a new era of unprecedented global co-operation or do we put our own national interests first and hide behind trade barriers?
These are major uncertainties – and we need to consider impact they could have. Each shaping event, or uncertainty, operates along a continuum. We can combine these continua to map four distinctly different future worlds:
A Quick Recovery?
The two scenarios on the left assume a relatively short downturn without too much “seepage” into industries outside banking.
As its name suggests, “Focused Change” means that change will largely centre upon the banking sector, primarily in the form of new regulatory approaches, but with the continuing “light hand” of regulation following the argument that regulation will stifle innovation, which in turn will hinder economic recovery and future growth. In broad terms, we return to the world we knew in 2007.
The “Globalisation Ahead” scenario assumes an internationally co-ordinated approach, but with a rather heavier regulatory hand reflecting the balance of views that now are appearing on the subject of regulation. This view holds that financial services innovation must be tightly controlled. However the banking and associated sectors still will remain the primary focal points of the regulatory push. “Globalisation Ahead” also represents the desired outcome from the position of the leaders of the developed economies. A relatively fast recovery and a new concensus on global co-operation appears.
In both these scenarios globalisation progresses and many of the BRICs succeed, but the developed economies (notably the UK) are left with the problem of what to do with their financial services led economies. What will fill the employment gap? In both these scenarios the financial services sector will not spring back to provide the surge of employment that it did (especially in the UK) in the 1980s and 1990s – so as the financial services sector contracts what will fill the gap?
So even the best scenario has a darker side for some.
New Waters …
As we progress into the right hand scenarios, a more difficult environment appears.
“Capitalism II” infers a deep global recession. Positively, sovereign wealth funds provide long-term investment to help restore stability to western economies. Globalisation slowly continues with the notable distinction that the global recession has acted as a catalyst to transfer both economic and, more importantly, political power from the economies of the west to the east.
This scenario heralds the end of primarily US led definitions of capitalism.
The price (from the perspective of the developed economies) for global co-operation in economic recovery may be a redefinition of capitalism to reflect new views and opinions on what is the “best way”.
The final scenario, “The Jigsaw” is arguably the most challenging and sees the undermining of many of the tenets of business management that have been established over the last two decades.
In “The Jigsaw” globalisation fails and nationalism prevails. Trading barriers and aligned trading blocks appear. In the face of unprecedented levels of unemployment, offshoring becomes socially unacceptable. One or more of the BRICs fail as they are still closely coupled to the fortunes of the developed economies. Governments in the western world struggle to manage both civil unrest and the rebirth of manufacturing industry. In this scenario, consumer preferences change dramatically from those witnessed today. A brand conscious society gives way to a society that values more intangible family experiences.
We have lived through an era of relatively stable growth during which time industry level forces such as technology have helped to shape strategy.
It is argued here that global level forces, not industry level forces, will now be the key influencers of corporate strategy and that regulation may take over from, for example, technology as one major driver of change. Unfortunately, we have to live through further shaping events to see the ultimate form that the global business environment will take.
Understanding and using the conundrum is an important task for business leaders. This briefing has given an example of how an understanding of driving forces and shaping events can produce early warning signals indicating the potential ultimate shape of the global – or national business environment. It is suggested that you map out your view of the conundrum, quite possibly using other forces and shaping events. Use a combination of critical uncertainties to generate potential scenarios that represent your views of the range of potential outcomes as I have done above.
As events unfold you can make qualitative assessments where the world is going and which scenario will prevail by assessing, for example, the two uncertainties that I have introduced above – industry contagion and global co-operation. You can use your assessments to track the “trajectory of change” – in other words towards which of the four scenarios the world is moving. An example, following January 2009 developments in the Irish and UK banking sectors, a revised possible trajectory of change is shown in Illustration 2 below:
In these future worlds some of the established tenets of business strategy will be challenged, for example:
That BRIC based strategies will prevail.
Globalisation is to the benefit of all.
Shareholder value maximisation is the central purpose of the organisation.
Continued operational cost reduction, especially through offshoring, is a route to competitive success.
The time has come not just to consider the length of a recession but what our world will look like afterwards and what this will mean for our businesses.