Global mega trends

Economics, Society and Business

In a world undergoing change where there are few certainties, it is useful to anticipate and plan for trends. These trends will affect us as individuals and the types of organisations we work with.

As a regular facilitator of strategy planning workshops I am always interested in the analysis of future trends. Today I share with you the views of Professor Joe Nellis of the Cranfield management school.

The trends themselves are unsurprising but the accelerated pace of change is what impresses – and frightens. Our question is what are the implications of these trends?

Professor Nellis divides the trends into three areas; Economics, Society & Environment and Business.

Economics – 3 trends

The massive realignment of economic activity from the West to the East is unprecedented. Today China accounts for less then 10% of world GDP, by 2050 it will be probably be the world’s biggest economy and have a GDP share of 25%. India is also pressing strongly behind China, and of course the US will remain a dominant force.

This economic growth in emerging economies will generate a demand for improvements in living standards. Citizens from emerging market countries look for improved public services; more schools, hospitals, infrastructure and better policing. This demand will result in an anticipated huge growth of the public sector in these countries.

Finally, the third economic trend is the unprecedented rise in the number of consumers in emerging and developing economies. Consumers with similar spending power to that traditionally associated with the West. It is predicted that there will be 1 billion of these consumers with needs to satisfy. Nellis says “such a demand to satisfy has never happened before in such a short time scale”.

Society & the environment – 4 trends

For the first time in the history of the world, people all over the world will be able to communicate with each other. Increasingly people in developing economies are gaining access to technology. In this connected world there will be a massive growth in interactivity. More companies will interact with other companies, and interact with individual consumers. This deepening globalism will, says Nellis “have profound implications for the world of business and society”.

Taking the number of university graduates as a measure of the future talent pool; the developed world produces about 16 million graduates per year. The rest of the world is graduating 33 million students annually. There will be an “exponential growth in the talent pool coming from countries of the emerging markets and the developing world.”

The shortage of natural resources is a trend that is widely accepted. The search for natural resources is intensifying. China is securing natural resources all over Africa to feed its economic growth, in Cornwall tungsten mines are about to open and closer to home there are plans for oil exploration offshore from Dalkey in Dublin.

The last societal trend he mentions is the increase in the lack of trust in big business (and in politicians). Corporate governance is increasingly important for larger companies, and how it can be used “to their advantage and to the benefit of society”. Pay and remuneration must be tied in to performance, and directors must be accountable to shareholders and realise the consequence of their poor decision making. (What measures have been made to recover the 1990s bonuses from Irish bankers? And why are failed Irish politicians being paid large pensions before they reach the pension age of 67?) 

Building trust is about actions, delivering promises and not the empty words from corporate PR and “public affairs” executives.

Business – 2 mega trends

There are “massive issues” to be faced in industry and in business.

The first is the availability of information through search engines on the internet and sites like Wikipedia. How will managers deal with information overload? Can products and services be mass customised for individuals and not only for market segments? The use of information is a huge opportunity for businesses, and “dealing with the overload a significant challenge”.

A combination of all of the above, of the increasingly connected and trading global village is that industry structures will change. New global networks will emerge as well as bigger companies (many of them state owned in emerging markets). Nellis anticipates “different business models and developments concerning the way in which companies interact with each other”.

Big Change is here

How can managers “manage” in this world of increasing complexity? Nellis suggests there is no choice, “if you don’t like complexity, don’t go into management!” The right talent must be recruited to run companies in a much more complex environment.

Gone are the 50 year economic cycles identified by the Russian economist Kondratiev. There has been a major seismic shift, the cycle of economic change is now much shorter, 10 to 15 years. Challengingly, a manager’s career will endure several seismic shifts. Previously managers would have lived through for example one or two economic cycles of ‘growth to recession’. Organisational change will need to be delivered quicker, and better.

Short term focus will no longer suffice, “a successful manager must stay focused on the horizon”. The pace of change is accelerating as has never happened before. “Address these long-term drivers of change now”, Nellis asserts, “or you may be heading for extinction”.

The question facing leaders is how can an organisation take advantage of these global movements?

Joe Nellis, Professor of International Management Economics, Cranfield School of Management, www.som.cranfield.ac.uk/som/

Billy Linehan of Celtar has much experience in strategic planning with clients, facilitating workshops in planning for change. Based from Dublin, Billy has a long term interest in future thinking and is available to work with you in anticipating future trends and how they will affect your business or organisation. Contact Billy at billy.linehan@celtar.ie to benefit from the input of an external adviser into your strategic thinking and business planning.  

“Keep your feet on the pedal!”

With little cash for job investment the government

 has made a fairly good stab with the Jobs Initiative

 announced today. One strong theme is to stimulate

 the tourist industry by removing barriers to visiting

 and reducing costs. A different need is met by

encouraging further education and training,

and work placements through internships.

At Celtar we welcome the initiative as supporting the new government’s strategy to energise the economic recovery.

What will be of interest is who will coordinate and supply the training, and what will be the remit of the training agency FAS? Current initiatives such as Skillnets have run their course – to meet today’s challenges new bodies with new objectives should be created.

The package of measures is budgetary neutral over the period to 2014, highlights are below.

- Temporary visa waiver scheme for short-stay visitors of 14 nationalities. This initiative will make it much easier for overseas visitors – including visitors from crucial emerging markets – to come to Ireland without having to incur the trouble and expense of applying for separate visas, once they have already obtained visas for the UK.

- Abolition of the €3 per passenger travel tax as part of a deal with airlines to restore lost routes. The Air Travel Tax will be reinstated should the airlines not open additional routes and increase visitors to the country.

- Introduction of a temporary reduced rate of VAT of 9 per cent, from 13.5%, to support the tourism industry. This new temporary second reduced rate of VAT will apply to a number of tourism and entertainment related goods and services with effect from 1 July 2011 to 31 December 2013. Hairdressing and certain printed material such as brochures and newspapers will also be charged at the new rate.

- Halving lower rate of PRSI with effect from 1 July 2011until end-2013 on jobs paying up to €356 per week.

- R&D tax credit legislation to be amended to allow companies to account for the credit either above or below the line thereby giving more flexibility for companies and increasing its attractiveness for corporate taxpayers and in particular US and other foreign investors.

- The Employer PRSI charge on share based remuneration which was recently introduced has been reversed with effect from 1 January 2011.

- A national internship scheme operating for two years with 5,000 places

- Additional 3,000 places in back to education initiative

- Additional 20,900 places for training, education and upskilling

- €10 million to be provided for school works, in addition to €20 million reallocated from existing budget

- €75 million reallocated for transport projects aimed at creating at least 1,000 new jobs

- €15 million for improvements in general transport

All paid for by?

The tax reductions and expenditure measures announced are to be funded through a temporary levy on funded pension schemes and personal pension plans. The levy will apply at a rate of 0.6% on the capital value of assets under management in pension funds established in the State. It will apply for four years commencing in 2011 and is intended to raise €1.9bn over those four years.

And of course the 12.5% rate of corporation tax so important for attracting foreign direct investment is here to stay. (Sarkozy, Merkel and Co. please get off our backs!)

Celtar provides business advice to owner managers, directors and CEOs of small and medium sized businesses and not for profit organisations.

“We work with businesses that have growth potential, with entrepreneurs who value an external perspective on how their ambitions can be realised”.

Contact Billy Linehan, billy.linehan@celtar.ie

Time to do it is now

Looking back we now recognise the negative influence of PR agencies, lobby groups and spin doctors hyping up the property speculation of the Tiger years. Much of the PR industry here mimicked the activities of their lobby group colleagues in Washington, promoting short term policies and deregulation. (And, strange to say, on radio these days we often hear the same people “talking up” their clients’ prospects, defending the HSE, the actions of state sponsored companies or acting the role of “objective” commentators on current affairs).

Hélène Rey of London Business School identifies where the malign forces of the lobby groups receive their strongest direction (and cash), from the financial institutions of Wall Street. She explains that current economic trauma will continue unless those who created the problems are brought under control. And the time to do it is now.

What happened

The worldwide economic downturn sprang largely from the US and, more specifically, from the investment banks, rating agencies, Washington regulators and other players in big-time Wall Street finance.

So at this juncture — when the US Congress is considering financial regulation reform and the US Securities and Exchange Commission (SEC) has at last brought action against all-purpose bad guy Goldman Sachs — we would do well to take a look back at what we learned about the origins and unfolding of the American financial crisis, so we may take an informed look ahead at whether we may reasonably expect reform of US financial regulation potent enough to avert a similar future collapse.

Looking back

With a nascent economic recovery seemingly underway, a number of participants and observers of the financial collapse have come forward, willingly or not, with treatises, letters, testimony, books and seemingly numberless email messages — a critical mass that permits some conclusions regarding the origins of and reactions to what became a global financial crisis:

• The massive consumer indebtedness and current account deficit of the US preceded, and contributed to, the crisis — as did the US Federal Reserve’s monetary policy, which held interest rates too low for too long.

• The structure of compensation within large US banks (and Irish banks!) encouraged wild risk taking, while regulators were too complacent or too indulgent in the face of the banks’ charm offensive.

• A revolving door of officials who have shuffled over the years between Wall Street’s major players and various US presidential administrations — particularly those of Clinton and Obama — has raised more than a few eyebrows.

• Ratings agencies, wishing to protect their ever-increasing profits from Wall Street, failed to properly assess risk of the overly creative and complex financial instruments built on the shaky foundation of sub-prime mortgages.

Some economists warned of the inevitable bursting of the “housing bubble”, but others were vocal in their flimsy justifications of unprecedented increases in house prices. When the financial mess moved from Wall Street troubles to worldwide economic crisis, policy makers reacted more often with confusion than assertiveness. In the institutional collapse that we now know most merited a US government bailout (that of Lehman Brothers), the US Treasury Department declined to act and thus contributed to the further destabilisation of financial markets. (In his subsequently released memoir, then-US Treasury Secretary Hank Paulson attempts to shift blame to the British Treasury for this failure. The latter, he claims, blocked the Barclays takeover of Lehman Brothers at the last minute, due to surely justified fears of a devastating impact on stability of the British financial system.)

While the US government failed to aid Lehman as it should have, its multiple rescues of insurer AIG appear to have been misguided. The principal beneficiaries of the government’s AIG assistance — no surprise — have been the largest of Wall Street’s banks.

Looking ahead

Just about everyone in Washington — from the White House to the regulatory agencies to Congress, on both Democratic and Republican sides of the aisle — is agreed that significant reform and strengthening of US financial regulation must occur to prevent another financial collapse and further bailouts of Wall Street by American taxpayers.

But one must wonder if this across-the-board momentum toward reform will be turned back, or watered down to ineffectiveness, under the withering lobbying firepower of Wall Street’s powerful financial institutions. From January through September 2009, financial institutions spent $126 million to influence Congress. The financial sector’s frenzied lobbying is already hammering away at stopping or weakening proposed regulation of derivative products, particularly the credit default swaps at the heart of many speculative strategies.

Prospects for meaningful financial reform may be called into question with a look at recent scholarly writings that examine the effectiveness of US lobbying activities by financial institutions. For example, a recent research article (“A fistful of dollars: Lobbying and the financial crisis”, www.imf.org/external/pubs/ft/wp/2009/wp09287.pdf ) poses an important question: why was the regulation of the mortgage market so faulty before the economic crisis? The authors respond simply and precisely: the financial institutions implicated in the excesses of the sub-prime market are those that spent the most money lobbying the US Congress.

Between 2000 and 2006, American financial institutions spent from $60 million to $100 million annually on lobbying efforts. Most of these efforts were focused on proposed legislation dealing with real estate lending and securitisation. Securitisation, more than any other factor, led to both the transfer of toxic assets to the balance sheets of many financial institutions, pension funds and government units and to the deterioration of credit quality. Banks that securitise and sell financial products to other institutions have little incentive to be concerned about the quality and ratings of the loans they sell off.

The financial institutions that spent the most money on showering Capitol Hill with campaign funds, lavish trips and other favours are also precisely the institutions that issued the riskiest loans, resorted to securitisation the most and had the fastest-growing portfolios of ever-riskier real estate loans. It seems reasonable to suppose that these same institutions were able to influence the quality of market regulation with their lobbying prowess.

Given the revenues, profits and compensation schemes of Wall Street’s heavy hitters in lobbying, it’s hardly surprising that they’re now throwing all their weight into shaping regulation of the financial system in a way that would preserve their rents. Will Congress, the White House and the regulators be able this time, unlike previous times, to resist?

Hélène Rey, Professor of Economics at London Business School

http://www.london.edu/newsandevents/news/2010/05/Avoiding_another_financial_collapse_1118.html

Economic recovery?

This article looks at the approaching recovery and suggests how your pricing strategy should be reviewed.

Hopefully we will see signs of recovery in Ireland next year – probably based on increased global demand, resulting in higher export sales from locally based multinationals and indigenous companies. Local consumption of goods and services will trail a little behind, and confidence will recover – let’s close our ears to McWilliams and the other prophets of doom.

Comments are welcome as always,

Best regards

Billy

Tim Smith of the Wiglaf Journal explains by most indicators, the major economies of the world are coming out of the deepest global recession in a lifetime.  Yet, the recovery is far from a return to pre-recessionary trends.  Executives might be hoping for return to strong growth, yet most should expect a tepid climate at best.

From a pricing perspective, the weak recovery will place pressures on firms to demonstrate that they are better positioned than their competitors to grow.  This demand for demonstrating growth, rewarded by higher valuations, may drive executives to grab market share through deeper discounts and promotions.  Alternatively, executives may be hoping to grab a higher value market segment by marching up the price to benefits map.  Yet, evidence indicates that executives should apply pressure to the marketing levers differently if they want to win in this period of a weak recovery.

Restrain those Discounts

First, executives must continue to restrain their discounts, if not decrease their discounting and price promotions during this period.

Research by Lodish and Mela in the HBR has indicated that companies routinely overweigh the importance of short-term gains and under weigh the importance of their brand’s value proposition.  “They … over-invest in price promotions and under-invest in advertising, new product development, and new forms of distribution.”

One of the challenges of heavy price promotions and discounts is that they train customers to buy on price, not on quality.  If the company spends most of its time communicating to customers that they have the lowest price, it is only natural for customers to become convinced that price is the most important decision criteria in making a selection. From a rational viewpoint however, price alone is not the appropriate buying decision metric.  The more appropriate metric is price to quality.  If an executive wants customers to buy on quality, then they better point out the value of their products and the deficits of low price / low quality offers.  For example: good walking boots last for years while bad walking boots last for months.  On a euro per month of wear, customers are usually better off buying quality boots.

Erosion of customer loyalty

A related challenge to industries plagued with heavy price promotions is the erosion of customer loyalty.  Customers trained to purchase on price promotions will also be trained to consider brands to be interchangeable.   From a customer value perspective, the costs of acquiring new customers are far greater than the costs of retaining a customer.  Executives should be wary of actions which reduce customer retention rates within their industry.

Finally, discounts, price promotions, and trade deals can all encourage unproductive economic activity.  At one point, it was estimated that one-third of all expenditures on trade deals were wasted through the effect of inefficient warehousing and distribution.  In tight economic times, neither manufacturer nor their retail partners can afford to waste money on storing goods.

Rather than pursuing a greater discount and price promotion budget, now might be the time to switch to value pricing and shift budgets towards branding, specifically online branding.

Focus On Low-Cost Targeted Solutions

During good economic times, a common business strategy is to add value to products at a rate faster than costs increase. During this weak recovery, this common strategy is unlikely to prove as profitable.  Customers simply don’t have the excess revenue and income to spend on unnecessary benefits.  Instead, firms should focus on uncovering quality solutions which satisfy a targeted need at a low-price.

Delivering target solutions

Excess capacity, slack labour markets, and overall uncertainty regarding future earnings of both consumers and industrial customers all imply that pressure will still be on low-price solutions to daily operations.  Rather than delivering gold-plated solutions, firms should focus on delivering targeted solutions for specific needs of customers to continue competing and surviving in a tougher economic climate.

Product development should continue to be undertaken, but rather than creating new products at the top of the price to benefit map, firms are more likely to profit from segmenting the mass market at the lower ends of the price to benefit map and delivering the specific products that this larger group of customers demand.

Recessions come and go.  Weak recoveries can turn into strong recoveries.  To paraphrase Winston Churchill:  Never, never, never, never give up.

Article by Tim Smith, Chief Editor, Wiglaf Journal

References

Leonard M. Lodish and Carl F. Mela, “If Brands Are Built over Years, Why Are They Managed over Quarters?” Harvard Business Review (July-August 2007): Reprint R0707H.

Paul Flatters and Michael Willmott, “Understanding the Post-Recession Consumer,” Harvard Business Review 87, no. 7/8, (July-August 2009):  106-112.