Big Picture — December 2011

When the managing director of the IMF, Christine Lagarde, issues warnings like this:

“There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating.” [Source]

it is time to take stock of where we are and make plans for the future.

The first step is to understand the key forces driving change.

What are the key trends and drivers shaping your business, your industry and business in general?

Our answers for business in general are included below. In the new year we will look at what to do about them.

In the meantime, have a great Christmas/Holiday period.

(And do let us know what here you agree with, and what you think we’ve left out.)


The future business environment will be shaped by forces under nine key headings:

  • Political/economic
  • Energy-related/environmental
  • Social
  • Technological
  • Supplier power
  • Customer power
  • Industry competition
  • New Entrants
  • Substitutes

(For background explanation, see here.)

The following sections examine these one by one:


Political / Economic:

  • As Eurozone crisis continues to inch forward, the possible outcomes are becoming more extreme: either stronger union or complete collapse
  • A lack of clear political leadership two months ago has crystallised 27 European countries into “26+1”: 26 working closely together, UK standing apart
  • US legislature is increasingly confrontational: unable to agree a budget; passing laws on China currency levels, detention without trial for suspects; making military equipment available to police forces; using ‘Homeland Security’ measures against unarmed civilians
  • US economy seems to recover; Europe’s flounders; China’s weakens with fears of construction bubble; emerging economies affected by reduced demand, higher inflation, and also opportunities to supplant existing interests
  • Global financial markets volatile as investors act as a herd, all seeking safety or risk
  • Collapse of MF Global reveals more corruption / lack of ethics in the system
  • Prices of oil and gold behave unconventionally. Oil takes on some characteristics of ‘currency’. Gold falls in crisis as individuals sell to cover losses elsewhere.
  • In UK, only manufacturing and mid-sized companies seem to offer growth.
  • [For these specific stories and more, click here]

In summary:
In politics and financial markets, the crisis are characterised by increased volatility between opposites, a polarisation of views. Each opposing view is valid and offers a possible way forward, but neither seems compatible with the other.
The impacts are being felt in every economy in the world. The whole world is involved.
Growth predictions have been slashed and are being slashed further. Emerging economies (including China) can no longer be relied on to provide growth.
And despite the polarisation, it is countries with a strong welfare model (relative equality/non-polarisation) that seem to have weathered the financial crisis best.

For business this means an uncertain future. There are forces for change pushing strongly in opposite directions, so the outlook is difficult to predict. The only current certainty is for volatility — which will place existing business models under pressure, and create opportunities for new business models.


Energy / Environmental:

  • Oil prices have risen higher and become more volatile. Shell’s CEO says this will continue for the foreseeable future.
  • German Bundeswehr publishes its report on peak oil in English, predicting severe impacts on economies and on issues of national defence
  • UK faces energy gap in 2-4 years
  • “EU faces 20 years of rising electricity costs”
  • The level of investment in renewable energy passes investment in fossil fuels
  • A tipping point for the cost of solar electricity could be reached in 2-3 years.
  • Massive floods disrupt homes and businesses in Australia. Severe US drought affects crops.
  • Thai floods are cited as one of three factors knocking Sony into $0.8bn loss
  • Oceans in crisis — 90% of stocks of big fish eaten since 1960
  • Ocean chemistry now primed for mass global extinctions (on land and sea) within 30-50 years
  • Massive die-off of trees, worldwide
  • [For these specific stories and more, click here]

In summary:
Energy is the lifeblood or our economies and we are facing rising prices and reduced supply of that energy. Investments in renewable energy have passed those in fossil fuels, so the rate of change is in the right direction. But it seems likely that the rate of new generation will lag demand: that is, although in the long term we may return to abundant energy, in the short term we are likely to see shortages.
Extreme weather events are increasing in size and frequency. The financial impacts on business are increasing. Almost all environmental indicators are worsening, not improving.

The impact for business is two-fold: we can generally expect the costs of energy and disruptions to supply to gradually increase; almost completely unpredictable are the extreme weather events that will bring severe disruption to businesses (either directly or via their customers, suppliers, and employees).


Social:

  • Large-scale redundancies, pay freezes
  • Squeeze of the middle classes, who have decreasing share of national wealth and income
  • Rising food prices, rising energy prices leave less disposable income to spend on other items
  • This feeds back into a global economic slowdown is blamed on ‘lack of demand’
  • Large pay increases continue at director-level
  • Rise of barter, ride-sharing, … as alternatives to the ‘mainstream’ economy
  • Sudden, strong emergence of movements for democracy in ‘Arab Spring’  and ‘Occupy’, supported in some areas, violently repressed in others.
  • [For these specific stories and more, click here]

In summary:
Increasing social inequality is leading to a increasing push-back against that inequality, and the search for alternative systems. The establishment response has often been quite severe, not just in the Middle East.
Again, the system is showing bifurcation: a choice between a future of increased inequality and (essentially) fascism, or decreased inequality and the rise of democracy.

Impact for business in the west: the concentration of wealth and income into fewer hands, combined with increased spend on the essentials of food and energy, leaves less money circulating in the economy. It separates existing business models into winners and losers. It also creates opportunity for new solutions to the problems people are facing.


Technological:

  • Investments in renewable energy generation surpass those in fossil energy
  • Forecast of ‘Tipping point’ in price of solar panels during next 2-3 years
  • McKinsey report shows existing model of resource production/use cannot continue in next 20 years
  • Huge deposits of rare earth minerals found on sea bed around Hawaii mean high tech developments can continue, but environmental impacts not considered
  • Cybertheft and cyber-warfare on the increase
  • New models for ecosystem-friendly agriculture and business being developed
  • Samsung increases smartphone sales four-fold in 12 months, passing Apple
  • [For these specific stories and more, click here]

In summary:
While economies in general are stagnating, technology companies provide rare success stories, which shows that people will pay for new ways of doing things. In particular, Samsung shows that even while the economy as a whole is stuttering, it is possible to increase sales four-fold, and beat an entrenched market leader. To do this it needed not only strong information technology, but also a strong business model (which is another kind of ‘technology’).
More widely we see growth two opposing futures for technology use: on the one hand technology is enabling new forms of conflict (cyber-warfare, cybercrime); on the other hand, new ecosystem-friendly technologies are emerging (eg biomimicry, energy generation, agriculture).
A feared lack of key rare earth minerals that threatened to stall technological development has been put to rest by the discovery of huge deposits around Hawaii. But the environmental impact of extraction is unknown.
More strategically, McKinsey research shows that our current ways of producing and using the key resources of food, water, energy and industrial materials, cannot continue as an extrapolation of the present. Radical innovation is needed.

The outlook for business: there is increased demand for better ways of doing things. If your business is one of the innovators, this is an opportunity. If you are one of the laggards it is a threat. This applies to ‘technologies’ in the broadest sense — ways of doing things — not just to information technologies.


The above are some of the key trends and drivers in the political, economic, energy, environmental, social and technological arenas.

What effects are these having on Supplier power, Customer power, Industry competition, New Entrants and Substitutes?


Suppliers:

In summary:
There is excess capacity of existing products and services, within a worsening economic situation. This presents two ways forward.

One way is to shrink the existing business model. The other is to innovate new products, services and ways to deliver them, in order to help alleviate the increasing pressure being felt by customers.

There is excess capacity in existing products and services. But there is under-capacity for highly sought-after new products and services.


Customers:

  • Customer power is stronger than usual
  • This has resulted in falling prices and reduced output in several industries
  • But customers themselves have little power, since their own ability to buy has been reduced
  • (Add specific items from your own industry here…)
  • [For these specific stories and more, click here]

In summary:
Although customer power is stronger than usual, their own position is also weak.


Industry Competition:

How are the above trends and drivers affecting different industries?

  • Non-food retailing is down as costs of food, fuel and utilities increase.
  • But even food giant Cargill’s profits are down two thirds because of impacts from volatility of  financial markets
  • Industrial metals (such as copper, zinc, platinum) connected to ‘real economy’ activities show more price stability than precious metals (silver, gold)
  • Some groups seek refuge in consolidation: Mobile phone operators consolidate in face of rising infrastructure costs, lower revenues; Yahoo and ABC News pool online resources
  • Others improve performance despite difficult times: ‘Bellwether’ engineering group ABB publishes Q3 results slightly up; Samsung grows smartphone sales four-fold; Lipton Tea grew market share by redesigning its entire business model to make the brand 100% guaranteed environmentally and socially sustainable.
  • Some find new opportunities in the crisis: emerging-market bourses agree to cross-list each others’ futures and options, increasing the interconnectedness of the world; pharma companies introduce tiered pricing in order to grow with emerging economies
  • Global manufacturing landscape shifts as Chinese labour costs rise; even UK shows a ‘shift to manufacturing’ (and mid-sized companies)
  • Airlines (especially low-cost) feel the pinch. BA repositions as ‘service’ airline.
  • New legislation will shift the landscape for airlines (carbon trading) and the financial services industries (various legislation to address the crisis).
  • Activist shareholders pressure large companies for sell-offs, to release shareholder value that they do not expect to come through dividends
  • Defence follows music/retail into cyberspace
  • (Add specific items from your own industry here…)
  • [For these specific stories and more, click here]

In summary:
The broad picture is one of downturn across all industries. This is exacerbated in some cases by new legislation and by links to volatile financial markets.
Some industries (manufacturing, airlines, defence) are finding their landscape shifting significantly.
For others, shareholders are so pessimistic about the outlook that they are calling for sell-offs as a way to free-up shareholder value.
Some companies, however, have improved performance by innovating.


New Entrants:

  • The difficult economic conditions have led to delay of several new listings on stock exchanges
  • Tesco has had to delay the launch of its new bank
  • New car hire firm will rent cars by the hour
  • (Add specific items from your own industry here…)
  • [For these specific stories and more, click here]

In summary:
Conditions for new entrants are not easy.


Substitutes:

  • In Greece, the barter economy is a growing alternative to the cash economy
  • Tesla launches family saloon electric car
  • Electric car charging-points rolling out across Britain
  • Boeing’s supply chain solution complex to implement, but brings much-needed stability
  • New car hire firm will rent cars by the hour, providing another alternative to car ownership
  • (Add specific items from your own industry here…)
  • [For these specific stories and more, click here]

In summary:
Alternatives, of various sorts, are growing, but are not always having an easy ride.


Overall summary:

The world at the end of 2011 is volatile and interconnected in a way that has not been before.

Across the categories of political, financial, economic, energy-related, and social trends, we see a bifurcation: the shift from a range of possible futures to the emergence of only two extremes as possible ways forward. Broadly we might terms these alternatives as ‘abundance’ and ‘scarcity’. There is currently high volatility between these possibilities and it is impossible to predict the outcome.

In technology, resource constraints mean our existing ways of doing things cannot simply be extrapolated into the future. If we want the future to be better than the past then we need innovation to produce new ‘technologies’ (in the broadest sense, ‘new ways of doing things’). The increasing crisis is creating increased demand for better ways of doing things. Companies that are rising to the challenge are finding success.

Only in environment is the picture unilaterally gloomy. All other categories are offering the potential for ‘better’ or ‘worse’ outcomes. Only under the environmental heading are all indicators pointing to ‘worse’.

The impact on suppliers, customers, industry competition, new entrants and substitutes is a downturn across pretty much all industries. But there are beacons of light.

For individual businesses there are two ways forward from this: either shrink the existing business model, in the hope that things will return to ‘business as usual’, or innovate new business models.

Given the nature and volatility of the forces described above we see no chance of a return to ‘business as usual’. Innovation then is the only way forward, and for those that succeed the rewards will be huge.

The scale of the task may seem daunting, but remember this: how this turns out will be down to the actions taken by all of us. The world is highly volatile (with strong forces pushing in both directions)  and highly connected, which means that a) the outcome is not controllable by any one party and will be the result of all our actions, and b) the actions taken by any one of us could change the entire system.

We shall return to look more closely at innovation in 2012.

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