Beckett Advisors - News Room

Beckett Advisors News Room
Robert McGarvey

Managing in a Dangerous World

The collapse of capital spending which triggered the slowdown in the U.S. economy did not originate with the terror of September 11, 2001; but the darkening of the global outlook since that date is presenting greater challenges to management than have been faced for several generations. What was really lost on that sunny day in September was the naive view that the global capitalist economy could expand seamlessly into the Developing World, bringing peace and prosperity in its wake.

Today, the future of the global economy is far less clear, the way forward for management is so uncertain that it has undermined confidence in the Boardroom, on Wall Street, and soon, no doubt, on Main Street. The collapse of confidence - founded in fear and uncertainty about the future - creates a self-fulfilling prophecy of doom and gloom.

But surely business has endured many such challenges in the past; the presence of conflict does not, in itself, mean the end of global opportunity, growth or profits. It does mean, however, that management must learn to adjust to a new more complex global reality.

Specifically for management, it means identifying the road forward, and quickly becoming competent in understanding and managing new orders of risk in a dangerous world. But where are the real growth opportunities going forward? What are the risks that need managing? What should management be doing to meet the challenge?

Where are the growth opportunities in the economy?

There is a good deal of uncertainty about the pathway to growth and profits at the moment. For a while in the late 1990's, there was a generally accepted view that the Internet would be the next growth Valhalla, and that profits would be generated in large quantities as consumers the world over jumped on the Western lifestyle bandwagon. This rosy view was rooted in a deeply held conviction that the ideological conflicts in the world had been resolved with the fall of Communism; that we were all now 'consumers' in a global market economy. The Dot.Com collapse coupled with the War on Terror has shaken this worldview to the foundations; for many it is simply not believed anymore.

But the truth is, globalization has not died, it rolls on apace. We know that China and India are big supporters of globalization; they've bought in and are prospering, hence the stampede of Western companies setting up operations, or transferring large portions of their global production to Asia, China in particular.

Let us not forget, globalization is not new; the fact is there has been an interconnected global economic order since the 16th Century. What's changed dramatically over the course of the past few decades is the levelling of the playing field as the Developing World's markets open, technology transfers and communications improve. This creates opportunities for Western business, but carries with it many significant political risks as well.

It's important to realize that globalization is not a single universal phenomenon, there are really two separate but interconnected revolutions taking place at once around the globe.

The most obvious revolution is that which is taking place in the emerging economies of what used to be called the Third World. These economies are experiencing an industrial type revolution, not dissimilar to the changes that Western economies experienced in the past.

Massive industrialization is underway in Latin America, Asia and Eastern Europe, together with all the erratic growth, fluctuating currencies, social and economic dislocation that accompanied urbanization and industrialization in the West.

Production is centering or locating in these economies because they are evolving industrial social and political structures, which facilitate the industrial production model. Industrial production works effectively precisely because these emerging economies are able to exploit the severe political, social and economic divisions in their industrializing societies.

Are all 1.2 billion Chinese 'target consumers' for Western products and services? No, but the rapidly growing urban middle and upper middle classes are. And they will consume great quantities of Western branded goods to achieve a global lifestyle. This 'market' in China is significant, but the growth in the consumer market in China will take many turbulent decades to achieve. Remember, the 700 million peasants in China are not consumers; they are the consumed.

So is all the growth in the world economy to be centered in the emerging economies? No, there are massive growth prospects in the Developed World as well. The demise of the Dot.Com's and the Internet bubble has masked for many one of the most significant transformations in the history of the global economy; the rise to prominence of nontraditional 'information-based' assets in the United States and other advanced economies.

It can truly be said that in the last two decades the US economy has experienced a massive asset revolution; the engine of growth has transformed from an industrial manufacturing base to a knowledge base - with profound consequences for business.

Market services and intangible goods now contribute over 75% of U.S. GDP. Intangible inputs today account for over 70% of value added in the automotive and consumer goods industries. Total annual R&D expenditures in the U.S. increased from $26 Billion in 1970 to $206 Billion in 1997, representing an average yearly growth rate of 8%. The number of new U.S. patents issued in 1998 reached 155,000 a 33% increase over 1997. Patent licensing revenues have shot up 700% over the past 10 years from $15B in the early '90s to over $100B in the year 2000.

Furthermore, there has been a parallel decline in industrial activity in the United States; the relative share of raw materials in manufacturing output has decreased at an annual rate of 1% per annum since the end of World War II. Since 1950, the relative share of energy input has also been in decline.

What does it mean for business: there are massive opportunities waiting to be realized simply in unlocking the 'intangible' knowledge assets residing in organizations. Buying habits of consumers are changing; Internet use is becoming ubiquitous and high-speed solutions are rapidly displacing the old dial up networks opening a vast array of marketing opportunities.

Although it's not much discussed now days, supply chain integration is providing competitors with significant cost and speed to market advantages. Many businesses in America are going to awaken from their present stupor only to find the competition has outflanked them permanently.

What are the new risk management issues?

Decades of international cooperation and a sense of a common future fueled much of the reductions in tariffs and other trade restrictions, facilitating the massive movement of capital, technology and people that underlay the expansive integration of the global economy.

Whatever else the War on Terror has done, it has reintroduced armed conflict and politics into the global economic picture. Political influences had never really disappeared, but they are becoming more pronounced by the hour as nations large and small scramble to define and protect their particular 'National Interests'.

We are in an unprecedented period of global anxiety and economic transformation; expect this period to be violent and dangerous. Business leaders beware; you will be expected to anticipate and manage your company's future in the face of these global crises.

Anticipating opportunities, acting boldly to achieve global scale must be accompanied by astute political risk assessment - coupled with strategies to minimize the risks. Bottomline: political risk analysis must now become an everyday part of business planning and decision-making.

What should management be doing to meet the challenge?

Be bold. Now is not the time for timidity. Management must develop a global perspective if the company's future is to be secured.

The salad days are over for US based suppliers. Globalization may be risky, but today you can't expect to succeed without being threshold on cost - even if you have other significant advantages - and this means having a global production strategy. Selling excellence is the key to survival. Be aggressive, proactive in your approach to marketing. Don't be afraid to make significant changes to your way of doing business.

Now is the time to make a commitment to excellence. You'll need to focus, differentiate, and excel.

Generate new sources of revenue through exploiting your intellectual property assets fully. Turn your R&D from a cost centre into a licensing profit centre.

Prepare for new tougher business ethics. Management will be held to higher ethical standards in the future with much higher standards of accountability. Remember: You will be judged by tomorrow's standards for acts committed today.

Learn to identify and manage political risks. Ask yourself: how solid is that Indonesian contract? What do we really own in China? How do I hedge my risk in foreign countries? What 'down side' protection is in place for currency devaluations, such as occurred in Argentina?

Opportunities await those who have the insight and courage to seize the future. Don't be lemmings: prepare to succeed.

Robert McGarvey is Founder & Director of Beckett Advisors, Inc., a strategic marketing firm based in Los Angeles. He can be reached at robertm@beckettadvisors.com