As 2011 fast approaches, concerns remain over the state of the global economy. Some economies (mostly the emerging and Asian markets) are seeing renewed growth, whereas the large Western economies are still struggling with the financial and social crises. All of this leads to much uncertainty.
Like death and taxes in the good old days, it seems now that the only thing certain in the economy is uncertainty. In the face of this, it is important for organisations to be agile and responsive - although, there is a propensity for organisations to dig in their heels in the face of ambiguity.
“There are mixed signals about the global economy every day. News oscillates from good to bad. To avoid excessive optimism or pessimism, we need a structured way of understanding some of these events in a time of significant uncertainty. Many companies and executives continue to plan on the basis of incremental growth and flat line projects despite the uncertainties,” says
Mark Spelman, Global Head of Strategy at Accenture.
What does this uncertainty mean for organisations?
Understanding the macroeconomic trends is fundamental for making business decisions. It provides a framework for changes to industry structure, value, winning strategies and operational excellence. The macro picture sets the context for the day-to-day micro decisions which drive business performance.
Explaining the macroeconomic context in which we sit, Mark says: “We have not one, but three crises to navigate. In addition, there are three sets of re-balancing going on; around government debt, consumer debt and bank recapitalisation. The degree of rebalancing across these three dimensions is determining the capacity of countries to bounce back from the three crises. The reason why a number of Asian economies have been able to recover very quickly is because they have not been handicapped by the need to undertake significant rebalancing actions. The countries that are trapped with high government debt, high consumer debt, and massive re-capitalisation of their banks are the ones that have struggled most to recover and post positive growth rates in 2010.”
Dan Londero, MD – International Sales Group, Reed Exhibitions says: “Internationally we observe a general degree of optimism, although several sectors remain troubled. The key question right now is how permanent are the global changes that we have recently experienced and what is the right balance of business to have in the different continents in order to capitalise upon those shifts?”
Ruth Cairnie, VP Commercial Fuels at Shell International says: “We have been seeing recovery in Europe and North America. Looking ahead, growth is expected to be, at best, weak although patchy. This requires continued strong focus on the sectors and markets that drive growth, maintaining high discipline on cash and risk. Our sale of fuels to businesses has a good exposure to growing economies in the East and Latin America. These should continue to grow, albeit potentially at a rate reflecting lacklustre growth in their export markets and impacts of exchange rates on competitiveness.”
Efficient Growth
Mark continues: “One headline for 2011 will be ‘efficient growth’. Why efficient? First, because demand in many countries has been underpinned by government actions and, yet, we know that many governments around the world are struggling with their debt positions and are looking for more from less. The second reason why efficiency matters is the link between inputs and outputs. Commodities, from oil to wood to rare metals, are becoming more scarce and difficult to exploit so we need to get more output for less input. Efficient growth will be the name of the game over the next 12 to 24 months.”
Thras Moraitis, Executive General Manager Group Strategy and Corporate Affairs, Xstrata plc says, “In our business – commodities – demand is driven essentially by the developing economies (China, India, Brazil, South Asia, etc) and by the urbanisation and industrialisation that is ongoing in these markets. Last year, China alone accounted for over 100 per cent of the growth in demand for some of our commodities. Therefore, we believe demand will continue to stay strong – supported by a return to growth of the US (which now represents an average of only about 30 per cent of total demand across the suite of commodities we supply and much less in terms of growth in demand).”
The American Economy
Although there is a recovery in process, albeit not as strong as some would like, it is expected that a full recovery of the global economy will not be made until the US economy starts to strengthen. Although damaged, the US is still strong and accounts for nearly a quarter of the global GDP. There are, however, concerns about its outlook. Mark says the two factors to watch in the US are government spending and the ongoing uncertainty regarding housing prices.
Implications on businesses
What does this uncertainty mean for businesses and their leaders? “In a world of uncertainty, many businesses still have much of their thinking driven by a flat line, incremental approach. The forces at work mean that businesses need to understand the global context and what it means to be agile and flexible in the face of uncertainty,” says Mark. “The start is ‘what happens if’ and the need for a more disciplined approach to risk and downside scenarios.”
Dan says: “Our strategic planning exercise when dealing with the immediate as opposed to the medium- to long-term is now, more than ever before, reliant on leading indicators of business performance. The development of more reliable leading indicators is also of priority. Given the uncertainty in global markets, our planning exercise has become more granular and frequent.”
To deal with such doubt, Thras’s organisation uses scenario planning and has a detailed set of early warning indicators which they monitor on an ongoing basis, making it easier to respond to market changes.
Mark contends that organisations need to take a careful look at the boardroom agenda and their assumptions. “The danger is that too many boardrooms, particularly in the West, are stuck in an old paradigm thinking of Western domination and are not anticipating the changes being driven by a multi-speed global economy and new competition.”
Tim Eggar, an Associate of Criticaleye and the Chairman of the Board of Nitol Solar Ltd says, "I am struck by the number of low-debt larger Western companies which appear to be waiting for ever more economic data points. European and Asian Governments have gone a long way to clarifying their policies; the performance of the US is perhaps less clear, but I think we have reached the point where shareholders in many sectors expect investments to be made. The contrast with the decision-making process in larger Asian companies is stark."
“The key message is that the world will be more uncertain, more ‘multi-speed’, more diverse and will experience even more rapid change as new technologies create new business models. The assumptions of the past need to be challenged – uncertainty requires even greater premium on organisational agility. Efficient growth through an agile organisation will be key to future success,” concludes Mark.
Too many organisations are focused on the next quarter. To deal with the continued ambiguity, organisations need to have a short-term view, but prudent leaders are able to understand the implications of the longer-term macroeconomic context.
Even with this macroeconomic knowledge, business basics should not go out the window.
Mike Turner, Chairman of Babcock International plc, gives this advice: “Uncertainty, cyclicality and the timing of business cycles are not new phenomena. What should remain as a constant is the pursuit of the company’s strategy. Whilst the strategy has to be regularly reviewed by the board, executives should always remain focused on executing the strategy and the pursuit of growth, both organically and by acquisition.”
We have just published today an article that goes into more depth on this subject. If you would like to access that article please click
here.
Please get in touch if you have any comments about the issues raised here.
I hope to see you soon,
Matthew
