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Robert McGarvey
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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
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