Over the past decade a new and complex world has emerged in which business operates.To survive, managers need to re-assess some popular business icons and to understand the current social and political climate. By Leon Gettler & David James
Unfortunately, few employers and even fewer employees see the point of constant retraining; and even fewer still are willing to pay. Whether we like it or not, it is up to governments to take the first step.
Top 10 risks
After a decade of the latest phase of globalisation, the world is both a riskier and a more promising place in which to operate. Managers are faced with opportunities and threats from all parts of the world and, for many, the management of risk has taken on a new meaning.
What follows is a list of 10 of the most problematic risks facing managers in this more uncertain environment. Many of them may seem contradictory, but this does not mean that they cancel each other out, rather that leaders must learn to deal with contradictions and paradoxes if they are to be effective in the modern enterprise.
If the following list of risks is unnerving, it is worth remembering a truism of seasoned finance traders: “Things are never as good as they look, and never as bad as they seem.”
The focus on shareholder value has had unintended consequences. Management’s focus on squeezing the last dollar out of every part of the business has left many corporations now overvalued. This is unsustainable. It has also placed pressures on key stakeholders: suppliers, employees, customers and communities. The result should have been recognised as inevitable. Faced with downsizing, outsourcing and duplicitous and meaningless jargon (“The customer is king”, “Our people are our best asset”), employees, suppliers, communities, customers and now regulators have started to turn on companies in ways that threaten their future. When that happens, investors follow suit and the share price collapses.
In a sense, the assumption that people’s ability to turn ideas into products is something that can be owned by a group of outsiders is an absurd contradiction. The challenge for managers is to balance a series of conflicting objectives: providing value for customers, offering worthwhile jobs and opportunities for development to employees, investing in innovation, working with communities and ensuring that financiers achieve a good return. These contradictions cannot be resolved through the concept of shareholder value.
Commentators such as Charles Handy argue that companies will need to re-evaluate the assumption that shareholders own a business. Instead, they will be more like mortgage holders who are entitled to a return on their money but no right to sell or close a business down if it defaults. This has broad ramifications not only for the way companies work but also for their governance. Watch out for an overhaul in the way directors are chosen and operate.
The knowledge society teeters on a fulcrum of contradiction. Knowledge is now hailed as the force that drives the economy. The wealth of organisations is said to be vested in what people carry in their heads. At the same time, education budgets in the West are being slashed, as is the number of teachers. But if security now comes from being employable rather than employed, education for life must be the prime investment for the future of society. This raises the question of who pays. One camp argues that the employer and employee must foot the bill, for they will be the main beneficiaries. Unfortunately, few employers and even fewer employees see the point of constant retraining; and even fewer still are willing to pay. Whether we like it or not, it is up to governments to take the first step.
Politicians will have to convince their electorates that only a high level of investment will enable economies to change and help people to develop and adapt. This investment will give individuals the capacity for the kind of critical analysis that allows them to distinguish between knowledge and information. For that to happen, education must become more affordable part-time learning, evening courses and distance learning becoming the norm so that it continues beyond school and university. Content will need to change too: communication skills and not just writing, acquisition in addition to reading, analytical skills to complement arithmetic and data, and self-awareness to enrich the information.
Immigration trends and integration patterns have become the paradox of globalisation. The movement of goods, money and services is now freer than ever but the movement of people is not. From Australia to Ireland, immigration has become the most divisive and potent political subject of the day, with politicians and shock-jocks alike exploiting public fears that foreigners will add to crime, increase unemployment and cheat the welfare system.
But still the pressures continue as hundreds of thousands of people, many risking their lives, trek to richer and safer countries. Pushing in the other direction is another force skills shortages. With birth rates falling, education and training facilities are struggling to adapt to the needs of a changing economy. This is not only in the so-called skilled areas, staff shortages are also starting to appear in unglamorous industries like construction, metal-working, agriculture and the hotel sector. According to The Economist, Australia already relies on foreign labor for a quarter of its workforce, Switzerland for nearly 20%, and the United States for about 16%. In the short term, this has forced many companies to look around the world to find skilled staff. Innovative methods of resolving this problem are emerging, and companies are starting to put pressure on governments to become more flexible. In Britain, for example, immigration officials have dropped eligibility criteria to allow fast-track work permits for workers in areas that suffer the worst shortages. As a recent report to the OECD noted, the trend is towards specific exemptions to help professions that are scrambling for talent. This will fuel political tensions. Riding the wave will be a challenge for business.
The effect of a declining population, reduced birth rates and increased longevity has been well documented. In the US, the number of people in the 20 34 age bracket has fallen by six million since the 1990s, and the number of those who are 50-plus has jumped to 12 million. In the late 1990s, Japan became the first country with a median age of 40. Its population is poised to peak in 2007 then start to shrink. Specialists say that populations in Europe will decline on a scale not seen since the Black Death.
Australia has a relatively young population but it is not immune to these pressures. At the same time, the new demographics create opportunities we have never seen before. The runaway success of the drug Viagra is just one example of what it can do for drug companies. Similarly, the growth in superannuation and retail investment has underpinned the boom in financial services. Combined with skills shortages across sectors, it is forcing companies to rethink their employment strategies. Cadbury, for instance, has employed retired sales managers and sent them to eastern Europe to develop operations there. IBM Belgium has established a separate company for ex-staff to contract their services back, ensuring that it preserves core skills. At the other end, older workers are branching out as freelancers and subcontractors. The boom in executive coaching and mentoring is part of this story. Coaches are usually 40-60 years old and have a record in running organisations with a history in more than one industry.
5.Shifting Power Balances
The world was not necessarily that much simpler when the two superpowers, the US and the Soviet Union, were dominant. But the end of the Cold War has unleashed international and social tensions that defy comprehension. Certainly, the events of September 11 confirmed one thing: expectations that the end of the Cold War had wiped out global conflict were wrong. Globalisation has enabled dissident groups to obtain focus, support and resources from all over the world. And when the end of the Cold War removed the need of the superpowers to underwrite client governments around the world, the global political picture became unstable.
Technologies available to states and terrorists alike are more frightening, from germ warfare to nuclear weapons. Certainly, the new breed of terrorists has shown they do not want political control but the utter destruction of their enemies. They are not likely to be deterred by the threat of large-scale retaliation.
Globalisation has also resulted in the relative decline of the nation-state. The forces gaining momentum are paradoxically local communities and global groupings. Markets put pressure on nations to agglomerate and join bodies like the WTO. At the same time, national governments are being challenged by the larger groups they have joined. The problem is compounded by the fact that national governments operate at so many different levels, from local communities to membership of global bodies. This creates tensions for society, including business. It raises a key question about public interest: whose interest is the national government representing?
The basic product range of developed economies has not changed as much as it might seem. The effect of the “digital revolution” has not been as great as expected; it has mainly been applied to products already in existence. Indeed, information technology was the 20th century’s only big new industry: the rest were essentially drawn from the extraordinary fertility of 19th-century technological innovation.
The new forms of energy, chemicals, the telephone, television, automobile, aeroplane, refrigerator, hi-fi equipment, movie and media, were mostly imagined and designed in the 19th century. By the second half of the 20th century, most of the “innovations” were really sophistications: refinements or incremental advances. Even the internet has turned out to be just a new form of distribution, not the vehicle for radically new products.
The products that will arise from the emerging “life sciences” industry, however, will be unlike any before seen. Genetic engineering will transform medicine: goats whose milk is a medicinal drug, corn that becomes a form of bio-degradable plastic (this is already close to production), spider webs that are being reconfigured to become a material many times stronger than steel.
Nanotechnology (the science of building materials from the molecular level) will develop entirely new types of material. The Perth company pSivida is using “bio-silicon” to control the release of drugs in the blood, for example. Its prospect is a “matter revolution” that will have as profound an effect on industrial economies as the Industrial Revolution had on agrarian economies. No manager can afford to ignore the risk that whole businesses will disappear or be transformed.
The build-up of debt in developed economies is unparalleled and almost certain to restrict economic growth. The main culprit is Japan, whose profligacy during the 1990s makes post-war Italy look frugal. Total debt is running at 600% of GDP, a level that cannot be dealt with in a conventional way. Extreme measures, such as printing money, are likely. This time, Japan cannot trade its way out of trouble, and whatever the country chooses to do will have great repercussions for the rest of the world. In such an international environment, holding debt will probably become more dangerous.
The situation is scarcely any better across the rest of the developed world. Net household savings in Australia, the US, Canada and Britain are at or below zero. It is only the surge in house prices that has kept demand high. Consumers tend to feel richer, and so are more inclined to spend, when house values increase, compared with share price rises.
In Australia, the second half of the 1990s brought a transfer of debt from government (which now has debt of about 16% of GDP) to households, which have debt equalling 73% of GDP. Were interest rates to rise to 6.5%, the proportion of household income servicing the debt would rise to 8% the same level as in 1990, when interest rates hit 18%. If there is a fall in house prices, many borrowers may start to regard their debts in a different light, and stop spending. A period of asset inflation in the housing sector seems to be drawing to an end. Recent growth has been triggered by a credit-led boom, and, eventually, all debts must be serviced.
Derivatives are a form of derived financial transaction (hence the name) designed to reduce risk. Over the past decade, they have dominated the world’s capital markets. At the peak, in 1998, the value of transactions was $US1.7 trillion a day. The annual value was 10 times world GDP. The result was that devices designed to reduce specific risk created a general risk to the whole system, and currency volatility was increased, perversely creating a greater need for derivatives.
The derivatives trade has since fallen to about $US1.2 trillion a day, easing some of the pressure. But currency volatility remains, and there is the threat of loss of liquidity (money available for the market). Consolidation has reduced the number of participants that can move the market. In 1995, 20 US banks accounted for three-quarters of foreign exchange transactions. By 2001, the number had fallen to 13.
The risk is of market failure, for reasons similar to the potential problems in insurance: less diversity tends to make markets less liquid. The size of the derivatives market is thankfully falling, but managers of enterprises in other countries are still faced with the likelihood that currencies will be volatile. When a secondary, or derived, market becomes the prime mover, then the risk of unforeseen consequences is great.
9.The Gap Between Rich and Poor
The “North South” divide, the wealth gap between rich and poor countries, is supposedly growing. A widely held belief is that as rich countries get richer, poor countries become poorer. The truth is more complex, and less controversial. The standard of living of poor countries, as measured in terms of longevity, nutrition and health, is generally rising. So is the standard of living in the developed world.
The gap between rich and poor is nevertheless not widening to the extent believed. That gap has existed since industrialisation became established in the late 19th century, since when it has tended to move up and down within a reasonably narrow range.
What is unambiguously different, however, is a greater realisation around the world that there is a gap. At the turn of the 20th century, poor peasants in Central China would have known little or nothing of rich industrialists in London or New York. There would have been a wide wealth gap, but neither party would have been greatly aware of the other.
At the turn of the 21st century, global communications and media have profoundly changed that situation. Just as the fall of the Berlin Wall was hastened by constant television images in East Germany reflecting the better standard of living in West Germany, so are people in poor countries regularly confronted with images of the developed world’s wealth.
This seems sure to be the dark side of globalisation: the negative sentiments caused by greater connectedness. The events of September 11 in the US give some indication of the horrors that this connectedness can unleash. With global opportunity comes global responsibility and an obligation not to ignore large disparities of wealth.
A worldwide crisis is looming in the insurance industry. The average period for which insurance companies hold funds has fallen from 30 years in the 1960s to five years. This puts great financial pressure on insurers, which can no longer offset actuarial risk by borrowing funds long term and investing short term in growth. Insurance companies now must operate in a similar fashion to investment-only funds. But, unlike such funds, they must also cover the extra risks associated with having to make payouts. This is tending to push insurance companies to make risky investments as they try to achieve adequate returns.
To offset these pressures, insurance companies in Australia and the US have undertaken a round of mergers and consolidation. Although this has in some cases brought short-term efficiency gains, it has reduced diversity in the market. Less diversity has the effect of making insurance risk harder to manage. In diverse markets, in which companies have different risk profiles and buying needs, it is more likely that risks will be covered, because transactions that are unacceptable to some companies will suit others.