Strategic Thinking for Turbulent Times

Kenneth A. Loparo, M S S el Namaki

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN:
  9781137413987
• eBook ISBN:
  9781137414007
• Topic: Business
• Subtopic: Strategia di business
• Index: Business

Strategic Thinking for Turbulent Times is a conceptual and operational guide to the process of business strategy formulation within a turbulence driven economic and business environment. This book features pioneering work on the process of strategic thinking after the dramatic shift in the fundamental premises of strategic management.

Part I

The Driving Forces of Strategic Thinking Today

Part I.1

Fundamental Shifts in the Foundations of Strategic Behavior

Wide ranging shifts in some of the foundation stones of strategic thinking are taking place today and will continue to do so for some time to come. There are many but three will dominate the future scene: capital markets, China, and the corporation itself. Capital markets, especially in the USA, have gone through measurable turbulence since 2008 and are going through the closest thing to a restructuring. China has assumed a key role in international trade and is about to assume the same role in finance. The corporation is changing in terms of structure, performance, and leadership. The following chapter addresses these torrents of change.

1

The Forces

1.1 The Problem

Corporate strategic behavior is undergoing radical change, a change that is touching the way the concept is formulated, expressed, and implemented. To understand the dimensions of this change let us recall that strategy is the science and art of identifying means for achieving an end. As a term, it encompasses a complex web of thoughts, ideas, insights, experiences, goals, memories, perceptions, emotions, and expectations that provide a context for specific actions taken in pursuit of a specific end result. And strategic behavior is an expression of the choices that we make in the course of these events. The process was driven for decades by a fairly stable pattern of global economic growth, a reasonable pace of globalization, a mildly functioning international capital market, and a conceited China!

The events of 2008 and beyond brought havoc into the picture. Systemic global financial discontinuity was, for a time, a real threat, global capital markets are damaged, corporations are concentrating, China is repositioning, emerging economies are profiling, and consumers and markets are restructuring.

Strong forces have changed the environment as much as the essence of strategic behavior. They have changed the patterns, the locus, and the approach.

Let us examine those forces more closely.

1.2 Key Forces of Change

1.2.1 Capital Markets

Global capital markets went, and are still going, through a substantial process of restructuring as a result of the adverse events of 2008. Corporate investment volume, strategies, and patterns have suffered, and continue to do so, as a result.

Growing securitization of nonperforming assets, large fiscal deficits, and excessive financing in the housing sector provided the prime trigger of the 2008 downfall. Other malignant policies and practices, primarily in the USA, enhanced the crisis. These included accelerated capital influx, weak regulatory frameworks, relaxed monetary policies, investment bubbles, collapsing asset prices, and massive deleveraging. Unproductive real estate investments, as well as poor standards of corporate governance within financial intermediaries, also played a role. Foreign capital participation in USA malpractice led to contagion and infection.

Today, the global financial system is undergoing a series of transitions along a difficult path to financial stability. A major challenge is to respond to the increase in market volatility associated with expectations for an eventual withdrawal from unconventional monetary policies in advanced economies (International Monetary Fund, 2013).

As a result, corporate investment capital markets went through serious systemic structural imbalance with a far-reaching impact on equity, debt, and even structural finance markets.

1.2.2 China and India

The economic rise of China and, more recently, India, is one of the most significant events of the late twentieth and early twenty-first centuries. Both are demographic giants (with populations of 1.35 billion and 1.13 billion, respectively), comprising around two-fifths of the world’s population. China’s gross domestic product (GDP) has grown at an average rate of about 10.0% a year since the early 1980s, while India’s grew at about 6.0% a year in the 1980s and 1990s, then accelerated to 10.5% in 2010 (World Bank, 2013).

This rapid growth, which has far exceeded the approximate average of 3.0% registered in high-income countries over the last quarter century, has had two main consequences. First, it has increased the weight of China and India in the world economy. Between 1980 and 2005, and prior to the 2008 crisis, the two countries’ combined share of the world’s gross output (measured in purchasing power parity (PPP)) trebled from 6.7% to 21.3%. Second, China and India account for a very large part of the growth of this product (in PPP). Between 1995 and 2005 China was responsible for one-fifth of this growth—a proportion similar to that contributed by the USA. India, meanwhile, accounted for 8.0% of the increase, a percentage greater than Japan’s (5%) (Bustelo, 2007).

China’s role in global trade and manufacturing is especially striking. China is the largest exporter and the second largest importer in the world. And, in 2010, China became the largest manufacturing country in the world, overtaking the USA. This share in aggregate global manufacturing is projected to overtake that of the USA by 2016, and is accompanied by a spectacular rise in the size, scope, and coverage of Chinese national and multinational corporations, such as Lenovo and Haier.

China’s middle class is also growing rapidly, and is expected to double in size in the next decade. The influence of this large consumer segment will only increase with its growing disposable income levels, creating a strong domestic demand for products and services.

The growth of China and India will, however, create a massive addition to the population of consumers, leading to a reshaping of global markets. Over the next decade, millions of Chinese and Indian consumers will begin to have discretionary income and inflate their country’s consumption outlay.

Those trends will significantly change the patterns of corporate strategic behavior worldwide.

1.3 Market Structures

1.3.1 Poverty

Income inequality and the globalization of poverty are reshaping the strategic behavior of corporations. Economic globalization has led to an ever widening gap between the affluent and the less fortunate. World Bank data defined the international poverty line as US$1 and $2 per day in 1993 PPP, which adjusts for differences in the prices of goods and services between countries. The $1 per day level is generally used for the least developed countries, primarily African countries; the $2 per day level is used for middle-income economies, such as those of East Asia and Latin America. By this measure, in 2005 there were 982 million people out of the developing world’s 4.8 billion people living on $1 per day, while another 2.5 billion (40% of the world’s population) were living on < $2 per day. In 2005, the poorest 40% of the world population accounted for 5% of global income. The richest 20% accounted for 75% of world income, and the richest 10% accounted for 54% (World Bank, 2007).

Putting it in market terms, a massive opportunity is emerging in markets for low-cost products and services! Work done on this issue within some American corporations reveals serious attempts at ways and means of adapting products and extracting more profits from the US working poor. The view is that those poor represent a viable massive market segment, and congruent products and services should be developed to explore this potential!

Opportunities arising from the significant increase in the number of those classified as “poor” is leading to significant adjustments in the strategic behavior of many corporations.

1.3.2 e-Tailing

Electronic markets or markets connected through state of the art communications networks and powered by high-speed computers are changing market structures and providing massive opportunities. China is leading in this respect. Its e-commerce market is transforming retailing and is playing a significant role in the country’s transition to a consumer-driven economy.

China has become the world’s second largest e-tail market, with an estimated $210 billion in revenues in 2012. The country’s retail sector is among the most wired. It contributed between 5 and 6% to total retail sales in 2012, compared with 5% in the USA.

Chinese e-tailing is not just replacing traditional retail transactions, but is also stimulating consumption that would not otherwise take place. Moreover, e-tailing is stimulating a move by the broader retail sector towards a digital future (McKinsey Global Institute, 2013)

Business to consumer transactions reached ¥650 billion or 35% of the online market in 2012.

China’s retailing model is crossing borders. Other emerging economies are developing e-tailing markets that could follow China’s business model—and potentially achieve similar growth rates. China’s e-tail operators are also expanding internationally, leveraging their direct access to Chinese workshops and original equipment manufacturing factories. This will constitute a threat to global consumer goods players; the competition will come from Chinese small and midsize enterprises, and micro-businesses selling directly to marketplaces in emerging economies.

1.3.3 Social Media

Social media is inducing significant changes in some of the conventional communication channels for products and services and the marketing thereof. Social media gives marketers a voice and a way to communicate with peers, customers, and potential consumers. It personalizes the “brand” and helps to spread the company’s message in a relaxed and conversational way. Social media is changing some of the fundamental premises of marketing by providing an identity, creating relationships with people who might not otherwise know about products offered or services provided, and communicating and providing an interaction. Social media marketing generates more business exposure, increases traffic, and provides marketplace insight (Stelzner, 2012).

Probably one of the most important contribution aspects of social media is incorporating an inherently social motivator that spurs broader engagement and sharing.

Social media outsourcing seems to provide an opportunity that is yet to be explored.

1.3.4 Competitive Behavior

Corporate competitive behavior is changing in nature and instruments. Two powerful forces are at play: competitive trust and concentration.

An observer of contemporary competitive behavior of US, European, Japanese, and multinational corporations cannot help but trace elements of Nash’s Equilibrium or the notion that in a game with two players, no player can benefit by changing his or her strategy while the other player keeps his unchanged. According to Nash, existing strategic behavior or a set of strategic choices and corresponding payoffs constitute an equilibrium (Fernandez and Bierman, 1998). Examples are abound all the way from the global steel industry to the US aircraft construction industry. Incumbents in the airline industry, for example, are in continuous watch of the new entrants and a game of mutual hostility evolves. When the small new entrant moves first and decides to enter a new route, the incumbent who operates many routes and observes the entrants’ behavior decides to accommodate or fight the entrant. Mostly, it is fighting that occurs as tolerating a single entrant may induce many entrants to follow suit.

The increasing intensity of competition and the evolving Nash equilibrium situation could be related to the increasing level of industry concentration. Data on industry concentration in the USA reveal a high measure of concentration, despite the divergent views as to what constitutes high and what constitutes low concentration. Data provided in Part II explore this issue and the measure of concentration in several industries.

1.3.5 Brands and Branding

Branding is, even today, considered the ultimate measure of success for a product. Brand awareness is the route to market share. Will this continue under the shifting grounds referred to earlier? There are reasons to believe that a shift from branding to functionality and quality is imminent. There are many forces of change.

The ranking of the top 100 global brands is less stable in the long term than it used to be. Many new and fast-rising entrants are innovators with new technology products. A high ranking in the list is thus unlikely to provide the long-term competitive advantage it used to present.

Consider also the fact that there are brands that are doing very well in their industry and market but fail to make the brand list. Several Chinese brands are among those. Lenovo is the world’s number one personal computer manufacturer and seller, with 58% of its sales outside China (Einhorn, 2012), yet it does not feature in the top ranks. Recently, Huawei took over the third place in smartphone sales from LG, and is the largest telecommunications equipment maker in the world (having overtaken Ericsson in 2012), yet again it falls short of the top brand list. Haier, with the world’s largest market share in white goods (2013 data) for the fifth consecutive year, is also not there. One may postulate that corporations could, in the future, be successful without a successful brand strategy.

Chinese companies are not only successful in China, but also in low-income markets in Africa, Russia, and Sou...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures
• List of Tables
• Preface
• Introduction
• Part I The Driving Forces of Strategic Thinking Today
• Part II How Will Companies Strategize Tomorrow?
• Part III The New Landscape
• Index