Strategy: A View from the Top Chapter 3: Analyzing the External Strategic Environment

1. Team 2 Caitlin Clark Stephen Massimi Will Mayrath Katie Trevino Matt Vatankhah Strategy: A View from the TopChapter 3: Analyzing the External Strategic Environment

2. Globalization • Globalization, as a political, economic, social, and technological force, seems unstoppable • The ever-faster flow of information across the world has made people aware of the tastes, preferences, and lifestyles of citizens

3. Understanding Globalization • It is important to define “globalization” • Economists focus on trade and regard the free flow of capital as the defining issue • Different characterization centers on the flow of high technology and real-time information as defining traits of modern world economy • Others point to nonstate actors’ growing influence relative to that of nation states • Also are numerous religious and cultural characterizations

4. Understanding Globalization, continued • Political globalization • Idea of globalization as a primary process reshaping the world approximately coincides with the collapse of communism in 1989 • In its aftermath, many countries opted for democracy and market-driven economies • Deregulated industries, privatized formerly state-run enterprises, and liberated capital flows

5. Understanding Globalization, continued • Economic globalization • Set in motion when trade and cross-country investment increased, and free enterprise began to flourish on a worldwide scale • Technological Globalization • The rapid pace of economic globalization that ensued could not have occurred without this force

6. Understanding Globalization, continued • Over the past 20 years, these three components have become mutually reinforcing, and together have created a new force that shapes many of today’s global strategic challenges: • Psychological globalization • Defined as the, “gradual convergence of human expectations on a global scale.”

7. Regionalism • Trade and foreign investment among and within the so-called Triad countries—the United States, the European Union, and Japan—still account for the bulk of global economic activity • More than four-fifths of the world’s 500 largest publicly traded companies are headquartered in the Triad

8. Regionalism, continued • Regional Trading Blocks • World bank data show that these account for almost 60% of world trade • Recently enlarged European Union (EU) has grown to account for almost a quarter of the world’s trade • NAFTA currently has only three members—Canada, the United States, and Mexico—but accounts for nearly 8% of world trade

9. Regionalism, continued • Some analysts view regionalism as a stepping stone toward a truly global economy • Others argue regionalism is simply a proxy for “real solutions” to the problems and pressures created by the globalization pressures • If this is true, regionalism may actually increase tensions as “like” countries and societies forge economic political structures that will be hard to change later • Would also signal that free trade on a global scale is not likely to become a reality any time soon

10. New Powerhouses • India • India’s GDP has grown more than 5% annually in the last 5 years • Investment is growing, foreign capital and technology are coming in, Western-style competition is taking hold, and state intervention is diminishing • Has become the location of choice for software development and many other services for Western and Asian companies alike

11. New Powerhouses, continued • China • By some measures, China’s economy is already larger than Germany’s • Has become a preferred location for manufacturing • Huge population provides a continuing supply of low-cost labor • Most of the classic barriers to the global flow of goods and capital were removed

12. New Powerhouses, continued • China, continued • China has combined inexpensive labor with technology to create a major, global competitive advantage by • Widely opening doors to foreign investment • Emphasizing the education of technologists • Providing major incentives for technology transfer • China is already the biggest trading partner for Japan, Korea, and many other key Asian economies

13. New Powerhouses, continued • China, continued • Economic progress is still uneven • Recognizing its vast potential, a vast number of US companies have begun doing business in China • Key challenge is that the government still controls many aspects of the business environment • Companies that try to compete against domestic firms for the Chinese market might not find the path as easy as those that generate the high-tech products and exports Chinese leaders are so eager to see expand

14. New Powerhouses, continued • China, continued • Challenge of developing a presence in China is therefore very different from that at home or in Western Europe • In China, there are few wholly American-owned companies • Most are joint ventures, often with Chinese middlemen either from the mainland or elsewhere in Southeast Asia

15. New Powerhouses, continued • China, continued • China does not yet have a consistent, easily understood, universally enforced judicial system • Makes large investments in what is fundamentally a very attractive market extremely risky • As the Asian economies take off, traditional Western multinationals increasingly will face strong competition from newly emerging Asian rivals intent on making major inroads in western as well as Asian markets

16. Global Tectonics • Whereas 20 year ago only a few businesses could be called global, today almost all businesses are affected by globalization • Multinational corporations are now active in at least 70 countries rated at “medium” to “extreme” risk, and more than $150 billion is invested in 50 countries rated “fairly” to “very” corrupt* *In the Transparency International Corruption Perceptions Index, according to Control Risks Group, a London-based international consulting firm

17. Global Tectonics, continued • Global Tectonics is the process by which developing trends in technology, nature, and society slowly revolutionize the business environment, much like Earth’s tectonics plates shift the ground beneath our feet • Environmental tectonics • Technological tectonics • Societal tectonics

18. 12 Global Trends • 12 global trends that are likely to present the most significant challenges for companies in the next 30 years: • Population trends • Across the planet, demographic trends are transforming societies, changing patterns of economic activity, creating new economic and social dependencies, and altering the geopolitical landscape • Urbanization • Migration from rural to urban areas is rapidly becoming a major challenge

19. 12 Global Trends, continued • The spread of infectious disease • As levels of migration and cross-border flow of labor and goods increase, the likelihood of epidemics and the spread of infectious disease becomes greater • Resource management • The strategies of many companies around the world depend on the availability of such critical resources as water, food, and energy

20. 12 Global Trends, continued • Environmental degradation • “Global warming” once was an uncommon term used by a few scientists who were growing concerned over the effects of decades of pollution on long-term weather patterns • Economic integration • Higher levels of cross-border economic activity have increased interdependence among the world’s economies and created a fully integrated economic system on a global scale

21. 12 Global Trends, continued • Knowledge dissemination • The emergence of a global economy based on knowledge and ideas has changed the very nature of strategic opportunity and risk • Information technology • Three decades ago, the Internet was still a dream • Biotechnology • Rapid advances in humankind’s ability to understand and manipulate the basic elements of life are likely to fundamentally alter scientific inquiry and offer solutions to problems that could not be solved before

22. 12 Global Trends, continued • Nanotechnology • The ability to create new materials one atom at a time is fundamentally reshaping our vision of the future • Conflict • The business implications of the sources of uncertainty are far reaching • Governance • Societies and corporations are connected by two interrelated sets of laws • First: defined by local and natural legislatures, multilateral agreements, and an emerging body of international law • Second: defined by the market • No matter where a company operates or what it produces, these laws affect, or even determine, its fate

23. A Global Knowledge Economy –Strategic Implications • Global Knowledge Economy Characteristics • Governed by laws of abundance, not scarcity • Effect of location is diminished • National laws, barriers, and taxes are difficult to apply • Knowledge enhanced; products/services can command price premiums • Knowledge is more valuable when locked into systems or process in the form of acquired skills and competencies • Human capital is the key component of value in a knowledge-based company

24. The New Global Economy • Faster technology transfer on a global scale implies shorter product life and smaller opportunity windows to bring products to market • As supply chains have become multinational, firms can focus on specific parts of the value chain

25. The New Global Economy, continued • Virtual corporations • Based only on a sophisticated knowledge of customer wants • The best way to deliver value • Likely to become more viable • These corporations likely will be without manufacturing or other in-house facilities • Fragmentation of markets and the reduced appeal of mass-marketing approaches are hallmarks of the new global economy

26. Risk and Uncertainty • The Risk Continuum Certainty Risk Uncertainty Accurate, measurable information available about the outcome of each alternative Cannot predict outcome with certainty but have enough information to assess its probability Little is known about alternatives or outcomes

27. Risk and Uncertainty, continued • Risk Analysis • To make analysis of strategic environment actionable • Must be able to assess the degree of uncertainty associated with relevant events • Must be able to assess the speed with which changes are likely to occur • Must be able to assess the possible outcomes these changes foreshadow

28. Risk and Uncertainty, continued • Change Forces • Some changes take place gradually and are knowable, if not predictable • May not know specific effects, but broad effects are relatively well understood • Prospect of new industry regulations creates a more immediate kind of uncertainty • New regulatory structure will either be adopted or it won’t

29. Risk and Uncertainty, continued • Change Forces, continued • Collapse of boundaries between industries creates uncertainty • The change forces themselves may be identifiable, but their outcomes might not be • Sudden collapse of foreign governments, outbreak of war, or major technological discoveries • Inherently random in nature • Not easily forseen

30. Scenario Analysis • A disciplined method for imagining and examining possible futures • The objective is to see the future broadly in terms of fundamental trends and uncertainties and to build a shared framework for strategic thinking that encourages diversity and sharper perceptions about external changes and opportunities

31. Scenario Analysis, continued • Divide knowledge into two categories • Things we believe we know something about • Things we know little or nothing about • Scenarios depict possible futures, not strategies to deal with them • Invite into the process outsiders • Examples: major customers, key suppliers, regulators, consultants, and academics

32. Scenario Analysis, continued • Scenario-Building Process has four steps • Step 1: Deciding what possible future developments to probe, which trends—technological change, demographic change, or resource issues—to include, and what time horizon to consider • Step 2: Identifying what forces or developments are likely to have the greatest ability to shape the future

33. Scenario Analysis, continued • Step 3: Constructing a comprehensive set of future scenarios based on different combinations of possible outcomes • Some combinations will be of greater interest than will others, either because they have a greater effect on the strategic issue at had, or because they are more or less likely to occur • As a result, a few scenarios usually emerge that become the focus of a more detailed analysis • Step 4: Generating scenario- specific forecasts that allow an assessment of the implications of the alternative futures for strategic postures and choices

34. Global Futures: The Global Scenario Group • Conventional Worlds • Envision the global system of the twenty-first century evolving without major surprises, sharp discontinuities, or fundamental transformations in the basis for human civilization • Scenario 1: Market Forces • Incorporates mid-range population and development projections and typical technological change assumptions • Scenario 2: Policy Reform • Adds strong, comprehensive, an coordinated government action to achieve greater social equity and environmental protection

35. Global Futures: The Global Scenario Group, continued • Barbarization • Envisions the grim possibility that social, economic, and moral underpinnings of civilization deteriorate, as emerging problems overwhelm the coping capacity of both markets and policy reforms • Scenario 3: Breakdown • Crises combine and spin out of control, leading to unbridled conflict, institutional disintegration, and economic collapse • Scenario 4: Fortress World • Features an authoritarian response to the threat of breakdown

36. Global Futures: The Global Scenario Group, continued • Great Transitions • Explore visionary solutions to the sustainability challenge, including new socioeconomic arrangements and fundamental changes in values • Scenario 5: Eco-Communalism • Incorporates the green vision of bioregionalism, localism, face-to-face democracy, small technology, and economic autarky • Scenario 6: New Sustainability Paradigm • Shares some of the goals of Eco-Communalism • Would seek to change the character of the urban, industrial situation, rather than to replace it, to build a more humane and equitable global civilization rather than retreat into localism

37. A New Compact Between Business and Society? • Societal considerations increasingly force companies to rethink their approach to core strategy and business model designs • Stakeholders—an emerging strategic imperative • Traditional strategies to grow, cut costs, innovate, differentiate, and globalize are now subject to a new set of laws

38. A New Compact Between Business and Society?, continued • Size Means Scrutiny • The bigger the company is, the more market dominance it achieves, the more attention and demand it faces • Cutting Costs Raises Compliance Risks • The more companies use traditional ways to cut costs, the more potential there is for crises related to noncompliant ethical practices • The risks involved in successfully complying with society’s expectations outweigh the benefits accrued from traditional ways

39. A New Compact Between Business and Society?, continued • Strategy Must Involve Society • Forward-thinking companies must consider social and environmental problems for growth • Example: GE, IBM • Reducing Risks Means Building Trust • Expand beyond financial and currency analysis to include destabilizing trends and events in society • No company can manage these risks without the trust of society’s leaders and communities

40. A New Compact Between Business and Society?, continued • Satisfying Shareholders Means Satisfying Stakeholders • In the long-run, the company that pays attention to the business-society relationship ultimately serves its investors because • Better tuned to identify risk • Able to build trust with its stakeholders • Well positioned to develop goods and services society values

41. A New Compact Between Business and Society?, continued • Global Growth Requires Global Gains • Supply infrastructure • Maintain business climates • Attract investment capital • Supply healthy, educated workers • Support growth that generates consumers with greater purchasing power • Companies cannot just serve consumer demand for quality device but must serve quality of life

42. A New Compact Between Business and Society?, continued • Productivity Requires Sustainability • The more companies innovate, the more productive and sustainable they will come • Differentiation Relies on Reputation • As “lifestyles of health and sustainability” consumer base grows, they will demand companies to demonstrate sterling reputations and commitment to society • Good Governance Needs Good Representation • Because corporate scandals are generating strict controls and governance reforms, companies are including their stakeholders in formal governance

43. A New Compact Between Business and Society?, continued • These laws are likely to play a “key role” in strategy formulation in the future • Companies will find that “being a good citizen” will pay off