What Next? Business In 2010 And Beyond
A review of perspectives and viewpoints on possible scenarios
By Dwight Allen, Mark Klein and Craig Muraskin; Illustration by Igor Morski
Companies are often told to position for the future even as they struggle to survive the challenges of the moment. Good advice — a bold and distinctive strategy is essential for gaining competitive advantage. Yet committing to a particular path forward is daunting when there’s so much debate about how tomorrow will look.
One way to describe the outlook is unclear or clouded. It’s worse than that, though. Rather than an absence of predictions about tomorrow’s business conditions, there are plenty — it’s just that they conflict. Equally qualified experts have diametrically opposed ideas about how things are going to go.
The wrong answer is to adopt nebulous strategies in the hope of succeeding regardless of what happens. Instead, we suggest an approach that allows making the kinds of commitments that can pay off big while providing alternatives to call upon if it turns out conditions favor a different tack.
The approach doesn’t rest on being smart about what lies over the horizon, but rather on paying attention to where people disagree and why. Doing that lets you understand the significance of what you’re counting on when you select a strategy and what other possibilities need to be considered.
Scenarios are an effective means of evaluating disagreements about the future in ways that yield the insights companies need to make, and to hedge, strategic commitments.
Arguments that matter: differing views on what’s ahead
Raw material for scenarios is readily available from a variety of sources in the media, academia, government, the blogosphere and so on. There may be different points of view within the corporate leadership team. Listening carefully and noting the issues most in dispute provide clues as to what trends are worth attention.
In the context of business strategy, three broad, interrelated topics seem especially hot. They have to do with where the pendulum will swing in areas with implications for many industries: (1) between government and market forces, (2) between concern about the environment and concern about energy supply, and (3) between globalization and geopolitics.
We’ve defined four scenarios for the upcoming decade by intertwining conflicting points of view concerning the three hot topics. Each suggests a very different set of things to plan for.
Eastopia: Government’s role in economies increases, reversing the previous free market, free trade trend. “Decoupling” becomes more of a reality as economically resilient developing nations reduce their dependency on exports to the West. Government-owned enterprises, national oil companies, and sovereign wealth funds based in the developing world thrive at the expense of Western businesses, whose clout is limited by sluggish economies at home. Energy security concerns are heightened by a decline in global oil production. Nations and enterprises compete fiercely for access to growing domestic markets and badly needed supplies of natural resources.
The financial crisis has accelerated trends that are shifting the world’s center of gravity way from the West, according to Roger Altman, formerly U.S. deputy treasury secretary and now chairman of investment banking firm Evercore Partners. The recession has hit the big industrial democracies hardest, he says, and “This damage has put the American model of free market capitalism under a cloud.”
The potential for a feeble U.S. economy worries Simon Johnson, MIT professor and former chief economist at the International Monetary Fund. He warns about the dangers of failing to act decisively on financial sector problems: The United States “could very well stumble along for years — as Japan did during its lost decade — never summoning the courage to do what it needs to do and never really recovering.”
Europe’s prospects look bleak to Laurent Cohen-Tanugi, a French lawyer, columnist and author. He charges that Europe isn’t responding to “the economic and social challenges of weak growth, insufficient innovation, a nonexistent energy policy, deficient higher education and research, and a declining population.” He thinks the European Union must be revised and strengthened before Europe can address these internal problems or properly defend its “interests and identity” in the global arena. However, he reports “no visible signs” that European leaders are prepared to act.
The ascent of China, Russia and other developing countries with government-led economies is foreseen by Ian Bremmer, head of political risk consultancy Eurasia Group: “State capitalist economies are likely to emerge from the global recession with control over an unprecedented level of economic activity.”
Fareed Zakaria thinks the “rise of the rest” goes beyond economic clout. Editor of Newsweek International and co-moderator of the PostGlobal blog, Zakaria argues that, although the United States will remain militarily preeminent, “in every other dimension — industrial, financial, educational, social, cultural — the distribution of power is shifting, moving away from American dominance.”
Canadian geoscientist J. David Hughes is among those who believe the world is at or near the point at which annual crude oil output will fail to meet demand. Hughes notes that oil production has peaked in Mexico, Russia and the North Sea, not to mention in the fields of six countries that are members of OPEC.
The oil squeeze will be exacerbated by the fact that in many producing nations with expanding economies the prices of gasoline and other petroleum products are heavily subsidized. That’s the view of Jeff Rubin, CIBC World Markets chief economist and chief strategist: “The more oil consumption grows in countries like Venezuela, Iran and Saudi Arabia, the less they have to export to the rest of the world.”
Concerns about access to oil and other resources will help make international relations tense in the next decade, according to Parag Khanna of the New America Foundation. He expects that the United States, Europe and China will compete for the markets and resources of “second world” countries including Brazil, India, Indonesia, Iran, Kazakhstan, Malaysia, Nigeria, Russia, Saudi Arabia and Turkey.
The Eastopia scenario thus captures an array of views that imply a difficult business environment for American firms. At home, they face an expanding and expensive public sector presiding over a chronically weak economy; abroad, their market access is limited by a welter of rules and exclusions imposed by rising powers with agendas that diverge from those of the West. Meanwhile, they must deal with pervasive uncertainty about energy security.
Westopia: As the U.S. economy recovers, there’s disillusionment with big government, and market capitalism stages a comeback. Many developing nations are weak and unstable, leaving the United States free to take the lead in repairing the frayed system of international trade and investment. The resulting model is widely criticized as favoring American interests. Russia, in particular, resists the upsurge of American power, alternately opposing U.S. geopolitical initiatives and making aggressive moves of its own. A lack of success in combating global warming by cutting emissions causes interest to shift to a controversial alternative — “geoengineering” interventions that would alter the world’s climate.
Dartmouth professors Stephen Brooks and William Wohlforth contend it’s premature to depict the United States as being overtaken by China, India or other rising powers: “A state that is rising should not be confused with one that has risen, just as a state that is declining should not be written off as having already declined.”
George Friedman, head of the strategic advisory firm Stratfor, has a loftier expectation for the United States — he thinks this will be the “American Century.” Friedman insists this conclusion is compelled by geostrategic realities: “The United States is economically, militarily and politically the most powerful country in the world, and there is no real challenger to that power.”
Howard Baker, former U.S. senator and Reagan aide, recalls how the GOP was declared dead in 1964, yet rebounded in 1966, won the White House in 1968, and then took four of the next five presidential elections.
“The core Republican beliefs in less government, lower taxes, more liberty, and greater security in a dangerous world still have power today,” he maintains. A GOP comeback in the next few years isn’t out of the question, he submits. “It’s happened before.”
Economist reporter Edward Lucas worries that “Russia is reverting to Soviet behavior at home and abroad, and in its contemptuous disregard for Western norms.” He doesn’t see Russia as a genuine military superpower, but he worries about strains and confrontations between Russia and the West.
What about China? Not everyone is convinced China will live up to current expectations. Some recall how Japan was touted as an unstoppable economic engine right up to the point when it stalled in the early 1990s.
For example, Minxin Pei of the Carnegie Endowment for World Peace is bearish on China, focusing on the limits imposed by the absence of democracy. “China’s rise will fizzle if no fundamental political reforms are implemented,” he says. “China may not only fail to fully realize its potential but also descend into long-term stagnation.”
Terrorism is unlikely to be a major issue in the next decade, according to Ohio State University political science professor John Mueller. He asserts that warnings about terrorist attacks, especially those involving weapons of mass destruction, are based on “lurid, worst-case scenarios.” They create a perception of risk that, in his view, is “overblown.”
Mike Hulme thinks climate change does deserve attention. He is founding director of the climate change research center at the U.K.’s University of East Anglia. Hulme has little faith in current climate change policy, though. He doubts complex international programs with precise targets will work as advertised, and he cautions that characterizing climate change as “the mother of all issues” opens the door to unwise alternative solutions, such as geoengineering.
Geoengineering is the use of technology to manipulate the earth’s climate. A leading example is spraying a sulfur dioxide gas into the upper stratosphere to reflect sunlight. “It’s almost certainly the cheapest and most effective method we have for cooling the planet fast,” observes Eli Kintisch, editor of the Science Insider blog.
The downside is that, as a group of scientists has conceded, “Fiddling with the climate to fix climate change strikes most people as a shockingly bad idea.” Kintisch calls it “hacking the planet.” Moreover, there could be adverse diplomatic repercussions if one nation launched a geoengineering project without advance consultation. Adding to the concern is the fact that some of the technology is within the reach of wealthy individuals and corporations.
But it is getting attention. In March 2009 the Obama administration’s science adviser said geoengineering is being discussed in the White House as a last resort if climate change should worsen.
How likely is a serious worsening? Studies reported in the journal Nature question whether temperature increases can be held below the level at which the biosphere exudes rather than stores carbon dioxide. Stephen Salter, engineering professor at Edinburgh University, guesses that “The chances of reducing emissions fast enough now are very low.”
Westopia synthesizes predictions that are hopeful for U.S. companies on some counts. The U.S. economy is healthier and more open, and credit flows more freely. Foreign markets are more open and receptive to Americans, although lingering economic problems and Russia’s assertiveness are concerns. However, energy and environmental policies are beset by controversy and uncertainty.
Smartopia: The hallmark of the new decade is an emphasis on what works. Ideology, national interest, and competitive advantage are all muted. A chastened West and a magnanimous East cooperate to ensure that a new world order emerges smoothly. There’s an era of cross-border coordination and compromise. Domestically, bipartisanship prevails. Government programs and policies speed the development of green technologies and promote greater efficiency in resource use. The United States and its allies yield influence on a number of fronts, business operations are subject to a welter of rules and controls, and economic growth is modest, but overall the stability is seen as worth the trade-offs.
In Smartopia, government is not the problem. To the contrary, government spurs effective solutions by being open-minded and facing facts. Domestically and internationally, pragmatism trumps geopolitics.
Unrealistic? Not according to Matt Miller, business consultant, author and National Public Radio commentator. He insists that accumulating problems will force the United States to turn a corner: “We’re entering a period when the ideological squabbling that’s been so pointless and dispiriting will give way to a new pragmatic consensus because the stakes of getting economic policy right will be much higher.”
For example, he cites interviews with Republican and Democratic insiders who agree that taxes are going to have to go up regardless of who is in power. Therefore, he argues, it’s time to stop playing politics and debate “what’s the best way to fund the government we want, consistent with strong economic growth and other vital goals such as saving the planet?” What we need, he contends, is a “smarter, growth-friendly brand of taxation.”
Who will lead the way? “Business executives will form the vanguard of the new creed,” Miller asserts. His reasoning: “By instinct and temperament the [business] sector is clear-eyed and unsentimental. It prefers pragmatic results to ideology.”
Issuing the call for pragmatism in the international realm is Kishore Mahbubani, formerly Singapore’s ambassador to the United Nations and now dean of the public policy school at Singapore National University. He is among those who believe Western global domination is fading.
Mahbubani seeks to defeat the fear that change represents a zero-sum game, and he deplores ideological and cultural baggage: “To achieve the optimistic outcomes we all desire, both the West and the rest of the world must rediscover the ancient virtue of pragmatism.” He sees this as a natural choice for the United States: “America’s strength has always been its down-to-earth and common-sensical approach to solving problems.”
An example of a pragmatic approach with respect to “the rise of the rest” is the strategy advocated by Princeton professor G. John Ikenberry. He wants the United States and other Western countries to make room in the international system for new powers such as China. Give the up-and-coming countries more say in organizations devoted to collective problem solving, Ikenberry advises — the UN Security Council, the World Bank, the IMF. Better that than risk the spectacle of “an increasingly powerful China and a declining U.S. locked in an epic battle over the rules and leadership of the international system.”
Regarding energy and the environment, New York Times columnist Thomas Friedman thinks the United States is ready to back ambitious goals such as those the Obama administration favors: “I am convinced that the public is ready; they’re ahead of the politicians.” He does not begrudge government involvement — creating the right conditions for the requisite technology innovation requires “a system of government policies, regulations, research funding, and tax incentives.”
In the Smartopia scenario companies have to adapt to life in an economy that is more government-driven than the current American model. Taxes are higher; regulation is more encompassing. Economic growth is tepid rather than torrid. Consumers have less disposable income and are less acquisitive. But the premise is that there are offsetting benefits in the form of greater stability, security and sustainability.
Dystopia: Efforts to stimulate moribund economies work all too well. Inflation soars. Spikes are followed by hard landings as debate rages about what policy prescription will bring relief. Political leaders seeking to deflect public discontent foment disputes with other countries, making it ever more difficult to maintain open markets and international cooperation. Some of the worst confrontations are between developing nations.
Terrorists exploit the disorder. The prices of energy and other commodities rise thanks to supply constraints, geopolitical upheaval, ill-conceived government measures and general uncertainty.
Robert Samuelson, economics columnist for Newsweek and the Washington Post, thinks we could be in for a replay of the inflation the United States experienced from the mid-1960s to the early 1980s. “Like the early 1960s, the spirit of reform is in the air. Great projects of economic uplift seem to beckon. Protect the middle class. Provide universal health care. Exorcise corporate greed. Control globalization. And, more recently, curb global warming.”
However, Samuelson fears that political leaders are underestimating the challenges and overestimating their ability to predict outcomes. He recommends caution: “As we weigh our economic prospects, we need to recall the lessons of the Great Inflation. It was a self-inflicted wound: something we did to ourselves with the best of intentions and the most impeccable of advice.”
He is especially dubious about policies that hold out the promise of creating new green technologies and green jobs while cooling the planet. “For now, anything that would sharply reduce global warming requires shutting down large parts of the economy that produce those gasses. Measures short of that may be economically costly as well as ineffective.”
So Samuelson fears that a stretch of severe inflation could result when the government tries to finance new initiatives on top of the burdens assumed during the financial crisis, not to mention existing obligations to Baby Boomers.
Commodity prices are another potential contributor. When energy demand turns up, a failure to bring sufficient oil to market could boost inflationary pressures. The International Energy Agency estimates that investment in energy facilities at the rate of $1 trillion annually is required to meet the needs of the developing world. It warns that investment delays caused by the credit squeeze could set up an energy supply crunch once the economy recovers.
The Federal Reserve and other central bankers play a crucial role in controlling inflation. One of the risks is that politicians worried about constituents’ reaction to high interest rates will keep central banks from raising or keeping interest rates high enough to prevent inflation.
Carnegie Mellon economics professor Allan Meltzer questions whether the Federal Reserve has the requisite independence given its involvement in a variety of rescue measures in coordination with political authorities. Meltzer worries that, “sooner or later, we will see the Fed, under pressure from Congress, the administration and business, try to prevent interest rates from increasing. The proponents of lower rates will point to the unemployment numbers and the slow recovery.”
Russell Napier of Credit Lyonnais Securities Asia thinks that in about two years investors will develop doubts about the government’s creditworthiness, the Fed will find it more and more difficult to purchase Treasuries, and a volatile era will ensue. One of the results: a “cataclysmic bear market.”
Geopolitics is combustible in this scenario as well as national economies and markets. Support for the proposition that geopolitical hostility is plausible is offered by Robert Kagan. Based in Brussels, Kagan is a senior associate at the Carnegie Endowment for World Peace and a Washington Post columnist.
Kagan recalls that when the Cold War ended there was hope that all such confrontations were history. “But that was a mirage,” he says. He believes that in the next decade world stability will be threatened by dangerous contests between (1) great powers seeking geopolitical advantage, (2) democracy and autocracy, and (3) radical Islam and modern secular cultures.
Bill Emmott, formerly editor of The Economist, highlights the possibility of conflict among Asian countries. “The rise of Asia is not just, or even mainly, going to pit Asia against the West, shifting power from the latter to the former,” Emmott predicts. “It is going to pit Asians against Asians.”
Elbow room is the issue. Says Emmott: “This is the first time in history when there have been three powerful countries in Asia, all at the same time: China, India and Japan. That might not matter if they liked one another or were somehow naturally compatible. But they are not. Far from it, in fact.”
The U.S. Commission on the Prevention of Weapons of Mass Destruction Proliferation and Terrorism was more alarmed by the terrorist threat than is John Mueller. Its 2008 report declared that, “Without decisive action, a terrorist WMD attack somewhere in the world is more likely than not by the end of 2013.”
Stability and security are in short supply in this scenario. Uncertainty is a fundamental characteristic of an inflationary economy, and the volatility interferes with everything from strategic planning and budgeting to procurement decisions. Getting pricing right is a constant challenge. Doing business across borders is difficult and risky. Security measures restrict operations both at home and abroad.
Translating the scenarios into strategy
To move from these four scenarios to strategic decisions, it is necessary to think through the scenarios’ implications for particular markets and products. Picturing the industry landscape associated with each scenario permits business unit heads to define how they would deal with the pertinent threats and opportunities. Having conducted that analysis, they can evaluate their current strategies and decide whether to continue on the same course, make modifications, or adopt a new plan.
But it’s important to acknowledge the dilemma. The more a strategy achieves clarity and precision, the more it locks in on assumptions that, as the scenarios show, are simply debatable theories about how the world is going to behave. Yet the answer isn’t to devise a strategy that’s so generic it will apply across all plausible futures — that maximizes survivability but limits the opportunity to differentiate and excel.
The solution we suggest is strategic flexibility. This involves creating strategic options that equip businesses to modify strategies if they encounter obstacles or openings that are depicted in the scenarios but aren’t part of the plan they’re following.
The options are ownership positions in assets that have been identified as useful for responding to particular scenarios, such as raw materials, distribution channels, technologies or skill sets. Strategic options can take the form of minority stakes, joint ventures, alliances or licenses. Obtaining them is the job of top management, typically operating through the corporate development group.
Strategic options give an organization the flexibility to deal with new market conditions without a premature, irreversible commitment. Ideally a company will have the equivalent of a portfolio of these holdings. This ensures it has made some degree of advance preparation for several scenarios, thereby hedging the bets its businesses make on what lies ahead in their markets.
Following this approach frees business units to commit aggressively to specific plans while the corporate office arranges for the means to alter course if necessary. In an environment such as today’s, it’s essential to position for the future and yet mitigate the unavoidable risk that what emerges will be different from even the most well-educated guess as to how the “new normal” will look. DR
Dwight Allen is director of M&A Studies for Deloitte Research, Deloitte Services LP.
Mark Klein is director of Strategy Development, Deloitte LLP.
Craig Muraskin is a senior manager, Strategy Development, Deloitte LLP.
The authors lead scenario development projects as part of the strategic planning process at Deloitte.
What Next Resources
Roger Altman, “The Great Crash, 2008” Foreign Affairs, January/February 2009
Laurent Cohen-Tanugi, The Shape of the World to Come: Charting the Geopolitics of a New Century (Columbia University Press, 2008)
Ian Bremmer, “State Capitalism Comes of Age: The End of the Free Market?” Foreign Affairs, May/June 2009
Fareed Zakaria, The Post-American World (W.W.Norton, 2008)
Simon Johnson, “The Quiet Coup,” The Atlantic, May 2009
J. David Hughes, “The Energy Issue: A More Urgent Issue than Climate Change?” in Carbon Shift: How the Twin Crises of Oil Depletion and Climate Change Will Define the Future (Random House Canada, 2009), Thomas Homer-Dixon, editor, with Nick Garrison, Jeff Rubin, “Demand Shift,” in Carbon Shift
Parag Khanna, Second World: Empires and Influence in the New Global Order (Random House, 2008)
Stephen Brooks and William Wohlforth, “Reshaping the World Order: How Washington Should Reform International Institutions,” Foreign Affairs, March/April 2009
George Friedman, The Next 100 Years: A Forecast for the 21st Century (Doubleday, 2009)
Howard Baker, Jr., “Time and Political Tides,” The Washington Post, May 5, 2009
Laurent Cohen-Tanugi, The Shape of the World to Come: Charting the Geopolitics of a New Century, (Columbia University Press, 2008)
Edward Lucas, The New Cold War: Putin’s Russia and the Threat to the West (Palgrave MacMillan, 2008)
Minxin Pei, China’s Trapped Transition: The Limits of Developmental Autocracy (Harvard University Press, 2006)
John Mueller, Overblown: How Politicians and the Terrorism Industry Inflate National Security Threats, and Why We Believe Them (Free Press, 2006)
Mike Hulme, Why We Disagree About Climate Change: Understanding Controversy, Inaction, and Opportunity (Cambridge University Press, 2009)
Eli Kintisch, “The Politics of Climate Hacking: What Happens If One Country Decides to Start Geoengineering on Its Own?” Slate.com, April 29, 2009
David Victor, M. Granger Morgan, Jay Apt, John Steinbruner, and Katharine Ricke, “The Geoengineering Option: A Last Resort Against Global Warming?” Foreign Affairs, March/April 2009
Seth Borenstein, “Tinkering with the Earth’s Climate to Chill Runaway Global Warming,” Associated Press, April 8, 2009
Fiona Harvey, “Changing the Planet Might Help Save It,” The Financial Times, May 9, 2009
Matt Miller, The Tyranny of Dead Ideas: Letting Go of the Old Ways of Thinking to Unleash a New Prosperity (Henry Holt, 2009)
Kishore Mahbubani, The New Asian Hemisphere: The Irresistible Shift of Global Power to the East (Public Affairs, 2008)
G. John Ikenberry, “The Rise of China and the Future of the West: Can the Liberal System Survive?” Foreign Affairs, January/February 2008
Thomas Friedman, Hot, Flat, and Crowded: Why We Need a Green Revolution and How It Can Renew America (Farrar, Straus, and Giroux, 2008)
Robert Samuelson, The Great Inflation and Its Aftermath: The Past and Future of American Affluence (Random House, 2008)
International Energy Agency, World Energy Outlook 2008 (Organization for Economic Cooperation and Development/International Energy Agency, 2008)
John Authers, “Cataclysmic Bear Market,” The Short View, FT.com, May 7, 2009
Allan Meltzer, “Inflation Nation,” The New York Times, May 4, 2009
Robert Kagan, The Return of History and the End of Dreams (Alfred A. Knopf, 2008)
William Emmott, Rivals: How the Power Struggle Between China, India, and Japan Will Shape Our Next Decade (Harcourt, 2008)
Commission on the Prevention of Weapons of Mass Destruction Proliferation and Terrorism, World at Risk (Vintage Books, 2008)
Translating the scenarios into strategy
Michael Raynor, The Strategy Paradox: Why Committing to Success Leads to Failure (and What to Do About It) (Currency Doubleday, 2007)