strategy: a view from the top chapter 3: analyzing the external strategic environment

STRATEGY: A VIEW FROM THE TOP

CHAPTER 3: ANALYZING THE EXTERNAL STRATEGIC ENVIRONMENT

TEAM 2CAITLIN CLARK

STEPHEN MASSIMIWILL MAYRATH KATIE TREVINO

MATT VATANKHAH

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

UNDERSTANDING GLOBALIZATION

It is important to define “globalization” Economists focus on trade and regard the free

flow of capital as the defining issueDifferent 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

UNDERSTANDING GLOBALIZATION, CONTINUED

Political globalizationIdea 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


Economic globalizationSet 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


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.”

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

REGIONALISM, CONTINUED

Regional Trading Blocks World bank data show that these account

for almost 60% of world tradeRecently 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

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

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

NEW POWERHOUSES, CONTINUED

ChinaBy some measures, China’s economy is

already larger than Germany’sHas 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


China, continuedChina 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

transferChina is already the biggest trading partner for

Japan, Korea, and many other key Asian economies


China, continuedEconomic progress is still unevenRecognizing 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 environmentCompanies 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


China, continuedChallenge 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 companiesMost are joint ventures, often with Chinese

middlemen either from the mainland or elsewhere in Southeast Asia


China, continuedChina 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

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

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 tectonicsSocietal tectonics

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

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


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


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

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 reachingGovernance

○ Societies and corporations are connected by two interrelated sets of lawsFirst: defined by local and natural legislatures, multilateral

agreements, and an emerging body of international lawSecond: defined by the market

○ No matter where a company operates or what it produces, these laws affect, or even determine, its fate

A GLOBAL KNOWLEDGE ECONOMY –STRATEGIC IMPLICATIONS

Global Knowledge Economy CharacteristicsGoverned by laws of abundance, not scarcity Effect of location is diminishedNational 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

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

THE NEW GLOBAL ECONOMY, CONTINUED

Virtual corporations Based only on a sophisticated knowledge of

customer wantsThe best way to deliver value Likely to become more viableThese 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

RISK AND UNCERTAINTY The Risk Continuum

Certainty Risk Uncertainty

Accurate, measurable information available about the

outcome of each

alternative

Little is known about

alternatives or outcomes

Cannot predict outcome with certainty but have enough information to

assess its probability

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


Change ForcesSome 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


Change Forces, continuedCollapse 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

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

SCENARIO ANALYSIS, CONTINUED

Divide knowledge into two categoriesThings we believe we know something aboutThings we know little or nothing about

Scenarios depict possible futures, not strategies to deal with them Invite into the process outsidersExamples: major customers, key suppliers,

regulators, consultants, and academics


Scenario-Building Process has four stepsStep 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


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

GLOBAL FUTURES: THE GLOBAL SCENARIO GROUP

Conventional WorldsEnvision 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

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

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

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

A NEW COMPACT BETWEEN BUSINESS AND SOCIETY?, CONTINUED

Size Means ScrutinyThe bigger the company is, the more market

dominance it achieves, the more attention and demand it faces

Cutting Costs Raises Compliance RisksThe 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


Strategy Must Involve SocietyForward-thinking companies must consider

social and environmental problems for growth○ Example: GE, IBM

Reducing Risks Means Building TrustExpand 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


Satisfying Shareholders Means Satisfying StakeholdersIn 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


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


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


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

strategy: a view from the top chapter 3: analyzing the external strategic environment

Documents

globalization pressures

psychological globalization

globalization economists

world trade regionalism

global scale

free trade

world traderecently

triad regionalism