Analyzing the External Strategic Environment

state-run

occurred without

the Fast 20 years,

shapes many

and together

challenges:

not have

industries,

formerly

strategie

today's

global

patent

years,

of

Charter 3 Analyzing the External Strategie Environment

55

Regionalism: A Stepping Stone on the Path

Toward a Global Economy?

among

investment

is still very much a work in progress. Trade and

the so-called Triad

Globalization

foreign

United States, the European Union, and Japan-

countriès-the

for the bulk of global economic activity, and more

still account

than four-fifths of the world' s 500 largest publicly traded compa-

nies are headquartered

in the Triad.3

and within

for

World bank data show that regional trading blocks account

almost 60 percent of world trade. The recently enlarged European

Union (EU) has grown to account

for almost a quarter of the

world' s trade. NAFTA currently only has three members-Canada,

accounts for nearly 8 percent of

the United States, and Mexico-but

world trade. ASEAN coordinates trade policies and promûtes eco-

nomic cooperation in Southeast Asia. EUROMED is a group of

12 Mediterranean countries that have agreed to establish a free-trade

zone by 2010. APEC consists of 18 countries around the Pacific Rim

that hope to create "free trade and investment

in the region" by 2010

for its higher incarne members, and by 2020 for the rest. Finally,

trading club founded by Argentina, Brazil,

Mercosur, a small

Paraguay, and Uruguay, represents 0.3 percent of world trade.

Saille 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 process. If the latter is true, regionalism may actu-

ally increase tensions as "like" countries and societies forge eco-

nomic and political structures that will be ha rd to change later. It

would also signal that free trade on a global scale is not likely ta

become a reality any time soon.

New Powerhouses:

India and China

century, Japan rose to eco-

ln the second half of the twentieth

nomic prominence. Today, India and China stand at the threshold

of a similar breakthrough.

India' s GDP has grown more than

5 percent annually in the last 5 years, and, by Saille measures,

China's economy is already larger than Ger:many/s.

56

Strategy: A View from the Top

.Iii

is growing,

ln India, investment

foreign capital and technol-

ogy are coming in, Western-style competition is taking hold, and

India has become the location

state intervention is diminishing.

and many other services for

of chaire for software development

Western ançi Asian companies alike.

China has become a preferred location for manufacturing. Hs

labor.

huge population provides a continuing supply of low-cost

With the conclusion of the Uruguay Round of trade talks, along

with China's inclusion in the World Trade Organization, most of

the classic barriers to the global flow of goods and capital were

removed. By widely opening the doors to foreign investment,

emphasizing the education of technologists, and providing major

incentives for technology transfer, China has combined inexpen-

sive labor with technology to create a major, global competitive

advantage. China is already

for

trading

Japan,Korea, and many other key Asian economies.

the biggest

partner

is still uheven, however.

are still made by bicycle or motor

ln some

China' s economic progress

is delivered by mule; a major-

areas,Coca-Cola is available-but

ity of deliveries

scooter.

Nevertheless, recognizing.its vast potential, a substantial number

ofD.S.companies, including Wal-Mart, KFC, Motorola, Elizabeth

in China.

Arden, and Nike, have

begun

doihg

business

Guangdong is Procter & Gamble's

for

largest overseas market

the soft drink market, with bot-

shampoo. Coca-Cola dominates

tIersat two dozen locations, and ,more planned. Other US. firms

that have made major investments

in China are ARCO, Amoco,

United Technologies, Pepsico, Lucent Technologies, General

Electric,General Motors, HP, and IBM.

that

doing business

A key challenge for Western companies

in

China is that the government

still controls many aspects of the

try to compete against

business environment. Companies

domesticfirms for the Chinese market might not find the path as

easy as those that generate the high-tech products

and exports

Chineseleaders are so eager to see expand. Motorola is encour-

them in

aged to sen cellular telephones

China.Boeing sens jet airplanes in China, but must

involve local

subcontractors and train local maintenance people. The challenge

froID

ofdeveloping a presence in China is therefore v~ry different

as long as it produces

Charter 3 Analyzing the External Strategie Environment

57

--

that at home or in Western Europe. ln China/ there are few wholly

companies. Most are joint ventures/ often with

American-owned

Chinese middlemen

in

Southeast Asia.

from the mainland

or elsewhere

either

China also does not Jet have a consistent/ easily understood,

universally enforced judicial system. There are only rudimentary

and limited legal protections

cThis makes large investments

attractive market extremely risky.

thaï foreign ventures can draw on.

a very

is fundamentally

in what

increasingly will

face strong competition

As the Asian economies take off, traditional Western multina-

from newly

tionals

emerging Asian rivaIs intent on making major inroads in Western

as weIl as Asian markets. Ranbaxy Laboratories,

for example,

compahy, already has become a

lndia's

leading

and the United States.

Samsung Electronics and HSBC followed a similar path to global

success; each developed unique competencies

in their home mar-

kets and then successfully transferred these skills to Europe and

the United States.

leading pharmaceutical

generics producer

in Europe

TECTONICS

GLOBAL

AND THEIR STRATEGIC

IMPLICATIONS4

of many Western markets

Whereas 20 years aga only a few businesses

could be called

global, today almost aIl businesses are affected by globalization.

The maturity

has forced firms ta

expand beyond the confines of the developed world into areas

with greater potential

thaï carry a level of risk far greater than thaï

in interna-

to which they are accustomed. Greater participation

tional markets me ans venturing into other, often unfamiliar, cul-

tures, dealing with different

regulatory agencies and structures,

and accepting a higher level of exposure to political and currency

risk. Geopolitical uncertainty has bec orne an increasingly impor-

tant factor in corporate strategy formulation. Multinational corpo-

rations are now active in at least 70 countries rated at "medium"

58

Strategy: A View from the Top

..

risk, and more than $150 billion is invested in 50

to "extreme"

countries

in the Transparency

International Corruption Perceptions Index, according to ContraI

Risks Croup, a London-based international

to "very" corrupt

consulting firm.5

rated "fairly"

Giobal Tectonics

The Penn State Center for Global Business Studies recently com-

trends that are likely

pleted a comprehensive

study of the global

leaders in

the most significant challenges

to present

the yeaTs to corne. The authors use the term "global

tectonics" to

describe the process by which developing trends in technology,

nature, and society slowly revolutionize

environ-

ment, much like Earth's tectonic plates shift the ground beneath

ourfeet.

the business

to business

people

life for people

or the phenomenon

The project categorizes

resource management,

and their environment,

tectonic shifts as societal,

technologi-

cal,or environmental. Environmental tectonics arise from the inter-

such as the

actions between

of urban-

growth in the world's population

and the

ization. They impact

Technological

quality of

informa-

tectonics-advances

global

tion systems-power

is

integration, and the speed by which the global economy

becoming a "knowledge"

shifts in international governance

ues, such as the current wave of democratization,

and governance reform.

economy. Societal tectonics represent

and political and cultural val-

economic growth and development,

in biotechnology, nanotechnology,

deregulation,

the world.

around

health,

12 Global Trends

challenges

trends that are likely to present

The project identified 12 global

in the next

the most significant

infectious

30yeaTs.Developments

diseases, resource degradation,

economic integration, nanotech-

nology,international conflict, and governance an will have major

consequences for corporate strategy. They might shake up indi-

are

vidual companies

in areas su ch as demography,

for companies

Companies

industries.

or entire

that

Chapter 3 Analyzing the External Strategie Environment

59

to these challenges,

attuned

appropriately willlikely

their peril.

thrive;

prepare

for

those that

them, and respond

ignore them do so at

1. Population

are transforming

ity, creating new economic and social dependencies,

the geopoliticallandscape:

trends

trends. Across the planet, demographic

societies, changing patterns of economic activ-

and altering

. The world population is rising-fast-from

6.4 billion

today to an expected 7.8billion by 2025and 9 billion by

2050.

. At the same time, the rate of global population growth is

decreasing, especially in developed countries, making a

"global population explosion" unlikely.

. Growth is highest

in those areas of the world least capa-

ble of supporting such growth.

. Asymmetric global growth will change the global politi-

cal equation and could create frictions.

. New migration and immigration patterns will emerge.

. Aging populations

the United States, and

in Europe,

Japan will present key challenges for the public as well

as the private sector.

The strategie implications

of these shifts are far reaching. As

markets

the economies of devel-

oping nations will take off, thereby shifting economic growth,

as

the tastes and preferences

the flow of capital,

well as the use of the world's natural and "strategic"

resources,

including food, water, and energy.

in developed nations mature,

of consumers,

a new, potentially

ln the developed

nations, where markets were

shaped by the values, habits, and preferences

population,

is emerging for a growing number of products

financial

45s-with

that of pensioners-have

froID those over 50, who are mainly interested in mutual

or deferred

largely

of the younger

highly lucrative over-50 market

ln

this split has already occurred. The under-

risk profile from

objectives

funds

annuities. Similarly, older people spend a higher

services,

a long-term outlook and a different

very different

and services.

investment

60

Strategy: A View from the Top

...........

proportion of their consumption

bles, whereas

tangible products.

their younger

in services and other intangi-

prefeT to buy more

counterparts

in developed countries

The graduaI aging of the population

into two distinct work-

also is creating a split in the labor market

forces, broadly made up of the under-50s

and the over-50s,

respectively. These two workforces are likely to differ markedly

and in the jobs they occupy. The

in their needs and behavior

younger group will seek a steady incarne from a permanent

job,

or at least a succession of full-time jobs. The rapidly growing

aider group will have more choices and will be able to combine

traditional

jobs, and leisure in whatever

proportion suits them best. Women, who now outnumber men in

increasingly look for flexible work

American higher education,

opportunities

technologies. A nurse, a

computer technologist, or a paralegal now can take a few yeaTs

offto rear children and then return to full-time work. Such jobs

are the first in hum an history to be weIl adapted to the special

needs of women and to their increasing longevity.

in the new knowledge

jobs, unconventional

2. Urbanization. Migration

is

rapidly becoming a major challenge. Whereas

today less than

half of the world's population lives in cities, by 2030 this number

is expected to increase to nearly 60 percent. What are some of the

implications?

from rural

to urban

areas

. Local and federal governments will be ha rd pressed to

and social services.

economic, and

provide the necessary infrastructure

for social, health-related,

. Rising potential

security volatility.

. Mega cities-with

become commonplace;

languish.

10 million or more inhabitants-will

rural development might

These trends offer large opportunities

innovation,

for business. To make

and eco-

investment,

mega cities livable requires

nomic growth. Sectors such as transportation,

housing, waste

management, and recycling will have to respond. There will

in rural areas to bridge the widening gap

alsobe opportunities

between the urban and rural economies.

Charter 3 Analyzing the External Strategie Environment

61

.

flow of labor and goods increase,

3. The spread of infectious disease. As levels of migration and

cross-border

the likelihood of

epidemics and the spread of infectious disease becomes greater. Its

impact on economic growth and development can be enormous;

in

many developing countries, HIV / AIDS has impaired the labor

force and all but overwhelmed

social systems such as education

and health cafe. The threat of biological terrorism is also becoming

more real with every passing clay.

Many of the solutions

to these problems will have to be pro-

vided by the private sector-from providing a health cafe infra-

structure to developing new generations of drugs to developing

disaster

response systems.

4. Resource management. The strategies of many companies

around the world depend on the availability

of such critical

resources as water, food, and energy. Access to plentiful fresh water

is a key concem in many areas and is a major determinant of local

forecasts suggest that future con-

growth and investment. Prudent

flict over water resources is increasingly likely. The availability of

food is impacted by and affects population growth, technology, and

governance. Increasing crop yields, enhancing foods with vitamins,

and improving distribution systems will be critical. Energy avail-

ability is an ongoing concem in many industries and has spawned

in a who le new range of renewable

innovation and investment

sources of energy.

the idea of global warming

the effects of decades of pollution

5. Environmental degradation. "Global warming" once was an

uncommon term used by a few scientists who were growing con-

on long-term

cerned over

patterns. Today,

weather

is weIl

known,

if not always well understood. Possible effects of global

warming include the inundation of low-Iying countries due to ris-

ing sea levels,

of severe storms, and the

retreat of glaciers and icecaps. Less abrupt changes could also

areas with

occur as average temperatures

four seasons,

longer and

include more precipitation. Less temperate parts of the world will

and a sharp decrease in precip-

likely see increasing temperatures

itation, causing long droughts and potentially creating deserts.

season might become

increased frequency

the growing

ln temperate

increase.

62

Strategy: A View from the Top

to

is hard

The most

devastating

in climate,

and also the hardest

but many might become

nations would stifter

they would not have the financial

effects,

predict, will be the effects on the world' s living ecosystems.

Many species of plants and animaIs will adapt or move to de al

with the shift

extinct.

The hu.man cost of global warming

to quantify.

Thousands of lives Fer year could be lost as the elderly or ill

trauma. Poor

suffer from heat stroke and other heat-related

the worst

people and underdeveloped

effects, because

resources

thaï corne with an increase in tem-

to deal with the problems

perature. Huge numbers of people could die from starvation

if

a decrease in precipitation

limits crop growth and from disease

if coastal flooding leads to widespread water-borne

Global warming is not the only environmental

illness.

concern. Water

and erosion also pose

pollution, deforestation,

to these prob-

significant threats to the environment.

lems will require a partnership

between the private sector and

regulatory authorities on a global scale. A small beginning has

been made. Smaller, more fuel-efficient cars and non-fossil-fuel

energy sources, such as hydroelectric power, solar power, hydro-

gen engines, and fuel relIs, all promise big ruts in greenhouse

gages if they become more common. At the internationallevel,

the Kyoto Treaty was written to reduce carbon dioxide and other

greenhouse gag emissions worldwide. Thirty-five industrialized

nations have committed to reducing their output of these gages to

varying degrees.

desertification,

Solutions

6. Economic integration. Higher

levels of cross-border

among

eco-

the

economic

interdependence

and created a fully integrated

nomic activity have increased

world' s economies

system on a global scale. The Airbus Consortium provides

good example. The aircraft's wings

Britain, its fuselage and tail

produces the do ors, and cockpit construction

bly take place in France.

located in more than 30 different

nents, spare parts, or provide

ingly is repeated in industry

in Germany. A Spanish company

and final assem-

ln all, more than 2,000 companies,

compo-

increas-

the

supply

services. This picture

are manufactured

and illustrates

after industry

countries,

a

in

Charter 3 Analyzing the External Strategie Environrnent

63

corporations

(MNCs) play today

raIe multinational

powerful

in the global economy.

Saille industries

policies

standards,

competitors

or subsidized

and regulations,

almost exdusively

for example,

technieal

are more regulated than others.

ln the steel

industry,

the presence or absence of favorable trade

policies,

and

government-operated

or customers

have a direct

influence on a company' s global strategie options.

relied on govern-

ln the past, multinationals

ments to negotiate the filles of global competition. However, as

the polities and economies of global competition

have become

companies are paying greater attention

more dosely intertwined,

to the nonmarket dimensions of their global strategies aimed at

shaping the global competitive

ln the telecommunieations

other deregulatory moves have encouraged companies

more global approaches

tionism or re-regulation

industry globalization and causes companies

approach.

to their advantage.

and

to pursue

to their business. The threat of protec-

inhibits

in the steel

to take a less-global

falling trade barriers

industry, however,

environment

industry,

7. Knowledge dissemination. The emergence of a global econ-

omy based on knowledge and ideas has changed the very nature of

strategie opportunity and risk. Knowledge is changing the nature

of the products and serviees companies bring to market and the

business models they use to develop and manage such offerings. ln

a knowledge-based

Internet economy, ideas spread aIl across the

world almost overnight at an extremely low cost, making it easier

for small companies, new ones, and those froID developing coun-

tries to compete with established firms froID industrially advanced

countries. So-called smart products-interactive

that

the more the y are used and that can be cus-

become smarter

a primary focus of modern product development.6

tomized-are

A tire that notifies the driver of its air pressure and a garment

that

heats or cools in response to temperature

changes are early ver-

or smart, products already on the mar-

sions of knowledge-based,

do business.

ket. Knowledge

Farmers use Massey Ferguson's yield-mapping

system to ma xi-

mize the yield of each square yard in every field. The system links

also is changing how companies

products

64

Strategy: A View from the Top

.

the farmer's tractor to a satellite-based Global Positioning System,

which records the latitude,

longitude, and yield of every square

yard. The data are automatically sent to the farmer's desktop com-

puter, allowing the farmer to investigate selected areas and ana-

lyze variations in productivity. Over time, this knowledge-based

system "has become more valuable than Massey Ferguson's pri-

mary business.

8. Information technology. Three decades aga, the Internet was

stiUa dream. Today, customers routinely tap into FedEx' s package-

Ilgoogling"

tracking database to check the status of their shipment,

has become an accepted verb in the English language, and remote

monitoring

cafe delivery.

a reality

Meanwhile, many comparues have created intranets for their infor-

mation bases so that employees can reallocate investments in their

401(K) plans, work together with corporate offices around the

globe,and connect to their homes.

is becoming

in health

in humankind's

the days of the maddening

9. Biotechnology. Rapid advances

streams of traffic and congestion

alter scientific inquiry and offer solutions

Information technology also is changing the quality of peo-

commute

pIes' lives. For many,

through endless

are already

over. Flexible work hauTs, the emergence of the fully equipped

home office, and new forfis of communication

are making new

lifestyles possible, allowing for a blend of work with family life.

ability to

the basic elements of life are likely

to

understand and manipulate

to fundamentally

problems that could not be solved before. The biotechnology

in three areas:

revolution is likely to have the greatest potential

and the environment. One clay, farmers

medicine, agriculture,

will be able to grow plants that make plastic-enough

to lessen

our dependence on ail; whole families of new drugs will eradi-

in pollu-

cate many types of disease, and major advancements

tion cleanup will become possible.

in

the biosciences will also likely shake up the world of electron-

ics and make silicon obsolete. Companies

such as Motorola

the potential of genetic engi-

have aIready begun to investigate

step toward

first

neering in computing-the

computer.

ln the long run, advances

a DNA-based

Charter 3 Analyzing the External Strategie Environment

65

10. Nanotechnology.

The ability to create new materials one

our vision of the

that will reduce the

the advent of molec-

atom at a time is fundamentally

future, with stronger and lighter materials

and reduce pollution;

cost of transportation

ular manufacturing

that reduces waste; and "nanomedicines"

that will be able to monitor, repair, and contrai human biological

systems.

reshaping

Il. Conflict. The fall of the Berlin Wall in 1989 changed the

conflict from being primarily a bilateral

civil and intracountry

in the developing world.

as weIl as

to threaten the stability of the inter-

nature of international

clash between superpowers

conflicts, most of them clustered

Terrorism has become a major

civil society-and

national political and economic order.

to multiple

continues

threat-for

business

The business implications of these sources of uncertainty are

and

far reaching-companies

polides around the world, protect

their information systems and

computer networks against cyber attacks, and create redundan-

des in their supply chains, aIl at significant cost.

must develop security standards

12. Governance. Societies and corporations

are connected by

is the fille of law as

two interrelated

sets of laws. The first

agree-

defined by local and nationallegislatures,

These legal

ments, and an emerging body of internationallaw.

vary greatly from one part of the world to another.

structures

Most have Jeep and ancient sodetal

roots; were shaped through

centuries of cultural, political, and economic change; and exhibit

of these struc-

a high degree of inertia. Proactive convergence

tures therefore

frame-

work may weIl be needed.

is unlikely, but a new global

multilateral

regulatory

these laws affect, or even determine,

The market defines the second set of laws. Here we see a very

different picture. No matter where a company operates or what it

produces,

its fate. It should

this second set of laws

not corne as a surprise,

is becoming-within

legaI

applicable

of

structures-the

force in the evolution of corporate gov-

emance practices around the world.

that

therefore,

the boundaries

dominant

i6

Strategy: A View from the Top

----

have

realities

of higher

governance

corporations

consequences

practices

adapted

investment. Worldwide

The market-Ied movement

in dar-ta-clay business

increasingly

toward at least a partial conver-

has several dimen-

gence of corporate

sions. Pirst,

their management

structures and practices to compete in increasingly global prod-

uct and capital markets and to deal with emerging global regu-

latory frameworks. Related to this development

is a second,

increases, business

subtler trend. As the pace of globalization

ln a growing part of the world,

cultureis starting to change.

government interference

affairs is wan-

define the fuIes of

ing; "product market"

competitive engagement. At the same time, executives mugi

explicitly deal with the potential

levels

of global economic volatility and carefully balance global and

localidentities, allegiances, and conflicts. A third market-based

is the recent, substantial

forceputting pressure on governance

increase in cross-border

cross-border

mergerand acquisition transactions now top $500 billion, some-

where between

of world Gross Domestic

Product, and are widely expected to rise further. Many such

transactions involve companies,

investments in developing

risks.Such investment patterns are the natural outgrowth of the

fourth force-the need to seek revenues abroad. For most global

and rising portion of their rev-

companies today, a substantial

enues and profits corne froID outside their "home" country. To

accommodate an increasingly global presence,

they also need to

debt and equity markets.

tap more and more into international

Suchglobal expansion gave fige to a fifth source of pressure on

corporate governance. Marketing

risk

management, and gaining credibility in new political and regu-

a global savvy few boards pos-

latory environments

demands

sess. Finally, the sometimes-unrealistic

of global

in the governance

investors for meaningful

short-term and long-

processand instant

and for risk-

term results and for entrepreneurial

taking and predictable performance

of

theglobal governance dilemma.

and infrastructure

countries, which carry substantial

involvement

for consistent

to new cultures, global

1 and 2 percent

the enormity

behavior,

facilities,

liquidity,

illustrate

requires

Charter 3 Analyzing the External Strategie Environment

67