The Mark 2010

With the rise of China and India, the economic centre of gravity is shifting, and with it, business decisions here.

It is February 2010 and you, as CEO, are in the midst of presenting your company’s Strategic Plan to your Board. You feel very confident having astutely sidestepped the financial and economic crisis of 2008-2009 and believe that while growth in the shorter term will be tempered, steady growth in revenues with increasing profitability lies ahead. Your analysis of your competitors, mainly domestic, has resulted in the formulation of counteractive plans and initiatives that will allow you to at least retain market share. Furthermore, you know that strategic acquisition opportunities abound, which could enable you to enhance organic growth potential well beyond the base case in the Strategic Plan if you so choose.

But suddenly, like a bolt of lightning, you are awakened from the comforting image of the world as you see it. One of your tough and very smart directors just asked a question that is profound and alarming. He wants to know what alternate strategies and contingency plans have been formulated to deal with likely much larger disruptive changes in the business landscape that could transpire over the next ten years – primarily linked to China and India. While you had obviously considered the impact of Asian competitive trends on your business and have formulated retaliatory and pre-emptive actions, you are fearful that the scope and dimension of such trends is far greater than you had anticipated. This is because, in framing his question, he paints the following picture of the scenario that could exist in 2020, and the consequential impact it would have on your business:

1. China and India, each with a vast and growing population base fuelling exceptionally high rates of growth, have been able to develop their own economies at a rate unmatched by western standards. Their success in product development, design, and innovation has necessitated increased focus on your company’s R&D and product development programmes requiring greater investment in people, capital, and manufacturing facilities.

2. Increasing personal wealth in Asia and a higher standard of living have underpinned very strong demand for locally manufactured products in these markets with resultant high-capacity utilization of manufacturing facilities. This has eliminated as a viable option your objective of establishing a low cost off-shore outsourcing partner for your company’s products.

3. China's ongoing economic transformation, commercial liberalization and deregulation has had a profound impact on the global economy and by the end of 2019, China’s economy could eclipse that of the U.S. Increased resource requirements have caused commodity and energy prices to rise to levels that have adversely impacted your profit margins, and price hedging strategies are too expensive.

4. Asian electronics have already decimated many of the U.S. leaders of yesteryear, and that is likely to continue unabated due to the increasing demand for electronic communications with growing bandwidth demands. Even greater innovation and proprietary design (albeit pirated through reverse engineering and patent infringement) have allowed competitors to leapfrog the technology content and design of your current products and their future road map.

5. Two other key industries, automotive and aerospace, have become dominated by Asian based companies. This has had an adverse impact on many of your customers and, in turn, your revenue base has eroded.

6. The centre of gravity of capital markets has shifted to China, which has driven the design of new types of securities and derivatives. Favourable tax incentives have been put in place and, together with more lenient exchange control regulations, have resulted in a tremendous flow of funds and investment in Asian economies. As a consequence, the U.S. Fed has been forced to increase interest rates to attract capital and fund enormous deficits from the bailouts and health care reform. Your access to capital and the cost thereof are now severe limiting constraints for funding your business.

7. As a consequence, fiscal and monetary policy in the U.S. has increased the risk of stagflation with continuing high rates of unemployment. This is not what you had considered and you need to reorganize your business and cut costs.

8. With the increased salaries and great employment opportunities in Asia, many of your key skilled and talented Asian employees, are returning to their home countries. Loss of these people has had a serious impact on your business.

9. Deployment in Asia of the most up-to-date technologies and equipment, coupled with high economies of scale, have resulted in exceptional quality and competitive differentiation of manufactured products at much lower costs. This has eliminated the remaining elements of any competitive distinction of your company’s products.

10. While you have not done so, some of your multinational competitors have established a base in Asia and are thus well entrenched to use those operations to be more competitive in the U.S. Their volume of production yields much lower costs and higher quality than you can achieve in the U.S.

11. With limited regulatory and environmental restrictions, as well as the absence of legacy corporate problems (pension, health care, environmental remediation requirements etc.), your competitors in Asia have much lower costs, more flexibility, and are not burdened by inefficiencies of the past. An aging population, political pressure and socioeconomic demands to solve these issues in the U.S. have resulted in a heavier corporate tax burden and higher amounts of corporate contributions to fund health care and pension fund deficits.

You are startled by the frightening reality of the world as it may appear in 2020. Your reliance on mathematical forecasting models and other empirical analysis based on historical business and economic cycles to predict the future has been trashed – these tools have been rendered irrelevant given the metamorphosis of the global economic equation. With China becoming the world’s largest economy and India following suit, this new centre of gravity has changed the nature of past economic linkages.

So, how will you respond to the possible challenges facing your company? Specifically, how can you prepare your company to deal with these possible negatively powerful exogenous circumstances? What do you need to do today to ensure the growth, strength, and adaptability of your business, for the next decade and beyond, in our uncertain and rapidly changing world?