1. Strategy A View From The Top Prentice Hall 3-1Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Chapter Three Analyzing the External Strategic Environment Cornelis A. de Kluyver and John A. Pearce II Third Edition

2. All Business Environments are Subject to Change. Successful Companies…  Keep their strategy aligned with changes in their environments and  Actively anticipate change - in customer demographics, future technologies, potential for new products/services, etc. - and seek to reinvent their industries. But… Many executives are unable to see the relevant changes in their strategic environment or appreciate their impact on the future of their business…

3. Understanding Globalization is Key to Strategic Thinking…  As the economies and demographics of the industrialized nations further mature, growth opportunities in traditional markets will diminish  Global Competition  has synchronized economic cycles  has increased business risk in all markets  has redefined relations between the private and public sector  has created new strategic challenges

4. But Globalization is Still Widely Misunderstood…  As a phenomenon/process There are many “myths” about globalization  What it means for business The nature of the challenges

5. Three Myths About Globalization and a Conclusion… Myths:  The World has become truly global  Globalization’s principal dimensions are economic, political and technological  Globalization is a zero-sum game Conclusion: Intelligent Globalization requires a different approach…

6. Myth 1 The World Has Become Truly Global

7. Myth 1 – Has the World Become Truly Global? Consider Trade and Investment Flows… U.S. or NAFTA European Union Japan or Asia Growing but small as a percentage of the total Rest of the World: Negligible

8. Myth 2 - Globalization’s Principal Dimensions Are Economic, Political, and Technological While Many Globalization Issues Have Their Roots In Economics, Politics or Technology…. Examples: FDI, Regionalization

9. … Other Dimensions are Becoming Increasingly Important  Trade, FDI, international calls & internet traffic serve as useful measures of global interdependence but…  Not all relevant dimensions can be quantified by this approach  Spread of culture & ideas  Forces beyond the ability of the individual nations  Global warming  Spread of infectious diseases  Rise of transnational crime

10. In Fact, Globalization Has Acquired A New Dimension (Human Expectations) Economic Political Technological Psychological

11. Myth 3 - Globalization is a Zero-Sum Game  Benefits of international trade?  theories show why countries should trade for products/ services even when they can produce them domestically  Patterns of international trade?  theories show why countries specialize the way they do  Role of the government?  theories help articulate the role of government policy

12. The Evolution of Trade Theory  Early thinking: Mercantilism  Adam Smith: The theory of absolute advantage, 1776  Ricardo: The theory of comparative advantage, 1817  Heckscher-Olin theory: 20th century  Product Life cycle effects  “New” trade theory  Porter’s diamond: national competitive advantage

13. Early Thinking: Mercantilism  Basic theme: encourage exports, discourage imports (accumulate gold/silver)  Fundamental weakness: Trade is seen as a zero-sum game (Later theories showed trade is a positive- sum game)  Although discredited as a theory, mercantilist thinking is still very much alive: political power=economic power=balance of trade surplus…

14. Adam Smith: Absolute Advantage  Attacks zero-sum game assumption  “Countries should specialize in the production of goods for which they have an absolute advantage and trade for others with other countries”

15. Ricardo: Comparative Advantage  Theory goes beyond Adam Smith: Question: What happens when one country has an absolute advantage in all goods? A: Still makes sense to trade - Produce only those goods which can be made most efficiently, trade for the others….. The principle of comparative advantage

16. Smith & Ricardo - Principal Conclusions  Potential world production is greater with unrestricted than with restricted trade  Holds even when we relax key assumptions:  diminishing returns to specialization  changes in the stock of resources or in the efficiency with resources are being used

17. Vernon: Product Life Cycle Theory  As products (markets) mature, both the location of sales and of (optimal) production change, thereby affecting the pattern of exports and imports  For many, especially technology products, the pattern is US, other advanced countries and developing nations

18. “New” Trade Theory  Origin: Questioning of the assumption of diminishing returns to specialization.  Instead: Has globalization fostered increasing returns to specialization? (economies of scale/scope)  Is the principle of comparative advantage therefore undermined by first-mover advantage?  Question: Does this encourage government intervention/strategic trade policy?

19. Porter’s Diamond – National Competitive Advantage  Outgrowth of “new” trade theory  Focus on four national attributes:  factor endowments  demand conditions  related and supporting industries  firm strategy, structure, rivalry Note: Governments can influence all four

20. Determinants of National Competitive Advantage: Porter’s Diamond Firm strategy, structure, and rivalry Demand conditions Factor endowments Related and supporting industries Chance Government

21. Implications for Business  Location of production is a key variable  Being a first mover, while risky, can have substantial payoffs  Government policy can have an important influence on competitiveness  Tariffs  Subsidies  Import quotas (and “voluntary” export restraints)  Local content requirements  Administrative trade policies (bureaucratic hurdles)

22. Key External Strategic Change Drivers for the 21 st Century: Global Tectonics Source: Fariborz Ghadar and Erik Peterson, GLOBAL TECTONICS: What Every Business Needs to Know, The Penn State Center for Global Business Studies, 2005

23. Global Tectonics The process by which developing trends in technology, nature, and society slowly revolutionize our environment, much like how the Earth’s tectonic plates shift the ground beneath our feet.

24. Global Tectonics Environmental tectonics arise from the interactions between people and their environment such as the growth in the world’s population or the phenomenon of urbanization, and impact resource management, health, and the quality of life around the world. Technological tectonics – advances in biotechnology, nanotechnology, information systems – power economic growth and development, global integration, and the speed by which the global economy is becoming a “knowledge” economy. Societal tectonics represent shifts in international governance and political and cultural values such as the current wave of democratization, deregulation and governance reform.

25. 1.Population –The world population is rising – fast – from 6.4 billion today to 9 billion by 2050 –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 capable of supporting such growth –Asymmetric global growth will change the global political equation and could create friction –New migration and immigration patterns will emerge –Aging populations in Europe, the U.S. and Japan will present key challenges for the public, as well as the private sector

26. 2. Urbanization –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. –Local and federal governments will be hard pressed to provide the necessary infrastructure and social services –Rising potential for social, health- related, economic and security volatility –Mega cities – with 10 million or more inhabitants – will become commonplace; rural development may languish

27. 3. 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. –The threat of biological terrorism is becoming more real with every passing day. –Many of the solutions to these problems will have to be provided by the private sector – from providing a healthcare infrastructure to developing new generations of drugs to developing disaster response systems.

28. 4. Resource management –Access to plentiful fresh water is a key concern in many areas and is a major determinant of local growth and investment. –Prudent forecasts suggest that future conflict 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 availability is an ongoing concern in many industries and has spawned innovation and investment in a whole new range of renewable sources of energy.

29. 5. Environmental degradation –Possible effects of global warming include the inundation of low-lying countries due to rising sea levels, increased frequency of severe storms and the retreat of glaciers and icecaps. Less abrupt changes could also occur as average temperatures increased. In temperate areas with four seasons, the growing season would be longer with more precipitation. Less temperate parts of the world would likely see an increase in temperature and a sharp decrease in precipitation, causing long droughts and potentially creating deserts.

30. 6. 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. Example: Airbus. The aircraft’s wings are manufactured in Britain; its fuselage and tail in Germany. A Spanish company produces the doors, while cockpit construction and final assembly take place in France. In all, more than 2,000 companies, located in more than thirty different countries, supply components, spare parts or provide services.

31. 7. Knowledge dissemination –The emergence of a global economy based on knowledge and ideas has changed the very nature of strategic opportunity and risk. –So-called smart products—interactive products that become smarter the more they are used and which can be customized—are a primary focus of modern product development. A tire that notifies the driver of its air pressure and a garment that heats or cools in response to temperature changes are early versions of knowledge-based, or smart, products already on the market.

32. 8. Information technology –Three decades ago, the Internet was still a dream. Today, customers routinely tap into Federal Express' package- tracking database to check on the status of their shipment, “googling” has become an accepted verb in the English language, and remote monitoring is becoming a reality in healthcare delivery.

33. 9. Biotechnology –The biotechnology revolution is likely to have the greatest potential in three areas: medicine, agriculture, and the environment. One day, farmers will be able to grow plants that make plastic – enough to lessen our dependence on oil; Whole families of new drugs will allow the eradication of many types of disease, and Major advancements in pollution cleanup will become possible. –Long term, advances in the biosciences will also likely shake up the world of electronics and make silicon obsolete. Motorola is taking the first step toward a DNA- based computer.

34. 10. Nanotechnology –The ability to create new materials one atom at a time is fundamentally reshaping our vision of the future with stronger and lighter materials that will reduce the cost of transportation and reduce pollution, –One day, “nanomedicines” will be able to monitor, repair, and control human biological systems.

35. 11. Conflict –The fall of the Berlin wall in 1989 changed the nature of international conflict from being primarily a bilateral clash between superpowers to multiple civil and intra-country conflicts, most of them clustered in the developing world. –Terrorism has become a major threat – for business as well as civil society – and continues to threaten the stability of the international political and economic order.

36. 12. Governance –Societies and corporations are connected by two inter-related sets of laws. The rule of law as defined by local and national legislatures, multilateral agreements, and an emerging body of international law. The market defines the second set of laws. This second set of laws is becoming - within the boundaries of applicable legal structures - the dominant force in the evolution of corporate governance practices around the world.

37. Analyzing Change: Scenario Planning Four Steps: 1: Define boundaries of planning effort 2: Identify most important determinants of strategic environment 3: Construct a comprehensive set of future scenarios 4: Generate forecasts to assess the implication of alternative futures for strategic postures & choices

38. Global Governance – Toward A New Compact Between Business and Society Nine New Rules

39. 1. Size Means Scrutiny The bigger a company is, and the more market dominance it achieves, the more attention and demand it faces for exemplary performance in ethical behavior, good governance, environmental management, employee practices, product development that improves quality of life, support for communities, honest marketing, etc.

40. 2. Cutting Costs Raises Compliance Risk The more companies use traditional means to cut costs—finding low wage producers in less developed countries, squeezing suppliers, downsizing, cutting corners, etc.—the more potential there is for crises related to noncompliant ethical practices.

41. 3. Strategy Must Involve Society For forward-thinking companies, social, and environmental problems represent the growth opportunities of the future. For others, they represent the new risks that must be managed. –GE is looking to solve challenges related to the scarcity of global natural resources and changing demographics. –IBM prioritizes producing social innovations alongside business product and process innovations.

42. 4. Reducing Risks Means Building Trust Classic risk management strategies must expand beyond financial and currency analysis to include destabilizing trends and events arising from society. Smart leaders realize that no company can manage these risks if it doesn’t earn the trust of society’s leaders and of its communities.

43. 5. Satisfying Shareholders Means Satisfying Stakeholders In the long-run, the company that pays attention to the business-society relationship ultimately serves its investors’ interests because – its antennae are better tuned to identifying risk, – it is able to build trust with its stakeholders, and – it is well-positioned to develop goods and services that society values.

44. 6. Global Growth Requires Global Gains Increasingly, growth requires a global perspective that recognizes the importance of strong communities which supply infrastructure, maintain stable business climates, attract investment capital, supply healthy educated workers, and support growth that generates consumers with greater purchasing power. Long-term growth also requires development. Visionaries realize that the companies that serve not just consumer demand for quality devices, but their demand for quality of life, will seize the greatest market share.

45. 7. Productivity Requires Sustainability Companies have seen that commitment to environmental management and safety in the workplace has been a driver of lower costs and greater productivity. Companies that take on the challenge of constraining their behavior through commitments to corporate citizenship find new incentive to innovate to compete. The more companies innovate, the more productive and sustainable they become.

46. 8. Differentiation Relies on Reputation In the U.S., an estimated 50 million people, representing over $225 billion a year in purchasing power, comprise the emerging “lifestyles of health and sustainability” consumer base. As the influence of these activist consumers grows, they will demand companies to demonstrate sterling reputations and commitment to society.

47. 9. Good Governance Needs Good Representation The recent wake of the corporate scandals is creating strict controls and governance reforms. But behind these changes is a deeper revolution calling for companies to include stakeholders in formal governance.

48. Strategy A View From The Top Prentice Hall 3-48Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.