Aftershock: Fallout from the Financial Crisis

The past eighteen months have seen extraordinary and unprecedented changes in the global economy. We are now truly in uncharted territory—analysis of past trends can tell us little about what is to come. Instead, through conversation with a wide range of business leaders and expert observers over the course of the year, and drawing on my own experience of more than 20 years as a strategist, I have formulated views on how customer needs and competitive dynamics have changed, how businesses are responding, and what success will require in the "new reality." As executives survey a global business landscape that has been transformed by economic and financial disruption, they need to ask—what will "business as usual" look like in the future? In considering their responses, all executives need to examine five dimensions of change. New Customer ValuesFrugality is cool. Examples abound of the newfound popularity of thrift, including the return of do-it-yourself and the widespread phenomenon of trading down to more value-oriented retail formats and offers. This fascination with thrift will likely persist beyond the recovery as consumers pay down debt and adjust to a world of higher taxes and uncertain asset values. With less to spend, buyers will choose more judiciously. Companies will need to invest in more sophisticated approaches to customer segmentation and use this information to develop genuinely differentiated offerings. Durability will also increase in importance, as customers hold on to products longer. Other values, such as environmental sustainability and corporate social responsibility, are likely to grow in importance as consumers become more selective. Similar changes will affect industrial buyers, with persistently higher levels of price sensitivity across all industries. Continued tight credit for companies of all types may also lead to an increased interest in new ownership models, replacing outright ownership with "pay-per-use" models. Companies in a wide range of industries will also seek opportunities to share capital investment costs and risks by creating third-party joint ventures that allow direct competitors to share common infrastructure at a lower cost. This is already happening in newspaper printing and mobile telephony, where common networks and infrastructures have increasingly become the norm. The new competitive realityImbalances in supply and demand resulting from underinvestment during the downturn will create price volatility across a range of industries as demand returns. Financial difficulties among suppliers may force downstream customers to bail them out or acquire them to secure access to resources that are scarce or difficult to replicate. Supplier consolidation and bankruptcies could create additional problems for buyers, shifting the balance of power and nullifying established rules and agreements. Bankruptcies and financial distress will change the faces of many industries. This may result in reduced capacity, potentially improving returns for those companies that remain in the market. However, capacity may also simply change hands, often at fire-sale prices that allow new entrants to compete from a much lower cost base. Meanwhile, attractively priced acquisition opportunities are drawing new investors into Western markets. Several emerging-market multinationals have already demonstrated their intention of using mergers and acquisitions as a basis to extend their footprint into the more profitable markets of the developed world. Accelerated consolidation is widely expected in many industries, including construction, energy, banking, and retail. This, too, will change the game for existing players, allowing the largest companies to pursue scale-based cost savings and offer benefits to customers that smaller players cannot hope to match. Increased regulation will be part of the new reality for many industries, as governments seek a more active role in managing such key industries as banking, housing, manufacturing and health care. The end result will be added costs and new constraints on what companies can and cannot do. Prospects for growthThe ability to invest in growth and the choices of where and how to grow will widen the gap between winners and losers. Winners will continue to invest in research and development through the downturn; have capital available to take advantage of M&A opportunities; respond to changing customer needs with innovative new offers; and establish early, strong positions in emerging markets. Organizations may need to consider different capital structures, and find new sources of cash to fund growth. Managers must also revisit their plans and prospects for organic growth, and adjust these to fit with the new customer reality. Executives will need to reassess their portfolios of products and services in light of changing customer needs and competitive dynamics. With a smaller pool of investment cash, companies will need to make difficult choices about how to allocate spending between developed and emerging markets, and between organic growth and M&A. To raise cash and pay down debt, some companies will have to sell off assets, creating opportunities for more financially secure players. New business modelsThese dramatic changes in customer behavior, the competitive environment and the outlook for growth will have a significant impact in two key areas: how companies operate and how they deploy talent at all levels of their organizations. As a result, companies will need to acquire new capabilities and rethink what activities they should undertake, and where. Outsourcing and the leveraging of global resources will grow as companies look to exploit labor cost differences and boost business performance. As companies expand across the globe, they will need to exploit scale more effectively, both in back-office activities like HR, finance and purchasing, and in front-office applications like package design, marketing analytics, and advertising and promotion. Rather than duplicating scarce skills in each region, global centers of excellence enabled by information technology will allow the most advanced players to deliver world-class capabilities to all geographies. Increasing numbers of cross border deals will create new challenges in integrating across multiple cultures, customers and competitive environments. This is particularly true for companies straddling developed and emerging markets. Technology will continue to transform the way business is done, facilitating greater mobility and the geographic dispersion of activities. A growing skills shortage in the West and the relative abundance of those skills in emerging markets such as India and China will cause companies to move increasingly sophisticated activities offshore—including major segments of the R&D value chain. A new talent agendaAdapting to crisis-driven change has required companies to shift direction nimbly, abandoning outdated plans and redirecting efforts into new and more promising areas. The downturn has posed difficult and often painful choices for leadership: how much to cut, what to preserve, where to invest scarce resources for growth, which markets or activities to walk away from, and how to lead teams confidently through change. High quality leadership will be a driver of success coming out of the downturn. The competition for talent will reignite following the downturn as companies scramble to rebuild capacity lost to the recession. The is particularly true in industries such as the financial sector, where many workers have emigrated or changed career paths. Talent shortages will be felt most urgently among trained, educated, and experienced knowledge-worker positions. In other industries, however, shifting economic power may lead to the permanent loss of jobs. The gaps in contribution, productivity and pay between highly trained, educated and experienced knowledge workers and a rapidly expanding pool of available but largely unskilled workers could drive greater labor unrest. This in turn could compel governments to act; possibly to introduce regulations that limit the differential treatment of employees. ConclusionThe downturn has already precipitated major changes in buyer behavior, industry structure, and competitive dynamics, and has opened a gap between winners and losers that is likely to continue to grow. Success will depend on leadership's ability to anticipate and react to these and succeeding changes and to make wise, often very difficult choices about how and where to invest, how to configure their operations, and how to preserve and rebuild key skills once growth returns.

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