ELEMENT 1: EXTERNAL FORCES AND AGENTS

ELEMENT 1: EXTERNAL FORCES AND AGENTS

The Multiplicity of External Forces and Their Relative Impact on the Business

The general environment consists of many factors external to the industry that may have a significant impact on the strategies of the enterprise. Systematic analysis of the factors making up the general environment can identify major trends in various industry segments. The framework shown in Figure 6 provides insight into the factors that should be understood when the enterprise engages in an analysis of its general, competitive, and internal environments.

In today’s world, distance is no longer a barrier to market entry, technologies are rapidly replicated by competitors, and information and communications technologies are shaping a new economic order. To manage their business operations effectively, organizations must now view their playing field as

the whole global economy. Prudent managers continually scan these environments for indications of the emergence of business opportunities and risks. They understand current trends and the relevant implications for their business.

Many trends are impacting the way business will be conducted in the future, but the New Economy is taking shape at the intersection of three very significant long-term trends that will continue to gather momentum in the decades ahead: the globalization of business, the revolution in information technology, and the growth of knowledge work. These trends are undermining the old order, forcing businesses to restructure and dramatically change their business models. In the following paragraphs, we discuss these trends and other significant social, demographic, political, and business reporting trends.

Globalization of Business

Simply put, capitalism is spreading around the world—if not full-blown capitalism, at least the introduction of market forces, freer trade, and widespread deregulation. It’s happening in the former Communist countries, in the developing world of Latin American and Asia, and even in the indus- trialized West, with economic union in Europe and the Free Trade agreement in North America.

The number of foreign companies operating in the United States is growing rapidly, at about 2% per year. They now total more than 40,000 and account for about 7% of all corporate assets in the United States. These foreign firms bring to bear the financial and production resources of their home countries on almost any emerging market opportunity in the United States and can quickly take market share with products manufactured less expensively abroad. Foreign competition has arisen not just in large industrial enterprises—automobiles, trucks, aircraft, and computers—but even in some traditional natural monopolies, such as telecommunications and satellite broadcasting.

International trade and investment will play a much larger role in the U.S. economy in the future. Exports and imports already constitute over 25% of the economy.

Increasingly porous national borders, changing corporate cultures, and continuing labor shortages are contributing to the emergence of a global workforce. As regions develop into pockets of specific talent, more workers will relocate to them. In other cases, companies will go to workers, hiring them where they live. Technology will enable the efficient execution of tasks regardless of proximity to home office. This fluid interchange of individuals and information will bring together people of disparate backgrounds. Individuals with dual nationalities will be commonplace.

Revolution in Information Technology

The foundation of the New Economy is the revolutionary explosion of computer processing power. Computing power doubles every 18 months. In addition, we have seen a 22-fold increase in the speed of data transmission obtained over ordinary telephone lines during the past two decades. This wave of innovation in data communications has promoted the extraordinary build-out of the world’s com- puter networks. Over 60 million computers are connected via the Internet. The network phenomenon is just as remarkable as the explosion in computing power. As information technology reduces the trade-off between the depth and quality of information and its access, the economics that underlie industry and organizational structures will be transformed. As more individuals and businesses con- nect electronically, the economics of scope will change organizational relationships, competition, and make vs. buy decisions.

Technology is likely to continue on its path of being smaller, faster, cheaper, and less visible in the everyday world. The intersection of computing and telecommunications will bring about a fun- damental change in the perception of distance and time. At the same time, the traditional interface that has existed between humans and technology will rapidly disappear. Remote sensing, data col- lection systems, cameras, and adjuncts to sensing abilities are among the major new applications in this field.

More significantly, information technology is transforming the global business environment. Hous- ing and autos used to drive the U.S. economy. Now information technology accounts for a quarter to a third of economic growth.

Growth of Knowledge Work

Increasingly, knowledge has become more valuable and more powerful than natural resources and physical facilities. Value propositions are based on information and ideas, rather than on the mere physical attributes of products. This phenomenon is true in both service businesses and in businesses that have historically focused heavily on tangible products. Knowledge is being used to enhance greatly the value of all physical products. The result is that much of our economic growth in recent years has been intangible. As value creation shifts from the mere economics of physical products to the economics of information, managing information, knowledge, and innovation will become a business imperative.

Information and knowledge have become the sources of competitive advantage. In industry after industry, success comes to those enterprises that manage knowledge and information more effectively than their competitors. Companies like Wal-Mart, Microsoft, and Toyota became great companies because they had intellectual capital—knowledge, information, intellectual property, and experi- ence—and used it to achieve competitive advantage. Knowledge and information have become the New Economy’s primary raw materials and the source of its most important products.

Data Access Transforms Business Reporting

The demand for data from users, including employees, capital suppliers, customers, regulators, and the like, will continue to accelerate rapidly. This will require the use of massive databases and network technologies that will provide customized information to users—anyplace, anytime.

In addition, highly networked environments will increase user needs for instantaneous information. Information on demand will be a requirement of all network participants. Users won’t be satisfied with paging through static report images; they will need to analyze data—within the scope of the reporting system—from multiple perspectives in order to answer critical business questions involving all aspects of the value chain.

Data access will replace traditional forms of reporting. Companies will employ complex, multi- faceted, client / server report-processing environments that include intelligent report viewers, tiered report processors, flexible report schedulers, report distribution schemes, user flexibility, and admin- istration and control mechanisms. Content agents that allow users to customize their reports and receive data in real time will support these databases.

Other Social, Demographic, and Political Changes

The following social, demographic, and political trends have been obtained from various research studies. They are illustrative examples of current trends and their related business implications. Many government agencies and private research firms continuously analyze and monitor trends that affect the way business is conducted. The enterprise and the engineer should cultivate and become familiar with these resources and monitor current trends during the design and development of the full business model.

Birth Rates The significant changes in birth rates during the past half century continue to affect the marketplace in subtle ways. New births have now become part of a much larger popu- lation base and are not as likely to have the major impact that the ‘‘baby boomers’’ have had. Markets will be smaller and enterprises will have to spend more time and resources to tap into them.

Immigration As births fall in the next decade, immigration will have even more of an effect on the composition of the market. Immigrants bring a diverse set of skills and attitudes to the United States, the most prominent being their enthusiasm and desire to partake in the U.S. experience.

Immigrants expand the labor pool in the workplace at both ends, as unskilled workers and as high-end workers with specialized talent and training. Business will find that the foreign-born make up an increasing share of their markets, especially in the four largest and most dynamic states: California, Texas, New York, and Florida. Companies will have to learn about the cultures of these groups as they become both customers and employees.

Household Growth Households are of particular importance to future markets because they are the fundamental purchasing unit. Virtually all consumer-spending decisions are made within the context of household needs and budgets. Thus, new households create new sales opportunities.

One of the most important longer-term consequences of the aging baby boomers is that household formation is slowing down. For companies that sell products and services to new households (housing, home furnishings, new cars, insurance), the days of growing with the market are over. Opportunities will now have to come from understanding the composition of the household, more than sheer growth in numbers. More and more sales will be driven by increasing the provision of value-added goods and services to households.

Families Continue to Change The composition of the household is changing. The share of households made up of married couples with children declined from 40% in 1970 to 25% in 1995. That share will continue to go down. The households with the most dynamic growth rates will be married couples without children.

Business will make more sales to smaller households, and the sales will demand more one-on- one interaction. This is because needs and tastes will no longer be driven by family imperatives, which tend to be similar to each other, but by those of adults, which tend to be more personal. This means much wider swings in the purchasing patterns of households.

Income Mobility of Workers Increasing immigration rates, the growing importance of education, and changing systems of compensation that reward high performers have contributed to a disturbing trend in the United States: a growing inequality in income between the rich and the poor. In the last three decades, the number of households with incomes under $15,000 (in constant 1996 dollars) has grown from 14 million to 21 million, while the number with incomes over $75,000 (in constant 1996 dollars) has grown from 4 million to 17 million. The good news is that every year about one third of adults of working age move out of their income quintile. In five years, almost half move.

Consumers’ purchasing behavior is driven by household resources. But access to credit means that consumer purchases may not always be limited by current earnings. Many household purchases are based on expected changes in future income. The fact that as many as 50% of adults can expect to find themselves in a different income quintile in the next five years suggests that payment flexibility will be a critical tool for enterprises trying to meet the ever-more elusive needs of the 21st century consumer.

The Virtual Workforce Technology and changing organizational cultures are enabling more people to work wherever they choose to live. In the next five years, the number of telecommuters is expected to reach 20 million or more. Some predict that half the workforce will be telecommuting from home, office, or shared facilities within the next decade.

At the same time, the number of temporary workers, freelancers, independent contractors, and the like exceeds 25 million by some estimates. Virtual partnerships / alliances between independent contractors are expected to flourish as sophisticated telecommunications capabilities enable people to link up with anyone, anywhere.

Political and Regulatory Changes The regulation of commerce and industry is being adapted to meet the needs of the new consumer. The United States spent almost a century building a regulatory network to protect citizens from the complex risks of a rich, urbanized, industrialized society. Now a more sophisticated consumer, new technologies, and a much more competitive global market are gradually creating an environment more self-regulating and open to consumer discretion, in which it is easier to spread throughout the marketplace the risk that the government formerly took on. As a result, regulatory barriers are coming down.

Sophisticated consumers, one of the key drivers of the move toward deregulation, will become a roadblock if they feel that their fundamental birthrights are threatened: (a) affordable and accessible health care choices, (b) safety and security of the financial system, (c) quality of life that environ- mental regulations protect; and (4) any issue that seems to lead to an unwanted invasion of privacy.

Privatization The transformation of state-owned or controlled enterprises into privately owned or managed enterprises is sweeping the world for the second decade. This phenomenon in- dicates expanding confidence in the benefits of market forces the world over.

While privatization initiatives have been common all over the world, Europe has felt the largest impact. Almost 60% of the private money raised in the last few years has been in Europe. The flow of public enterprises into the private sector will continue in the 21st century, though probably at a slower rate. Privatization has increased competition and lowered prices, given consumers more choices, increased the rate of innovation, ended subsidies to state-run enterprises, provided new investment opportunities, and replaced monopolies with new players.

Key Trends to Follow The New Economy will be affected largely by future develop- ments in three key areas:

1. Information technology, providing refinements of computer technologies to optimize the possibilities of electronic commerce

2. Biotechnology, where the manipulation of genes will allow new control over diseases and health possibilities

3. Nanotechnology, the development of miniaturized systems so that everyday instruments such as mobile phones and calculators can be used in extraordinary ways

Customers

In the New Economy, the companies with the smartest customers win. The richness and reach of information created by the network economy has moved the power downstream to the customer. With more timely, accurate, and relevant information, customers will be in the driver’s seat as existing products are improved and new products are introduced. Their power in the New Economy cannot be overemphasized. The extent to which customers are integrated into the design, development, and improvement of products and services will determine competitive advantage. Knowledge is the driver of the New Economy, and customers generally have much more of it than the producers of products and services.

Competitors

As the richness and reach of information improve, traditional barriers to entry in most markets will be reduced substantially. Enterprises can no longer focus most of their efforts on analyzing existing competition. New market entrants will appear at an ever-increasing rate, and value propositions will be challenged continuously.

Regulators

The regulation of commerce and industry is being adapted to meet the needs of the new consumer. The competitive global market is gradually creating an environment that is more self-regulating and open to consumer discretion. As a result, sophisticated consumers are driving deregulation; however, markets will deregulate at varying speeds around the world, some much more slowly than others. In- depth understanding of local regulations will be important as enterprises expand into an ever- increasing number of new markets.

While many regulatory barriers will disappear over time, new regulations will emerge regarding the environment, safety of the financial system, access to health care, and other areas that are con- sidered important to the new generation.

The Community

The networked economy will ensure that an enterprise’s stakeholders, including the local communities that it serves, have a breadth of information to help them make choices. Managing the brand image will become even more important as companies realize the importance of providing information to their stakeholders about social and environmental performance.

Alliances

Alliances are fraught with uncertain risks and opportunities. Uncertainty brings ambiguity, and am- biguity can lead to business failures. Alliances are most advisable when conditions are right within both the enterprise and the target industry. When alliances are considered, there is a range of strategic options that should be measured in terms of their related risks and rewards.

Rewards can be measured in a variety of ways: market share, cash flow, depth of product line, and growth, to name a few. Risks generally include political, monetary, technological, partner, and market risks, among others.

The architecture of alliances is composed of a number of critical elements, including common language; principles and practices; strategies; structure, roles, and responsibilities; processes and systems design; interrelationships and interfaces; early warning signals; and performance manage- ment.

Stakeholders and Owners

Stockholders are only one of several possible stakeholder groups. Obligations to a firm’s stockholders are generally referred to as the firm’s fiscal responsibility, while obligations to its stakeholders— parties that have an interest, or stake, in the success or performance of the company—are referred to as the firm’s social responsibility.

Sweeping trends in corporate governance are placing more oversight responsibility on boards of directors, audit committees, and other corporate committees to improve fiscal and social performance, as well as stakeholder communication. In addition, stockholders are demanding board of director independence and accountability.

Suppliers

In many industries, the cost of purchased supplies accounts for 60–80% of production costs, so suppliers can have an important impact on an industry’s profit potential. When the number of suppliers in a market is limited and substitute products are lacking, suppliers can exercise considerable power over their customers because the switching costs can be problematic and costly.

The relative importance of the suppliers’ products to the buyer, and conversely the relative lack of importance of the buyer to the supplier group, give significant power to suppliers. Other factors that increase the bargaining power of suppliers include high switching costs and a credible threat of suppliers to move into various stages of the value chain as direct competitors.

Capital Markets

The changes in capital markets in Europe and North America are spreading throughout the world. China is already entering the commercial capital markets in Europe and the United States, and Russia will follow. The West is investing in rising and maturing stock exchanges throughout the world as it seeks market positions and greater return on capital. Major new enterprises in developing economies,

created through privatization, are entering the world’s capital markets. But as companies tap capital sources outside their home countries, capital suppliers are likely to demand representation on their boards of directors.

The Economy

Macroeconomic developments, such as interest rate fluctuations, the rate of inflation, and exchange rate variations, are extremely difficult to predict on a medium- or long-term basis. Unpredictable movements of these macroeconomic indicators cannot only affect a company’s reported quarterly earnings, but even determine whether a company survives. There is general agreement that the fi- nancial environment, characterized by increased volatility in financial markets, is more risky today than in the past. Growing uncertainty about inflation has been followed quickly by uncertainty about foreign exchange rates, interest rates, and commodity prices.

The increased economic uncertainty has altered the way financial markets function. Companies have discovered that their value is subject to various financial price risks in addition to the risk inherent in their core business. New risk management instruments and hybrid securities have prolif- erated in the market, enabling companies to manage financial risk actively rather than try to predict price movements.