Globalization calls for new strategies
Firms urged to develop flexible biz models to be long-term winners
By Ernst & Young
The world isn’t flat ― it’s curved, bumpy and you can’t see what’s ahead. Even as new markets expand and globalization increases, opportunities are becoming harder to find.
Not so long ago, companies from mature markets, faced with shrinking prospects at home, looked to rapid-growth economies as their best hope for profitability. Rapid-growth-market companies, for their part, buoyed by robust domestic economies, began to expand into neighboring countries and, increasingly, the developed world.
Now the economic outlook is blurring in many markets, and a looming squeeze ― slowing growth, increasing competition, significant operational complexity and shortages of talent in key markets ― is diminishing business prospects.
Ernst & Young, the world’s leading professional services firm, just focused on the evolving globalization and the challenges for businesses when it made public its annual globalization report at the World Economic Forum (WEF) 2012 at Davos, Switzerland, in late January.
Our latest report, ``The world is bumpy: globalization and new strategies for growth,” draws on two sources of original research: Ernst & Young’s Globalization Index, which measures the world’s 60 largest economies according to their degree of globalization relative to their GDP, and a survey of 1,000 senior business executives worldwide, conducted in late 2011, canvassing their thoughts on globalization; as well as a forecast of global and regional GDP growth over the next four years.
The world is bumpy
Despite faltering prospects for the world economy, globalization is still increasing among a majority of the world’s 60 leading economies as they so far avoid descent into protectionism, according to the report. However, 90 percent of executives expect to see an increase in protectionist measures if the global economy slides into a double-dip recession.
While Ernst & Young forecasts that global GDP growth will be just 3.4 percent in 2012, the index continues to predict that globalization will continue to advance this year and up to 2015. This is most pronounced for medium-sized emerging markets like Vietnam, Malaysia, Mexico and Colombia and smaller European countries like Belgium, Denmark, Slovakia and Austria.
The U.K. and the United States are the only major markets where the index forecasts a modestly declining globalization score in the next three years due to both countries introducing immigration rules that will impact on the hiring of foreign nationals.
The only year in the past two decades when this trend paused globally was in 2009 at the height of the financial crisis. However, among the survey respondents, more than half think that a deteriorating economic environment will cause a dramatic increase in tit-for-tat protectionism.
Ernst & Young Chairman & CEO James S. Turley comments, ``While globalization continues apace regardless of weaker growth around the world, the specter of protectionism remains a threat. Businesses and governments have to continue to make the case for globalization as a positive force for economic and social good and avoid any descent into protectionism.’’
The performance of the emerging markets, led by the BRIC countries, continues to offset sluggish growth in the developed world. Ernst & Young forecasts that the combined GDP of the emerging markets is set to grow by 5.3 percent in 2012, continuing to outpace the developed world and increase their share in world GDP.
The GDP of emerging markets (measured on a purchasing power parity basis) could overtake that of the developed economies as early as 2014, with about 70 percent of total world growth in the next few years coming from the emerging markets, of which over a half will be from China and India.
The outlook in Europe, where Ernst & Young forecasts essentially flat growth in 2012 even if the sovereign debt crisis is resolved, and in the United States, where Ernst & Young is forecasting modest if below par growth of 2.5 percent, is less positive.
Business executives surveyed were understandably nervous about the current business outlook, highlighting a looming squeeze _ slowing growth, increasing competition, significant operational complexity and shortages of talent in key markets _ that they believe is diminishing business prospects.
They were also more pessimistic than most economic forecasters. While they remained optimistic about the medium-term potential for emerging markets, slightly more than half of the senior executives questioned believed that the global economy is likely to fall back into recession by the end of 2012.
Almost two-thirds consider it likely that there will be a new global financial crisis, triggered by eurozone debt defaults. And almost 90 percent of the respondents expect to see an increase in protectionist measures if the global economy slides into a double-dip recession.
Challenges for business
As well as the prospect of an increase in protectionism, the sovereign debt crisis in the eurozone and the global economic slowdown have also raised the possibility of a new credit crunch as banks scale back lending against a backdrop of declining confidence in interbank markets.
Ernst & Young Chief Operating Officer John Ferraro explains the challenge for business: ``This daunting scenario presents many problems for global companies, not all of which possess the flexibility, responsiveness or skills needed to overcome them.
``Our research for this report has uncovered four fundamental business challenges that companies must navigate in the years ahead,’’ he added. ``These are complex and unlikely to be resolved quickly, but we believe that businesses can tackle them with new responses that rely on flexibility, speed and unconventional thinking.’’
To be a long-term winner in this increasingly uncertain world, Ernst & Young suggests, companies should adapt a different mindset. In particular they should understand that managing across highly divergent and fast-moving markets requires focus on execution and operational excellence.
Companies must develop highly flexible business models that enable them to respond to new opportunities and threats. And they must understand why inclusive leadership is increasingly important to thrive in constantly changing conditions.
This article was contributed by Ernst & Young.