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Published: January 22, 2008

 
 

Signals for the Coming Year

Hunkering down and waiting for the turbulence to end will not be a successful strategy. Instead, there will be a renewed interest in having a balanced corporate portfolio, deliberately hedging against local or sector-specific downturns. Some companies, like HSBC, are already learning to develop truly global managers, cultivating employees who can move during the course of their careers through a dozen regions (and who are willing to make personal sacrifices to do so; for example, putting their children in boarding school). Corporations have paid lip service to global activity; now they will be forced to make it a core focus, even if that’s difficult at first.

2. The cost of energy complexity. Energy has been in a state of turbulence for a year now, with dramatic price increases, a more serious emphasis on climate change, and a growing consensus that the energy mix must shift…eventually. In power generation, coal is out (too many greenhouse gases) except in China (for the moment), nuclear is coming back (but not yet having an impact), renewables are rhetorically satisfying but not yet viable (too small, too uncertain, too unscalable), and demand is poised to rise. This makes natural gas the default fuel for the moment. In transportation fuels, the conflict between biofuels and food production will be with us for some time, and so will the challenge of building out the kind of infrastructure needed to run motor vehicles on electricity or hydrogen (hydrogen could take decades).

From a strategic perspective, the most important underlying trend is not the move toward any particular fuel or option, not even hybrids, but the ambiguity of choice. This will affect business practices, subtly but pervasively, throughout the world this year. For as energy sources proliferate, complexity increases. Complexity adds cost. And most companies have not yet figured out ways in which they can focus their energy bets on a limited number of technologies. They can expect their costs to escalate.

Unfortunately, there is no way to avoid complexity and uncertainty in making choices about energy. There will be no obvious single solution; like decisions about expanding into new markets, the best options will vary for each industry and location. And although flexibility will be paramount, few companies can be infinitely flexible.

Ambiguity has one beneficial consequence: It tends to spur innovation. The energy industry will increasingly resemble the early years of the Internet, marked with both fruitful and failed experimentation, yielding many unexpected successes — and quite a few visible failures. Who will be the energy-oriented equivalents of Amazon, eBay, Yahoo, and Google? We may get some leading indicators during the coming year.

3. Participative risk. Financial institutions, central banks, governments, and insurance companies, all learning to survive in a more volatile economy, are thinking differently about risk than they used to. They are enlisting their customers to assume partial responsibility for reducing the risks they face, not just insuring against them.

This trend will be amplified by the generational shift that begins this year, bringing about a tidal wave of financial and medical need in the U.S. as the baby boom generation starts to enter its 60s. Some of these people are well-prepared for their retirement years, and wealth-related industries are emerging to meet them. But many are not. A large number of people also are ill-prepared for the increasing frequency of storms, fires, and other natural catastrophes. And food safety, product safety, and energy safety scares will continue, as will the threat of financial disasters.

Insurance companies in health care and other fields have already begun to rethink the relationships among the costs of care, the costs of insurance, and the level of awareness of their customers. (This is the basic premise of the influential consumer-driven health-care model.) Some government leaders are also becoming interested. Who will educate the public on sound financial practice, on preventative health care, and on wise consumer choices in general? That question has not yet been fully answered, but there may be a wave of activity in the private sector this year, as health-care and financial-services firms continue their innovation in consumer-oriented services.

 
 
 
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Resources

  1. Amy Bernstein, “Making Innovation Strategy Succeed,” s+b Leading Idea, 1/08/08: An interview with Booz Allen Vice President Barry Jaruzelski lays out strategies for innovation that can provide overall resilience in the coming year. Click here.
  2. Kaj Grichnik and Conrad Winkler, “Manufacturing’s ‘Make or Break’ Moment,” s+b, Winter 2007: Excerpt from the forthcoming book Make or Break: How Manufacturers Can Leap from Decline to Revitalization (McGraw-Hill, 2008) describes such new operational challenges as scarcity and human capital issues — and how to address them. Click here.
  3. Rich Kauffeld, Johan Sauer, and Sara Bergson, “Partners at the Point of Sale,” s+b, Autumn 2007: Example of the new kinds of activities made possible by trends in media and IT. Click here.
  4. Christopher Vollmer, Always On: Advertising, Marketing and Media in an Era of Consumer Control (McGraw-Hill, 2008): Forthcoming book about how new media have changed the marketing function. Click here.
  5. Steven Wheeler, Walter McFarland, and Art Kleiner, “A Blueprint for Strategic Leadership,” s+b, Winter 2007: How to build an organization in which executives will flourish. Click here.