Competitiveness in uncertain times: four trends to watch

All will be revealed when the rankings are released in late May. In the meantime, here are four of the trends that will influence this year’s competitiveness scores:

1. The global economy is fragmenting. It is very difficult to talk about a “global economy” because every kind of economic model is out there. Some countries are overheating, like China and maybe Turkey. Some countries are in recession – obviously Greece, perhaps Spain too this year. Some are risking inflation, like Russia and India, while some are risking deflation, like Japan and maybe Switzerland.

Perhaps one of the biggest impacts of the recession was to fragment the global economy, rather like a diffraction of light. The global economy was a white light, but now there are all kinds of shades, and companies will find it very hard to react to that.

Companies will have to adopt several parallel business models. Some of these will be adapted to countries with high inflation, others to markets with a very strong middle class. In emerging economies, for example, there is a fast-growing “less poor” class, and firms will need a business model for that too.

So companies need to be flexible, nimble and tuned in to local or regional markets. The difficulty is to manage this diversity of business models in a highly efficient way.

2. Businesses will use their cash. Much of the current gloom is coming from financial institutions and governments, and the market is extremely sensitive to this bad news. But quite a lot of businesses, including those that come to IMD, are doing better than many people would expect. 

Just one example: towards the end of last year, American companies had US$2,150 billion in cash on their balance sheets, with Apple alone having something like $98 billion (a few billion more than the US Treasury). There has never been so much cash on corporate balance sheets.

What do companies do with all this cash? The first thing is to buy back their shares and push the price up a bit, because they feel that their stock is undervalued and want to protect themselves from a possible takeover bid. The second is to acquire other companies, so expect to see a lot of mergers and acquisitions in 2012.

From an investor’s perspective, a good buy for 2012 will be blue-chip international companies that have diversification of risk and a good amount of cash. They still have a market, people are still buying – and most probably they will do whatever they can to maintain their share price.

3. Mature economies need to re-industrialise. The “Made in” model is going to be a critical aspect of 2012 for a very simple reason: the unemployment numbers are terrible. The jobless rate is 10.4 per cent in Europe and 8.6 per cent in in the US. For youth unemployment, double the numbers: 18.5 per cent in in the US, 21.3 per cent  in Europe and as high as 48.7 per cent in in Spain. This is a social time bomb and is unacceptable – especially with elections coming up in France, the US and elsewhere.

How do countries create jobs? They have to manufacture and they have to export. So they are going to rediscover industrialisation. In the last 20 years, the US, Europe and Japan have lost about 20 per cent of their industry in terms of its share of GDP, and this is not acceptable.

Mature economies will have to go back to “re-shoring” and have more domestic manufacturing. This is a big issue in the US. Jeff Immelt, the CEO of General Electric, is very much pushing this agenda. So is President Sarkozy in France. They are right to do so. The “Made in” is important, because a country is ultimately defined by what it makes.

Alongside this, expect to see much more flexible labour forces across the world. Rather than firing people, many companies will try to reduce working hours and lower wage rates a bit. Both employers and labour unions have a huge role to play here.

4. The euro will survive. The euro will not disappear. Why? Because it would be such a shock for everybody, because so much has been invested in the euro politically, and because exiting the euro probably isn’t in the interests of the peripheral economies in the euro zone.

If Greece went back to the drachma, it would still have to pay for its imports in euros or dollars. This will bring inflation up, possibly to Zimbabwe-type levels, thousands of per cent. And that would be terrible.

So this problem of the euro has to be solved, and the single currency has to be made to work. The critical aspect is that at the end of the day, the markets have to see the “lender of last resort” in Europe. And it has to be the European Central Bank – or an institution that says, “Here – whatever the debts are, we are going to pay them.” The price of doing this will be high, but the price of letting the euro go will be even higher. 

Final thoughts: The dream of globalisation – a unified world economy, global business model and convergence everywhere – is clearly not going to be realised in 2012. The biggest challenge for senior executives this year will be to manage diverse business models simultaneously.

The main worry is that companies have heard so much bad news from banks and governments recently that many of them have made a Plan B just in case. The problem is that when everybody makes a Plan B, the Plan B scenario might actually happen. 

 

Stephane Garelli is the director of IMD’s World Competitiveness Centre (Switzerland) and teaches on IMD’s Orchestrating Winning Performance programme.