(Insturctor’s name)
Dobbs, Richard, Tim Koller, and Sree Ramaswamy. “The future and how to survive it.” Harvard business review Oct. 2015: 48-62.
Article summary
Over the last three decades the economic environment in the world was remarkably profitable. It was especially advantageous for the Western Europe and North America: those experienced significant increase of revenues. During this period, both income and profit growth rates for companies there were higher than those of the global GDP (by 50% and 30% respectively). Overall, the after-tax margins have grown by 65%. However, according to the authors’ supposition, this trend is going to take the opposite direction. Despite that the incomes of Western corporations will continue to rise, they will be in danger of losing their leading positions. More precisely, the impressive numbers achieved in last 30 years may return to the former in just 10.
In the first instance, the article illustrates what were the preconditions of that dramatic growth, and describes the growth itself. There were two main factors accompanying the profit boost period. Firstly, privatization and deregulation processes around the world pushed the competition among private companies from different areas of business. Thus created, the situation involuntarily provoked the market participant to perform better. Secondly, at the background of urbanization and industrialization in developing countries, the purchasing powers there grew vastly, allowing higher investment possibilities for multinationals. The consumer class has grown by 2 billion, reaching 3 billion in 2013, leading to the appearance of a plenty of new investment-attractive projects. Although such an expedient economic situation was present in most part of the world, companies from North America and Western Europe were to benefit most from it.
The article claims that for Western companies there were three premises to perform best in that situation. First of all, the world’s biggest corporations had emerged in North America and Western Europe. The initially bigger scale predetermined profit redistribution in their favor. For example, there are some corps in the USA - Apple, or Walmart, for instance - which in terms of their workforce and capitalization may be compared to quite a few countries. In addition, many of Western companies have been successfully operating in the outside world by that time, generating there a large portion of overall income. For some companies, revenue from the overseas made up 50% and more from the total. Finally, falling costs and tax rates together contributed to greater productivity.
Today, Western world is facing several problems. Aging population, lack of young and qualified workers, and update needing financial system are among them. Moreover, “companies in the emerging world are catching up with Western multinationals”. Specifically, players from emerging world start to perform better than most of their Western competitors. The developing world introduces new ideas and strategies in making business. For example, the long-term planning is presented as an alternative to immediate profit oriented policy, usually exercised by Western players. What is interesting is that new players are also more capable of fast adjustment to the arising changes, and of working in uncomfortable environment, for example, in countries where technology are underdeveloped. Another important thing is that larger populations put some players in an advantageous position. For instance, Chinese and Indian companies specializing in the field of telecommunication accordingly have more customers. The emerging competitors, who use quite different methods of running businesses, are now rapidly enhancing their participation in global economics. Authors suggest that China is the most aggressive and successful of them. Particularly, three Chinese companies hold the leading position in domestic appliance sector. Thus, the gap between Western and emerging companies decreases dramatically.
The paper devotes special consideration to the spheres of information technology and internet. These two are described as a threat for Western established way of doing business. Firstly, companies based on digital platforms are more economical in terms of service and maintenance than the traditional ones. Moreover, they are more convenient in use for both keepers and users, and allow rapid growth of the scale, and, consequently, the incomes. Referring to the previous argument, the ability of tech companies to spread fast makes it advantageous for the populous emerging economies such as China or India. Internet promotes a range of opportunities for vendors and customers. At the same time, the points mentioned above negatively affect some industries, such as advertising and telecommunication. For clarity, services like Skype, Amazon, Alibaba, etc. are gradually surpassing their incumbent competitors in the corresponding areas. Therefore, Internet adds to the emerging world’s competitive power.
Based on the provided arguments, authors present their forecast up for 2025. Although they expect subsequent growth of both consumption and income levels, the profits are likely to be reducing in the future. This is because of intensifying deregulation and development of tech companies around world. The prospective period is associated with the growth of labor costs and simultaneous decrease in production costs. The described situation will be beneficial for consumers and workers, whereas for companies’ it will be a challenging time in terms of gaining margins. For Western companies in particular, it is expected to shorten their share in global income pool from 68% to 62%. On account of their more conservative strategies of doing business – specifically the focus on quick profit, and poor integration into idea-intensive industries – the balance of multinational corporations in the world may shift nearly to the equal value: 55% from Western and 45% from the emerging economies.
In the last part of the article, authors discuss the future development of North American and Western European biggest companies. In order to keep leading positions, they should immediately react to the changing economic environment. There are five possible actions recommended.
Western companies should not be totally dwelled on internal affairs, and put more effort to explore the emerging markets to be able to cope with the changing environment.
After that, they have to become less conservative in terms of doing business, so that they will become prepared to adapt to the changing rules innovations.
Western companies should create and support technological “ecosystems”, by means of which they will be able to track the important changes.
Finally, Western giants should consider finding young, talented and qualified workers as one of the most prior tasks. Moreover, they have to create for them better “pay and career opportunities”.
