July 2005
Introduction to
Scenario Planning
Overview of the
Five Global Drivers
Scenarios &
Wildcards
Navigating Global
Risks
1
While the opportunities of globalization have grown
Trade barriers are steadily on the decline
W. Avg. US Tariff Rate
3.0
2.5
2.0
1.5
1.0
5
4
3
2
1
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
0.0
1989
0.5
1990
Globalization Index, Weighted
A.T. Kearney’s Globalization Index
So have the risks
Computer viruses cause more damage in less time
Economic Damage
Damage of
of Viruses,
Viruses,
Economic
$US, millions
millions
$US,
Terrorist incidents are increasingly common
3000
2500
2000
1500
1000
500
9 Hours
2400
1800
1200
12
Hours
600
150
3
Days
Years
10
Minutes
2 Days
0
0
1997
1999
2001
2003
Jerusalem Concept Melissa Love Code
SQL
(1990)
(1995) (1999) Bug
Red
Slammer
(2000) (2001) (2003)
2
Successful companies must anticipate and manage change according to the
key drivers of the global operating environment
Globalization
Consumption
Patterns
Demographics
Technology
&
Innovation
Natural
Resources &
Environment
Regulation &
Activism
Wildcards
• Low probability, high impact, disruptive events
3
Example: globalization - is an integrated world at risk?
Projected Globalization, 2003-2015
Continued Growth?
50
Globalization Index, weighted
45
Growth in globalization, 1990-2003
Stagnation?
40
35
Decline?
30
25
20
15
10
1990
1992
1994
1996
Source: A.T. Kearney Globalization Index, 2005
1998
2000
2002
2005
2010
2015
4
For each driver, we model the component parts
Globalization
•
•
•
•
Economic Integration
Technological Connectivity
Personal Contact
Political Engagement
Demographics
•
•
•
•
Population Growth
Age Dependency Ratio
Gender Imbalances
Infectious disease
Consumption Patterns
•
•
•
•
Size of the overall consumer market
Income distribution & the middle class
Local tastes
Consumption trends
Regulation & Activism
•
•
•
•
Government liberalization
Corporate image
Stakeholder activism
Corporate social responsibility
Natural Resources &
the Environment
I llu
stra
ti ve
• Resource Scarcity (oil, water)
• Energy Dependence
• Environmental Degradation
5
Scenarios are built from the ground up
Driver:
Indicators:
I llu
stra
ti ve
Globalization
• Economic Integration
• Political Integration
• Social Networking
• Technology Gap
Sub-Scenarios:
“National Guard”
“Near Abroad”
“Davos Man”
6
Macro-Scenarios are developed from a combination of sub-scenarios and span
the continuum of future possibilities
I llu
stra
Generate Scenarios
Macro Drivers
Indicators
•
•
•
•
Globalization
Economic Integration
Political Integration
Social Networking
Technology Gap
• Growth and Distribution
• Wealth Accumulation
• Familial Piety
Demographics
Sub-Scenarios
Continued Gap
Slow Integration
One Europe
Street War
Guarded Acceptance
Home, Sweet Home
ti ve
Scenarios
1
"Regional
Polarity"
2
“Melting Pot"
Management Uses Scenarios as Guidelines
•
•
•
•
Prepare risk and action plans for the different scenarios
Observe drivers and other “road signs” along the way
Adopt scenarios and plans to changes in the environment
Restructure business to changing environment
7
“Powerfully imagined and rigorously researched…scenarios are an indispensable
guide to decision-making in an environment of new risks & opportunities”*
Drivers
Globalization
Full-Spectrum Scenarios for the World in 2015
Open Borders, Lingering
Castles and Moats
Patchwork World
Fears (Optimistic)
(Pessimistic)
(Baseline)
National Guard:
Near Abroad:
Davos Man:
perceived external
globe settles in for long
world growth and
threats to security fuel
haul of low intensity
confidence continue as
nationalism
conflicts
does global integration
Demographics
Urban Time Bomb:
young, poor populations
combust while aging hits
West
Safety Valve:
rich countries are “gated
communities” with limited
immigration
Consumption
Patterns
Discount Warehouse:
weak growth restrains
middle class size in
emerging countries
Multiplex:
Affluent Individualism:
consumption spans a wide world of savvy,
spectrum - standardization sophisticated consumers
to customization
Natural
Resources &
Environment
Toxic Shock:
resource competition and
regional conflicts
Search for Alternatives:
some regional instabilities
and ecological concerns
Abundance Renewed:
new reserves and
technologies come on line
Regulation &
Activism
New Dirigisme:
populist governments and
militant activists
Selective Re-regulation:
“rational” government
action & self-correction
Back to the 80s:
forces of commerce and
technology overpower
restraint
* John Gray, School Professor of European Thought, London School of Economics
Adaptive Labor Market:
intelligent immigration
policies improves
prospects
8
Introduction to
Scenario Planning
Overview of the
Five Global
Drivers
Scenarios &
Wildcards
Navigating Global
Risks
• Globalization
• Demographics
• Consumption Patterns
• Natural Resources & the
Environment
• Activism & Regulation
9
Globalization
Globalized countries tend to be rich, free and open
2005 Globalization Index Top 10
Economic
Personal
Technology
2005 Globalization Index Bottom 10
Political
Economic
Singapore
Peru
Ireland
China
Switzerland
Venezuela, RB
United States
Turkey
Netherlands
Brazil
Canada
Bangladesh
Denmark
Egypt, Arab Rep.
Sweden
Indonesia
Austria
India
Finland
Iran
Source: A.T. Kearney Globalization Index 2005
Personal
Technology
Political
10
Demographics
The developing world will comprise virtually all future population growth
Population trends in developed and developing countries (1750 – 2100)
Total World Population
Developing Regions
Developed Regions
12
Population (billions)
10
8
6
4
2
0
1750
1800
1850
Source: Population Reference Bureau, U.S. Census Bureau
1900
1950
2000
2050
2100
11
Demographics
Developing countries will be urban and young
Mega Cities 2015
5-8 million
8-10 million
> 10 million
Developing countries in 2020 show a youth explosion…
…while industrialized populations are aging rapidly
Age Groupings 2020
Age Groupings 2020
75+
75+
60-74
60-74
45-59
45-59
30-44
30-44
15-29
15-29
0-14
0-14
Males
-20
Source: US Census
Bureau -10
0
Females
10
20
-30
-10
Males
Females
10
30
12
Demographics
A convergence of forces is creating a new global market for talent
Talent
Shortage
in the West
Global
Market
Liberalization
Technology
Driven
Innovation
And Productivity
Shift From
Manufacturing
To Services
Economy
Skills
Development
in Emerging
Markets
13
Consumption Patterns
Middle class growth will be largely in the developing world
2000
2015
UK
South
Korea
Ireland
Canada
Japan
Canada
56m
United States 68m
Ireland
Scandinavia
UK
71m
United States
84m
Scandinavia
Benelux
145m
70m
Japan 49m
Baltics
36m
82m
Germany
40m
21m
Spain
Mexico
South
Korea
Russia
France
East Turkey
Europe
Iran
9m
Benelux
Germany
18m
30m
France
China
76m
Hong
Kong
Mexico
27m
19m
Taiwan
Central
America
Colombia
Portugal
Chile
Israel
India
Thailand
Malaysia
Singapore
23 m
5.5m
4.3m
Russia
595m
East
Europe
Turkey
82m
Iran
Northern
Africa
Central
America
Philippines
Colombia
Indonesia
South
Africa
Argentina
Italy
New Zealand
Peru
Chile
Pakistan
Portugal
Brazil
Australia
24m
Thailand
Caribbean
Venezuela
39m
24m
Spain
Venezuela
Brazil
Peru
Italy
Caribbean
China
33m
9m
9m
Israel
Northern
Africa
India
Taiwan
Hong Kong
Vietnam
Malaysia
South
Africa
Singapore
Philippines
Indonesia
Australia
Argentina
New Zealand
10 million
consumers
Middle Income
Source: World Bank, EIU, US Census Bureau and A.T. Kearney analysis
Upper Middle
Income
Upper Income
14
Consumption Patterns
Consumption patterns are shifting
Advanced Markets:
More Experiences
Emerging Markets:
More Stuff
„
High-end, luxury goods
„
Status-oriented merchandise
„
Custom features and add-on´s
„
Electronics
„
Individualized leisure activities and
entertainment options
„
Consumer durables
„
New vehicles
„
Housing
„
Travel and tourism
„
Vacation homes
„
Concern for health, longevity
„
Growing ecological awareness
Source: Dr. John Quelch
15
Consumption Patterns
Local culture will also drive consumer preferences
United States
English Canada
French Quebec
Time
Do it now
Wait
The past
Energy
Superman
Winter energy
Frustration
Space
The universe
The best
place on earth
Shrinking or
under siege
The Logic of Emotion
Life, liberty and the
pursuit of happiness
Peace, order,
and good government
Je me souviens or a
sense of remembrance
The Body
A machine
An inconvenience
For pleasure
Food
A machine
Maintenance
Enjoyment
Eating
Fill up the tank
Keep life going
An orgy
Source: Dr. G. Clotaire Rapaille, Archetype Discoveries
16
Natural Resources
Four key factors will drive future energy markets
Politics
Technology
• Development of
situation in Iraq
• Extractive
technology
• Central Asian
regime stability
• New efficiencies
• OPEC
cohesiveness
• Alternative energy
technology
Economics
Environment
• Consolidation of
oil markets and
firms
• Degree of
observable
climate change
• Asian economic
development
• Availability of
natural resources
• Central Asian
macroeconomic
stability
17
Natural Resources
The future will be increasingly characterized by concerns over water scarcity
and water stress
2000 Water Availability
2050 Water Availability
As Percent of World Population
As Percent of World Population
Stress
5%
Scarcity
3%
Stress
24%
Sufficiency
92%
Sufficiency
58%
Sources: CGIAR = consultative group on international agricultural research& ÍWMI = international water management institute
Scarcity
18%
18
Natural Resources
The reality of global climate change is now universally acknowledged
Temperature Change, °C
1.0
0.8
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
1866
Sources: Scientific American, NASA
1899
1932
1965
2002
19
Activism & Regulation
Complex regulatory issues challenge constrained governments…
Issues at the frontier
„
Digital technology & privacy issues
„
E-commerce
„
Biotechnology
„
„
Stem cell research and human cloning
U.S. Government “Brain Drain”
Public Sector Retirement
Eligibility, 2005
Eligible
45 %
Genetic testing raises medical privacy
concerns
• Nearly half the senior executives
in the US government may soon
depart
Source: Council on Excellence in Government
20
Activism & Regulation
…while empowered activists challenge corporate behavior
Transnational networking
• Low cost of global transportation and
communication
• Decentralized organizations disseminate
information rapidly and efficiently
Brand image
exploited by
activists
Brand “boomerang” tactics
Brand editing
• Profusion of brand names and identities
allows activist groups to educate and
instigate consumers
21
Introduction to
Scenario Planning
Overview of the
Five Global Drivers
Scenarios &
Wildcards
Navigating Global
Risks
22
Each scenario has its own set of implications
Implications under Open Borders, Lingering Fears
Full-Spectrum Scenarios for the World in 2015
Drivers
„
„
Castles and Moats
Patchwork World
Open Borders,
Lingering Fears
Globalization
Rise of localization
Bilateral half-measures
Homo economicus
Demographics
Restless masses
Immigration queue
Global talent flow
Consumption
Patterns
Rice and beans
World bazaar
Hey, big spenders
Natural
Resources &
Environment
Constrained energy
Necessary innovation
Fuel for growth
Regulation &
Activism
Big Brother is watching
Partial restraint
Chicago boys II
The US and China are the dominant economic and political players on the world scene
Increased trade and investment openness boost international business activity and
technological innovation, but several thorny regulatory and governance issues remain.
„
Rising affluence of consumers, with growing middle class in emerging markets
„
Industrialized countries become more open to immigrant workers due to aging workforce
23
Insights derived from the scenarios can be quantified and driven down to the
level of geographic markets and key customer industries
24
Wild Cards
“Wildcards” must also be considered
Wild cards are low-probability, extremely high-impact events that:
(1)
(2)
(3)
(4)
directly affect the human condition;
are potentially disruptive (negatively or positively);
are intrinsically beyond the control of any institution, group or individual;
are rapidly moving
Global
War
Country
New
Epidemic
Erupts
Disintegration
Mercantilism
Source: The Arlington Institute, A.T. Kearney Analysis
Terrorist
Resurgence
Hacker
Quantum
Hell
Leap
25
Introduction to
Scenario Planning
Overview of the
Five Global Drivers
Scenarios &
Wildcards
Navigating Global
Risks
26
In this rapidly changing business world, corporations face an increasingly
complex risk environment
Greatest risks impacting FDI decisions, 2004
64%
Government regulation/legal decisions
Country financial risk
60%
Currency/interest rate volatility
Political & social disturbances
46%
Corporate governance issues
30%
Absence of rule of law
29%
Theft of intellectual property
28%
Terrorist attacks
26%
Security threats to employees/assets
26%
Disruption of key supplier/customer/partner
20%
IT disruption
19 %
Employee fraud/sabotage
Activist attacks on global/corporate brands
Source: A.T. Kearney Foreign Direct Confidence Index
Emerging Risks
23%
Product quality/safety problems
Natural disasters
Traditional Risks
5 1%
10 %
6%
5%
27
S&P 500 Directors fear they are unable to properly assess emerging global
risks and opportunities
Percent S&P 500 Directors Rating Board as
“Very Effective”
50
49%
43%
40
30
24%
20
21%
16%
15%
10
0
Probing
Problems
Source: A.T. Kearney Analysis
Monitoring Leadership Guiding
Financials Development Strategy
Monitoring Performance
Risks
Warnings
28
Lack of appropriate tools and objective information are seen as the biggest
impediments to effective strategy and risk monitoring
What are the impediments to monitoring business performance?
(% of directors ranking in top 3)
Regular, independent, third-party
reviews of governance practices:
41%
Should Have:
Do Have:
Yes
24%
19%
17%
21%
23%
Yes
55%
No
45%
N/A
1%
No
75%
Directors do
not have
enough time
Insufficient Board Amount and Lack of tools/
operating Culture
type of
processes
mgmt.
company providing early
discussions
information warning signs
Source: A.T. Kearney Analysis
29
Managing risk requires five key steps
1
3
2
Prioritize earnings
drivers
Examples
Identify critical
infrastructure
4
Locate
vulnerabilities
5
Develop
responses
Monitor the risk
environment
Risk responses
Priority sourcing locations
Illust
r
—Intellectual Property
—Delivery & Logistics
Key
Characteristics
—Raw Materials & Inventory
Not
considered
On “to
do” list
ative
Implementing
Flexible
—Personnel & Customer
Support
Redundant
—IT & Telecom Systems
Strategic
—Manufacturing, Plant &
Equipment
Collaborative
Key Port/Node
Flow of Goods
30
A risk/response matrix should be agreed upon to define the responses
required at each level of risk
Risk/response matrix for procurement/sourcing operations
Risk Level*
Profitability
Impact
Action Required
Severe
High
„
High
High
„
Elevated
Moderate
„
Guarded
Moderate
„
Low
Moderate
„
Operations in affected country to be
stopped immediately
Action plan for diverting operations
to be created within 1 month
Explicit risk
mitigation/diversification strategy
to be created within 1 month
Report on key risks to be submitted;
validation of current strategy
Regular risk monitoring
Accountability / Report Level
„
CEO and Executive Team
„
CPO
„
Legal, Financial Departments
„
Procurement and Supply Chain
leadership team
„
Regional Sourcing Managers
„
Category Managers
„
Risk audit core team
* Sample gradations; additional complexity can be incorporated in model, including probabilistic distribution, variability in risk assessment, etc.
31