Transcript Dia 1 - Riga Graduate School of Law

The Talitha Group
Beyond the abyss: What did we
learn (if anything)?
Prof. Luc Nijs
Riga Graduate School of Law
Founder & Group CEO The Talitha Group
Lagos Nigeria, 25-26 August 2009
Agenda for this session (more or less)
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How has the world economy changed?
What does it mean for emerging markets and EM
companies?
Are EM’s still more risky?
Semi-globalization strategies
The Human Capital paradox in EM’s
Marketing 3.0
Non-market strategy - the missing link
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How the world economy has changed?
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Fin.\Eco. crisis has acted as an ignition
Underlying current has been in place for many years
now
Swap in debtor\creditor nations
EM’s no longer a super-cyclical play
Translation of that process to EM companies
Combination of volume\demographics, technology
(digitalization) and resources will position EM’s to
become a undeniable force in world economy
Old (Western) model of economic superiority no longer
valid
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How the world economy has changed?
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Western investors are still not willing to get it right
Most portfolio’s still have only 3-5% EM exposure
PPP-adjusted portfolio construction justifies between
40-50% of EM exposure in a global portfolio
World is a slow-learning place
Some examples
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How the world economy has changed?
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Alignment of shareholder interest & compensation models:
◦ In the period 2003-2007, the 7 largest US investment banks created 41,8
bio. USD in equity value
◦ In the same period those banks delivered 226,4 bio USD in compensation
◦ Extremes:
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Merrill Lynch 21,5 leverage (compensation/equity) vs. JP Morgan 1,14
Pure mirroring of how the crisis has unfolded
ROI has never been risk adjusted
Explains the high ROI in the Financial services industry relative to other
industries
◦ Since Q2 all banks (even those covered by TARP and the pay czar) have
returned to pre-crisis practices
◦ Problem is the good old ‘agency conflict’
◦ Those banks used to be private partnerships where risk-return trade-off
was better balanced
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Are EM’s more risky?
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Often a shallow discussion since most EM risk is non-economic and
therefore non-quantifiable risk
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CDS spreads for BRIC’s are these days lower than for the California
state bonds
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Bubbles in the making:
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Effect of quantitative easing in West:
◦ Fixed-income
◦ Currencies
◦ Cf. burning your furniture to heat the house
◦ LT effects can/will be disastrous
◦ Strategic effect limited: no direct link with job creation or consumer
spending which accounts for 70% of US GDP
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What else didn’t we learn
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JP Morgan chief economist James Glassman in a report
14/8/2009
◦ V-shaped recovery is arriving
◦ Pent-up demand will boost economy to 3,5 % GDP growth for the
quarters to come
◦ No jobless recovery
◦ No new normal
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Versus Nouriel Roubini in April 2009
◦ W-shaped recovery a potential risk
◦ Especially when commodities rebound too fast
◦ Inflationary pressures
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What else didn’t we learn
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Versus Luc Nijs October 2008 in a letter to investors:
‘The scope & nature of the crisis forces us to believe that
future GDP growth for (at least) the next couple of years
in the US will be capped by productivity growth
determined by:
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Deleveraging balance sheets of corporations and households
Permanent destruction of certain levels of consumer demand
Capital destruction (and therefore job destruction)
QE and leveraging of governments (and future tax hikes)
Permanent dislocation of real estate valuations’
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What else didn’t we learn
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This seems to be the first recession where we didn’t fix
anything (rather then destroy wealth)
Some are still in denial about what happened
Banks back to the old normal
Excessive margins on all banking products
Limited refocus on relevance EM’s in future economic
play
Interest rates are a dangerous play: they act as traffic
lights in an economy and these days all lights are on
green
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What does it mean for EM’s and EM
companies?
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Historically characterized by higher volatility and lower
liquidity
Causing investors to demand higher risk premiums
For EM companies this meant that they learned to live
with:
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Higher volatility
Institutional and regulatory voids
Trade & currency restrictions
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BUT…
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What does it mean for EM’s and EM
companies?
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Decoupling is not a yes-or-no phenomenon
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Decoupling happens in rounds (and the rounds are
appearing faster and faster)
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For now decoupling is limited by immature capital
markets in EM’s and weak social structures that will cap
consumer spending in EM’s
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Globalization will always create a certain level of linkage
between economies
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What does it mean for EM’s and EM
companies?
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Organizations are ‘build to change’ (not ‘build to last’)
More and enhanced agility
On average, less leveraged balance sheets
Tomorrow’s global giants are not the usual suspects
EM to EM transactions are the trade which is improving
the most in recent years
EM companies are very well positioned to determine
global economy going forward
But also some issues to sort out…
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What does it mean for EM’s and EM
companies?
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80% of companies are having success cause they fill a
gap in their domestic market
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Which has been modeled based on a local institutional
and regulatory environment
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Taking that model and being successful abroad needs
careful attention:
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Globalization strategies
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Adjust to local conditions
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Remodel firm DNA
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Become local
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(?) What advantage to you have over
other local players
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Expensive when covering many
countries
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Find commonalities among countries
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Most important for firms with high fixed
cost base
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Regional strategies
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Impact on how to manage a firm:
(de)centralized
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Even large MNC’s fail here
Arbitrage
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Exploit differences between markets
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Needs willingness and ability to change
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Needs creative, fearless executives
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Some strategies get outdates fe. abor arbitrage
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Semi- globalization strategies
Think Local-Act Local
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Some other issues we need to cover
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When do joint ventures with foreign partners work?
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Building brand equity: you can’t chase money, it needs
to chase you
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When knowledge hampers innovation?
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Are we at the end of a technology cycle globally?
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Climate change: impact most probably to be larger than
last industrial revolutions
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Talitha Executive
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Decay of information
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HC-related issue not just training
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Applicability in new context
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Agility build-up
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Paradigm building
Firms and its people
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Adaptability
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Transportability
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Firm DNA adjustment
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Auto-didactic skill development
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How to behave as a corporate executive during
recessions
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Continuum perpetuum:
Engage in
opportunities
Forego
opportunities
Risk of going
overboard
Create permanent
competitive
disadvantage
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Which organizations have lasted for centuries
Those that:
1.
2.
3.
4.
Are aware of their identity
Are tolerant to new ideas
Adapt to their environment
Are conservatively financed
Only the paranoids survive!
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Effect of globalization
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Globalization and digitalization is causing a form of
permanent turbulence
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Will make life more difficult for executives
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Globalization gone wild: everybody is competing with
everybody
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Even more difficult is managing the effect of reversed
globalization that we are experiencing these days
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Effect of globalization
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Globalization is no monotonic linear upward-sloping
curve as we would like to believe
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Distance still matters
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3 strategies are only a start (p. 13):
◦ For most companies the question is not which strategy cause all
three apply simultaneously but the questions is more to what
degree do they need to interact to end up with the best result
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Human Capital in emerging markets
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Not everybody is like you!
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Value set might be very different
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Cash and career visibility not necessarily the backbone
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Honor, holidays, personal responsibility, facilities for families….
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HC paradox
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Chinese behavior on African continent a good example
◦ Involve local communities
◦ Relevance of expats in firms has declined significantly last decade
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There is more capital than talent in this world (even after this recession)
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Marketing 3.0
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Marketing 1.0 (’80): convincing arguments
◦ Fe. Buy our products cause it…
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Marketing 2.0 (’90): target emotions
◦ Fe. Your children will be thankful
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Marketing 3.0 (going forward): targets the mind: turn
your client into business partners
◦ Fe. Involve them in issues like sustainability, environment, climate
change…
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Be disruptive…you need to be a maverick to be
successful
Link with non-market strategy essential
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Marketing 3.0
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Case of discussed turbulence:
◦ Link between corporate development and marketing needs to
be stronger in order to allow them to pre-early identify
investment opportunities
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Don’t treat marketing as just communication with the
market
Give them a central position in your firm
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Marketing 3.0
Brand equity
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Brand development: from idea to concept
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Brand building: from concept to local embedment
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Brand equity: capitalize on brand by changing firms DNA
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Non-market strategy
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Determines the interface between business and politics
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Manages the relationship between firm and government,
regulator, NGO’s and the media/society
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Corporate citizenship
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Building of competitive advantage in a market strategy:
◦ Relationship to clients, suppliers, competitors,…
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Non-market strategy
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BUT competitive advantage can be lost or gained
outside the market
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Most companies have given this little thought or don’t
consider it part of their level playing field
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Although it is the place where the biggest difference can
be made
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Most important: how to integrate market and non-market
strategies in a consistent way
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Non-market strategy
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Now more important then ever:
◦ More and more products and services become commoditized
◦ In a globalized world your success in determined by much
more than you and your clients; many more actors have an
impact on your firm
◦ 24 hour/7 days news cycle: your business is impacted while
you sleep
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Cost/Quality relationship no longer at the center of
what you do
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Non-market strategy
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Which models are available:
◦ Government relations + public policy
◦ Communications
◦ CSR + sustainable development
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Top-down approach and buy-in of board absolutely
necessary
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It needs an involvement of people who think differently
◦ Not the old model: fe. government relations= public policy +
lawyers
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Non-market strategy
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Tools to build a non-market strategy
4 I‘s
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Issues
Interest groups
Institutions
Information
Identify opportunities and threats
◦ Data collection
◦ Strategy formulations
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Non-market strategy
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Critical is how to make your market and non-market
strategy work together
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Market strategy is about ‘POSITIONING’
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Non-market strategy is also about ‘POSITIONING’
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Exploitation of opportunities in your firms’ political &
social environment
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THANK YOU!
To elaborate further on the topic discussed, please contact:
Professor Luc Nijs
Chair in investment banking
E-mail: [email protected]
Direct phone: +3214479370
The Talitha Group