Beyond the abyss: What did we Beyond the abyss: What did we learn (if anything)?learn (if anything)?

Prof. Luc NijsRiga Graduate School of Law

Founder & Group CEO The Talitha Group

Lagos Nigeria, 25-26 August 2009

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Agenda for this session (more or less)

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?

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Old (Western) model of economic superiority no longer valid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?

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?

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:

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?

Often a shallow discussion since most EM risk is non-economic and therefore non-quantifiable risk

CDS spreads for BRIC’s are these days lower than for the California state bonds

Bubbles in the making:◦ Fixed-income◦ Currencies

Effect of quantitative easing in West:◦ 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

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

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

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:

◦ 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

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?

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:◦ Higher volatility◦ Institutional and regulatory voids◦ Trade & currency restrictions◦ …

BUT…

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What does it mean for EM’s and EM companies?

Decoupling is not a yes-or-no phenomenon

Decoupling happens in rounds (and the rounds are appearing faster and faster)

For now decoupling is limited by immature capital markets in EM’s and weak social structures that will cap consumer spending in EM’s

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?

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?

80% of companies are having success cause they fill a gap in their domestic market

Which has been modeled based on a local institutional and regulatory environment

Taking that model and being successful abroad needs careful attention:

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Globalization strategies

Ada

ptat

ion

Aggregation

Arbitrage

• Adjust to local conditions

• Remodel firm DNA

• Become local

• (?) What advantage to you have over other local players

• Expensive when covering many countries

• Find commonalities among countries

• Most important for firms with high fixed cost base

• Regional strategies

• Impact on how to manage a firm: (de)centralized

• Even large MNC’s fail here

• Exploit differences between markets

• Needs willingness and ability to change

• Needs creative, fearless executives

• Some strategies get outdates fe. abor arbitrage

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Semi- globalization strategies

Thin

k G

loba

l-Act

Glo

bal

Think Global-A

ct Local

Think Local-Act Local

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Some other issues we need to cover

When do joint ventures with foreign partners work?

Building brand equity: you can’t chase money, it needs to chase you

When knowledge hampers innovation?

Are we at the end of a technology cycle globally?

Climate change: impact most probably to be larger than last industrial revolutions

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Talitha Executive

(App

lied)

kno

wle

dge

Learning curve

Firms and its people

• Decay of information

• HC-related issue not just training

• Applicability in new context

• Agility build-up

• Paradigm building

• Adaptability

• Transportability

• Firm DNA adjustment

• Auto-didactic skill development

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How to behave as a corporate executive during recessions

Continuum perpetuum:

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Engage in opportunities

Risk of going overboard

Forego opportunities

Create permanent competitive disadvantage

Which organizations have lasted for centuries

Those that:

1. Are aware of their identity2. Are tolerant to new ideas3. Adapt to their environment4. Are conservatively financed

Only the paranoids survive!

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Effect of globalization

Globalization and digitalization is causing a form of permanent turbulence

Will make life more difficult for executives

Globalization gone wild: everybody is competing with everybody

Even more difficult is managing the effect of reversed globalization that we are experiencing these days

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Effect of globalization

Globalization is no monotonic linear upward-sloping curve as we would like to believe

Distance still matters

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

Not everybody is like you!

Value set might be very different

Cash and career visibility not necessarily the backbone

Honor, holidays, personal responsibility, facilities for families….

HC paradox

Chinese behavior on African continent a good example◦ Involve local communities◦ Relevance of expats in firms has declined significantly last decade

There is more capital than talent in this world (even after this recession)

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Marketing 3.0

Marketing 1.0 (’80): convincing arguments◦ Fe. Buy our products cause it…

Marketing 2.0 (’90): target emotions◦ Fe. Your children will be thankful

Marketing 3.0 (going forward): targets the mind: turn your client into business partners ◦ Fe. Involve them in issues like sustainability, environment, climate

change… Be disruptive…you need to be a maverick to be

successful Link with non-market strategy essential

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Marketing 3.0

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

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

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Brand development: from idea to concept

Brand building: from concept to local embedment

Brand equity: capitalize on brand by changing firms DNA

Brand building

Bra

nd d

evel

opm

ent

Brand equity

Non-market strategy

Determines the interface between business and politics

Manages the relationship between firm and government, regulator, NGO’s and the media/society

Corporate citizenship

Building of competitive advantage in a market strategy:◦ Relationship to clients, suppliers, competitors,…

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Non-market strategy

BUT competitive advantage can be lost or gained outside the market

Most companies have given this little thought or don’t consider it part of their level playing field

Although it is the place where the biggest difference can be made

Most important: how to integrate market and non-market strategies in a consistent way

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Non-market strategy

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

Cost/Quality relationship no longer at the center of what you do

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Non-market strategy

Which models are available:◦ Government relations + public policy◦ Communications◦ CSR + sustainable development

Top-down approach and buy-in of board absolutely necessary

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

Tools to build a non-market strategy 4 I‘s

◦ Issues◦ Interest groups Identify opportunities and threats◦ Institutions◦ Information

◦ Data collection

◦ Strategy formulations

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Non-market strategy

Critical is how to make your market and non-market strategy work together

Market strategy is about ‘POSITIONING’

Non-market strategy is also about ‘POSITIONING’

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: luc.nijs@rgsl.edu.lv

Direct phone: +3214479370

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