Moscow Long View

SAN FRANCISCO SÃO PAULO SEOUL SINGAPORE TOKYO TORONTO ZURICHSHANGHAI

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Copyright © 2011 by Monitor Company Group, L.P.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means — electronic, mechanical, photocopying,

recording, or otherwise — without the permission of Monitor Company Group, L.P.

This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion.

COMPANY CONFIDENTIAL

SAN FRANCISCO SÃO PAULO SEOUL SINGAPORE TOKYO TORONTO ZURICHSHANGHAI

The Art of the Long View forLarge Organizations

The Higher School of Economics

Moscow— Oct 4, 2011

Peter Schwartz

Chairman, Monitor Global Business Network

Agenda

Scanning the Horizon: The Current Business Environment

The Art of Re-Perceiving: An Introduction to Scenarios

Foreseeing Surprise: Sample Scenarios

2ZMK-XFT-MonterreyScenarioPlanning-5-11-11-EO Copyright © 2011 Monitor Company Group, L.P. — Confidential

Conclusion

Scanning the Horizon: The World in Which Multinational Corporations OperateIs Increasingly Subject to Surprise, Which Creates Both Risk and Opportunity

Financial Crisis Middle Eastern ProtestsR

isk


Op

po

rtu

nit

y

The Rise of Social Media Media Disruptions

201020072001

Scanning the HorizonUncertainty in the Current Business Environment Is Characterized by:

Processed Transactions and Response Times: Eurex Exchange

Speed

100

90

80

70

250

225

200

175

Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11


Source: W. Eholzer and Eurex (7 Feb 2011)

60

50

40

30

20

10

150

125

100

75

50

25

Transactions (in millions) Response Times (in milliseconds)


Interconnection

Speed Connections ofthe Internet


Source: The Opte Project (Internet Map); Mario C.E. Freese (Airline Map)

Daily CivilAviation Routes


Interconnection

Speed


Source: NDTV.com (New Delhi Television); CBSNews.com

Democratizationof Information

Flash Crash of May 2010


Interconnection

Speed 11,000

10,800

10,600


10,400

10,200

10,000

10AM 12PM 2PM

DOW 9,869.62998.50 / 9.2%

ExtremeVolatility



Flash Crash of May 2010

Interconnection

Speed 11,000

10,800

10,600

What methods can we use to manage


10,400

10,200

10,000

10AM 12PM 2PM

DOW 9,869.62998.50 / 9.2%

ExtremeVolatility


What methods can we use to manageuncertainty, see emerging opportunity, and

anticipate surprise?

Agenda





Conclusion

The Art of Re-PerceivingChallenging Mental Maps


The Art of Re-PerceivingWhat Are Scenarios?

Scenarios are . . .

Rich, data-driven stories about tomorrowthat can drive better decisions today

Descriptions of the external environmentin which the organization may need tooperate, not the organization itself


Hypotheses that describe a range ofpossibilities for the future — notpredictions

Imaginative narratives that stretchthinking, challenge conventional wisdom,but are always plausible and logical

A framework for recognizing and adaptingto change over time — ahead of time

Scenario PlanningEnvisioning Multiple Futures

The Art of Re-PerceivingScenarios Are Not Forecasts and Avoid the Trap of Simple Extrapolation

Forecast PlanningExtrapolating from the Recent Past


Scenarios overcome the tendency to predict, allowing us to seemultiple possibilities for the future

What we know todayWhat we know today

+10%-10% Uncertainties

The Art of Re-Perceiving: There Are Three Key Skills Organizations MustMaster to Develop Powerful Scenarios and Successfully Navigate Surprise

ImagineAlternative

Futures

Sense and


Sense andTrack

Indicators

Rehearsethe Future

The Art of Re-Perceiving: Imagine Alternative FuturesScenarios Are Created Through an “Outside-In” Approach

ContextualEnvironment

Transactional

Begin with an “outside-in” view to identify and plan for the external influences anduncertainties that will have a significant impact on the organization

Social change

Technology advances

Economic shifts

Environmental trends

Political developments

Industry dynamics

Effective scenariosconnect these


TransactionalEnvironment

OrganizationalEnvironment

Industry dynamics

Customer needs

Competitor moves

Stakeholder developments

Products and services

Operations

Asset base

Costs

Branding

connect theseenvironmentsin an engaging

strategicconversation

Driving Forces, ObservedTrends, and Events

The Art of Re-Perceiving: Imagine Alternative FuturesScenarios Make Sense of Complexity

Clustering Related Patterns intoPlausible Stories and Alternative Futures


ScenarioPlanning

Story B Story C

Story A

The Art of Re-Perceiving: Imagine Alternative FuturesThe Scenario Development Process Is Both Rigorous and Imaginative

CustomerPortraits

Quantified Trend Research

6 4 2 0 2 4 6 6 4 2 0 2 4 6

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

90-94

100+

52

2030118.3 million

195083.6 million

22Median AgeJapan


Learning JourneysNetworks of Remarkable People

The Art of Re-Perceiving: Sense and Track IndicatorsWhy Track Early Indicators?

Help discern when a scenario is beginningto emerge

Understand cause and effect relationships

Suggest when a different strategic move /contingency may be required

Alert the organization to weak signals of


Alert the organization to weak signals ofpotential high-impact changes

MonitoringA regular review ofpreviously identifiedtrends and key data

points

The Art of Re-Perceiving: Sense and Track IndicatorsLooking for Indicators

Ratios

RatioDirection and

Meaning

Standard of Living

Education?

Education

Labor Productivity?

Public Health

Environmental Damage?

Economic Success

Social Stability?


ScanningA broad, systematicsweep for brand new

issues anddevelopments

The Art of Re-Perceiving: Rehearse the FutureDevise Robust Strategies to Deal with Surprises

Avian Flu

Global LogisticsCompany

Original Contingency

Eyjafjallajökull Eruption

Analogous Contingency


Global FinancialServicesCompany

Y2K Computer Failure 9/11 Terrorist Attacks

The Art of Re-Perceiving: Scenario Applications: Scenarios Can Play aRange of Roles Across Functions, and with Varying Outcomes

Design 1:

Driving InnovationThrough FutureMarket Insights

Design 2:

OrganizationalLearning andIntelligence

Alignment andVisioning


Design 2:

Making StrategicBets for Growth

Design 3:

Transforming theOrganization

Innovation

Strategy

OrganizationalTranformation

The Art of Re-Perceiving: Scenario ApplicationsAnd They Can Be Used Across the Strategy and Planning Timeline

Most organizations have established, regular, strategy and planning processes. Scenarioscan strengthen a planning process in a number of ways

Strategicplanningguidance

developed

Review of unitplans,

alignment ofobjectives,budgets set

Plan andbudget

approved

Review ofyear and startof next year’s

planningguidance


Unit plansaligned to

corporate plan,budget

submitted

Units reshapeplans in linewith revised

guidance andbudget

Beginimplementationof strategic plan

In-Yearadjustments toplan execution

The Art of Re-Perceiving: Scenario ApplicationsAnd They Can Be Used Across the Strategy and Planning Timeline

Most organizations have established, regular, strategy and planning processes. Scenarioscan strengthen a planning process in a number of ways

Strategicplanningguidance

developed

Review of unitplans,

alignment ofobjectives,budgets set

Plan andbudget

approved

Review ofyear and startof next year’s

planningguidance

Scenarios providebig-picture contextand inform criticalstrategic decisions

and direction

Stress-tests plansagainst scenarios tohelp leaders adjust

portfolio


Unit plansaligned to

corporate plan,budget

submitted

Units reshapeplans in linewith revised

guidance andbudget

Beginimplementationof strategic plan

In-Yearadjustments toplan execution

Scenarios help unitsgenerate new ideas forplans; understand risks

and opportunities aroundfuture market conditions;develop robust options

and assumptions

Deploy contingencies asrehearsed, prompted by

early indicators

The Art of Re-Perceiving: Scenario ApplicationsThe Strategic Conversation and Strategic Options

Scenarios

DecisionMaking

Strategic conversation creates these flows and keeps these relationships healthy as an art,not a science


KnowledgeCreation

ExistingStrategies

EmergentStrategies

Ine

vit

ab

leS

urp

ris

es

24

SCENARIOSSC

EN

AR

IOS

Ine

vit

ab

leS

urp

ris

es

Market analysts have lowered their growth expectations

Economists and market analysts have recently lowered their forecasts for global,developed and emerging market growth due to:

– Perceived policy errors in both the US and Euro-Zone

– Prospect of further fiscal tightening to combat excess debt levels

– Erosion of consumer and business confidence (despite many organizations sittingon piles of cash)

NE

WR

EA

LIT

IES

– Extreme stock market volatility leading to a negative feedback loop betweenweak growth and soggy asset markets

Policy makers’ options are now limited, but further action is anticipated

– Further interest rate cuts (where possible)

– Quantitative (and other non-standard forms) of easing

– Further select fiscal stimulus

– EM currency appreciation

Source: Morgan Stanley, Monitor Analysis August 2011

Ine

vit

ab

leS

urp

ris

es

Key uncertainties all appear to be on the downside

Continued decoupling of developed vs. developing country GDP growth

Inability of policy makers to resolve structural issues and institute reform

Collapse of the Chinese property bubble?

Unsustainable growth of consumer debt in Brazil?

Further spread of European sovereign debt crisis?

NE

WR

EA

LIT

IES

Further spread of European sovereign debt crisis?

US political deadlock approaching Presidential elections?

Rising commodity prices?

Middle East political instability?

Deteriorating US-China relations?

Japanese economic (continued) stagnation?

Ine

vit

ab

leS

urp

ris

es

What will be the balance and nature of future economic relationshipsin the world?

50%

60%

70%

80%Percentage of world GDP, 1820 - 2008

China

India

CA

SC

AD

ING

CR

ISE

S

0%

10%

20%

30%

40%

1820 1851 1882 1910 1941 1971 2002Note: Western Europe defined as Western 30 statesSource: Angus Maddison, The world economy: Historical Statistics, OECD 2003

EU

USA

Ine

vit

ab

leS

urp

ris

es

Critical uncertainties

Integration vs. fragmentationof global system and nation

states?

Policy response toeconomic weakness?

SC

EN

AR

IOS

Nature and strength ofeconomic growth?

Ine

vit

ab

leS

urp

ris

es

Possible scenarios for the next 5 to 10 yearsFour main possibilities

Fragmentation

Reformed Economic Policy/ Increasingly Constructive

Strong Economy /Convergent

Growth

Conflict &Stalemate

Divergenteconomic growthb/w OECD andBRICs

Deviantlyglobalized future

Relative peace Renewed /

continuedeconomicgrowth

ConstructiveRivalries

Po

lic

yR

es

po

ns

eto

Ec

on

om

icW

ea

kn

es

s

SC

EN

AR

IOS

GreatRecession II

Fragmentationof Global

System andNation States

Unreformed Economic Policy/ Increasingly Unconstructive

WeakEconomy /Divergent

Growth

Slow or no growth indeveloped countries;muted growth in BRICs

Little structural reform

Integrationof Global

System andNation States

MuddlingThrough

Unconstructive economicdialogue sparks crisis ofconfidence

Weak growth & decliningasset markets

Integration vs. Fragmentation of Global System and Nation States

Po

lic

yR

es

po

ns

eto

Ec

on

om

icW

ea

kn

es

s

Ine

vit

ab

leS

urp

ris

es

Muddling Through

The “official future” for many Relatively slow or no growth

in OECD countries and mutedperformance in the BRICs

Political stalemate continuesin the EU and US, hamperingstructural reform

China avoids a propertybubble collapse and is

SC

EN

AR

IOS

bubble collapse and ismoderately successful instimulating domestic demand

If weak demand in the OECDcontinues, danger that theglobal economy veers towardsthe “Great Recession II”

Ine

vit

ab

leS

urp

ris

es

Constructive Rivalries

A world of relative peace andrenewed / continued growth

US & EU “get their acts

SC

EN

AR

IOS

US & EU “get their actstogether” & the BRICscontinue to perform

Mutually dependent growthensures a constructive geo-political environment

Danger that commodity-driven inflation creeps back in

Risk of on-going shocks inenergy and food markets dueto demand spikes andstructural supply shortages

Ine

vit

ab

leS

urp

ris

es

Great Recession II

Global economic “perfectstorm” unfolds; US fiscalcrisis, Japanese stagnation,

SC

EN

AR

IOS

European sovereign debtcrisis, and China, Brazil &India finally over heat

Negative spiral of crisis ofconfidence, weak growth anddeclining / highly volatileasset markets dominates theeconomic and geo-politicallandscape

Few safe havens and a realdanger of “a lost decade”

Renewed political leadershipand cooperation required tobreak out of the negative cycle

Ine

vit

ab

leS

urp

ris

es

Conflict and StalemateS

CE

NA

RIO

S

Continued divergence in economic growth between developed OECD(stagnant) and developing (vibrant) markets

Fabled “End of Empire” dynamics for the U.S. become an increasing reality

India will find itself alone with a strong China, and must find alliances ofconvenience

U.S. / China tensions rise, seemingly on a path to inevitable conflict

Scale and diversity of deviant globalization is huge – parastatal institutionsflourish and challenge legitimacy of national governments

Agenda





Conclusion

ConclusionFirst Steps to Getting Ahead of Surprise

Create opportunities for richer strategicconversations by:

– Developing and sharing scenarios inyour company

– Ensuring participation from employeesat all levels in your organizations


Create a diverse network of internal andexternal sources of learning to identify andtrack indicators

Create appropriate preparation andresponse mechanisms

Documents

Moscow Long View