The "normal" of tomorrow

How will the new normal of tomorrow look like ? The new normal will be shaped by a confluence of powerful forces—some arising directly from the financial crisis and some that were at work long before it began. Lets look at some features that could probably define the new normal: 

• There will be lesser financial leverage in the system. This reduction in leverage has been fueled by two factors : increase in debt due to financial innovation & the credit bubble fueled by irresponsible risk taking.  Business models that rely on high leverage will suffer reduced returns. Companies that boost returns to equity the old fashioned way—through real productivity gains—will be rewarded.
• Another defining feature would be the expanded role for government. A good outcome of the crisis would be greater global financial coordination and transparency. A bad outcome would be protectionist policies that make it harder for companies to move capital to the most productive places and that dampen economic growth, particularly in the developing world.

It was clear much before the crisis that US consumption could not continue to be the engine of global growth. Consumption depends on income growth, and US income growth since 1985 had been boosted by a series of one-time factors—such as the entry of women into the workforce, an increase in the number of college graduates—that have now played themselves out.

Companies seeking high rates of income and consumption growth will increasingly look to Asia. Through it all, technological innovation will continue, and the value of increasing human knowledge will remain undiminished. For talented contrarians and technologists, the next few years may prove especially fruitful as investors looking for high-risk, high-reward opportunities shift their attention from financial engineering to genetic engineering, software, and clean energy.

McKinsey Strategy Classics: 4 phase planning, Nine box matrix, MACS

• A company should make sure that it is the best possible owner of each of its business units - not simply hold on to units that are strong in themselves.
  
• Strategy : An integrated set of actions designed to create a sustainable advantage over competitors.
  
• Planning routinely progresses through four discrete phases of development. The first phase, financial planning, is the most basic and can be found at all companies. It is simply the process of setting annual budgets and using them to monitor progress. As financial planners extend their time horizons beyond the current year, they often cross into forecast-based planning, which is the second phase. A few companies have advanced beyond forecast-based planning by entering the third phase, which entails a profound leap forward in the effectiveness of strategic planning. We call this phase externally oriented planning, since it derives many of its advantages from more thorough and creative analyses of market trends, customers, and the competition. Only phase four—which is really a systematic, company-wide embodiment of externally oriented planning—earns the appellation strategic management, and its practitioners are very few indeed.
• McKinsey’s standard portfolio analysis tool is the nine-box matrix, in which each business unit is plotted along two dimensions: the attractiveness of the relevant industry and the unit’s competitive strength within that industry. Units below the diagonal of the matrix are sold, liquidated, or run purely for cash, and they are allowed to consume little in the way of new capital. Those on the diagonal—marked "Selectivity, earnings"—can be candidates for selective investment. And business units above the diagonal, as the label suggests, should pursue strategies of either selective or aggressive investment and growth.
• MACS (Market Activated Corporate Strategy framework): MACS represents much of McKinsey’s most recent thinking in strategy and finance. Like the old nine-box matrix, MACS includes a measure of each business unit’s stand-alone value within the corporation, but it adds a measure of a business unit’s fitness for sale to other companies. This new measure is what makes MACS especially useful. The key insight of MACS is that a corporation’s ability to extract value from a business unit relative to other potential owners should determine whether the corporation ought to hold onto the unit in question. In the MACS matrix, the axes from the old nine-box framework measuring the industry’s attractiveness and the business unit’s ability to compete have been collapsed into a single horizontal axis, representing a business unit’s potential for creating value as a stand-alone enterprise. The vertical axis in MACS represents a parent company’s ability, relative to other potential owners, to extract value from a business unit. And it is this second measure that makes MACS unique.

Global sourcing : Factors at play

Globalization is not a very recent phenomenon. Since 1914 itself, people could make use of the advantages of globalization to pursue their needs. In terms of charting out their global sourcing strategies companies need to keep three aspects in mind-

• Low cost off-shoring as a concept will remain and is probably here to stay. Even though labor costs between China and America having been closing in, the gap is still expected to increase to $26 per hour in 2013 from $17 currently. What would happen is that low cost destinations would compete against each other for various off-shoring projects.
• Within these low cost destinations itself, internal locations would compete for business due to cost arbitrages between various locations. Going forward, it would make sense for companies to understand the dynamics within these low cost countries in order to gain maximum leverage from these locations. This would involve substantial investment in research and manpower.
• Politics and public policy will play an important role in the coming years in shaping global forces. Companies would need to carefully understand these policies and their implications. Whether or not countries will agree to play by common rules in international trade or pursue their own nationalist or regional policies will be critical.

The ability to understand these global forces at play would be crucial for companies to succeed in the coming decade.