People doing business on an international stage faced unprecedented opportunities and challenges in 2011. 

Yet societies are demonstrating surprising capacities for resilience. Emerging economies are propelling an uneven global recovery from the Great Recession. Engineers in places like Nairobi, São Paulo and Doha are beginning to build export-worthy technologies.

Only a few years ago, these developments would have been hard to fathom. This is a momentous time for anyone engaged in cross-market projects. It’s only fitting that the year’s top books match the scale of the changes we’re witnessing.

Here’s a year-end roundup of books that define our times and guide practitioners with a global perspective:

Thinking Fast and Slow, by Daniel Kahneman – The most influential social scientist of our time describes the two “systems” that shape our thinking and decision-making: ‘System 1′ is fast, intuitive, and emotional, while ‘System 2′ is slower, more deliberative, and logical. This seminal work reveals insights that have overturned traditional assumptions about metacognition.

“The Next Convergence: The Future of Economic Growth in a Multi-Speed World, by Michael Spence – The Nobel Laureate presents an elegant thesis to account for the current surge among emerging economies and its global impact.

Inside Egypt: The Land of the Pharaohs on the Brink of a Revolution, by John R. Bradley – A rich, beautifully written account of the socio-political dynamics in Egypt by a perceptive and appreciative observer.

Egypt after Mubarak: Liberalism, Islam, and Democracy in the Arab World, by Bruce Rutherford – A timely and incisive look at the complex political, economic and cultural forces shaping Egypt today.

The Party: The Secret World of China’s Communist Rulers, by Richard McGregor – An illuminating, inside look at past, present and future leaders of China’s impenetrable Politburo.

The Origins of Political Order, by Francis Fukuyama – This much-anticipated book by one of our most insightful and, at times, controversial political theorists was worth the wait. In the first of three projected volumes, Fukuyama describes the ways by which ideas have shaped political order.

The Price of Civilization, by Jeffrey Sachs – The outspoken Columbia University economist believes that the decline of American civic virtue is at hand. His poses what seems like an obvious question: Why has taxation become demonized? According to Sachs, taxes are the price we pay for civilization.

The Future of Power, by Joseph S. Nye – What are the forces and mechanisms shaping global power and how is society being affected by it?  Nye explores these questions and asserts that the U.S. and China have much to gain by deepening their cooperation.

Adapt: Why Success Always Starts with Failure, by Tim Harford (reviewed here) – The clever British economist demonstrates how effective trial-and-error leads to better results. In our world of complexity and unpredictability, learning from failure is imperative.

Civilization: The West and the Rest, by Niall Ferguson – The economist-provocateur explores a central question: “Why, beginning around 1500, did a few small polities on the western end of the Eurasian landmass come to dominate the rest of the world?” He posits that the West had six “killer apps”.

Monsoon*, by Robert Kaplan – A mind-bending journey across regions of the Indian Ocean which are growing in geostrategic importance as American power shifts gears. Ahmed Rashid aptly describes Kaplan as “a landscape artist who covers the world with extraordinary perception and insight”.

Emerging Africa–How 17 Countries are Leading the Way*, by Steven Radelet. The author, an economist, identifies the reasons for superior economic performance in some African countries. He concludes that the chief driver of economic development is an “interplay between economic reform and political change”.

The Dragon’s Gift – The Real Story of China in Africa*, by Deborah Brautigam – Brautigam debunks the standard myths about China’s aspirations and roles in Africa. It’s an indispensable read for anyone doing business on the continent.

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Endnotes:

* Denotes books published in 2010. (All others were published in 2011.)

Addendum:

Daniel Kahneman fans will likely appreciate his conversation with David Brooks at CUNY: video clip.

Another Kahneman resource is Michael Lewis’ Vanity Fair piece, “The King of Human Error”. Lewis writes:  “[Thinking, Fast and Slow] is wonderful, of course. To anyone with the slightest interest in the workings of his own mind, [the book]  is so rich and fascinating that any summary would seem absurd.”

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The West and the Rest

This is a tale of two economies with interlocking features. One has excess supply; the other has gnawing demand. In the West, economic growth is slowed while emerging markets are busting at the seams. An explosion in the number of urban, middle class consumers and related factors is powering growth in emerging markets.

The World Bank estimates that, on average, emerging nations will grow by 4.7 percent – double that of developed countries — through 2025. That growth isn’t only evident in the so-called BRIC nations, but in Turkey, Indonesia, South Korea, and across the developing world. Some of the fast growing regions are in Sub-Saharan Africa.

In fact, growth in emerging markets would be even greater if it weren’t constrained by a lack of capital, infrastructure and technological capacity. Western companies have the resources and expertise to help bridge many of these gaps.

This is a propitious time for Western firms with a global agenda to enter emerging markets. They can tap these markets by creating new business models, innovative services, and value-added plays by leveraging their IT capability. Here are points that Western businesses ought to consider if emerging markets are on their agenda.

Ready or Not? 

It’s interesting to work with Western companies that see opportunities in foreign markets but haven’t yet devised a market entry strategy. My advice for clients considering emerging markets is to focus on the fundamentals of value-creation. My playbook calls for first conducting a market readiness study to measure the potential demand for the product or service and, on that basis, to help plot a sound market entry strategy.

Understanding customers is central to serving any new market. Customers in emerging markets — both B2C and B2B — often have different buying drivers, like less disposable income, than those in developed markets.  It’s smart to visit the region, meet directly with prospective customers, and ask plenty of questions.  It’s important to gain a rich understanding of the market — its economics, demographics and business climate.

Then comes another round of questions — this one for key stakeholders — including: How will demand be generated (by segment)? Who are the competitors and how will they respond? What are the market barriers — regulatory hurdles, corruption, and supply chain gaps? In short, what are the known risks and how can they be overcome?

Soft Landing

For organizations that have completed the discovery exercises, tested assumptions, and are convinced of the merits of serving the target market, I suggest that they explore several market entry scenarios to choose a strategy that fits their situation.

Some companies benefit from acquiring businesses in the target market while others prefer to form alliances with firms that can help them establish a beachhead. Either approach comes with advantages and disadvantages.

Alliance-building is an undervalued competency that can be nurtured. A skilled alliance officer can identify prospective partners, negotiate partnership deals and help keep alliances on track as the business evolves.

The ‘Ecosystem’

After establishing its beachhead, the market entrant should build a network of diverse, local suppliers. This local ‘ecosystem’ can be leveraged to support many of the company’s critical market penetration activities.

On a related note, I think it’s smart to use local talent and develop local skills wherever possible. That’s an effective way to demonstrate a longer-term commitment to the community. The high caliber of talent that I’ve encountered in emerging markets has been inspiring.

Western companies with a global agenda ought to evaluate whether serving emerging markets makes sense for their business. If so, there are benefits to seizing the opportunity before the inevitable onslaught of competitors joins the fray.

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As always, I’d appreciate your feedback.

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TALE OF TWO ECONOMIES – ENDNOTES.

Thanks, Alexandre Giesbrecht, for the image.

The section title ‘The West and the Rest’ refers to Fareed Zakaria’s “rise of the rest” thesis in The Post-American World (’08) (updated in ’11).

Despite it’s popularity, I don’t care for the term ‘BRIC’ because it includes oil-based Russia with the more diversified economies of Brazil, India and China.

Seven of the 10 fastest-growing nations over the next five years are in the Sub-Sahara, as charted in this Economist piece (1/11).

More on this subject:

In their 2010 book, Winning in Emerging Markets, Tarun Khanna and Krishna Palepu offer their framework for evaluating and entering emerging markets.

The International Finance Corporation (IFC) provides their annual Doing Business reports ranking countries by regulatory barriers. Year-to-year changes suggest regulatory reform trends. This is Doing Business 2012. 

The World Bank’s report, Global Development Horizons 2011—Multipolarity: The New Global Economy shows that emerging markets will drive global economic growth through 2025.

Related: Strategy +Business piece, Competing for the Global Middle Class (8/11)

Addenda:

The World Economic Forum’s Competitiveness Index (2011-2012)

HBR piece, New Business Models in Emerging Markets (1-2/11), i.e. targeting the middle market opportunities

McKinsey Global Institute (MGI) publications on the subject of economic integration

KPMG’s High Growth Magazine

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Despite the shaky underpinnings and dire economic climate, the U.S. still ranks ahead of the other nations in competitiveness, though economists see thorny challenges ahead.  On the plus side, the U.S. still brings a lot in the area of production potential, well-functioning labor markets, sophisticated businesses, academic leadership and technological innovation.  

While these are sustainable virtues, the U.S. has its work cut out to stay on top as other countries take steps to improve their competitiveness (see Fareed Zakaria’s seminal The Post American World).  Globalization is leading to the “Rise of the Rest”. This pattern has been evident to anyone involved in business dealings across markets over the last decade.   

The report had few surprises. A notable exception is that the UK slipped (from 9th last year to 12th) due to its heavy reliance on a flagging financial services sector. 

Singapore, the Scandinavian nations and Switzerland have been perennial leaders for several years. And it isn’t surprising that the Gulf nations are on the rise due to worldwide demand for hydrocarbons coupled with concerted economic reforms.

Fiinally, some sub-Saharan nations are making headway though, as a region, it still lags behind.  These economies have had 5-6% annual growth rates and relatively low inflation in recent years.  But their infrastrusctures are fragile and they may be hit hard by a global slowdown.    

The WEF report is a lagging indicator of the strengths and weaknesses of global economies.  For example, it doesn’t take into account the prospects of a global slowdown which reduces the demand for resources. 

The take away is that governments play a substantial role in shaping a nation’s long-term capacity to compete in an increasingly global and crowded world.  Good governance rules.

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Competitiveness will be further reinforced by collaboration-enabling tools including social media. Meanwhile, a critical mass of worldwide governments is creating conditions for even greater competition and openness which will drive even more cross-border collaboration.

History has shown that some markets will lag while others quicken their pace. It’s critical to understand how factors “on the ground” affect globalization.

The Oxford Handbook of Business History provides a context for understanding how flattening may unfold. The authors offer comprehensive, cross-disciplinary look at business history which they organize into four parts: Approaches and Debates; Forms of Business Organization; Functions of Enterprise; and Enterprise and Society. For those who want a a context for what’s next, it’s a companion resource to Michael Porter’s The Competitive Advantage of Nations and Ted Levitt’s work on global marketing.

Want more on this subject?  Check out the World Economic Forum’s Global Competitiveness Report (’07-’08).

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The other carriers are reeling too. The industry is acting swiftly to remove capacity – cutting routes and frequencies – in anticipation of reduced traffic in the coming months. And the U.S., industry isn’t alone.

Europe’s biggest carrier, Air France-KLM, warned of a profound “reshaping” of the global industry amid record fuel prices.  The European carriers aren’t nearly as exposed as their U.S. counterparts, but they’re certainly feeling the pain.

The International Herald Tribune notes, “With its bleak outlook for the airline industry, Air France-KLM joined American Airlines, the world’s largest carrier, which said Wednesday that it was adding fees, cutting hundreds of flights in the United States, and eliminating thousands of jobs to cope with the crisis.”

Asian carriers are reeling, too. Australian carrier Qantas hiked its fares for the second time in a month while Japan Airlines said it would increase its fuel surcharge along with its competitor, All Nippon.

Among the Middle Eastern carriers, Emirates looks to be in the best shape due to its healthy cash position. In fact, this may be their opportunity to take advantage of the worldwide economic downturn to fortify its position as a global player.

As other carriers cut back, Emirates can accelerate its plan to connect European and Asian traffic through growing Dubai hub. But this begs a question about its hungry rivals, Etihad and Qatar Airways: Can the region sustain three major carriers if there is a worldwide economic downturn?

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The forecast for airlines is gloomy and getting darker by the day. Network carriers in the U.S. are facing high costs for aircraft ownership, fuel, labor and maintenance. With rising fixed costs, no pricing power and negligible profit margins, reducing capacity to relieve pricing pressure seems to be mission imperative.  But network carriers are reluctant to reduce their inventories much further.

Due to their low credit ratings, airlines can’t borrow money at reasonable rates to invest in more fuel efficient planes and more efficient facilities.

All this means that the industry will have to consolidate – out of sheer necessity – despite the thorny challenges of integrating large, people-intensive organizations and fragmented legacy systems.

Can consolidation fix the ailing economics of the airline industry?

It’s too early to tell, but it probably won’t be enough.  In the end, new and innovative airline business models are needed to solve the industry’s deep, structural problems.

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First off, the term ‘emerging markets’ was coined in the ’80s to describe rapidly growing economies with low-to-middle per capita income. They comprise over 80% of the world’s population, representing about 20% of the world’s economies.

Countries that fall under this umbrella are incredibly diverse ranging in size from (Singapore) to massive (China and India). They’re growing at varying speeds—merely “quick” (South Africa, Mexico and Chile) to “breakneck” (China, India, and the Gulf states).  And, their fortunes are linked to those of developed economies. In fact, many economists hold that when the United States sneezes, the EMEs catch pneumonia.

Or do they? Not so much, say advocates of the “decoupling,” the notion that emerging markets are broadening and deepening to the point where they no longer depend on the mature markets for their growth.  Decoupling accounts for emerging market stocks’ overperformance these last few years.  But is decoupling really happening?

Last May, Merrill Lynch economist David Rosenberg, told the NYT’s Daniel Gross, “I find it hard to believe that the rest of the world is going to be immune to a consumer sector that’s primarily responsible for pulling in nearly $2 trillion of the world’s output.”  His take was, “Before we can say there’s a decoupling, we have to wait for a sneeze—all we’ve had is a runny nose.”

The U.S. economy sneezed (sub-prime mortgage crisis) and coughed (credit crisis). The U.S. economy is sounding more bronchial by the day.

Mr. Rosenberg, and his cohorts may have been vindicated. In January EME stocks were rocked. And, they failed to get much relief from the medicine–$145 billion stimulus package. Hong Kong’s main index dropped 5.5% — its biggest loss since Sept. 11, 2001—while India’s fell by 7.4%. Even Brazilian stocks – darlings of the EME — dropped 6.6%.

There is some degree of decoupling. While certain markets—mature and developing—are susceptible to certain market forces other markets simply aren’t because today there are lots more variables at play.  The global economy is growing up rapidly and relationships among markets are becoming more complicated.

This increasing complexity is due to the fact that resources no longer flow exclusively from mature markets to emerging regions as they had in the past. For example, both the GCC’s and Africa’s mineral resources are being hungrily devoured by China to the benefit of all three economies. This is conferring a protective effect on them which wasn’t possible in prior cycles.  Flows of knowledge and capital are becoming omni-directional and multifaceted.

So?  It’s a classic “good news, bad news” story for mature economies, like the U.S. and EU. The good news: healthier, emerging markets can continue to buy products from mature economies like U.S. and Europe, hastening their recovery.  But the bad news: the price of oil will likely remain higher, longer — despite the reduced demand for oil among mature economies.

And, let’s consider the implications for Western product-service providers who see opportunities for delivering services to some of these EMEs.

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