Defense In Depth
Why U.S. Security Depends on Alliances—Now More Than Ever
“The alternative to global integration is not appealing,” I wrote ten years ago, while serving as CEO of IBM. “Left unaddressed, discontent with globalization will only grow. People might ultimately choose to elect governments that impose strict regulations on trade or labor, perhaps of a highly protectionist sort. Worse, they might gravitate toward more extreme forms of nationalism, xenophobia, and antimodernism.”
In short, I concluded, “the shift from [multinational corporations] to globally integrated enterprises provides an opportunity to advance both business growth and societal progress. But it raises issues that are too big and too interconnected for business alone or government alone to solve.” At the time, a new business model—the Globally Integrated Enterprise—was just emerging. It was truly global (as opposed to multinational) in how it approached management and operations.
Today, the world stands at the crossroads described in that article.
Britain, a country long known for its global engagement, has voted to leave the European Union. A rising chorus of nationalism echoes across developed countries; it calls for tighter borders and restrictions on immigration. Global trade negotiations have essentially ceased, and regional trade deals face strong headwinds of opposition.
My original argument built on forces unfolding throughout the world, such as evolutions in technology, operations, and work patterns. Shared business and technology standards that let businesses plug into truly global systems of production were unlocking efficiencies throughout companies. Increasingly collaborative approaches to work were fostering innovation. And new skills and new governance systems were changing how people worked and how they were managed. These dynamic forces were transforming the corporation, and since then, they have given rise to new global business players, such as platform companies.
Since the article was published, a number of trends have further changed the world’s business, political, and technology climates, ushering in dual worlds for business split between the physical and digital. Meanwhile, governments are retreating from economic and political openness, while the digital world is increasingly pulling people toward greater integration.
In such a dynamic environment, clashes are inevitable. Although political forces seem to be trying to separate people, technology is digitally connecting and integrating them in everything from business to entertainment to commerce to social sharing and commentary to scientific endeavors. Leaders in the private and public sectors will need to develop business and governing models that reflect the realities of this dual world while maximizing opportunities and minimizing obstacles.
Business in particular has an important role to play in addressing the challenges connected to technological change. If these issues are ignored, discontent with globalization will grow. We can already see that discontent, and many of the short-term measures that government officials have pushed will interfere with meaningful long-term solutions.
A POTENT COCKTAIL
A potent cocktail of interrelated local and global forces unleashed the changes that swept across the economic, political, and technology landscapes over the past decade.
The U.S. financial crisis of 2008 contributed to a challenging economic climate in many countries throughout the world. The crisis was a reminder of just how economically integrated the world has become. In the past, the effects of a U.S. housing downturn would have been contained within North America. But the U.S. downturn in 2008-09 destabilized the global banking system, a reflection of its high degree of exposure to U.S. real estate.
The recovery from that downturn has been slow and, for many people, nonexistent. Labor markets remain weak—unemployment is above ten percent in the eurozone after reaching 12 percent in 2013, and the labor force participation rate in the United States is hovering around its lowest level since the late 1970s. Among 25 advanced economies, about 550 million people—two-thirds of the population—have seen their incomes stagnate or fall over the past decade.
Also as a result of the financial crisis, U.S. nonfinancial corporations have approximately $1.7 trillion cash on hand, with the technology sector accounting for 46 percent of this total) —a reflection of both the high U.S. corporate tax rate as well as diminished confidence in global investment opportunities. And with the turbo-charged commodity cycle at an end, developing countries must focus more on realizing growth from innovation. Such growth offers great long-term rewards, but it’s also more difficult to achieve.
Other issues present longer-term challenges. One is demographics. Among the ten countries with the highest median age, seven are in Europe, including Germany. Japan is the “oldest” country in the world. Another major economy, China, is projected to experience a slowdown in its population growth. A related issue for a number of advanced economies is productivity slowdown. From 2011 to 2015, the United States had its lowest five-year period of productivity since the 1940s. And globally, productivity has not returned to the average level seen in the seven years before the financial crisis.
These challenges have resulted in sustained uncertainty among citizens and investors.
The response by business and political leaders has been to try to remain flexible and “resourced” for tomorrow’s surprise developments. Meanwhile, voters in many parts of the world have come to see established political figures, regardless of party affiliation, as some combination of incompetent (and thus unable to implement economic solutions) and untrustworthy (implementing solutions that only benefit others). There is a vast gap in trust of institutions between those in the lowest quartile of income earners, who trust institutions the least, and those in the highest income quartile, according to surveys by the marketing communications firm Edelman. The gap is largest in the United States (31 percentage points), but also sizeable in other high-population countries, such as France (29 points), Brazil (28 points), India (22 points), Russia (19 points), and the United Kingdom (19 points). That frustration has given rise to anti-establishment figures in a number of countries.
Underpinning today’s economic and political challenges has been the transformation of work, play, learning, commerce, and communications through increased computing power, expanded access to mobile technologies, and creative minds’ search for solutions.
There has also been continued development and proliferation of highly disruptive technologies, including 3-D printing, data analytics, blockchain, and robotics. These technologies, and others like them, can be harnessed for great social and economic benefit. Connected to these technologies has been an explosion of data, and with it a re-calculation of economic value—asset values—affiliated with this data-rich environment.
Tangible assets, which are characteristic of the physical world, are being subjected to the economic headwinds of slow global growth. But intangible assets, which are characteristic of the digital world, are finding their value increasing and economic wind at their back.
Perhaps most noteworthy of all has been the emergence of platform companies. These companies have upended traditional business models, shifting the focus from a contained enterprise to ecosystems where value is created by facilitating exchange. And they frequently open themselves up to third parties who add value to the platform.
Notable platform companies include Uber, Airbnb, and Workday in the United States; Baidu and Alibaba in China; Flipkart in India; and Naspers in South Africa. These companies, and others like them, are extensions of the globally integrated enterprise and embody key attributes such as agility, scale, accountability, and efficiency. They also create one common scalable support system that facilitates business on a global scale. A related development has been the emergence of hundreds of so-called “unicorn” companies: privately held companies with valuations exceeding $1 billion. About 70 percent of all unicorns are platform companies.
The evolving digital environment has unlocked extraordinary opportunities, but it’s also contributed to risks, including cyberbreaches and intellectual property theft, as well as challenges, such as the dislocation of those working in rapidly modernizing industries. Digitally oriented companies, which typically operate throughout the world, face the challenge of maintaining consistency everywhere they do business.
The common denominator across economies, politics, and technology is change: new economic arrangements, new political alliances, and new technologies. In this environment, we should also expect the continued evolution of business models.
A NEW BUSINESS MODEL
Over the last ten years, many managers have responded to the challenging economic environment by focusing on just one element of the Globally Integrated Enterprise model: reducing costs by optimizing existing structures and arrangements. Other elements, such as pursuing growth and increasing agility (which could help accelerate scaling up, market entry, product design, and most importantly reach and satisfy new demand) were mostly ignored.
But as managers have grappled with changes across the economic, political, and technology environments, they’ve reached an inflection point and must select a new business model. The choice is influenced by the struggle between the physical and digital worlds. In the physical world, geopolitics has pushed governments away from economic and political openness. This environment has strained supply chains and customer responsiveness. Coupled with social and political barriers to operational integration, business leaders are losing organizational agility and being forced to reassess their local relevance. At the same time, they have to pursue growth through global linkages.
Meanwhile, tools and technologies are emerging that foster greater economic and social integration. This digital environment is underpinned by rapid growth, pinpoint interactions, high customization, and efficiency. A few key stats reflect the growth across the digital environment:
As of 2014, there were 97 mobile cellular subscriptions globally for every 100 people. Ten years earlier, that figure was 27. Today, social media is used by an estimated 2.2 billion people globally—with nearly all growth coming since the launch of some of the first social networks, such as Friendster in 2002 and LinkedIn in 2003. About 3.4 billion people around the world use the Internet—up from fewer than 1.2 billion in 2006. Data and digital flows are growing rapidly; the total volume is projected to be 50 times bigger in 2020 than what existed ten years earlier.
The digital environment is transforming the global economy’s profile. Digital flows have increased global gross domestic product by an estimated $2.8 trillion over the past decade and have had a bigger impact on economic growth than the flow of goods. The digital economy is also unlocking opportunities for millions of developing-economy companies, particularly small businesses, as they leverage platforms such as Alibaba, Amazon, eBay, Flipkart, and Rakuten to reach more customers. It is evident that developing countries can benefit from the digital environment even more than developed ones. We are seeing this firsthand in Africa.
A fundamental challenge for corporate managers is finding the right balance when operating across these two models—pre-empting or overcoming the obstacles erected by politics or the public while leveraging the opportunities presented by connectivity and integration.
Business leaders, and public officials who care about economic development and reigniting growth, find themselves having to work in two expansive realms: the physical world and the digital world. How one optimizes the intersection of these two will shape the new architecture of global enterprise and be the true differentiator of success in the future.
One of the keys to realizing the opportunities inherent in this environment is knowing how to engage demand—and how to satisfy it. While there are examples of forces in the geopolitical world trying to limit the ability to satisfy demand, the digital environment makes it possible and much easier to do so. For business or political leaders who want to capture this opportunity, one of the keys is to look ahead, perhaps 10 years.
The future global enterprise will be found at the intersection of this tension between local vs. global, which in today’s reality is increasingly revealed by the constraints of the physical world as companies pursue digitalization’s technological benefits..
Successful managers will optimize operations at this intersection, reflected partly by management realities such as digital supply chains. By doing so, they will recognize the demands for local relevance coming from the public and private sectors and nonprofits. Within this framework, there will be a few fundamental issues for the future of the enterprise.
THE DEMAND SHIFT
The first is the shift from a supply-side to a demand-side world. We live in a much more demand-side-oriented world than we did ten years ago. After decades of operation in an industrial age, enterprises understood how to create and address supply. But their ability to quickly and directly engage demand, or to satisfy diverse multicultural demand, was limited.
The demand shift that’s underway throughout the world, in parallel with a shift in technology-infused supply capabilities, translates to new opportunities and obligations to fulfill that demand. Over the past ten years, new tools and increased connectivity have emerged to help engage and satisfy demand, both locally and globally. One such tool is demand analytics, which has been described as “data-centric solutions that support smarter demand-side decision-making about customers, brands, marketing, budgets and pricing.” The net effect is that companies can develop a more comprehensive understanding of the demand side, and can do so faster.
Another such tool is 3-D printing, which blends industrial- and information-age technologies. It empowers individuals to create a range of on-demand products, layer by layer. This new way of making things will have profound implications for the manufacturing sector. Since mobile 3-D printing machines can be located virtually anywhere, and spare parts can be manufactured on demand (thus reducing or eliminating the need for stockpiling), the effect is potentially transformative: consolidation of supply chains, acceleration of production times, and significant reductions in fixed costs. By 2025, the estimated economic impact of 3-D printing could be $550 billion per year.
But new demand-related opportunities could be blocked by rising pressures from the public and political spheres. These pressures could take many different forms—including taxes, import tariffs, or restrictions on data flows—and are unlikely to generate long-term benefits for the intended recipients. Business leaders must therefore stay focused on the realities of localization and societal needs, especially in periods of adjustment. People, regardless of where they live, will be much more likely to support globalization if they can see how they as individuals will benefit. Given that the local gains of globalization (from job creation to lower-priced goods) are often not well understood or intentionally ignored by some locally focused stakeholders, business leaders and their companies must be assertive about publicizing them. If they fail to do this, anti-globalization voices will crowd out the others and undercut the opportunities presented by the demand-side shift for billions of connected people around the world.
The second issue is the expansion of the middle class and proliferation of technology. The twin forces of increasing wealth (reflected in the rise of the global middle class) and expanded enterprise and consumer-scale technology will shape the business and political climate over the next decade.
The rise in global living standards has been a remarkable achievement. From 1990 to 2010, for example, 1.2 billion people moved into the middle class throughout the world, and 1.8 billion more are projected to do so by 2025. Individuals with rising incomes have evolved (and will continue to evolve) into discriminating consumers of household goods and services, as well as engaged citizens with an awareness of what their government representatives are doing (or not doing) to improve living conditions.
On the technology front, we will see robotics continue to develop into a key component of production and an emblem of both the opportunities and challenges associated with bringing automation to workplaces. Robotics can increase productivity and decrease prices for goods and services, but they also reduce the need for human labor—a development that could affect the labor market and trigger intervention by government officials. Similarly, drones are likely to take on a larger role in commerce, starting with the potential to disrupt the entire delivery industry. Routine tasks, such as shopping, are likely to become less common as drones accelerate delivery times to virtually any location. But what tradeoffs will we accept, for instance, in employment, traffic congestion, and safety?
On the consumer side, the continued proliferation of technologies, such as video-enabled smartphones and the popularity of communication platforms such as Twitter and customized broadcasting platforms such as YouTube, will heighten transparency in ways that challenge the private and public sectors. Companies will need to stay globally consistent (since their online presence will be accessible globally), while always preparing for the possibility that a consumer-led campaign, enabled by video and social media, will go viral and threaten the brand.
The potent mix of higher incomes and greater access to technology will lead citizens, customers, and investors to become more engaged and more demanding. They will expect products and services that are customized and underpinned by smart technologies to make their lives easier and more efficient, and if their expectations aren’t met, they will have no reservations about taking their money (or their votes) elsewhere.
Companies in particular need to aggressively exploit the technologies that will enable them to develop business models that are digitally and socially focused. Successful business leaders will understand that their strategy will require more than simply acquiring technology companies and trying to integrate them—it will require company executives to build internal capabilities and to lead a mindset shift that will make it clear to employees and customers alike that they benefit individually by embracing these technological shifts.
The third issue will be integrating different generations and perspectives. Amid all of the commentary about digital technologies walling people off in like-minded communities, there’s a more hopeful (and overlooked) reality: these technologies are driving integration among people of different generations and different points of view. For companies, that integration presents an enormous opportunity—but also significant risk.
There’s no denying that millennials throughout the world are bound together by being the first generation to be raised digitally. They’ve lived most or all of their lives being connected to the Internet and, increasingly, the rest of the world, and they tend to be more global in their mindset. But even those who are older, such as Generation X and baby boomers, have some basic level of digital fluency and functionality, and the generations’ behavior is more similar than commonly believed. Consider Facebook. In the United States, a Pew study shows that while 87 percent of 18– to 29-year-olds use Facebook, so do 73 percent of those who are 30–49, 63 percent of those who are 50–64, and 56 percent of those over 65.
These numbers, which are similar for other social networking sites, showcase the potential for companies to leverage technology to enhance communications with, and camaraderie across, their workforces. In the process, management can build trust with employees—and employees can build trust with each other. Although the rewards derived from smart use of technology can be greater than in the past, technology shortcomings can also bring a higher price, including employee grievances that go public or mass departures.
The same dynamic is at play in companies’ external strategies. They can also leverage technology to reach more consumers globally and to be responsive to the heightened pressures from consumers that exist in the digital age, such as transparency, communications, speed, and customization. Such pressures will only grow over the next decade as more than one billion young people enter the global labor market, at which point millennials will make up more than 75 percent of the global workforce.
In a world that is increasingly shaped by digital forces, companies face both greater opportunities and greater risks. As has always been true, management must identify and integrate leaders from each generation to advance their strategies and shape their decision-making. It will be especially important to place individuals from digitally raised generations in management roles so that their skills and global orientation are embedded in a company’s procedures. This will be necessary as a company seeks to closely align itself with both its own employees and its customers.
A fourth issue, for companies in particular, is determining what opportunities are created by the proliferation of new technologies and how to seize them. Progress on these fronts depends on developing a contemporary business model, corporate structure and management system that capture these opportunities. A guiding principle should be showing constituencies a path to the future while providing simple, low-cost solutions that draw on modern technologies to drive speed and responsiveness.
Platform business models provided solutions—they were a response to more demanding and connected customers and constituencies. Those in need of transportation, particularly at peak times, didn’t want to be at the mercy of unreliable and antiquated taxi services. And those in need of accommodations wanted options beyond those offered by the hotel and lodging industry. Thus, the emergence of Uber and Airbnb.
But a number of management issues with platform companies remain unresolved. Take safety, for example. A small number of Uber drivers have assaulted their passengers, and a small number of Airbnb hosts have assaulted their guests. The challenge for platform companies is to instill in those who are associated with them the same level of discipline that applies to full-time employees. Public perceptions of individual platform companies are a byproduct of anyone associated with those companies, no matter how distant the association may be.
What’s clear is that the opportunities for companies are going to be massive over the next ten years. But the competitive pressures are going to be greater, and the price of failure will be higher. Similarly, if governments don’t provide quality education, safety, and health care, or if they fail to make progress in combating corruption, they will not enable their local businesses and citizens to move to this future of opportunity. Eventually, the leaders of such governments will be removed from power, and the people living under these governments will be at risk of being left behind.
If companies and governments are going to find favor with consumers and with voters, and retain that support, they must be able to continually adapt to emerging technologies. They must be willing and able to challenge their most sacred cows and assess their real relevance to a future that is shaped by very different forces. Business leaders must be willing to drive organizational change even when they know they will directly confront strong resistance. But the longer they wait to move to the future, the more difficult it will become.
A SHARED PATH FORWARD
I believe businesses and governments must have a shared objective. They must bring people together on global and national levels to create a collaborative, progressive, and balanced path forward. What’s changed, and what gives this objective fresh urgency, is the economic volatility and political uncertainty spreading throughout the world.
Amid volatility and uncertainty, companies and governments should not lose sight of one of the important lessons from the past two decades: the individuals and communities that have prospered have done so because they developed the skills needed for the future, embraced a more connected and diverse world, and became hubs for innovative behavior and investment.
That process has raised living standards for hundreds of millions of people, but the new opportunities inevitably mean that some jobs get eliminated in the process and individuals are dislocated. As I noted ten years ago, if globalization is left unaddressed, discontent will grow. Government has a role to play in solving the problem, namely by enacting policies that actually address the transition to the future rather than obfuscate things for political expediency. These policies must give people the tools and skills to seize new opportunities. Companies can and should play a direct role in partnering with governments to develop and implement these policies.
The key now is for enlightened leaders to develop and continually modernize models for business and government. If they don’t, we will see an increase in intolerance and tensions. If they do, I’m confident that the challenges of today and tomorrow can be overcome in ways that deliver greater civility, more employment, higher incomes, and greater prosperity for people throughout the world.