Future Perspective the Futures Company World in 2020

8/11/2019 Future Perspective the Futures Company World in 2020

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Future Perspectives

The World in 2020:The businesschallenges of the future


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Introduction:

The world landscape

in 2020

The world in 2020 will be verydifferent from that of 2011, andcertainly from 2000. During thelong globalizing boom since the1980s, we became accustomedto navigating by a set of familiarassumptions: that increasing

globalization was inevitable;that technology would reducecosts and increase accessto consumers; that capitalwas cheap; and that oil wasinexpensive and would remainreadily available for at leastanother generation.

Overlaid on this was a strong set

of policy assumptions, certainlyin the affluent countries ofthe North, nationally andinternationally: that openmarkets were the best way toorganize trade and production(and sometimes, regulation),and that deregulation was goodfor everybody.

To a large extent, these

assumptions have been put tothe sword by the financial crisisof 2008 and its aftermath, andby the growing awareness of

the ecological deficits whichthe world faces. The countrieswhich have performed bestover the past decade havebeen those such as China andBrazil which have resistedideas about open markets.

Latin America, increasingly aneconomic powerhouse, hasgovernments which have takensteps to reduce inequality. Inthe financial sector, countrieswhich weathered the financialcrisis with least disruption,such as Canada, are thosewhich had continued to regulatetheir banking sectors more

assertively.

In this respect, the financialcrisis of 2008 represented anending, but not a beginning. Weare in a liminal moment, betwixtand between, an ambiguousand transitional phase in whicha threshold is being crossed.There are more questionsthan answers, and increasingly

our assumptions about howthe world works are open tochallenge and interrogation.As societies, we are having

Future Perspectives

are thought-pieceswith concise, focusednsights into importantssues of interest to

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As societies, weare having freshconversations about therelationships between

business, governments,societies and individuals

which are still in theirearly stages.

fresh conversations, still intheir early stages, about therelationships between business,governments, societies andindividuals. Liminal momentssuch as this can last a decade,or more, before opinion

coalesces around a new set ofoperating assumptions abouthow the world works.This report, therefore, is writtenas a contribution to thoseconversations. It looks forwardsto 2020 and beyond, ratherthan back at the last decades. Itseeks to do three things. First,we examine the big macro-

factors which are shaping theglobal landscape, which tosome extent constrain choicesand shape opportunities.Second, we explore theimplications of this landscapefor business, identifying someof the dilemmas it frames fororganizations over the nextdecade. And third, we look atthe impact of these changes on

the way in which businesses aremanaged, and the attitudes andunderstanding they will need toprosper. Welcome to 2020.

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The map of how the world islikely to change over the nextdecade can be drawn over eightcontours. Inevitably, theserepresent a simplification, aswith any model. In practice,they overlap and are connectedby complex and unpredictablefeedback mechanisms. Inlooking at ways to describe theworld of the coming decade,

we have identified these as thesignificant vectors of change.They are summarized here andexplored in more detail in a setof short essays in the followingsection.First, the world population is

expected to climb past seven

billion later this year,and then

continue to rise, potentially toaround eight billion in 2030and nine billion in 2050. Mostof these people will end up incities, and most of them in citiesin Asia. (In 2008, for the firsttime, more people lived in citiesthan rurally.) At the moment,Asia, Africa and Latin Americaare enjoying a youth dividend,while in Europe and Japan, the

population is already aging.By 2030, according to someestimates, only in sub-SaharanAfrica will populations not beaging.

The second contour is the

economic shift toward Asia,and, more recently, towardLatin America. The speed of

this has been remarkabletheChinese economy, for example,has grown ten-fold since 1978,and the economic growth ofChina and India alone has

pulled over 700 million peopleout of poverty, even whileinequality has increased. Thisshift is perhaps best seen asa re-balancing of the worldeconomy, back towards theregional shares seen beforethe industrial revolution, butin a world where resources areconstrained growth increasinglybecomes a zero-sum game.

This suggests that there willbe economic pressure on thericher worldeven without thedebt overhang from the 2008financial crisis.

The third contour is finance

everywhere.This trend hasseen financial flows dwarf thephysical value of trade and

production over the last quarterof a century, during which timeboth the size and the profitmargins of the banking sectorhave increased vastly. It alsocreated the conditions for thefinancial crash in 2008. Oneresult has been a huge increasein inequality. The debt that hasbuilt up in the United States andEurope could take a decade to

unravel; there may be anotherfinancial crisis waiting in thewings; and there has been asharp polarization of viewsabout the role of the financesector.

Together, these trends havecombined to increase demandand consumption, creating a

larger global middle class withmore resource-intensive tastes,such as driving cars and eatingmore meat and dairy products.The trends have also raised

sharp questions about thenature of capitalism. But theyfind themselves coming up hardagainst the limits to growth, inthe shape of more expensiveenergy, resource shortages, andpressures on food and watersupplies.

Energy is the fourth contour.Our societies, globally, are

hugely dependent on oil, butproduction of known suppliesis close to peak (or perhapsalready past it), so supply islikely to start to fall even asdemand continues to rise.This creates tight markets,in which prices spikeandso far, it seems that when oilgoes through the $100-$120/

barrel level (depending onwhose models you use), it

chokes off demand, creating astart-stop economy. Coal is asubstitute for some uses of oil,but it produces climate changeeffects, and coal reservesmay be lower than estimatessuggest. The long-run under-investment in renewable energyin most markets means that

were likely to see an energy gapin many countries. On the brightside, however, the investmentin solar is increasing rapidly asprice/performance ratios fall.

The 2020 global landscape

The debt that hasbuilt up in the UnitedStates and Europecould take a decade tounravel.



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In the longer term, climatechange will become a significantissue in its own right. Over

the next decade, however, it isclosely entwined with energy,since the use of fossil fuels forenergy is the largest contributorto carbon emissions. Issuessuch as carbon pricing, forexample, will largely playthemselves out as elements ofenergy costs.

The fifth contour of this

future landscape is resource

shortages. The huge risein volume production ofcomputers and phones hascreated demand for mineralswhich werent valued a quarterof a century ago, such astantalum. The increasingcomplexity of modernappliances and devices means

that a wider range of moreobscure metalsthe so-calledrare earthsare used in theirproduction to reduce weightand increase durability. Many ofthese are found largely in China.Urbanization has also increaseddemand for familiar resources,such as copper, platinum,and even steel. Over time, itslikely that it will be possible tomake substitutes using nano-technology, but this is unlikelyto happen at scale in a singledecade. NGOs are increasinglymonitoring resource productionfor ethical issues about conflictminerals, in parts of the worldwhere production subsidizesregional or local wars.

Food and water constitutethe sixth contour.Whetheror not we can feed the globalpopulation is an increasingly

disputed question. Foodproduction is still increasing,but food production per head

is in decline. Traditional foodproducers, such as China, areincreasingly becoming foodimporters, even while land insome markets is being turnedover to producing ethanol forfuel. Extreme weather eventsare disrupting production. Atthe same time, the proportion ofhigh-quality agricultural land isdeclining. The food price spikesof 2008 and 2010/11 have ledto social unrest and the collapseof governments. And behindthe food issues sits a loomingwater crisis. Right across theequatorial belt there are regionsof water shortage, some moreacute than others, and severalcoinciding with areas of rapidpopulation growth. In many

places, for example SaudiArabia, non-refillable aquifersare being drained down, withinevitable consequences forfood production. In some placesthere is the specter of citiesbeing abandoned because theyhave run out of water.

Together, of course, thesetrends act as a brake onconsumption, which mayalso be true of overuse of thebiosphere, more generally.

Technology is the

seventh contour. Focusingon information andcommunications technologies,four interlocking stories aretransforming and disrupting

the landscape. The first is theshift to portable and mobiledevices, principally through theglobal growth of mobile, but

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Can nine billion peoplebe fed? Can we cope

with the demands inthe future on water?

Can we provide enoughenergy? Can we do it, allthat, while mitigatingand adapting to climate

change? And can we doall that in 21 years time?Thats when these thingsare going to start hitting

in a really big way.(Sir John Beddington,UK Government ChiefScientist, speech atSDUK 09)1

http://www.govnet.co.uk/news/gov-

net/professor-sir-john-beddingtons-

speech-at-sduk-09

also through the more recentshift towards tablet devices,which is already cannibalizing

computer sales. The second isthe rise of GPRS and mapping-related technologies, whichmake devices local and place-based. The third is the spreadof embedded sensorsdataeverywherewhich are ableto respond to and collect datafrom mobile devices. And thefourth is data privacy, whichis increasingly a concern ofgovernments, regulators andNGOs.

Mobile, in particular, isan increasingly globalphenomenon. By the end of2010, there were an estimated5.3 billion mobile subscriptionsworldwide. Across Asia-Pacific,mobile penetration has reached

67%. Even in Africa, which lagsin terms of penetration, there

is some striking innovation,notably around payments. 55%of Kenyan adults, for example,

are members of the M-PESApayments system.

The last of our contours is

identity,an unpredictableresponse to globalization. Asmarkets extend, they extendthe range of industrializationalmost everywhere, disruptingtraditional social structuresand cultures. For this reason,the question of identities isthe canary in the coalmine ofglobalization, reasserting itselfin different ways in the faceof more intrusive markets,adapting to modern forms andmodern technology as it goes.

In the following section,we provide some deeper

perspectives on these eightissues.

http://www.govnet.co.uk/news/govnet/professor-sir-john-beddingtons-speech-at-sduk-09http://www.govnet.co.uk/news/govnet/professor-sir-john-beddingtons-speech-at-sduk-09http://www.govnet.co.uk/news/govnet/professor-sir-john-beddingtons-speech-at-sduk-09http://www.govnet.co.uk/news/govnet/professor-sir-john-beddingtons-speech-at-sduk-09http://www.govnet.co.uk/news/govnet/professor-sir-john-beddingtons-speech-at-sduk-09http://www.govnet.co.uk/news/govnet/professor-sir-john-beddingtons-speech-at-sduk-09


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Source: The Futures Company

Population andurbanization: a long boom

The long-term increase in theworlds population has beenstriking. In 1800, it was justshort of a billion, and passedtwo billion in the 1920s. Itreached four billion in 1974,and since then has beenadding another billion everydozen years or so. In 2011, itwill reach seven billion. TheUnited Nations populationforecast sees these rates ofgrowth starting to slow again,reaching eight billion by 2030,and then, further out, peaking(or not) at nine billion around2050, depending on whoseassumptions you believe.1

There have long beenpredictions that the planetwont be able to support

population growth, whether byMalthus at the end of the 18thcentury or by Paul Erlich in the1960s. So far, cheaper energyand technology innovation have

meant that living standards andthe health of the populationhave improved sharply. More

recently, the so-called Greenrevolution, which increasedfood production fasterthan population in the globalSouth, has been driven by thesame combination. The extentto which these gains have beenmade possible by the long-termboom in cheap energy is asubject of controversy.

Urbanization has also playedits part. Typically it improveseducational and literacy levels,and increases the proportionof women in the workforce.Together, these three factorsare the strongest influences onfertility levels, and it is possiblethat the rates of growth inglobal population will start

to slow sooner. (Relativelysmall changes to the fertilityreplacement rate of 2.1 childrenper family have large effects).At the same time, more

controversially, it is argued thatincreasing urbanization will alsoimprove sustainability. Stewart

Brand, for example, writes inWhole Earth Discipline that Inthe developed part of the world,cities are Green mainly becausethey reduce energy use, butin the developing world, theprimary Greenness of cities liesin their ability to draw people inand take the pressure off ruralnatural systems.

Others say that such gains areoffset by higher living standardsand higher consumption.The biggest effect of globalpopulation growth, however,is a huge building boom. Mostof these new people will live inSouth and East Asia; one way ofimagining the scale of the urbanboom is that a city the size of

Los Angeles will be built everythree months for the comingtwo decades. One significanteffect is that this absorbs globaliron and steel resourcesiron

IncreasingPopulation

EnergySqueeze

IdentityWars

ResourcePressure

Food andWater Scarcity

IncreasingConsumption

Shift to Asia

Financialization

Ubiquitous Technology

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ore prices are at long-termhighs. Another is that itincreases demand for energy,

for urbanization, infrastructure,and transportation projects.

The economic shift to theSouth: back to the future

The economic shift to theSouth, which has been thedominant world economic storyof the last 20 years, is in someways a return to the past. 180years ago, before the UnitedStates and Europe enjoyedtheir industrial revolutions andcolonial powers stripped outindustry in China and India,Asia was responsible for 60%of world GDP. While 60% ofthe worlds population is nowin Asia, only 28% of globalincome is there. China recently

passed Japan, in terms of GDP,to become the worlds second-largest economy. Long-termeconomic predictions suggestthat China will catch America

within two decades, and thatEuropes nations will slide downthe world GDP league table as

emerging economies rise up.(Such econometric models oflong-term rates of growth arebased on narrow assumptionsthat current trends willcontinue; they are also under-informed by ecological limits.)

Chinas role in the East Asianeconomy is sometimesmisunderstood. It is perceived

as a manufactory, whereas, asPhilippe Legrain observes, it ismore of a network, managingthe production of goods whoseparts are made across theregion.

As trade barriers have fallenand technology has madeeasier to co-ordinate supply

chains that stretch acrossmany different companiesin many different countries,the way in which manyproducts are made has been

revolutionized. ... An AppleiPod assembled in Chinais made up of a display

from Japan, a multimediaprocessor from Singapore,a central processor fromTaiwan and memory fromSouth Korea.2

A critical implication isthat diplomatic and politicleadership becomes important:the interlocking tradearrangements in the region

would be destroyed by regionalconflicts, which is one of thereasons that China has investedheavily in the Shanghai Co-operation Agreement and otherpan-regional organizations.More broadly, Chinas directedeconomy, which follows themodel used for industrializationby the earlier Asian Tigers,

has undermined, perhapsfatally, the market-led modelspreferred in Washington.3

Population and development: Virtuous and vicious cycles

When the fertility rates of national populations suddenly fall, it creates a huge economicopportunity, explains Fred Pearce in his book Peoplequake. It works like this: a baby boom phasecreates significant population growth, and as this generation reaches working age, fertility levelsfall sharply, making a dramatic difference to the balance between the working and the dependentpopulation. This releases finance for economic investment. As Pearce says, As countries movefrom high to low fertility, they experience a period of a couple of decades when demographicconditions for rapid economic growth are near perfect Chinas single-child policy created itseconomic boom. Asian countries which are currently going through this phase include Thailandand Vietnam; India could follow, as could several sub-Saharan African states. But demographicsalone dont translate into a boom; countries also need human capital, in the shape of a literateand numerate population. The best indicator, according to the demographer Wolfgang Lutz, is acountrys literate life expectancythe average number of years over which people are literate.Chinas literate life expectancy is now over 50. Indias, at 35, may be too low. Africas is lower,although they have time to improve it: investment in primary education may be the best growthstrategy. But without the right conditions, the potential energy created by the youth bulge isoften channeled instead into social unrest and political disorder.



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But there are constraintswhich suggest that the rapidrates of growth which weve

seen in China and India maynot continue. The first is thatwage costs, certainly of skilledworkers, are rising rapidlyas each country develops itstradable sector (the exportingsection of the economy). This is

an inevitable part of economicdevelopment, as David Coatspointed out in a paper for theWork Foundation. Economic

growth is associated with risingproductivity and rising wages,so it is entirely reasonable toanticipate that Chinese andIndian labor costs will increaseas their economies grow.The labor cost gap with thedeveloped world will shrink, justas it did between developedcountries and the Tigereconomies in East and SouthEast Asia.4One response hasbeen to move into new, highervalue sectors, learning fromeconomic partners as it goes.China is now, for example, theworlds largest producer of windturbines and solar panels.

There are other constraints aswell, ranging from pollution,

water and food productionshortages in China, alongwith signs of an asset bubble,to corruption in India. Both

suffer from profound inequality(theres a recurring argumentthat China needs to generate

around 6% growth to maintainsocial equilibrium, and preventfrequent, under-reported, socialunrest in poorer rural areas).Similarly in India, inequality isnow a significant social factor.India may be a middle-incomecountry, but it still has thelargest concentration of theworlds poorsome 350 millionpeople.

Looking forward, one of thebiggest economic questionsis about whether the highsavings rates in much ofAsia will decline, releasingmoney for spending andre-balancing their economiestowards less investment andmore consumption. This is a

question about levels of socialprotection; savings rates arehigh because people save toinsure themselves againstsickness and unemployed.There are lessons here fromLatin America, where the moreleft-of-centre governmentsin the region have reducedinequality and increasedsocial protection. Even TheEconomisthas noticed thatthis has been good for theregions economic stabilityand economic development.This may be necessary if theworld economy is to prosperin the coming decade, sincethe hangover in Europe andthe United States from thefinancial crisisif history is

a guidecould have five orsix years still to run. As weobserved in our US MONITORreport in 2010, economists

China is now, for

example, the worldslargest producer ofwind turbines andsolar panels.

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Carmen Reinhart and KennethRogoff, in studying hundredsof financial crises, found that

the period of stagnation after acrisis was usually as long as theexuberance which preceded it.5Japan may be the best modelfor the near-term prospects forEurope and the USA.

Some are more scathing on theprospects for the West: DambisaMoyo has attracted attentionfor her book, How the West WasLost, which argues that the Westis in long-term decline, withtoo little capital accumulation,insufficient investment inskills, infrastructure, andtechnical innovation, and littlepolitical will to reverse these.Without subscribing to herargument about the need forstrong central governments,

in a more constrained globaleconomy, growth becomesmore of a zero-sum game.The Cambridge economistRobert Rowthorn has recentlysuggested that a possibleoutcome is significant structuralchange in the economies of theaffluent world, with groups ofworkers who are exposed tointernational competition mostvulnerable.6It is possible thatthe size of the tradable sectorwill shrink because of risingenergy costs. But sitting behindthese structural changes is thespecter of protectionism, tradewars, and worse.

Finance everywhere, and

the return of political

economy

One of the most striking trendsof the past quarter-century has

been the extent to which theeconomies of the rich worldhave become dominated by

finance. The trigger has beena combination of informationtechnology and deregulationby governments which believedthat they had tapped into a newsource of competitiveness andwealth. The speed of transfer,and its low cost, means thatforeign exchange dealingsoutweigh world trade by a factorof about 60. The flows of the

financial networks represent anintense form of globalization.

In the UK, Robin Blackburnhas written of this process asbeing one of financialization,in which, following deregulation,the logic of finance becomesubiquitous, feeding on acommodification of every

aspect of life and the life-coursestudent loans, babybonds, mortgages, homeequity release, credit-card debt,health insurance, individualizedpension funds.7

The American economistThomas Palley summarizes theeffects of this as follows:

Financialization transformsthe functioning of theeconomic system at boththe macro and micro levels.Its principal impacts are to(1) elevate the significanceof the financial sectorrelative to the real sector,(2) transfer income from thereal sector to the financial

sector, and (3) contribute toincreased income inequalityand wage stagnation.8



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Global economic scenarios

Following the financial crisis, The Futures Company collaborated with the Institute forDevelopment Studies to produce a set of global economic scenarios, looking out 10 to 15 years.The purpose of these scenarios is to help understand and to manage uncertainty, and theprocess assumes as a starting point that there are multiple possible futures, not a single pointforecast. Scenarios help to identify strategic issues, opportunities, risks, and pressure points. Theproject generated four distinctive scenarios, which are summarized in outline here:

South by South East: China and India continue to drive substantial growth in the Asianeconomy, while Europe and the United States are trapped in a lost decade of highindebtedness and low economic growth.

Western (Re)invention: Politicians in the richer countries run with the Green New Deal as away to recharge their faltering economies; at the same time Asian economies slow because of

resource and political challenges. The Odd Couple: The financial imbalances between China and the United States lock themtogether, and China uses the leverage it gains from this to increase its influence in internationalinstitutions.

Rollercoaster: The world moves from using the dollar as its reserve currency to the Eurobutin an unplanned and unpredictable way. The result is two decades of disruption, protectionism,and skirmishing.

In terms of identifying uncertainties, it is worth noting a few points from the scenarios analysis.The first is that although the growth of Asia and Latin America is inevitable, certainly over the nexttwo decades, the rate of growth is not, and that relatively small differences in growth rates have a

significant impact on the balance of global power.

The second is that although it is increasingly fashionable to write off the prospects for the affluentWest, certainly in the face of what may be a decade spent de-leveraging debt, it is still where muchof the worlds industrial and technology base is to be found. Germany remains the worlds largestexporter of manufactured goodsby rank; the USA is still the largest manufacturer in terms of valueadded.

The third is that the embrace between China and the United States described in The Odd Coupleis essentially unstable, and that when it does start to unravel it could trigger any one of the otherthree scenarios. Finally, it is easy to write off the Rollercoaster scenarioand generally in futureswork people push away potential futures which seem less familiar. But the trigger for such a

scenario is more likely to be political than economic; the route to it is likely to involve diplomaticfailures and also failures by international institutions.

These processes extend beyondthe affluent world. There havebeen two decades in whichthe International MonetaryFund and the World Bankhave prescribed widespreadderegulation and privatization, in

sectors from health to educationto water, as a condition forpoorer countries seeking itsassistance. The effects have

often been counterproductive.Some of these privatizationshave been reversed in recentyears, having failed to deliver theclaimed benefits.The results of all of this extendbeyond economics. The

bank sector is now the mostinfluential lobbyist in Americanand British politics. ElizabethWarren, former head of the

Congressional Oversight Panellooking into the US TARPprogram, said last year, Thereason that were not changingthings in Washington is thatthe banks have lobbyists inWashington in numbers Ive

never seen. ... Theyve got theirposition papers, and they justkeep slamming in the samedirection over and over and

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over.9In the UK, former PrimeMinister Gordon Brown saidin an interview, We should

have regulated the banks morebut when the crisis broke andwe looked at the question ofregulation, we were so heavilylobbied that we didnt do it.If bankers consider that thetime for apologies for theexcessive risk-taking which

led to their crash and multi-billion bail-out is over, votersdo not seem to agree. The

neologism banksters hascome into the language sincethe crisis. Irelands Fianna Filgovernment was humiliatedin the February, 2011 generalelection as a result of itsagreement to punishing bail-outterms.

Rolling StonejournalistMatt Taibbi, who coveredthe financial crisis and itsaftermath, seems closer tothe public mood. He describedthe investment bank GoldmanSachs as a vampire squid anda huge, highly sophisticatedengine for converting the useful,deployed wealth of society intothe least useful, most wastefuland insoluble substance on

Earthpure profit for richindividuals.10

One of the consequences hasbeen thatfor two decadesnownew income has accruedmostly to the top 1%, notablyin the United States, wheremiddle-class incomes haveremained flat. Another hasbeen that the behavior ofcorporate executives hasbecome closer to that of theirpeers in the banking sector,and pay differentials within allorganizations have ballooned,with little evidence of improvedperformance or outcomes.11

There are, however, many signsof a response to this surge in

inequality and the proximityof finance to politicians. Thereis a new interest in the effectsof inequality on societies

(for example in the work ofWilkinson and Pickett12and ofDanny Dorling13). Regulators

have been more willing todiscuss the social impact ofa large finance sector. Thenew economics foundationhas calculated the socialvalue created by the bankingsector, and found it negative.14In the United States, thereis public commentary aboutthe apparent revolving doorbetween Wall Street and theWhite House, and its impact ondecisions. Even McKinsey haspublished an article about thePonzi economy by science-fiction writer Kim StanleyRobinson.15At the same time,there is more visibility of thelarge public subsidies whichbanking attracts (for example,in insurance underwritten by

governments), while proposalsfor a financial transaction taxcontinue to be promoted byEuropean leaders.

The need for political changemay be more urgent thanwe think. The consultancyOliver Wyman has published ascenario about the avoidablehistory of the financial crisis

of 2015.16Their scenario hasa plausible combination ofWestern finance fuelling acommodities bubble, punctured

There are systemicreasons for believingthat we may haveanother crisis tocome.


The global financialnetworks of thenew economy areinherently unstable.They producerandom patternsof informationalturbulence thatmay destabilize any

company, as wellas entire regions ofcountries, regardlessof their economicperformance. [Emailfrom Manuel Castellsto Fritjof Capra, 2000]


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when the Chinese economystarts to slow, leading to thecollapse of development

projects across Asia and LatinAmerica, and huge asset write-offs.There are systemic reasonsfor believing that we mayhave another crisis to come.The work of Joseph Taintersuggests that complex systemsexperience decline not as aslow degradation, but insteadas a succession of failures,punctuated by periods ofrelative calm. As Andrew Curryand Hardin Tibbs have argued,

One can envisage a future inwhich shocks to the politicaleconomy of globalizationoverlap with shocks to theexpansion of technologythat has underpinned it, and

with shocks to the overallenergy and environmentalsystem. 17

Energy: a limit to growth

For a generation, since theOPEC supply squeeze in the

1970s, it has been an articleof faith among oil producersand governments alike that

oil resources would be stableand secure until at least the2030s. A small dissidentgroup of early-peak oiladvocates, which argued thatoil production would start tobe squeezed much earlier, wasdisregarded by policymakers.But the oil spike of 2007afactor in the financial crisis andthe recessions which followedithas refocused intereston the timing of peak oil (thepoint at which half of all usablereserves are extracted). Thismatters because once thismoment has passed, especiallyas demand continues togrow, oil markets will becomeunstable and erratic, showinglarge price rises and falls.

Economic models typicallysuggest that once the price ofoil reaches $100 to $120 perbarrel, economies are tippedback into recession.

The most recent analysisfrom the International Energy

Agency, historically optimisticon energy outcomes, shownin the diagram, is a cause for

concern. The year of peakproduction for existing fields inproduction has already passed.Although it looks at first sightas if energy supply (oil andgas) will continue to grow, thelight blue triangle to the rightrepresents unknown (as yetundiscovered) reserves of oil,in an exploration environmentwhere new discoveries of anysize are increasingly rare.Even with these productionassumptions, this total outputmeets projected demandfrom China and India only ifdemand from OECD countriesstarts to fall. It is perhaps notsurprising that the BritishIndustry Taskforce on PeakOil, a coalition of concerned

businesses, has called forurgent action to address theissue of energy scarcity, which itbelieves will force an oil crunchwithin the next five years.

Meanwhile, Shells latestenergy analysis, published as

Source: International Energy Agency, 2010

Unconventional Oil

1990

0

20

40

60

80

100

mb

/d

1995 2000 2005 2010 2015 2020 2025 2030 2035

Natural gas liquids

Crude oil: fields yet tobe found

Crude oil: fields yet tobe developed

Crude oil: currently

producing fields

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Signals and Signposts, arguesthat the world is entering anera of volatile transitions and

intensified economic cycles,partly because developingnations, China and Indiaincluded, are entering the mostenergy-intensive phase of theireconomic growth. Althoughthere will be some gains fromefficiency and innovation, thesewill not be enough. It foresees asubstantial gap between supplyand demand, which can bebridged by some combinationof extraordinary demand

moderation and extraordinaryproduction acceleration.18That production accelerationmay come from substitutioninto coal, which has damagingclimate change effects, or frominvestment in renewable energy,in particular solar power. There

appears to be some scope forreducing demand through ashift in investment towards the

so-called Green Economy,according to a recent UNEPreport.There are wider issues here.The economists David Boyleand Andrew Simms, associatedwith the new economicsfoundation in London, connectthe long term energy trendswith a fundamental shift intransportation and mobilitypatterns:

The question is no longerwhether aspects of thismassive localization aregoing to happen, with theaccompanying reskilling oflocal people to deal with thenew local tasks and roles,butas fossil fuels become

more expensivewhen it willhappen.19

Beyond that, there are serioussystemic questions. As ThomasHomer-Dixon argues, when youlook at the demise of the greatcivilizations throughout history,they start to decline when

they start to run out of cheapenergy, measured particularlyby the energy return on energy

invested. Looking at theincreasing complexity involvedin extracting oil, whether fromCanadas Tar Sands or from theGulf of Mexico, as a global oil-dependent society, we are juststarting to hit that moment ofsharp decline.

Resources and raw

materials: the squeeze forenough

As economic expansioncontinues, especially in Asiaand Latin America, there areincreasing pressures on suppliesof raw materials, particularly(but not only) of those essentialfor advanced manufacturing.Rare-earth metals are vital to

many of the next generation ofenergy and auto technologies,and demand is rising swiftly.Currently China produces 97%of the worlds supply and hasalready proved willing to restrictexports, to benefit its domesticindustry and for diplomaticleverage.

Shell foresees asubstantial gap

between supply anddemand.



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Meanwhile there is a scramblefor lithium around Chile andArgentina as the demands ofelectric car production start toforce up prices. Nissan predictsthat a tenth of cars worldwidemight be using lithium batteriesby 2020.

Growing consumer awarenessaround sourcing also placespressures on other materials,such as tantalum mined in theDemocratic Republic of Congo,

where demand for mobileelectronics helps supportviolence and exploitation. Inthe US, the Dodd-Frank Act in2010 now requires due-diligencereporting on a range of materials.There are also emerging NGOcampaigns around ethicalsourcing, such as Enough in theUS and Global Witness in the UK.

These pressures are promotinga range of responses. Onestrategy is to design outscarce materials: Hitachi, for

example, is developing newferrite oxide motors to replacerare-earth metals. Increasedmaterial efficiencies will becomemore important in processdesign. Smarter re-use ofmaterials is also increasing,with products being designedto enable product componentsto be extracted, and productsto be disassembled or repaired.Meanwhile, there is increasinginterest in materials which havealready been discarded. The

Japanese, in particular, havebeen developing the conceptof the urban mine. It is stillexpensive to extract materialsfrom waste, but systems andprocesses are improving.Nutrients from food waste canalleviate phosphate shortages;old phonesounce for ouncecontain 100 times as much goldas gold ore.

Beyond simply respondingto shortage, nanotechnologyinnovations are starting to create

new opportunities. The nano-materials market is predicted,perhaps optimistically, to beworth $100 billion by 2020.In particular carbon nano-tubes hold great potentialfor miniaturizing circuits andimproving electrical efficiency,and they offer significant benefitsas a structural and buildingmaterial. In other sectors,nanotech innovations willcomplement existing materials,for instance improving the taste

profile of foods, or even thebodys ability to absorb nutrients.Plastic electronics pave theway for the further expansionand ubiquitous embedding ofconsumer gadgets.20

Food and water: smalldifferences, big outcomes

As global populations rise,and as affluence bringsdemand for more varied andricher diets, the pressures onagricultural production and

Source: The Enough Project, Getting to conict-free (December 2010)

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water availability are mounting,

with an expected 30 to 50%increase in demand for food by2030. Indeed the UNs WorldFood Program has noted theincreasing scarcity of food isthe biggest crisis looming in theworld.

While populations areincreasing, intensive farmingis causing the degradation ofagricultural land and loss ofnutrients.The World ResourcesInstitute estimates that 40%of the worlds agricultural landis now seriously degraded.Meanwhile in China, arableland is decreasing, despitegovernment efforts, and early2010 saw a dip in agriculturaloutput following prolonged

drought. WorldWatch notes thatclimate change and increasingdrought are set to reducecrop yields and raise prices,sharpening the need for better

crop varieties and heightening

interest in genetically modifiedfoods and crops.

With interconnected markets,the effects of environmentalshocks can reverberate aroundthe world, as seen in the 2008crisis when wheat prices roseby 50% and food riots spread,and again in 2011 when spikesin the price of food fuelled the

uprisings across the Middle

East. Such calculations arefinely balanced. A relativelysmall shift to ethanolproduction in the USA has had adisproportionate effect on world

food markets. And if China had

to import just 5% more grainto make up for a shortfall, itwould suck up the entire worldsexports of grain. In the faceof such price challenges andpotential for shocks, carefulattention to supply chains isneeded, particularly with theprospect of protectionismand bans on crop exports toprotect national populations.And on top of this, as the newmiddle classes of the emergingeconomies shift towards eatingmore meat and dairy, theirdiet becomes more intensive,consuming a greater share ofagricultural resources.

Similar political forces canbe felt around water. In 2010

the UN passed a resolutionmaking access to clean waterand sanitation a fundamentalhuman right, increasing politicalawareness of water issues.

The increasingscarcity of food is the

biggest crisis loomingin the world.

Projected Water Scarcity in 2025Source: International Water Management Institute


Physical water scarcityEconomic water scarcity

Little or no water scarcity

Not estimated

Indicates countries that willimport more that 10% of theircereal consumption in 2025.

Note:

Physical water scarcity

Economic water scarcity

Little or no water scarcity

Not estimated

Indicates countries that willimport more that 10% of theircereal consumption in 2025.

Note:


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Water has already causedpolitical disturbances andstrikes in India and China. In

the latter, over one-third ofwater has been contaminatedand is unsuitable for eitheragriculture or industry. Insuch regions, water is theleading factor in creatingunsustainable bio-systems.The Earth Policy Institute saysthat, in many parts of the world,non-renewable undergroundaquifers are being drainedto maintain existing foodproduction levels.

Indeed, the United NationsFood and AgriculturalOrganization predicts that by2025, two thirds of the worldspopulation could be living inconditions of water stress.Water is often overlooked as an

issue in the richer world, sincemuch of the water consumed insuch countries is embedded inproducts imported from othercountries. Theres 140 litersembedded in a cup of coffee,and 2,700 liters in a cottont-shirt, for instance, most ofwhich has come from an areaof water stress. As this remotewater becomes scarcer, thepolitics of embedded water willmove up the social and politicalagenda.

Technology: deepening,

not accelerating

It is easy to be overwhelmed bythe sheer volume of data abouttechnology. There are 5.3 billion

mobile phone subscriptionsworldwide; and more than 16billion text messages sent everyday. Facebook has 600 million

members and the 10 billionthApple app was downloadedthis year. Over 350,000

apps are available via Apple,over 150,000 via Android.Cumulatively, it seems thatthe digital space is speedingup. But this is deceptive. Inaffluent markets, penetrationof digital devices has reachedmaturity (even saturation) andin Asian and Latin America, it isgetting there quickly. There are,increasingly, questions aboutwhether Moores lawtheprediction, effectively, that theperformance to price ratio ofintegrated circuits would doubleevery two yearswhich hasbeen a reliable guide to industrydynamics for four decades, isbeginning to reach its limitsas production reaches themolecular scale.

Some theory might help.The Futures Companysperception is that informationand communicationstechnologies are deepening,not accelerating. Our thinkinghas been influenced by thework of the economic historianCarlota Perez, whos trackedfive long phases, or surges, oftechnology innovation, goingback to 1771. Each phase runsfor 50 to 60 years and followsa common pattern (as can beseen in the diagram). Theresan installation phase, in whichthe new technology platformspreads in visibility and usage(device penetration increases,underlying infrastructure isdeveloped). Theres a bubble

and a crash, in which investorsget over-excited about theprospects. And then theres adeployment phase, in which

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the applications associatedwith the technology platformdeepen and broaden, and theunderlying impacts on societybecome more profound. TheICT surge started in 1971,with the invention of themicroprocessor. Weve finishedthe installation phase, weve

had the crash (dot.com, notglobal financial crash, thoughthe two may be linked), andnow were several years into thedeployment phase.

Taking an analogy from theprevious wave, the installationphase was the period duringwhich roads were built and

car technology becamecheaper; in the deploymentphase, cars became massconsumer items, suburbsand edge-of-town retailing

developed, and demandencouraged intensification ofthe infrastructure (for examplethe development of freeways).In terms of ICT, what we canexpect to see over the nexttwo decades is continuinginnovation. Says Perez,

Installation periods,and especially bubbles,bring the system toextreme individualismand callousness; bubblecollapses and the ensuingDeployment periods tendto bring back the balanceand put the accent on thecommon good.21

We can see some of this beingplayed out already. While themobile phone is, on the faceof it, the most individual of

technologies, it is also themost networked. The adventof GPS puts the emphasis on

place as much as people, andthe development of sensortechnologiesembeddedintelligence everywherecompounds this, using thecumulative impact of location-based phones to create publicdata about our environmenteven while they are providingindividual services. It is saidthat monitoring GPS datafrom mobiles travelling in theirowners cars already gives amore reliable picture of trafficcongestion than the roadsideinstallations which have beentypically used previously. Themost profound effect of digitaltechnology over the nextdecade may be to rethink theway we manage our cities. And

cutting across all of this, likea fault line, there is increasingconcern about privacy, atriangle of tensions betweenindividual users, privatecommercial interests whichwish to market to them, andpublic providers which wish toaggregate anonymous data forpublic purposes.

Identity: the networked

olive tree

In the first of his three bookson globalization, The Lexusand the Olive Tree, ThomasFriedman uses the olive treeas a symbol of identity: itrepresents everything thatroots us, anchors us, identifies

us and locates us. Like muchof Friedmans writing, it istoo simple. Issues of identityhave become sharper as a

The Long Phases of Technology Development

Source: Adapted from Carolota Perez, Technological Revolutions and Financial Capital:The Dynamics of Bubbles and Golden Ages (Edward Elgar Publications, 2003)



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result of globalization, but thishas been shaped by changesin technology as well aseconomics.

One of the striking featuresof the past 15 years has beenthe way in which electronic

networks have reinforced linksof language, history, and culture.The conventional wisdomwas that the combination ofthe internet and globalizationwould flatten these, spreadingEnglish universally. Theprocess of convergence, wroteKenichi Ohmae, goes fasterand deeper. It reaches well

beyond taste to much morefundamental dimensions ofworldview, mindset, and eventhought process. The digitalutopian Nicholas Negroponte,wrote in a similar vein: Likea mothball, which goes fromsolid to gas directly, I expectthe nation-state to evaporate.But there are dangers in thisDavos world-view, in which

autobiography is represented associology. The briefest of looksat Wikipedias many languagesis enough to realize that the

internet has allowed culturesand languages to reassertthemselves. This had alreadystarted before the invention ofthe world wide web, but cultures

can now project themselves andconnect. Financial flows are also

relevant: diasporas in wealthierareas send money home in vastquantities: everywhere but sub-Saharan Africa, these informalfinancial flows are greater thandevelopment aid.

So it is worth unraveling thisknot. It is obvious, firstly, thatthe increasing scale and form ofindustrialization which the most

recent wave of globalizationrepresents, within societiesand between them, will disrupttraditional social forms. As John

Gray writes, The imperativesof flexibility and mobilityimposed by deregulated labormarkets put particular strainon traditional modes of familylife.22Manuel Castells, in thesecond volume of his hugestudy, The Information Age,

explains it this way: When theworld becomes too large to becontrolled, social actors aim atshrinking it back to their sizeand reach. When networksdissolve time and space,people anchor themselves inplaces, and recall their historicmemory.23

What is different is that thoseplaces, and those historicmemories, are both virtual andphysical: one can be connectedglobally without becomingglobish. While the nation-stateappears to be weakening, someof the most effective formsof identity are associatedwith imagined nations andcultures which never managed

to achieve modern statehood,such as Catalunya, the Basqueprovinces, Qubec, Kurdistan,or Scotland. Constructed

While the mobile

phone is, on theface of it, themost individual oftechnologies, it is alsothe most networked.

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identities tend to be effectiveat using networks to build linkswith other, similar, communities.

And while the nation-state isnow generally less successfulat promoting identity, at leastoutside of sport and tourism,this may change with recession.Some of the most toxic formsof identity combine resistanceidentity with national symbols.One limit is that, as John Urry

argues, most societies arenot nations, let alone nationstates (the huge population

of overseas Chinese is anexample)24. And identity is noteither/or. People are morelikely to see their identityas both/and; Catalan andSpanish and European; morethan half of those living inScotland think of themselvesas Scottish and British. People

are more subtle than elites givethem credit for in constructingtheir cultural communities.

From an economic and politicalperspective, though, this hasramifications, largely throughthe way that civil society isconstructed. Identity alwaystakes a social form. In the post-war period, certainly in Europeand the US, dominant civil-society organizations tended to

The limits of globalization

At the height of the enthusiasm for globalization in the 2000s, Thomas Friedman explainedhow globalized trade, outsourcing, supply-chaining, and political forces would flatten theworld, changing it permanently, for both better and worse. Friedmans view was common inthe last decade of the 20th century, when many believed that globalizationthe process bywhich regional economies, societies and cultures become integrated through global networks ofcommunication, commerce and transportationwas inevitable.

Lately, however, the argument for an ever-more interconnected world has started to look thinner.A wide range of thinkers and commentatorsfrom John Ralston Saul and Ha-Joon Chang to Will

Huttonhas begun to question whether the global economy can continue indefinitely to becomemore interconnected.

A range of weak signals suggests that globalization may not continue unabated:

Globalization has retreated in the past: by some measures, levels of economicinterconnectedness are lower today than at the outbreak of WW1.

The global financial crisis demonstrated the instability inherent in a complex, networkedglobal financial system, while recent spikes in the price of various basic food commodities arereminders that the integration of global markets carries risks as well as opportunities.

The current global era has been fuelled - literally - by abundant sources of energy especiallycheap oil. This made possible cheaper, quicker travel and wider trade than ever before. But asthe cost of energy rises in future, so too will the cost of moving goods and people. Put simply,being physically connected will become more expensive.

Climate change could also constrain global interconnectedness. The economic impact ofcontinued climate change on agriculture, our built environment, ecosystems and humanhealth will be significantand in many cases, the response is a turn towards greaterlocalization of production and consumption.

The risk of global pandemics is exacerbated by widespread international travel. So far, wehavent had a pandemic that has been destructive, but health professionals regard this as

likely. Restrictions on travel would almost certainly follow.The future is never a simple extrapolation of the present. Steins Law reminds us that, Thingsthat cant go on forever, dont. The globalizing boom of the past generation seems likely to comeinto this category.



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be aligned with economic andpolitical institutions (politicalparties, trades unions). Now

they are not; they are far morelikely to be oppositional, andalso more likely to be connectedinternationally.25

Uncertainties

A trend is a trend is a trend,until it bends, says thefuturist Ged Davis. His point

is that trends dont continueunchecked. Eventually, theycreate a response, and its in theinterplay between trends thatnew markets open up and newrisks emerge.

There are some relativecertainties embedded in thebig trends which will shape theworld over the next decade,

but there are also someuncertainties, where several ofthe trends collide or combine.As part of the research for thispaper, we used a number offutures tools to identify thespaces which appeared torepresent distinctive changesto the business environment,and therefore also created

new challenges for businessmanagers. These are developedin the next section.

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The business challenges

The world which emerges overthe next decade and beyond isone with some hard constraints(especially around resources),some soft opportunities(for example the changingshape of consumer markets,technology), and some factorswhich are ambiguous, suchas identity. Often businesseslook at such dilemmas and

trade them off. Indeed, this is anormal response in corporateculture, which is often basedaround negotiation and internalcompromise between importantinternal and external players.

Dilemma theory, developed byCharles Hampden-Turner andFons Trompenaar, originally to

deal with cultural conflict withinorganizations, suggests thatrather than either/or trade-offs, both/and outcomes canbe found which reconcile thedifferences and create morevalue, opening up new spacesfor innovation. Indeed, suchdilemmas often pit hard edgesagainst softer dangers: asHampden-Turner puts it, the

rocks of Scylla on the one handwith the whirlpools of Charybdison the other.

In this section, therefore, weexplore the business challengesposed by the trends, and someof the opportunities that theyrepresent.

Listening to newconsumers

The changing economicenvironment opens up the

prospect of different typesof customers; a new middleclass across much of Asianand Latin America, and debtconstrained consumers in

Europe and the United States,who expect to see greatervalue in their exchanges withbusinesses. Globally, the costsof basics (such as food and

energy) are far more likelyto rise than fall over the nextdecade, so discretionaryincome will be squeezed, even

in those markets showingcontinuing economic growth.In the richer countries, theexperience of recessionandsome of the more unscrupulouspre-recession corporatebehaviorcreates demandsfor more social behavior frombusinesses. The academicMichael Porter has written

about shared valuesomeway from his original company-focused work on the creation ofvalueand the challenge thisrepresents to the financially-driven perspectives which havedominated businesses for thepast generation:

How else could companiesoverlook the well-being

of their customers, thedepletion of naturalresources vital to theirbusinesses, the viability

Dilemma Theory

Hard

Constraints

Soft Edges

Trade Off

X(10,10)

Source: Fons Trompenaar, Riding the waves of culture, Valencia 2008

The future belongsto the meaningorganization

which sets out tobuild authenticprosperity.



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of key suppliers, or theeconomic distress of thecommunities in which they

produce and sell?26

From a different background,the business critic UmairHaque argues that the futurebelongs to the meaningorganization which sets out tobuild authentic prosperity. Ashe writes in a blog post to markthe publication of his book, TheNew Capitalist Manifesto,

Companies are going tohave to get lethally seriousabout having an enduring,meaningful, resonant,multiplying, positive,proliferating set of impactsof all types, whether social,human, intellectual, spiritual,creative, or relational. An

isolated notion of profitis obsolete: its an aridindustrial-age conceptionof a currency-focusedconstruct thats built totrivialize everything but whata firm owes its owners.27

Some of the questions askedwhen businesses developproducts and services for theworlds poorer consumersifthey have so little, what arewe offering that is worth theirspending on?are relevanthere, too. The dilemma isabout providing more valuewithout being bankruptedoneself; resolving it may involvedifferent types of servicedesign, different materials, or

different calculations aboutthe worth of lifetime customervalue. But also expect to seemore innovation from the

South coming into Northernmarkets. It is only a matter oftime, for example, before low-

cost products such as the TataNano car, or unlocked versionsof Huaweis $100 AndroidSmartphone, find their way intothese markets. Tata, of course,owns Jaguar and Land Rover inthe UK.

Finding new ways to createvalue with your customers mayinvolve more intelligent use ofdata. The trends point towarda world in which companiesare drowning in data, butlikeColeridges The Rime of theAncient Marinerare unableto touch any of it because ofregulation or privacy concerns.But sometimes the mosteffective way to utilize a richsea of data is not to target an

individual but to understandthe shifting flows and eddies ofthe mass. And theres anotherresolution to this dilemmawhich fits well with the idea ofthe meaning organization.Rather than semi-covertlycollecting data exploitingconsumers carelessness aboutopting out, you create a data-sharing proposition that makesconsumers want to opt in.

Producing for scarcity

A second dilemma is betweenthe developing energy andresources constraints and theneed for businesses to be ableto continue producing andmanaging goods and services.

Companies have alreadystarted to reduce their energyconsumptionit is, invariably,

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one of the early gains ofcorporate sustainabilityprograms. Increasing energy

prices will make businessesfocus harder on this. But in anenvironment where power cutsare likely to be increasinglycommon in the affluentworld, resilience will be moreimportant than energy saving.Building and managing localcapacity in renewable energywill be an increasingly importantpart of operational planningand facilities management. Thisalso represents an opportunityfor businesses to engage morewidely with their communities.

Resource pressures createsimilar problems for bothcost base and supply chain,but with greater scope forinnovation. In the short term,

it is possible to reduce theamounts required. This isalready happening, for example,in response to potential andactual shortages of rare-earthmaterials. GE, for example,has been monitoringresourceissues for a number of years.Its foresight meant that ithas, over the last three years,developed ways to capture themetal grindings previously lostduring manufacture, recapturerare metals, and develop newalloys.28

These are the early wins inresource management. Beyondthis, there is potential both todesign materials out of usein products, and to make it

possible to reuse materials(here design for disassemblyhelps). There will be innovationin new materials, initially

through nanotechnology, andlater (in the 2020s and beyond)through biotechnology. And

theres also significant scope forshifting from selling productsto managing services, usingICT to manage provision anddelivery. This is a model firstdeveloped in Jeremy Rifkinsbook The Age of Access, andmost recently popularized byLisa Gansky as the mesh. Dataand social networks becomea vehicle to organize accessto something without needingto own it. Gansky states, TheMesh has emerged as thebest new creative engine forgetting more of what we wantwhen we want it, at less costto ourselves and the planet.The car-share scheme, Zipcar,is one of the most prominentexamples of this trend. In the

services sector, we are alsoseeing companies incentivizetheir customers to use less bysharing the gains with them,a trend sometimes known ascollaborative consumption.

Beyond this, the model ofcradle-to-cradle beckons,or closed-loop production, inwhich producers create anindustrial ecology of linkedproducers: any by-productsfrom a production processeither go back into the landas a bio-resource, or becomea raw material for one of theirindustrial ecology partners.It is an attractive model, andfar more sustainable, but itrequires a deep reorganization

of industrial and businesssystems, focusing much moreintently on material flows.29While it may take 25 years or



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more to become a mainstreammodel, companies whichpioneer this are likely to find

that they have developed aresistance to shock whichallows them to outpace theircompetitors.

We expect interest in theseissues to be acceleratedby the arrival of full-costaccounting models, whichextend the balance sheetto include the costs whichbusinesses currently dumpon their neighbors and theirenvironment. These accountingstandards already exist, andwe will start to see elementsof them coming into corporatereporting over the decade,certainly in some markets.Indeed, one of the sharpesttrends in the wake of the

financial crisis has been thewidespread emergence ofarguments for new ways ofmeasuring economic andbusiness performance.

Capitalism versus capital

A wider question is whetherthe interests of business

are promoted by finance.Capitalism, perhaps, is nolonger well served by capital.This is part of a broaderquestion about the idea ofefficient markets, which hasbeen used as a justification forcontinuing deregulation of thefinancial sector, and has createda false dichotomy betweenmarkets and the state. Efficient

markets, notes Joseph Stiglitz,can still produce sociallyunacceptable outcomes.Governments havent helped

here, placing themselves inthe same ideological trap.As Porter and Kramer note,

The presumed trade-offsbetween economic efficiencyand social progress have beeninstitutionalized in decadesof policy choices. In practice,whether a good is produced bythe market or the state is downto particular circumstancesand particular contexts. Forexample, Taiwanese and SouthKorean steel mills, government-

owned, were more efficientthan privately-owned USmills. Good social protectionsystems can make it easierfor private businesses, andtheir workforces, to adjust toexternal change.30Diane Coyleobserves that there is no rightplace for the boundary betweenthe public and private sector,or between markets, firms,or other kinds of collectiveinstitutions.31

The financial crisis hasre-opened these questions,and resources pressuresadd another twist. In timesof shortages, politicians and

regulators are more likely toimpose restrictions on markets.This is often seen as a simplisticalternative, but there are many

ways in which markets can berestricted without requiringpublic control.

Historically, markets arecomplex affairs which balancethe interests of competingclaims, and allow economicand social uses to be balanced.Land is a case in point. BarbaraHeinzen makes a valuabledistinction between columnrights and mosaic rightsin land ownership. Columnrights are those framed byeconomic rights, where anowner has access to all therights associated with a pieceof land (including the air aboveand the minerals below), andcan dispose of the propertyas they choose. Mosaic rights,instead, give different groupsoverlapping rights of use and

access to the land.32Suchissues are already live businessissues. For example Coca-Cola states thatafter someoperational difficulties in thepastin countries experiencingwater shortage it designs itswater use in such a way that itdoesnt compromise water useby local communities.

Beyond markets

Whether regulators choose toconstrain markets or not, theyare likely to be increasinglycontested as mechanisms forsharing scarce resources. Oneof the strongest themes whichemerged from our analysis ofthe drivers was justice with

everything, which appearedrepeatedly in response toresources and security. This is,essentially, an issue about the

Whether a goodis produced by themarket or the stateis down to particularcircumstances andparticular contexts.

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fairness of market outcomesbetween different members ofsociety, and between societies.

Sustainability brings a thirdtype of outcome into sharpfocus: the balance of outcomesbetween present and futuregenerations.

The first two issues canbe resolved, generally, bycombinations of limits onmarkets, rights and regulation.In contrast, mechanisms for

representing the interests offuture generations, are almostcompletely absent frombusiness or political processes.And conventional cost-benefitanalysis is very poor atrepresenting such interestsin financial modeling; modestdiscount rates obliterate thevalue of investing in the interestsof the future.

But the economics ofsustainability suggest that thiswill change quickly. As DianeCoyle writes in The Economicsof Enough, The question ishow, as a matter of morality, weshould include people in futuregenerations when we makedecisions about consumingenvironmental resources now.Hungaryso far uniquelyalready has a ParliamentaryCommissioner for FutureGenerations. Businesses willincreasingly need to be able toshow that their decision-making

processes have allowed for thevery long term, and legislativeand accountancy codes

will start to be designed torepresent it in todays decisions.

In other words, then, howdo businesses ensure thatstakeholders who are presentlyinvisible to themthey may noteven be bornare representedin todays business decisions?It is a long way from the currentenvironment, at least in the US

and the UK, where shareholderswhose interest is short-term andspeculative can have a decisiveinfluence on a takeover battle.Accounting-based models willnot be enough. But governancewhich takes account of suchlong-term value asks questionsof a business which shouldmake it far more resilient.

The return of land andlabor, and the old

economics

Finally, one way of thinkingabout this new businesslandscape is to go back tosome of the early ideas abouteconomics, namely that anenterprise was obliged tocombine resources of land,labor, and capital to producetheir goods. By the middle ofthe 19th century, land was lessimportant, and labor more so.(The publication of Marxs DasKapitalwas one sign of thisshift.) By the last quarter of the20th century, a combinationof globalizing economiesand increasingly widespread

communications technologyhad all but eliminated thesignificance of labor to theenterprise. Capital became theonly factor of production worth

worrying about, and the corridorbetween the CEOs and theCFOs offices was the only place

worth being seen.

But in the last decade andthe next one, land and laborare re-emerging as importantfactors of production. In thecase of land, it is increasinglyrepresented by the raw andprocessed materials that areharder, and more expensive,to extract from itfossil fuels,

water, minerals and so onaswell as biosphere resources andeco-system services.

In the case of labor, thepressures have been slower todevelop, but they can be seenin a number of different ways.These include: the changingattitudes of Millennials to workas a source of status (it is a less

important part of their identitiesthan for earlier generations);the increasing wages beingcommanded by workers informer low-wage economies,which is an inevitable part ofeconomic development; andthe increasing understanding bybusinesses of the role of peoplein the increasingly difficult taskof creating value from complex

and ambiguous knowledge.

Suddenly the OperationsDirector and the HumanResources Director have to jointhe conversation, along withrecent C-suite additions suchas the Chief Talent Officer andthe Chief Knowledge Officer.Following close behind, perhaps,will be the CXO - the Chief Ethics

Officer.

Land and laborare re-emerging asimportant factors ofproduction.



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The business of 2020

We know, because wevebeen told often by academicsand business consultantsover the past two decades,the characteristics of thebusinesses of the future. Theywill, we read, be responsive,adaptive, flexible, agile; all wordswhich are rarely associatedwith the large production-driven corporations of the 20th

century.

These may be necessarycharacteristics, but theargument of this section is thatthey are not enough in the faceof the world of 2020. Some areonly symptoms of a deeperchange. It is worth developingthis point. Many of the changes

urged on businesses have comefrom people who are over-influenced by the twin driversof economic globalization andtechnology, and are largelyblind both to external resourceissues and to how organizationsacquire, develop, encode andretain knowledge, and to howbusinesses interrogate theirexternal environment for signs

of change.

Responding to the changingglobal landscape described inthis report will require differentcharacteristics and differentperspectives. Organizationsare more than temporaryassociations of individuals. Theeconomic rationalefor which

Ronald Coase won a NobelPrize in Economicsis thatthey reduce the transactionalcosts of doing business;individuals can share ideas

and set up projects without

having to go through thetime-consuming processes ofreaching agreements on howto do business together. Butthis is a narrow instrumentalperspective. They are muchmore than this. In his finebook The Origin of Wealth, EricBeinhocker reminds us thatorganizations are complex

social systems. They have goals;they maintain boundaries;they are purposeful socialconstructions.33 So if theyare to survive in the face ofincreasing turbulence, theyneed characteristics whichare designed to maintain theintegrity of the organizationwhile being open to externalchange.

The three characteristics of theorganization that will thrive in2020 are explored below: thatit has struck a balance betweenefficiency on the one hand andorganizational sustainabilityon the other; that it is able tomatch changes in the externalenvironment with changes

in its ability to interpret thatenvironment; and that it is ableto maintain its organizationalboundaries while being opento new sources and resources.These three tasks are laidout in the schematic, and aresummarized here under theheadings of:

Managing for resilience Managing for variety Managing porousness

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(a) Managing for

resilience

One of the biggest lessons fromthe financial crisis in the USand the UK was that tightly-coupled complex systems arelikely to fail. There are too manydependencies and too little timeto make corrections when oneelement starts to malfunction.Many modern supply chainsare similarly tightly-coupled;

it is almost a requirementof the just-in-time supplychains favored by moderncorporations for reasonsof cost-management andcustomer-responsiveness. Suchsystems prioritize efficiencyover resilience. This has workedbecause resources have beenplentiful, and because they havebeen able to exercise significant

control over their operatingenvironments. But in pushingfor more efficiencies, theyhave reduced resilience andincreased brittleness. Duringthe banking crisis, for example,the banks simply snappedwhen the external conditionschanged. Many would havebeen out of business as quickly

as Lehman Brothers had itnot been for billions of dollarsof federal bailouts. But it is

not just true for the bankingsector. During the volcaniccrisis in early 2010, gaps startedto appear in food systems.Indeed, Andrew Simms of thenew economic foundation haswritten an essay arguing thatthe food system is so vulnerablethat we are, in his words, ninemeals from anarchy.34

If too much efficiency canspell disaster, too muchresilience means stagnation. Aninteresting paper by BernardLietaer and others arguesthat human systems such asbusinesses need to learn fromthe way in which ecologicalsystems balance efficiency andresilience. They keep the two in

balance, but prioritize resilienceover efficiency: resilience isroughly twice as important thanefficiency at the optimum. Thewindow of viability is strikinglysmall.

At the moment, however, evenif businesses are starting tomove towards more sustainablebusiness models, finance

and governance, certainly inthe Anglo-Saxon businesscultures, are still pulling

towards efficiency. Short-termism is one symptom of theimbalance towards efficiencyover resilience, and in turnit worsens the balance. AsMcKinseys Global ManagingDirector Dominic Barton wrotein Harvard Business Reviewrecently, If the vast majority ofmost firms value depends on

results more than three yearsfrom now, but management

is preoccupied with whatsreportable three months fromnow, then capitalism has aproblem.35This is not thecase everywhere, for one of thestrengths of Asian businessesso much so that it represents acompetitive advantageis theirwillingness to take a longer view.

(b) Managing for variety

The second feature of thethriving business of the 2020sis its ability to understandthe level of variety in itsexternal environment, andhow to monitor it, manage it,and respond to it. It is worthbacking up here for a moment,since variety is a technical

term drawn from cybernetics,popularized in the businessliterature by Stafford Beer.

Sustainability

100%

Diversity & Interconnectivity

Optimal Balance

GreaterEfficiency

(streamlining)

GreaterResilience

Towardsbrittleness

Towardsstagnation

Real-lifeecosystems

Source: Lietaer et al, Is Our Monetary Structure a Systemic Cause for Financial Instabil-

ity? Evidence and Remedies from Nature. Journal of Futures Studies, March 2010

One of the strengthsof Asian businessesis their willingness totake a longer view.



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The notion of variety comesfrom the systems work ofRoss Ashby in the 1950s,

who observed in his Law ofRequisite Variety that onlyvariety can absorb variety.In other words, organizationsneed to match internally thevariety they encounter in theirexternal environment. This isnot something that happensautomatically. Instead, it isdone through a combinationof an organization firstattenuating or reducingsignals from the environmentto simplify, thus reducing thelevel of variety which needsto be understood, and thenamplifying or increasing itssignals back into the externalenvironment, thereby boostingits own variety.In practice, mostmanagement processes, in both

the commercial and the publicsectors, can be understood asbeing about strategies whichare designed to manage variety,whether simplifying the externalenvironment (thus reducingvariety) so that it can be betterunderstood and acted upon,or increasing responsiveness(thereby increasing variety).Segmentation, for example,reduces the external variety ofmillions of customers to a muchsmaller number of customertypes. Channel management,similarly, reduces the waysin which a business hears itscustomers so it can processtheir requests more effectively.Innovation is usually designedto increase variety (for example

through product extensions),and business strategies suchas mass customizationeffectively enabling the

customer to personalize theirexperience, but from a limitedrange of choicesare a classic

example of managing variety.

Looking at the drivers, external

variety seems certain toincrease sharply. Businesseswhich are not able to absorband process this increasedexternal variety will suffer.Organizations need to think

of this as a whole cycle, anoverall system of exchanginginformation between theexternal environment andthe organization. This creates

proper focus on the wholechain of the activities involvedin processing whats going on

in the external environment,understanding it, andresponding, learning as you go.

Sometimes, in response toexternal changes, organizationswill change the way theymanage variety by increasingtheir ability to managecomplexity. For example,recent innovations in service-

design models have movedaway from having front-linestaff handle calls according tostrict time-based and process-based parameters, to lettingthem resolve the whole issue.This increases variety initially,and takes more time, butreduces time and cost later on,as the work of John Seddon

demonstrates.36

The one option that is notviable is ignoring changes inthe complexity of the external

One option thatis not viable isignoring changesin the complexityof the external

environment.

Organization

Information

Amplify

Attenuate

ExternalEnvironment

Source: Adapted from Stafford Beer, Doagnosing the

System for Organizations, Wiley, 2003

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environment. As Stafford Beer

once wrote, The lethal varietyattenuator is ignorance. Inother words, what you dontknow can kill you.

(c) Managing porousness

Organizations, as noted above,have boundaries. They haveedges which delimit where they

end and their environmentbegins, even if that edgesometimes becomes blurred.Without edges, they wouldno longer be organizations,but open networks. And thereare constant flows acrossthose boundaries, a constantexchange of money, goods,services and information,between the organization

and its customers, suppliers,regulators, legislators andneighbors.

The edges, therefore, alreadyhave doors. But when theexternal environment ischanging rapidly, they need toexchange more, in particular,knowledge about methods,

processes, ideas, behaviors,worldviews, systems andbusiness models. The conceptof porousness, adapteddeliberately from natural

sciences, deals with how this

happens.

The pervasive metaphor ofbusiness has been aboutorganizations as machines.But this is unhelpful, fororganizations are also livingsystems, Academic Karl Weicksays organisations are in thebusiness of producing meaning,

and in such a way that thesemeanings continue beyondthe life of their founders.37InHidden Connections, FritjofCapra observes that while amachine can be controlled, asystem can only be disturbed.38Porousness is about helping tocreate disturbances.

When environments change

and organizations dont,they become meaningless.Porousness creates theopportunity to engage withnew meanings, to explorethem, to develop them, toprovoke, without destroyingthe reasons why organizationsexist in the first place. Inpractice, organizations arent

good at this. Art Kleiners richcounter-cultural businesshistory, The Age of Heretics, isa history of people disturbingtheir organizations with new

practices and ideas.39His

metaphor of the heretic is nota careless one. In the corporateenvironments of the second halfof the 20th century, few of themturned out well, even where theprotagonists could show thattheir approach produced better

outcomes for the organization.(And most of their ideas havenow reached the businessmainstream).

The notion of open knowledgehas started to create someporousness in terms of ideas.A number of companiesfrom Procter and Gambleand beyondhave developedapproaches to innovation basedon sharing information andideas with people outside oftheir businesses. Silicon Valley

prospered, while Route 128 didnot, because of the informalexchanges between engineersfrom different companies whosocialized away from work. (The

Explaining requisite variety

Stafford Beer used examples from the world of police and crime to explain the idea of requisitevariety. To use a simple, if extreme, example, a police force could reduce the level of crimeandthe level of variety in its external environmentif a citizen was always accompanied by a policeofficer, although the police force would be very large and the society very poor. But in practice,this is not how policing is managed. Instead they reduce external variety by grading crimesby their level of seriousness, while increasing their own internal variety by deploying cars andhelicopters, employing community officers (without the full range of responsibilities of policeofficers) and using surveillance technology such as CCTV cameras.

A machine can be

controlled, but asystem can only bedisturbed.



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east coast Route 128 computercompanies were morecorporate and more closed).40

There is evidence that open,commons-based, knowledgeapproaches tend to producegreater commercial and socialvalue than closed ones, even ifthe music and film industries,or politicians, dont appear tounderstand this yet. But then,we also know that innovationis more likely to happen atthe edge of the organization,away from the corporatecentre, where the pressures ofacculturation are less keenlyfelt.41

There is a consequence here forhuman resources. Organizationstend to discriminate againstindividuals whose resumesare full of change. As Mary

Catherine Bateson points out,such people show resilience,and creativity, the strengthto produce new learning.She adds, Quite a commonquestion in job interviews is,What do you want to be doingin five years time?. Something Icannot now imagine is not yet awinning answer.42

Porousness is partly aboutwelcoming the strange anddifferent, and finding waysto do this so you can absorbdifference, rather than reject it.But there are some easy wins:validate staff who networkoutside of the business;welcome those who seekcareer breaks; and encourage

returners whose work or travelselsewhere can let them, as theyreturn, see your place as if forthe first time.

In practice, however, largecomplex systems such asorganizations tend to respond

to threats and changes incompletely the opposite way, byincreasing their span of control.As Thomas Homer-Dixon writes,When we try to manageserious threats to our well-being, we usually create neworganizations, institutions,and procedures rather thanreforming those that alreadyexist. ... Too often, though, thisstrategy simply adds anotherlayer of complexity on top ofan already cumbersome anddysfunctional managementsystem. So, over time, ourmechanisms for dealing witha more volatile world becomemore rigid and susceptibleto catastrophic failure whenexposed to severe stress.43

In effect, we deal with increasedcomplexity by creating systemswhich are more complex,more rigid, and more tightlyconnected, even though thisis setting up the conditions fora later disaster. Instead, weshould be increasing simplicity,building buffers, and softboundaries so we can absorbchange slowly instead of beingoverwhelmed by it.

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industries. This is also true inthe US. As Senator John McCainsaid, Bushs first energy bill left

no lobbyist behind.45

Third, in terms of organizationalknowledge, businesses findit easier to maximize existingproduction methods thanto invest in new ones. Theknowledge, skills, relationshipsand business models involvedin doing this are already familiarto them.

And finally, efficiencies areas likely to lead to increasedconsumption as to resourcesavings. This is the so-calledJevons Paradox, formulated inthe 19th century and repeatedlyfound to be true as energyefficiencies have increasedover the past generation.

Depressingly, perhaps,when The Limits to Growthauthors run their WorldModel,technology gains merely delaythe moment when the globaleconomy reaches the point ofovershoot and collapse. Itnever averts it.46

The new technologies willcome, but too slowly to enablea smooth transition fromone industrial model to thenext. The result will involvesignificant disruptions tobusiness as usual, certainly inricher markets, and probablyin middle-income countries aswell, over the next 10 years andbeyond.

From a narrow commercialperspective, one way forbusinesses to maintain marginsand growth in constrained

markets is to put pressure onsuppliers and their workforceto reduce costs. Looking at

income statistics, this hasbeen happening for some timealready in the US, and is a trendin other countries, especiallysince the financial crisis. In hisrecent book on the precariat,Guy Standing writes of theincreasing numbers of insecureand poorly-paid workers whoseexperience is of temporarycontracts, short-term work, andfew benefits.47But this processcant continue without raisingquestions about equity, fairness,and social justice. It is not evenparticularly good economics.

If the prospects for

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