UNC Megatrend Presentation

1. Welcome to
Megatrends in Business
A speakers series sponsored by
The University of North Carolina at Chapel Hill
Kenan-Flagler Business School
MBA for Executives & Executive Development
Programs

2. MBA for
Executives Weekend MBA, OneMBA®
Visit our web sites:
www.emba.unc.edu
www.OneMBA.org
Blog: www.EMBAtalk.com
Follow us www.emba.unc.edu/connect

3. UNC Executive
Development Custom and Open Enrollment Programs
UNC Executive Development partners with successful companies
to develop leaders and build better organizations by leveraging
p g y g g
The Power of Experience.
For more information: www.ExecDev.unc.edu
or contact us at 1-800-UNC-EXEC

4. America in the Reset World:
Charting N
Ch ti a New C Course
Professor Peter Brews
Kenan-Flagler Business School,
University of North Carolina at Chapel
Hill
Megatrends
The Westin Arlington Gateway
April 15, 2010

5. Presentation Outline
• What is Reset, why choose it as headline?
• Resets facing America: what is the Reset World?
• Theory of Reset?
• How far in are we?
Questions welcome any time

6. Reset
‘To set again or anew’
Merriam-Webster
Merriam Webster Online Dictionary
Re·set
– verb (used with object)
1.
1 to set again: to reset an alarm clock
clock.
2. to set back the odometer on (an auto or other vehicle) to a lower reading: a
used-car dealer charged with resetting his cars
Dictionary.com

7. Potential Resets facing America
Consumption Reset: conspicuous to careful; more to less
p p ;
or corollary
Savings/Investment Reset: Less to more
Fiscal Reset: less to more taxes/more to less govt. expenditure

8. Consumption, savings, fiscal resets necessary because America has lived
beyond means for past generation…
Country out of balance, publically and privately

9. Major Conclusions

10. US Federal Gross Debt as % of GDP: 1940-2009
.
Source: zFacts com
zFacts.com

11. US Gross Federal Debt is now around 98% of US GDP
Source: http://www.usgovernmentspending.com/downchart_gs.php?year=1792_2010&view=1&expand=

12. US Macroeconomic data: Consumption and Mortgage Equity Withdrawals
Graph constructed by Professor Christian Lundblad, Kenan-Flagler Business School, University of North Carolina at
Chapel Hill.
Consumption and GDP data from the Bureau of Economic Analysis (BEA). Mortgage equity withdrawals are measured as
the year-over-year change in mortgage debt (from the Federal Reserve Flow of Funds) minus 70 percent of residential
investment spending (f
(from the BEA). (Source: L. Josh Bivens, Economic Policy Institute)
) (S )

13. US Macroeconomic data: Home prices, building costs, interest rates, population
p , g , ,p p
Source: http://www.econ.yale.edu/~shiller

14. Other
Oth resets facing America
t f i A i
Political Economy Reset: From Last Super Power to First Among Equals
Energy Reset: From fossil to renewable fuels
Globalization Reset: From supply to market seeking
These three are less classical ‘resets’ than structural changes Americans must
resets
face/adjust to

15. Reset classically about returning t practices f ll
R t l i ll b t t i to ti followed b f
d before; i li return t
implies t to
previous status quo
But reset includes new behaviors as well as returning to sq; reset often also
involves change management

16. If reset involves change before constructing Theory of Reset consult Theory of
Change Management
Management….

17. Change Management Approaches/Models
Top down versus bottom up; directed versus
participative
Shock therapy versus gradual change
Change as unfreeze, change refreeze (Lewin
unfreeze change, (Lewin,
1951)
Change as D x M x I > Cost of Change (Beer 1989)
(Beer,
Theory E versus Theory O Change (Beer and Nohria,
2000)
)

18. Beer’s Model: Change as D x M x I > C
Successful Change = D x M x I > C
where:
D = Dissatisfaction with status quo
M = Model of future state aspired to, including
structures, systems, behaviors, attitudes etc.
I = Implementation/processes/sequence of events required to
learn new structures, systems, behaviors, attitudes such that
desired state is achieved and the change accomplished

19. and C = Cost of Change, i.e.
Loss of power
Loss/obsolescence of skills/competences
Loss of relationships/jobs
L f l ti hi /j b
Loss of rewards/benefits/titles
Loss of indentity
Costs if status quo maintained/change not implemented

20. There is no more delicate matter to take in hand, nor more dangerous
to conduct, nor more doubtful in its success, than to be the leader in
the introduction of changes. For he who innovates will have for
enemies all those who are well off under the old order of things and
things,
only lukewarm supporters in those who might be better off under the
new.
Niccolo Machiavelli

21. Towards a Theory of Reset
1) Consider level of D; if population not ready to reset increase D
“Don’t let crisis go to waste…”
g
2) If reset is back to previous status quo, go there after establishing urgent need
to do so
3) If reset involves new model/solutions, follow accepted change management
procedures, i.e. ensure D, build and test model, roll out etc., and
• Make sure all stakeholders with role to play in model’s
construction/testing/rolling out are involved in construction
• Look for best overall model/solution not driven by stakeholders with narrow
model/solution,
interest that might confound/hijack model/solution

22. Towards a Theory of Reset
4) Model’s terms and leadership actions will also impact reset’s success:
• Shared sacrifice will enhance acceptability
• Leaders must be first to adopt reset ….

23. Towards a Theory of Reset
5) How model/solution i f
H d l/ l ti is framed/sold also i
d/ ld l important:
t t
“Americans could reduce their consumption by 20 percent and they probably
would not notice it…”
or
“What would happen to your quality of life if you had 20 percent less stuff?”
What stuff?
or
“Do you live to work, or work to live?”
or
“And if you think we are in trouble, visit Haiti, Zimbabwe, Mexico, Iceland,
Greece, etc…keep your scale/perspective, show some character, etc…”

24. For challenging resets managing expectations and framing reset positively key
Also best if leaders ‘tell the truth’ backed by credible, balanced evidence
tell truth credible
People not stupid…

25. How f i are we?
H far in ?

26. Resets/adjustments needed:
• < 5 - 10 % in US Consumption as % of GDP
• > in US Savings to 5 - 10% of GDP
• > in US taxes 3 - 5 of GDP %
• < 20% in average US body weight
i.e. all must save more, consume less, adjust consumption expectations, de-
lever
Note: 2009 QIII Personal Consumption Expenditure was estimated to be just
over 71% of GDP; GDP in 2009 < by more than 3 percent

27. Average Real GDP Growth
Year Growth Rate
2009 -3.2
2008 0.43
2007 2.13
2006 2.65
2005 3.08
2004 3.58
2003 1.83
U.S. Bureau of Economic Analysis
2009 estimate until Sept.

29. Gross Private Domestic Fixed Investment
US$ billions
Year (2005 base year)
2009 1,453.0
2008 1,989.4
2007 2,146.2
2006 2,230.4
2005 2,172.2
2004 2,058.2
2003 1,871.6
U.S. Bureau of Economic Analysis
2009 2nd Quarter estimate

30. Future Scenarios:
Party On, Dude
To
Tighten Belts

31. Party On, Dude
• Bailouts continue/budget deficits g
g grow, p
, pandering rather than p
g pain: no p y as
pay
you go imposed
• Government borrowing increases, private investment/GDFI crowded out,
welfare grows - corporate and consumer
• World eventually becomes nervous of US$/Economy, dumps US$, status of
world reserve currency lost to Euro or Rmb
• US descends into second class status, paying off today’s debt through
inflation, debasing currency into Mickey Mouse money
• This is worst case scenario, unlikely but possible

32. Tighten Belts: Take the Pain, Adjust, Emerge..
• After stabilization, tightening occurs: interest rates rise to encourage
savings/counter inflation, budget deficit stabilizes, federal govt. > discipline
• Short to near term economic growth declines/moderates, jobs lost, Americans
reduce consumption, increase savings to de-lever balance sheets, increase
savings/cushions
• After initial adjustment US economy resumes growth based on ongoing
productivity gains, clean tech/high tech/organic innovation, local and export led
growth
• China, Brazil, India, others become locomotives of global growth, lasting well
into the 21st Century, consumption model evolves
• US evolves from last Superpower to First Among Equals

33. Situational check
• Obama Administration/Congress still stemming bleeding, closer to p y on, dude
g g g, party ,
than to tightening belts; triage
• Deficit for 2009 federal budget forecast to exceed US$1 6 trillion 3x greater than
US$1.6 trillion,
2008; possibly >US$1 trillion next year too; easier to increase debt than to impose
discipline/pay as you go
• Choice between stimulating investment vs. consumption vs. permitting correction;
borrowing should be for investment, not for consumption
• Pres. Obama’s talk of fiscal responsibility encouraging…walking tight rope
• Serious belt tightening only likely after next Presidential election; most likely if
O’bama re-elected …

34. Either way Americans must reduce consumption/living standards to match
productivity/income, and prepare for the additional overhead of healthcare,
baby boomer retirement costs, and for clean energy development costs
y gy
We probably cannot borrow grow vote our way out of the current mess
borrow, grow,
More than likely, future entitlement expenditure will have to be curtailed
(see O’Bama’s Deficit Reduction Panel, headed by Bowles and Simpson)

35. And we still have some way to go in a long term adjustment that will span
decades, if not generations…
Economic recovery/growth in the short/medium term likely to be muted, below
trend
t d

36. For the sake of our children/grand children we must deal with our
economic imbalances (short term) as well as with Global
Warming/Climate Change (long term)
We are currently mortgaging their futures, economically and
environmentally…
BIG TIME

37. But don t go from irrational exuberance to irrational depression
don’t
All a question of balance...

38. Whether US declines or revitalizes depends upon political
choices/leadership and willingness of all to confront reality and adjust
p g y j
End of world not nigh, it could be far worse…
US economy still envy of world, flexible, innovative, open for business,
productive
While recovering from our party and hangover, all must work to keep it that
way!!!!
Defer gratification, invest/save, and most importantly live within means
And the longer we wait/leave the adjustment, the bigger it will be, the more
it will cost…

39. And remember principles of Reset/Change Management
1) ) Consider the level of D; if population not ready to reset, increase D
2) If reset bac to p e ous status quo go t e e a te estab s g u ge t need
) eset back previous there after establishing urgent eed
to do so
3) If reset involves new model/solutions, follow accepted change management
procedures, i.e.
procedures i e ensure D build/test model roll out etc
D, model,
4) Model’s terms and actions of leaders will impact reset’s success
5) How model/solution is framed/sold important, and manage expectations
astutely
Two more:
6) Change always harder than you think it will be, takes longer, costs more…
7) Change is never as hard as you worry it will be…