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Corporate Management in Turbulent Times

By Dr. Allen Yeh, Dec 29th, 2008/12/28

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“In turbulent times, an enterprise has to be managed both to wit

hstand sudden blow and to avail itself of sudden unexpected o

pportunities.

This means that in turbulent times, the fundamentals have to b

e managed, and managed well”

--Peter F. Drucker, Managing in Turbulent Times”-1980

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The Year 2008 will go down in history as one of the most turbulent

period since WWII, if not since the 1930 “ Great Depression”

-Just look at some examples: In July 2008, oil was trading at an all time high of 147USDs/barrel-and is around

40USDs at the moment-projected to go down to mid 30’s in early 09

Daily chartered rate for large bulk cargo ship a few months ago, was close to

240,000USDs/D, and is now only about 1% of this-a reduction of 99% in less than

6 months

In stock markets, the decline is also un-unprecedented -if you buy 1,000USDs of

Delta Airline a year ago, you would have 49.0USDs left today; -If you had

purchased 1,000USDs worth of AIG one year ago, you would have 33.0USDs today

The prices of world’s major commodities, such as steel, aluminum, etc are also

declined by more than 50% in a short 6 months span

How can an organization cope with changes of such magnitudes? How

does “Corporate Manager” manages during time of extreme “Volatilities”

and “Turbulent”

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The Five Key Fundamental Forces

I. The emergence of the new world order/regional

economic blocks

II. The Environmental Impacts on Industrial

Development /Cross Boarder Trade-How to Manage

“Sustainability”?

III. The Transition from Petroleum based economy to

“Renewable/Bio Energy”??

IV. The global warming/impact to industrial development/

cross border trade

V. The re-structuring of world financial system

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I. The emergence of a new world order/regional

economic blocks.

The 21th century will over turn many of our basic

assumptions about economic life The end of European domance of global politics a

nd economics The decline of America as a economic super pow

er Emergence of the new economic powers: China, I

ndia, Russia and Brazil etc.

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World Population from AD 1 to 2001

I. The emergence of a new world order/regional

economic blocks.

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Population Growth from 1950 to 2050

I. The emergence of a new world order/regional

economic blocks.

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Human Population in the Developed and

Developing Countries from 1950 to 2005

I. The emergence of a new world order/regional

economic blocks.

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Economic Activity by Region in 2000 and 2050 (projected)

I. The emergence of a new world order/regional

economic blocks.

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Annual Growth Rates from 1990 to 2005 vs.

Income Level in 1990

I. The emergence of a new world order/regional

economic blocks.

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The current trajectory of human activity is not subatainablePopulation growth and consumption of resources such as farmland, wat

er, commodities will put severe strains on the world’s eco-system.Rapid rate of consumption in energy resources, particularly oil—the eme

rging of large population centers such as China, India, Brazil etc will put further strain on world’s energy sources-

Environmental Mandates, such as restriction on use of hazardous chemicals in manufacturing processes and the EU’s WEEE recycling mandates etc are all measures to regulate cross border trade.

The emergence of “CO2 abatements” are an important economic and ind

ustrial policiesGlobally, the trends of production and retail trades increasingly focusing

on issues such as :

-Global Warming;

-Sustainability

-CO2 labeling

II. The Environmental Impacts on Industrial Development / Cross Border Trade

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“Oil is the world’s biggest and most pervasive business, the

greatest of the great industries that arose in the decades of

19th century. As we look toward the 21th century, it is clear t

hat mastery will certainly come as much as from a computer

chip as from a barrel of oil…Until some alternative source of

energy is found, oil will have far reaching effects on the glob

al economy; major price movements can fuel economic gro

wth, or contrarily drive inflation and kick off recession.”

“Daniel Yergin” – President, Cambridge Energy Research Associates

III. The Transition from Petroleum based economy to

“Renewable/Bio Energy”

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The drilling of oil from black rock for the making of “Ke

rosene” in a small town called “Titusville” western pe

nnsylvania in 1850’s served as the origin of modern p

etroleum industry, with Standard Oil Co then dominat

ed not only the US but the world’s petroleum producti

on and trade for many decades.

Up until 1970’s US was the largest oil producer in the

world with daily outputs exceeding 10 MM barrels/D.

III. The Transition from Petroleum based economy to

“Renewable/Bio Energy”

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The Oil Shocks:

“ In 1861 oil was selling for 10USDs/barell, and quickly dropped to 0.5USDs due to lack of demand.

1. The 6 days war of 1967 -the 3rd Arab-Israeli War-oil flow was cut by more than 60%,-Arab oil producers using “Oil” as weapon

2. The second Arab-Israeli War of 1973-the Oil Embargo, oil prices went from 5-6USDs/barrel to over 20 USDs as a result of the supply disruption.

3. The 3rd Oil Shock: Oil price peaked around Nov 1985 to 31.75USDs/ barrel to 10.0USDs/barrel.

4. The 4th Oil Shock: 2008-in July oil hit the historical height of 147USDs/ barrel and quickly dropped to around mid 30’s by Dec 08.

III. The Transition from Petroleum based economy to

“Renewable/Bio Energy”

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Crude Oil Discoveries

III. The Transition from Petroleum based economy to

“Renewable/Bio Energy”

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Crude Projections of World Oil Production

III. The Transition from Petroleum based economy to

“Renewable/Bio Energy”

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Crude Oil Pricing Trend

III. The Transition from Petroleum based economy to

“Renewable/Bio Energy”

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Fundamental questions:

1. Are we running out of oil? How long before the oil

stocks is depleted? -what are the alternatives?

2. What would be the long term price level of crude oil-

and its impact to the global economy?

3. Is this transition from the petroleum based economy to

an global economic order based on Renewable /Bio

energy”?

III. The Transition from Petroleum based economy to

“Renewable/Bio Energy”

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IV. The global warming/impact to industrial development/

cross border trade The long term trend of “Global Near Surface Temperatures” increases- f

rom 1850-2005

The rapid rise of “Atmospheric Carbon Dioxide”

Human activities have greatly increased emissions of some greenhouse gases (called “Anthropogenic Greenhouse Gases”).

Global warming causes polar ice to thaw, sea levels to rise, and increases the severity of extreme climate events (droughts, floods, tropical storms).

The main anthropogenic GHGs are:

-carbon dioxide (CO2)

-methane (CH4)

-nitrous oxide (NO2)

-hydrofluorocarbons (HFC)

-perfluorocarbons (PFC)

-sulfur hexafluoride (SF6)

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With the objective of mitigating climate change, most of the world’s countries signed the United Nations Framework Convention on Climate Change (UNFCCC) in 1992, and the Kyoto Protocol in 1997.

Two types of market:

1. A regulated market has greenhouse gas (GHG) emission limits set by a regulatory body. Emitters have emission reduction targets and can buy carbon credits to meet such targets.

2. A voluntary emission reduction market exists outside of any regulatory mandate (e.g. the Kyoto Protocol), but there are common understandings regarding project types, documentation to be presented, etc.

IV. The global warming/impact to industrial development/

cross border trade

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Global Average Near-Surface Temperatures from 1850 to 2005

IV. The global warming/impact to industrial development/

cross border trade

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Atmospheric Carbon Dioxide

IV. The global warming/impact to industrial development/

cross border trade

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Human Dominance or Alteration of Several Major

Components of the Earth System

IV. The global warming/impact to industrial development/

cross border trade

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1033 as of May 2008 RegisteredCDM Projects

By Industry:

Source: UNEP Risoe CDM Pipeline, March 2008

By GHG:

IV. The global warming/impact to industrial development/

cross border trade

25Source: State of the Voluntary Carbon Market, 2008, p. 7

IV. The global warming/impact to industrial development/

cross border trade

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Benefits of GHG Redaction to Corporation

Contribution to climate change mitigation, society & sustainable

development

Generate extra income for projects that reduce GHG emissions

and lead to achieve sustainable development goals

May improve process

May reduce costs

May demonstrate leadership

May fulfill corporate objectives

IV. The global warming/impact to industrial development/

cross border trade

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V. The re-structuring of world financial system

The global financial impacts to the US sub-prime sector and the subsequent dem

ises of some of the world’s first tier investment firms and banks, such as Bear St

ern, Lehman Brothers, AIG, Fortis and many others have resulted in hundreds of

billions of loses across all sectors

The sever impact of “liquidies” of financial institutions not only cause the strain of

the entire financial world, but also severely impacting sectors that are highly dep

endent on “Financing” such as housing, auto, leasing, large purchases, leverage

buyouts, hedging, M/A transitions, etc. For instance, in the US it is believed that

between 20-30% of the decline in auto sales can be attributed to the shortage of

“Financing Facilities”.

During the past 12 months, investor confident of financial service industries have

reached all time low, which are severely impacting the future of many of the finan

cial products promoted by world’s financial institutions.

Longer term, it is inevitable that a “Restructing” and “New Mode of Operations” a

nd “Higher Regulatory Standards” will be instituted to ensure a much transparent

and accountable financial system throughout the world.

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Recommended Reading List Jeffrey D. Sachs Common Wealth-Economic For a Crowed Planet, the Penguin Press

(NY), 2008

Ethan S. Harris, Bem Bernanke's Fed, the Federal Reserve After Greenspan, Harvard

Business Press, 2008

Daniel Yergin, The Epic Quest for Oil, Money & Power, the Free Press (NY), 1992

Al Gore, Earth In The Balance: Ecology and the Human Spirit, Houghton Mifflin Co, 1

992

Lester C. Thurow, Dangerous Current: The State of Economics, The Ramdom House,

NY, 1983

Peter F. Drucker, Managing in Turbulent Times, Harper Business Press, 1980

MT: E Neumayer, Weak versus Strong Sustainability: Exploring the Limits of Two Opp

osing Paradigms, 2nd edn; J Kahn, The Economic Approach to Environmental Resour

ce Economics, Dryden Press, 2005

A Hoffman, Competitive Environmental Strategy: A Guide to the Changing Business L

andscape, Island Press, 2000