The market-led strategies of the past based on growing consumer segments with increasing spending power won’t cut it in a slower-growth global economy. J. Walker Smith, Executive Chairman at The Futures Company examines the economic backdrop and the way forward for businesses and brands.
Increasingly, it looks like there’s a new normal for the global economy and it worries the current crop of business leaders, who are accustomed to operating in a higher growth economy with stronger consumer spending.
Since 2011, the global economy has sputtered, with a growth rate below 2.5%. At this level of growth, it’s uncertain whether it can reach escape velocity from the 2009 Great Recession. If it can’t, then the past several years of stagnation in employment, wages, business investment and consumer spending will continue. The plunge in oil prices and the sharp slowdown in China have added to this by worsening prospects for a return to the robust economic conditions that once were commonplace.
Economists debate whether this is structural or cyclical, and much of their focus is on weak productivity growth. But falling population growth worldwide, particularly among the working age population of 25 to 64-year-olds, locks in slower growth. The McKinsey Global Institute* has estimated a 40% drop in GDP growth over the next 50 years from falling population growth alone. To forestall that, McKinsey figures that it would require productivity growth to be 80% higher in the future than it has been in the past, which is highly unlikely. Whatever the effects of technology and innovation on productivity, the size of the gap in lost economic expansion due to declining population growth is almost certainly going to be too much to make up.
So the bottom line is that slower growth is the new global economic reality for which business leaders must prepare.
Slower growth is not a down cycle, soon to rebound. It is a lower set point for the global economy around which cycles will go up and down. The effects of slower growth reinforce the situation. In particular, weaker consumer spending slows growth, which in turn, weakens spending even more. It is a vicious circle that, once established, is hard to reverse.
For brands, slower growth means a disruption of demand. There will still be more consumers with more money, just not as many with as much as before. This puts a cap on what brands can expect from market growth alone. Just staying even with the market will mean weaker brand growth. To continue to grow strongly, brands will have to exceed the trend line. Brands must create demand, not simply count on it growing strongly. This is the imperative of success – create demand, not follow it.
Growth will have to come from growing within bounded markets. In effect, this means that expansion in a slower growth global economy is a feat of defying gravity. To grow strongly, brands will have to rise above the slowing tug of the marketplace.
Managing successfully in a marketplace of slower growth means creating market-space opportunities that are below the scanning horizon of competitors.
These are opportunities to create demand. For this, companies and brands need to broaden their conceptual horizons. Here are six steps businesses can take to create sources of growth in a slower growth global economy.
1. Take an integrated interactive view of how change is happening in a category
Trends happen in clusters, never in isolation. The interactions of trends create novel patterns that open up fresh market possibilities. Driving forces might include technology innovation, new demands from key customers, political shifts, deregulation opening new opportunities, or new competitors. The tensions between these driving forces create new market ‘dynamics’, which create demand by opening up new innovation spaces.
2. Identify emerging profit pools
As demographics and values shift, so do pools of money. As one sector contracts, the money doesn’t disappear, but shifts to a new value pool – to new generations or to new markets or to new consumer segments. This is where a new source of demand can be created,
3. Look to the cultural edges
Leading-edge consumers are the best guide to shifting cultural and social values and the products or services associated with them. Capitalising on such a shift in value perceptions requires a reinvention of value propositions in order to create demand around a radically different way of understanding needs and benefits.
4. Learn from the disruptors
Competitors will be experimenting with changes in the operating assumptions of their businesses, and replicating these efforts can create demand. Such learning may come from direct category rivals or from disruptors in other categories, like retail ideas applied to automotive or media ideas applied to travel, and so forth.
5. Create new markets
Stay vigilant for trends and shifts in demand that break open spaces in the market, and then act quickly to fill the need effectively. Markets often cycle, so being ready for the opportunity as it appears is critical.
6. Reinvent the value chain. If a brand’s value chain remains the same, slower growth will gradually squeeze it dry. Companies and brands must, therefore, rethink their business structures. Several critical market trends are already reshaping value chains for the future. Pricing will be dynamic and occasion-based, often free instead of fixed and premium. Distribution will provide immediate fulfillment on demand. Transactions will be more anticipatory, automatic and agent-based. Data will be at the heart of everything.
Slower growth is changing the global market for all businesses and brands, making it more perilous than ever to keep thinking in the same old ways. Yet for those that can to defy gravity – by rethinking sources of growth in a slower growth global economy – the rewards are bigger than ever, too.
Originally posted M&M Global 20 July 2016