Sources of Growth in a Slower Growth Global Economy
In a slower growth world, money to spend and people to spend it won’t grow like before. Companies and brands that just stay even with growth in the overall economy will be growing more slowly. Achieving faster growth will require that business leaders find ways to defy the gravity of slower growth.
The evidence is stark about the failure to sustain high business growth. Once companies fall below the rate of overall growth, it is rare to become a fast-growth business again. Research reported by Clay Christensen and Michael Raynor finds that less than one company in twenty succeeds in regaining above average growth after falling below average GDP growth. (See their book The Innovator’s Solution.) The challenge at hand is that continuing to employ high-growth strategies in a slower growth marketplace puts companies and brands at significant risk of slipping so far behind that, as the evidence shows, they will never catch up again.
The conventional business strategies that have been used to ride out recessions are not the answer. Slower growth is not a down cycle, soon to rebound. Rather, the entire economy has been shifted to a lower set point that will persist. Cycles will go up and down around this lower set point.
Almost without exception, in the higher growth global economy of past decades, growth strategies have been market-led strategies focused on growing segments of consumers who have growing amounts of disposable income. This dictated decisions about targeting and pricing, which in turn determined decisions about communications and distribution. More consumers and higher prices were central to everything. It was all about following market trends.
The biggest consequence of slower growth is that it caps market-led opportunities of more consumers and higher prices. The available market is contracted. As the population of prospects levels off and as disposable income becomes more constrained, these levers of growth lose the effect they used to have. Pull them now, and little happens. The strategies of success in a high-growth global economy are taken out of play for a slower growth global economy. This is exactly the situation in which many companies find themselves today. It is not a down cycle that will rally soon. It is the new normal of a lower set point.
To defy gravity in a slower growth world, businesses need to create market-space opportunities. What this means in more specific terms has been diagrammed and discussed in previous Future Perspective reports, Unlocking New Sources of Growth (2012) and Succeeding in Low-Growth Markets (2012). To create demand, companies and brands must look to markets, consumer groups or categories to realign or reinvent their business models in order to better match shifts in who has money, shifts in social values, shifts in technologies, or shifts in business models. What all of these things have in common is that they represent unrecognized, poorly understood market-space opportunities that are below the horizon of competitors. These are opportunities to create demand.
Rethinking Growth
The Futures Company employs a structured way of identifying opportunities to rethink and reshape markets in order to create demand. It is a process that begins by scanning change in order to understand the dynamic ways in which markets are evolving as shifts in economics, demographics, values and technologies interact to create swirling pools of potential across categories and sectors.
However, to act upon this understanding of change, it is necessary to go a step further and determine how change interacts with a company’s or a brand’s competencies and capabilities, as well as the design of its business model. To enable companies and brands to visualize this intersection of external environment and internal capacities, The Futures Company has developed the Change Triangle shown in Exhibit 9, which depicts the ways in which external changes flow into a company or a brand, thereby channelling the scope and direction of response.
Moving counter-clockwise from the peak of the Change Triangle, the risk-reward ratio becomes more demanding but more attractive, too. The level of business challenge increases, but the outcomes of success increase even more.
The left-hand side of the Change Triangle shows that, initially, as the external environment changes, businesses can respond by adapting. This means new branding and positioning or incremental innovation. These are necessary changes, but, ultimately, are unlikely to be transformational. Indeed, data show that branding is less valued and that returns to incremental innovation are declining.
Along the bottom of the Change Triangle, as external pressures increase, companies and brands must respond by evolving. Such a response means structural things like long-term innovation or operational adjustments. These can improve the competitive situation for a company or a brand by distancing it from category issues about things like health and safety or by broadening its offer beyond traditional category contours.
The right-hand side of the Change Triangle corresponds to the consumer disruption of demand for which the response must be new business models that better align a business with shifts in the external environment. Not only does such a response upend categories, it is hard for competitors to copy, too. This side of the Change Triangle is the challenge posed by slower growth, and it requires more than just adapting or evolving. In the face of contracting demand, such responses won’t be enough. Instead, wholly new approaches to create demand are imperative, especially new business models.
To over-simplify, though not unfairly, the traditional focus of business building has long been to do old things in new ways. With slower growth ahead, the future focus must be about finding new things to do in new ways. For this, companies and brands must broaden their conceptual horizons. Thinking and planning like this is not easy or intuitive, but the Futures Company utilizes six ways of doing so that companies and brands help unlock innovative ways to create demand.
First, take an integrated, interactive view of how change is happening in a category. Trends happen in clusters, and never in isolation. The interactions of trends create novel patterns that open up fresh market possibilities. These opportunities are hidden only if companies and brands refuse to see them. As management consultant Richard Normann put it in Reframing Business,
“Driving forces for change are there to be utilized, unless they are blocked out by myopia or politics. Driving forces may be borrowed from the external environment, in the form of critical change factors such as new technology, important customers [with] new demands, political changes, deregulation creating new opportunities, or new competitors or invaders.”
The tensions between these driving forces create new market ‘dynamics’ (as they are designated in client work at The Futures Company) that create demand by opening up new innovation spaces.
Second, identify emerging profit pools. As demographics and values shift, so do pools of money. Future-proofed strategies look for these new value pools as money moves between groups — to new generations or to new markets or to new segments of consumers. As one sector contracts, the money doesn’t disappear. Rather, it shifts to a new value pool where a new source of demand can be created. It’s exactly as Peter Drucker, the doyen of management consultants, urged business leaders to ask themselves: “What has already happened that will create the future?”
Third, look to the cultural edges. It is no secret that leading edge consumers are the best guide to shifting cultural and social values and the products or services associated with these shifts. As business scholars Rita Gunter McGrath and Ian Macmillan observe in their book Discovery- Driven Growth, such products or services “differentiate massively on some dimension of performance that enough customers really care about (even if they are worse on others).” In doing so, “they change the criteria that customers use to judge value.” 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.
Fourth, learn from the disruptors. Cultural edges are always roiling markets. But in turbulent times, competitors will also be experimenting with changes in the operating assumptions of their businesses. Such learning may come from direct category competitors or from disruptors in other categories, like retail ideas applied to automotive or media ideas applied to travel, and so forth.
Fifth, create new markets. Perhaps the best way of explaining this point is to cite an example from Apple (albeit at the risk of cliché). Management scholar Richard Rumelt interviewed Steve Jobs a year after he had returned to the company. (This story is told in Rumelt’s book Good Strategy, Bad Strategy). The success of Apple was not yet assured and Rumelt asked Jobs about the conventional wisdom at the time that Windows and Intel had a lock on the market. Jobs replied that every decade or so a window of opportunity opened up, and when it did he planned to jump through it. Jobs had no intention of betting the future of Apple on adapting or evolving. He was “going to wait for the next big thing” in order to create a new market for Apple to dominate. Such opportunities are not unique to the technology sector.
Sixth, reinvent the value chain. If a brand’s value chain remains unchanged, slower growth will gradually squeeze it dry. The old ways of doing business won’t yield profitable margins in a marketplace upended by slower growth. When strong growth is a tide lifting all boats, little thought is given to creating demand by reinventing the value chain. But when the ebbing tide of slower growth exposes the shoals, companies and brands must rethink their business structures.
Success in transforming business structures means undertaking several types of business model innovations at once, in particular, streamlining the operational architecture while also honing the consumer proposition. This is the topic of a forthcoming thought-leadership white paper from The Futures Company, but it is important to note here that even though this kind of reinvention often means cutting costs, this is not about cost-cutting for its own sake. As management guru Michael Porter has noted, reducing costs, in and of itself, rarely creates competitive advantage. Instead, reinventing the value chain is about delivering a fresh proposition to consumers. As noted in The Futures Company report, Making High Value Work, “Value is created by investing, even over-investing, where it matters most, and using effective business systems to keep the rest of the company lean.” Oftentimes, this entails taking costs out in order to create a margin for innovation, which is a way to unlock, even catalyze, new sources of value.
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.
These six ways of rethinking growth are not entirely new. They touch on many things that brands do now to spot new opportunities. But generally speaking, in a high-growth environment, these ways of rethinking growth take a back seat to the market-led opportunities of higher prices and greater penetration. It’s always easier to follow trends than to create demand. But the easy growth is gone now, making it imperative to move these six ways of rethinking growth to center stage.
Continuing to think in the same old way has always been perilous. There is no better expression of this than the tearful words of the Nokia CEO at the press conference announcing Nokia’s acquisition by Microsoft: “We didn’t do anything wrong, but somehow, we lost.” The market changed and overtook Nokia. Now, slower growth is changing the market for all companies and brands, making it more perilous than ever to keep thinking in the same old way. Yet for companies and brands that able to defy gravity — by rethinking sources of growth in a slower growth global economy — the rewards are bigger than ever, too.
This article is lightly edited from The Futures Company’s Future Perspective report, Defying Gravity: Sources of Growth in a Slower Growth Global Economy, by J. Walker Smith, Andrew Curry, Joe Ballantyne and Mark Inskip.
