Business Leaders Around the World Need to Prepare for an Era of Slow Growth in the Global Economy, Warns The Boston Consulting Group in a New Book
Few Companies Are Acting Decisively Enough in the Wake of the Global Downturn; Leaders Should Take Their Cue From Companies That Gained a Competitive Advantage in Equally Challenging Economic Times, Such as the Great Depression and Japan's "Lost Decade"; a Once-in-a-Lifetime Opportunity to Change the Pecking Order of Their Industries Awaits Enterprising Executives
| Source: The Boston Consulting Group
BOSTON, MA--(Marketwire - February 18, 2010) - The Boston Consulting Group is publishing a
far-reaching diagnosis of the global economic crisis and an in-depth
analysis of what leading corporations need to do in order to excel in a
postrecession slow-growth world, in a new book titled "Accelerating Out of
the Great Recession: How to Win in a Slow-Growth Economy" (McGraw-Hill,
February 2010).
The authors, David Rhodes and Daniel Stelter, senior partners at BCG, argue
that companies face ongoing and long-term challenges brought on by global
trade imbalances, unstable financial institutions, and overleveraged
consumers who can no longer be counted on to drive economic growth.
"There will be no return to the 'old normal,' and, just as we won't be able
to count on the consumer -- especially the U.S. consumer -- to rescue the
global economy, it's unlikely that the growth of emerging economies such as
China and India will be enough to generate a return to pre-2008 global
growth," says Stelter.
Rhodes adds, "Business will have to adapt to some 'new realities' --
including greater government intervention, the shakeup of existing industry
structures, cost-conscious consumers inclined to save more, and an
atmosphere in which stakeholders, ethics, and solid governance take
priority over shareholders and quarterly results."
New Realities Require Painful Adjustments but Offer New Opportunities
Companies need to prepare for a multispeed global economy. While some
countries (such as China, India, and Brazil) are seeing a return of
prerecession growth rates, the developed world will experience many years
-- if not a decade -- of slow growth.
"It's important to remember that U.S. consumers generate a large share of
global GDP -- nearly 19 percent. There's no obvious short-term replacement
for this mainstay of global commerce. Even China's economy will not have
sufficient strength to save the economy: it would take a 32 percent
increase in private consumption in China to offset a 5 percent reduction in
U.S. consumer spending," says Rhodes.
Companies will have to make some painful adjustments as they come to terms
with the new realities.
To stabilize the financial sector, governments mobilized more than $18
trillion, and they injected more than $2 trillion to stimulate the real
economy. These initiatives to "reflate" the global economy amount to an
unprecedented and historic experiment, and it is not clear what the
long-term impact will be. There remain "zombie banks" that do not or cannot
provide loans, making shrinking credit a problem that could last for years.
And even with a 1990s-type job creation rate, it would take until 2014 for
unemployment to return to its prerecession level. Also, one of the side
effects of all the government intervention is the increased influence of
politicians in business affairs.
But the authors conclude that the rewards for companies that effectively
navigate this slow-growth world will be significant and sustainable.
Corporate leaders who act boldly have the potential to seize
once-in-a-lifetime opportunities that will allow them to change the pecking
order of their industries.
Businesses Are Not Acting Decisively Enough
As part of the research for "Accelerating Out of the Great Recession," BCG
surveyed more than 400 executives in seven countries at companies with more
than $1 billion in annual sales. The majority of the respondents expressed
an appropriately sober view of the business climate. And most -- between 50
and 70 percent -- have made the basic defensive moves, such as increasing
their focus on key customers, reducing administrative expenses and
inventory levels, and renegotiating supplier contracts. However, far fewer
have made the more difficult and important longer-term moves. For instance,
only 44 percent plan selective exits from product lines, only 39 percent
plan selective exits from customer segments, and only 43 percent have taken
or plan to take action involving divesting businesses and exiting sales
channels.
Stelter notes, "Leaders recognize the need to be both defensive and
aggressive. But when it comes to taking action, they seem to be just
playing around the edges of cost cutting. We're concerned that they are
neglecting the necessary adjustments in order to meet their own
expectations of a slow-growth global economy."
Defense First: Leaders Need to Safeguard the Long-Term Health of Their
Companies
Rhodes and Stelter have dug deep into the history of companies that
outperformed during three major recessionary periods -- the Great
Depression, the U.S. stagflation of the 1970s, and Japan's Lost Decade --
in order to identify strategies with a proven record of working in the
toughest times. They investigated some 100 companies during the Great
Depression (constituting two-thirds of the 1929 capitalization of the New
York Stock Exchange), all companies in the Standard & Poor's 1500 Index in
the 1970s and 1980s, and nearly 5,000 Japanese companies from the 1990s and
early 2000s. Outperformers from these periods were subjected to an in-depth
analysis in order to discern the roots of their success.
According to Rhodes, "To learn how companies can thrive in a damaged
postcrisis economy, it is useful to look at companies that thrived during
the Great Depression. Although it may seem ironic given their recent
performance, GM and Chrysler actually excelled in the 1930s and were able
to grow their market share by a staggering 15 and 19 percentage points,
respectively, during the Great Depression.They acted quickly and decisively
on the defensive side and were able to take the fight to their
competitors."
To survive in today's challenging and highly competitive environment,
companies need to protect their fundamentals as follows:
-- Rethink cost models. One way to make cuts -- without damaging the core
-- is to restructure around profit centers and projects. In the 1930s,
General Electric was able to outperform its competitor Westinghouse by
cutting costs quickly and deeply while also retaining its top talent.
-- Synchronize inventories to shifts in the external environment. Simply
cutting inventory, without reference to other factors, is a mistake.
-- Lower the perceived price of goods and services. By removing add-on
features or unbundling them, companies can create the perception of price
cuts while actually preserving margins and revenue.
Defense Is Not Enough: Companies Must Go on the Offensive and Deploy
Game-Changing Strategies
After protecting their fundamentals, executives need to be ready to go on
the attack. The competitive environment will be harsh -- and now is the
best time to make some of the game-changing moves that could change the
future of their companies and their industries.
Executives need to consider the following moves:
-- Embrace government affairs and programs. Two of the strongest companies
of the last several decades, GE and IBM, were beneficiaries of
opportunities created by the New Deal programs of the Great Depression.
Executives need to learn to work with increasingly influential and powerful
politicians and government officials.
-- Invest shrewdly in R&D and innovation. Downturn investments are often a
better value because there is more availability of, and less competition
for, resources. IBM continued to invest in innovation during the Great
Depression, and McDonald's accelerated past Burger King during the 1970s by
increasing the relative number of store openings.
-- Increase M&A activity. BCG research shows that deals completed during
downturns significantly outperform those done during upturns. In downturns,
premiums are lower and opportunities are richer and more abundant. Now is a
good time to be a predator, rather than waiting passively and becoming prey
during the slow-growth period.
-- Learn from, and keep an eye on, "challenger" companies in rapidly
emerging markets. These companies will be able to accelerate faster because
of cost advantages and comparable technical competence.
-- Address work-life balance issues. Flexibility in this area will help
compensate for lower wages and, at the same time, enable companies to
retain the talent they need in the future.
Observes Stelter, "Simply cutting costs and slashing marketing expenditures
is not enough. Now is the time to transform industries. In the book, we
show how many other companies did it during past recessions and
postrecession periods. Executives need to take the lead in employing
game-changing strategies."
"History shows that structural shifts in the pecking order of industries
occur more often in difficult times than in prosperous ones. And these
shifts often endure for a long time," adds Rhodes. "During downturns, what
distinguishes long-term winners from the also-rans is the courage to make
bold, difficult decisions. In the long term, actions taken now will be the
ones that define the future of companies and even industries, and it is up
to executives to act."
The New Business Environment Will Trigger a New Corporate Culture --
Requiring Leaders to Adopt a New Managerial Mindset
"In the postrecession era, well-run companies will be characterized not by
constantly improving quarterly earnings but by solid balance sheets, good
cash positions, and strict management, all of which will result in lower
profit levels as postrecession prudence replaces prerecession leverage,"
Stelter notes.
The authors also maintain that the pendulum will swing from favoring
shareholders to favoring a wider range of stakeholder groups. "The culture
of a company will assume new importance as organizations act to preserve
their skill base and to be seen as proceeding responsibly in the aftermath
of the Great Recession," Rhodes states.
The book also makes the following points:
-- Given that a slow-growth environment will lead to lower equity returns,
stock options may lose their appeal -- so it will be necessary to redesign
compensation systems in order to attract and retain talent and reward
strong and sustained performance.
-- There will be a call for executives to not just reap the benefits of
upside gains but also bear downside risk. Executives will increasingly have
to put some of their own wealth at stake.
-- The debate about what constitutes "fair" capitalist behavior will move
to the forefront. More than two-thirds of executives expect an increase in
public scrutiny of business ethics and personal actions.
The authors maintain that running a company in an era of slow growth will
feel altogether different from the way it has felt in prior years -- and
much will rest on how CEOs and management teams are willing to challenge
their existing managerial mindset.
Rhodes observes, "It will no longer be enough to play just to play -- it
will be necessary to play to win. Those who take the initiative, respond
decisively to the challenge, find their own way of differentiating
themselves from less fleet-footed competitors, and execute their strategies
with single-minded determination can expect to grow."
To receive a copy of "Accelerating Out of the Great Recession" and
supporting materials, or to arrange a conversation with one of the authors,
please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.
About the Authors
David Rhodes is a senior partner and managing director at The Boston
Consulting Group and the global leader of the firm's Financial Institutions
practice. Since joining BCG in 1985, he has worked primarily on projects
involving major strategy and organizational change in large financial
institutions, working with clients in Europe, Asia-Pacific, the Middle East,
and the United States.
Daniel Stelter is a senior partner and managing director at The Boston
Consulting Group and the global leader of the firm's Corporate Development
practice. During his 20 years with BCG, he has participated in and directed
many projects throughout Europe with a focus on corporate finance
(including M&A, IPOs, due diligence, strategic alliances, and joint
ventures) and strategy (including portfolio strategy and value management).
About the Survey
Survey results are based on an online questionnaire completed by 434
business managers in seven countries. All respondents represented companies
with at least $1 billion in global revenues in 2008, from all industries
except financial services. The survey was commissioned by The Boston
Consulting Group and administered by Grail Research from August 24 to
September 1, 2009.
About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm
and the world's leading advisor on business strategy. We partner with
clients in all sectors and regions to identify their highest-value
opportunities, address their most critical challenges, and transform their
businesses. Our customized approach combines deep insight into the dynamics
of companies and markets with close collaboration at all levels of the
client organization. This ensures that our clients achieve sustainable
competitive advantage, build more capable organizations, and secure lasting
results. Founded in 1963, BCG is a private company with 68 offices in 39
countries. For more information, please visit www.bcg.com.