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How to Win in a Slow-Growth Economy

Accelerating Out of the Great Recession

February 01, 2010 by David Rhodes and Daniel Stelter
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In This Article
  • In this excerpt from the book, which won a 2010 getAbstract International Book Award, BCG provides a clear-eyed look at the slow-growth business environment that is likely to last for years to come.
  • Drawing on lessons from previous recessions, BCG offers insights about, and practical suggestions for, opportunities in the aftermath of the Great Recession.
 

There are, of course, many voices arguing that nothing has really changed, that things will soon return to the “old normal.” As evidence that not so much is different, they point to the apparent recovery in the banking system and some green shoots of global growth as 2009 drew to a close. But, as we describe in the first two chapters of this book, we believe that such complacency is ill-founded.

This is not a book about economics in general or any economy in particular. This is a book about strategy and management. We are interested in the fallout of what is being called the Great Recession because the nature of the recovery forms the backdrop against which management must make the strategic and operating decisions that shape their companies.

And an awful lot hangs on whether a business leader foresees a fast- or a slow-growing world. Even if business leaders do not subscribe to the view that economic growth will be slow, we still believe that they cannot go wrong by following the line of logic set out by the philosopher Blaise Pascal in his work Pensées. He was not sure whether God existed, but—in what has become known as “Pascal’s wager”—he argued that it is most prudent to act as if there is, in fact, a deity. The consequences of living a life of a nonbeliever—only to discover, at the moment of death, that such a path was wrong—are too dire to risk. When it comes to business management, the analogous quandary is the question of economic growth.

To set a context for our thoughts on strategy and management, we need to come clean on our assumptions about growth—which are firmly rooted in our view on the nature of the recovery in the United States. U.S. consumers drove the global boom, and they will determine—through their changing habits and behaviors—many of the “new realities” that we believe will shape the global economy (more on this in Chapter 2).

It is not only the fact that U.S. consumers generate a very large share of global GDP—on the order of 18.8 percent—that makes their contribution so important; it is also that there is no obvious short-term replacement for this mainstay of the global economy. There may be four times as many consumers in China as there are in the United States (and Chinese households also tend to have stronger balance sheets), but Chinese consumers simply do not have the wealth or spending power of the U.S. consumer, even in tough economic times. In 2008, total private consumption in China was equivalent to just 15 percent of total U.S. consumer spending, or 2.9 percent on a per capita basis. Thus, a 32 percent increase in private consumption in China would be needed to offset just a 5 percent reduction in U.S. consumer spending.

This is not going to happen.

China is not a strong enough economic engine to pull the whole world back into a period of high growth, even though it is the world’s fourth-largest economy and accounted for nearly a quarter of total global growth in 2008. There are just too many developed countries (including the most important one in the world) suffering from the effects of a severely damaged economy for China to pull off a kind of indirect global bailout.

So we do not subscribe yet to the theory of decoupling. We remain concerned about the United States because it is still the main economic player on the global stage. Over the next few years, the Indian and Chinese economies may well perform spectacularly. So in time, it may indeed no longer be axiomatic that when the United States sneezes, the world catches a cold. But for a while yet, at least, any economic ills of the United States still matter to the wider world.

Put plainly: We believe that much of the world is now entering a period of prolonged slower growth, as we will discuss in the coming chapters. This is of great significance to business leaders and executives—for at least five reasons:

1.It increases the competitive intensity of business. In order to grow, companies will have to gain market share. The management teams and strategies of all companies—especially poorly run ones—will be placed under enormous stress. This will force the reshaping of the competitive landscape in many industries, as well as the redefining of fundamental business dynamics.

2.It prompts governments to become more activist. We expect to see an increase in protectionism—embracing trade, employment, reindustrialization, and finance. There will be greater regulation, and some governments will further tinker with fiscal and monetary policy, whereas others will take on greater ownership of private enterprises.

3.It forces a change in the nature of consumption. Consumers in emerging markets may well increase their spending, but not by enough to offset the weak growth in consumption in the United States and Western Europe, where consumers will save more in the face of greater job insecurity and reduced retirement provisions.

4.It triggers a process of deleveraging. This occurs as individuals and companies (and eventually governments), weighed down by huge and unsustainable levels of debt, recognize that it is payback time. This will act as a further drag on global economic growth.

5.It sparks an acceleration in industry restructuring. Tough economic times tend to expose structural weaknesses—just look at the U.S. auto industry. Poorly grounded business models and excess capacity, among other problems, will force companies—especially those in mature industries—to adjust to or exit the market.

Yet, even within a low-growth economy, and despite all this change and restructuring, we believe that the aftermath of the Great Recession will present opportunities for growth—even better-than-average growth—to companies that are positioned to exploit them.

This is an excerpt from  Accelerating Out of the Great Recession: How to Win in a Slow-Growth Economy  by David Rhodes and Daniel Stelter. Copyright © 2010, The Boston Consulting Group, Inc. Reprinted by permission of McGraw-Hill. All rights reserved.