The Long Road of Slow Growth

The Long Road of Slow Growth

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About the Commentators
  • author image
    David Rhodes

    David Rhodes is a London-based senior partner and managing director at The Boston Consulting Group and the global leader of the firm’s Financial Institutions practice.

  • author image
    Daniel Stelter
    Daniel Stelter is a senior partner and managing director in the Berlin office of The Boston Consulting Group and coauthor of Accelerating Out of the Great Recession: How to Win in a Slow-Growth Economy (McGraw-Hill, 2010).

The Long Road of Slow Growth

Management in a Two-Speed Economy, Innovation & Growth
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  • On the first day of a recent New York trip, newspapers covered a survey of some 50 economists who reported a positive outlook along with optimistic expectations of growth. The next day, two economic stories dominated the business front pages: one reporting very depressed lending figures and the other noting an unexpectedly sharp drop in consumer confidence.

    The daily drip-feeding of conflicting data makes it tough for managers to develop a perspective. It becomes tempting to sit and wait. Yet history shows us that the pecking order of entire industries tends to get shaken up during turbulent times—and the new order persists for years thereafter. But to act, you need to have a view.

    We have argued consistently—and we see nothing that persuades us to change our beliefs—that the United States (like most Western economies) is entering a period of prolonged slow growth. This really matters. Companies accustomed to growing simply by following the markets upward will find that growth will only come by winning market share. Competitive intensity will increase and real winners (and losers) will emerge. (More on what it takes to become a winner below.)

    So why do we argue that there will be slow growth in the United States? Firstly, history tells us that a globally synchronized recession—particularly if preceded by systemic financial upheaval—tends to be far deeper and longer lasting, and the subsequent recovery is slower. Just look at IMF data warning that recessions accompanied by financial crisis tend to be “two to three times as deep and two to four times as long” and to lead to “negative growth of 4.5 percent of GDP.”

    Secondly, over the 20 years preceding the crisis that began in mid 2007, the U.S. economy grew on the back of an unsustainably high-return financial system whose profits peaked at nearly half of total American corporate profits. Needless to say, this level of performance will not return anytime soon.

    Thirdly, while median inflation-adjusted U.S. hourly wages remained fairly flat, the American consumer (whose spending accounts for 70 percent of U.S. GDP) continued to spend with the sort of abandon that only unconstrained credit can give. U.S. consumers are now worried about jobs, reduced asset prices from the bursting of property and stock bubbles, and the consequent threat to their retirement accounts—made worse by impending problems with Social Security.

    Fourthly, the damaged banking system is still very leery about granting credit, although demand is low anyway. And it takes about five dollars of credit for each dollar of GDP growth. Finally, the economy barely limped into 2010, despite the Obama administration’s unprecedented stimulus efforts. Absent the stimulus effect, recent economic performance is still worryingly constrained outside the government sector.

    The world has seen tough economic times before. In our book, Accelerating Out of the Great Recession: How to Win in a Slow-Growth Economy, we looked at how companies responded during major downturns. The stagflation of the 1970s, Japan’s Lost Decade, and even the Great Depression all provide examples of companies that prospered under adversity.

    The lessons are clear. It is not enough to pay down debt, conserve cash, drive down costs to preserve the bottom line, and simply sit it out. Companies that take advantage of their competitors’ paralysis will create an advantage that endures for a long time. Here are just a few examples of winning strategies:

    • Confident companies invest in R&D while their competitors cut back. DuPont, IBM, Chrysler, and GE all outspent their rivals during the Great Depression and developed products ahead of their competitors. They also continue to support their brands when others cut back—P&G developed its leadership positions by doing this during the 1930s. It is hard to catch up later, particularly when everyone else starts spending.

    • Taking advantage of competitor indecisiveness can also mean expanding distribution to capture share while others dither (just like McDonald’s did in the 1970s and 7-Eleven Japan during the Lost Decade).

    • Companies should think hard about developing products to cater to changing customer needs as consumers “trade down.” Pricing strategies play an important role—and creative companies take actions such as adapting features, creating new product bundles, developing “lock in and trade up” approaches, or introducing pay per use. During the Great Depression, IBM launched lower-cost accounting machines, shipped many on leasing contracts, and made very attractive returns on the peripherals.

    • And companies need to think about how to benefit from government stimulus and reindustrialization programs. It is also empirically true that acquisitions and divestitures typically add more value in downturns than when markets are more buoyant.

    These lessons are broadly applicable to companies of all sized with two exceptions: small and medium-sized companies cannot renegotiate terms or shoulder more volume risk the same way that larger companies can.

    The prolonged economic troubles are also beginning to prompt a new set of questions about how management needs to think and act. In some parts of the world, observers talk about Capitalism 2.0, with much of continental Europe and Asia (politicians and voters alike) rejecting the rawest versions of Anglo-Saxon capitalism. This new model accepts greater government intervention and regulation (and not just of banks); it moves beyond the tyranny of quarterly earnings and embraces a much longer time frame when thinking about value creation; it rewards managers based on long-term value creation, paying for elements that the manager can directly influence and taking into account the risks being generated; and it promotes a governance model in which boards of directors understand the business and are better positioned to hold management to account.

    At the same time, managers need to be alert for other potential changes: a two-speed world of low growth in the West and much higher growth in some of the rapidly developing economies could prompt rising protectionism (after all, could President Obama win an election on the back of high unemployment and low growth while China enjoys 8 percent growth?); the redefinition of globalization, with the relatively unscathed rapidly developing economies of the East protecting their home markets while their emerging global-challenger companies embark on aggressive internationalization (supported by low costs and undamaged banks); and the opportunities created by government investments (including stimulus programs) and attempts to reindustrialize.

    History, as Winston Churchill observed, is written by the victors. Those companies and executives who act decisively are far more likely to prosper in these difficult times than those who sit on the fence waiting to see what happens. It could be a long wait.

    This piece was originally published on
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