2. 2
change to sustain business footprints in this era of slower global growth and racing digital
technology innovations disrupting established business models and mindsets.
Let us start by gaining an overall perspective on opportunities for future growth through two
different prisms i.e., developed and developing economies, before finally looking at why
leading organizations through proactive business transformation, enabled by a creative and
transformative digital disruption, could be a great business strategy to overcome the
challenges posed by the prospects of slower future growth.
DEVELOPED ECONOMIES:
In case of Developed Economies future economic growth can come only thru’ multifactor
productivity enabled and accelerated by a combination of breakthrough innovations in;
- Manufacturing Technologies (3D Printing, Robotics, Electric Storage Batteries)
- Internet Technologies (Networks, Mobility, Platforms, Cloud, Internet of Things,
Broadband)
- Hardware Technologies (Microprocessor, Connected Devices / Sensors), and
- Software Technologies (Virtualization, Augmented Reality, Adaptive/ Deep Learning
Algorithms, Artificial Intelligence)
The new age digital economy that delivers very high productivity growth based on these
technology innovations are predominantly asset lite as against the industrial age economy
which takes pride in an asset heavy business model. The new age digital enterprises need
less people and capital while delivering exponential value to its stakeholders as against the
industrial age economy that guzzle people and capital while returning relatively less or
moderate value to its stake holders. That is the stark and contrasting reality.
And as we move forward in this 21st
century we would increasingly see a
multi-speed economy i.e., one, a digital
economy, that is extremely asset lite,
very high on multifactor productivity
and value creation, and another, an
industrial age economy, that is asset
heavy, low on multifactor productivity
with low or moderate returns.
In fact, the value of government bonds with negative yields having exceeded $12 trillion
speaks volumes about the lack of investment opportunities available in the new age digital
economy to match the scale of savings, and at the same time reflecting investor sentiment
and confidence in the ability of industrial age businesses to be in the forefront of future
global growth.
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In developed economies, private investments in energy and commodity sectors will continue
to act as a drag given the weak global demand and excess capacities, besides due to the
deleveraging underway in these sectors. Further, the demographic changes, due to aging
societies and falling population, will act as a drag on consumption and labor inputs to growth.
But that might get offset with labor productivity through increased levels of automation.
Similarly, opportunity for
productivity growth due to labor
force mobility to higher
productivity sectors is not
significant as well, since
developed economies are already
a predominantly service
economies.
Growth driven by increase in
government spending in public
infrastructure is not envisaged in
developed economies unless
governments in a desperate move
to sustain growth let loose the public spending at the cost of catapulting the already
gargantuan government debts to astronomical levels, thereby expanding budget deficits and
weaving a murky future. But this option seems imminent, at least in the short term, since
the loose monetary policy stimulus (quantitative easing, credit easing and zero or negative
interest rates) provided by the central banks of the developed economies is not having the
desired transmission to the real economy in terms of increased lending by banks or fresh
private investments or increased consumption or higher inflation.
Perhaps, one would argue that the loose monetary policy is only helping the corporates to
borrow cheap for share buy backs and enhance EPS, thereby transferring wealth to private
investors, while at the same time, punishing the savers (households) with near zero or
negative interest rates and making them save even more to meet their future needs. This
depresses current and future consumption obviously. Besides, low interest rates also make
pension and insurance funds, who need certain minimum returns on their fixed income debt
securities, vulnerable to meeting their long term obligations and exposing them to
insolvency, which further exposes the households to old age financial insecurities.
Such narratives abound in the western media and it fuels the sense of disenchantment and
disenfranchisement already being felt by the common man. What often gets unnoticed is
the disruptive role played out by the technology and digital business model innovations that
have made certain legacy jobs vanish and associated skills irrelevant. So what the
protectionists and isolationists do not take cognizance or acknowledge at this point of time
is the fact that even if we were to erect border walls and trade barriers so as to constrain
migration and free trade, it is highly unlikely that some of the erstwhile jobs were to be seen
4. 4
again, unless one takes the very extreme step of banishing the influence of new technologies
and innovation in the realm of business.
Having said that, the recent rise of protectionist and isolationist behavior and prominence
of political leaders with hardline views seen across America and Europe only reflects the fact
that people have lost hopes and singularly pinned the blame on their respective
governments and corporate leaderships for failing to share with them the fruits of
globalization. Rather there is deep resentment and indignation against rising inequality of
income and wealth accentuated by globalization, which did its job by allocating resources
efficiently, and moved investment and employment to those places where it is efficient to
produce goods and services as determined by the market forces. This has helped the wealthy
investors from developed economies increase their wealth while at the same time spreading
wealth and prosperity in the emerging economies that benefited from this globalization.
The common man from the developed economies has been feeling lost out and at the
receiving end of this globalization with neither their elected representatives in the
government nor the large corporations having done anything to improve their lives.
Governments, on the other hand, saddled with herculean public debt levels, are peeved at
the corporate or tax inversions adopted by large corporations by relocating their legal
domicile to low or no tax countries while retaining the business operations in their original
locations, which forced the governments to enact legislations like BEPS (base erosion and
profit shifting) to address corporate tax revenue leakages. It is not beyond imagination or
comprehension to see globalization being forced in to reverse gear sooner than later with
trade protectionism, anti-migration rhetoric, localization mandates and appeasement of
vote banks taking the lead in poll campaigns and policy making.
DEVELOPING ECONOMIES:
With economic growth in China having slowed down, Developing Economies like India and
Indonesia offer plenty of scope for growth driven by opportunities for investments in public
infrastructure, domestic and exports
manufacturing, and service sectors.
Besides growth driven by labor
productivity through mobility of
labor force from rural economies to
higher productivity jobs in
manufacturing and service sectors is
a distinct opportunity. At the same
time, further reforms can deepen
credit and market access to rural
economy that can enhance rural
entrepreneurship and hence
increase rural productivity as well. Rural productivity can be further improved by adequate
investment in agricultural R&D and increased opportunity for market pricing of agricultural
produces.
5. 5
There are a series of policy reforms being implemented in India towards attracting private
investments in public infrastructure, manufacturing and service sectors. Recent policies
aimed at opening up private and foreign investments in public infrastructure, renewable
energy, defense manufacturing and consumer retail are noteworthy. Having said that, both
the banks and private sector are yet to clean up their piled up bad debts constraining bank
lending, credit growth and overall private investments. Besides the exports are not robust
enough as well, impacted by overall slack in the global demand. Hence when it comes to
growth discussions in India, what gets highlighted time and again is the need for accelerated
government spending towards public infrastructure, and rural consumption driven by
monsoon, which really cannot be a substitute for pick up in private investments.
Countries in the ASEAN region are at different stages of development and several countries
in that region like Thailand, Philippines, Vietnam, Myanmar going through political
transitions and their future growth
trajectories would be largely
influenced by factors and decisions
associated with it. Taiwan too is in
a political transition and is going
through a testing time in its
relationship with the main land
China, impacting their mutual
bilateral trade. Over the decades
Malaysia has diversified its growth
model from a predominantly
commodity based economy to
become a major exporter of
manufactured goods, and its future growth would continue to be influenced by growth in
global trade, which has lost momentum currently. This is the first time in a decade that global
trade growth has shrunk (from 8% to below 3%) and has lagged behind the global GDP
growth.
Middle East is gradually coming to terms with low oil prices and would see slower growth
until the economy diversifies in to other areas of investments and exports. Besides the
debilitating civil war and conflicts in Libya, Yemen, Syria and Iraq have devastated the
economic and social fabric in these countries and causing destabilizing effects in their
neighboring countries due to unplanned and uncontrolled mass migrations and
resettlements.
One of the developing economies which carry huge potential for future growth is Africa,
with its expected doubling of population in the next few decades due to higher fertility and
lower infant mortality rates, and unlimited opportunity for investments in public
infrastructure and consumer retail services. Africa can be one of the engines of future global
6. 6
growth, if only political and social stability returns to that region, which would be in
everyone’s interest.
Economies in the Latin American countries like Brazil, Venezuela, Argentina are going
through some structural shifts with past mismanagement of fiscal and monetary policies
taking a severe toll on the economy with runaway inflation and currency depreciation. Their
medium term economic growth would depend on recovery in oil and other commodity
prices, and implementation of prudent fiscal and monetary management.
In essence the countries that belong to developing economies hold unlimited opportunities
for future economic growth driven by domestic consumption (population growth), domestic
investments (public infrastructure, manufacturing, and services) and labor productivity
(mobility to higher productivity sectors supported by skill enhancements). Having said that
most of the regions in the developing economies like Middle East, Africa, and Latin America
are going through medium term economic growth challenges due to various issues that are
specific to each of country / region that can be broadly attributed to either bad debts and
bank recapitalization or ongoing political transitions or slump in oil and commodity prices or
unwinding of economic excesses committed in the past or war and conflict or a combination
of any of these issues.
Given this scenario the global investors have demonstrated understandably a lesser appetite
for investments opportunities in developing economies since the potential returns after
adjusting for risks due to currency depreciation, inflation, defaults, policy constraints,
political instability, and conflicts is far from attractive. This partially explains the rationale
behind global investors parking their wealth with treasury bonds in the developed
economies even at negative yields.
CONTOURS OF FUTURE GLOBAL GROWTH:
As one can observe there is a very clear pattern and hypothesis that tend to define the
trajectory of future growth in the developed and
developing economies.
Future economic growth in the Developed economies
would largely have to come from technology innovation
and multifactor productivity, given the muted outlook for
private investments and consumption. Government
spending would try to provide some growth momentum
despite constraints imposed by an already very high debt
levels. Hence the low interest rates, very low inflation,
and slower growth are to be seen as a new normal than
an exception in the developed economies.
Countries in the Developing economies could be the engines of future global economic
growth due to their huge domestic demands, if only some of the structural, regulatory,
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political and social stability issues are addressed effectively by the respective governments,
so as to induce private investments. Government spending across the developing economies
is already stretched with high debts, interest
burden and fiscal deficits, and cannot be
expected to fuel the growth impetus beyond
a threshold. Global investors would be very
glad to participate and support domestic
growth in the developing economies if they
see a conducive environment for investment,
rather than parking their funds in bonds with
negative yields. Hence the onus is on the
developing economies to create that
environment of trust, confidence, and
positive business climate so as to attract
foreign investments. Both investors and
business enterprises would benefit from an
environment in which one can qualify and
quantify the risks properly, even if the risks are on the higher side (as it gets factored in the
spreads), than an environment that is perceived as opaque, tentative and subjective.
Putting it all together, looks like we are entering a slower growth future globally at least in
the medium term till we see;
- multifactor productivity growth due to break through technology innovation in the
developed economies, and/or
- growth engines firing on cylinders in the developing economies driven by domestic
demand.
This is the perspective as far as the future global economic growth is concerned. Now let us
turn our focus to short term and look at issues affecting the current economic equilibrium
in terms of current supply and current demand.
ECONOMIC EQUILIBIRIUM: BUSINESS CYCLE OR NEW NORMAL?
Slower growth implies weakness in effective demand. The broader issue that depresses the
current demand globally is the surplus investments made in the past. The current global
economic environment is characterized by weak effective current demand, and huge under-
utilized excess capacities and inventories, and this situation is likely to persist in the medium
term, till the economic equilibrium is restored in the real economy between global supply
and demand. The pace at which this unwinding can happen depends upon the following;
- Conviction of governments and central banks in the developed economies to stop
providing artificial support to stocks and assets through quantitative easing and zero or
negative interest rates. This inflates asset prices and creates new asset bubbles, and
benefits only those who have access to capital (read: wealthy investors) and punishes
8. 8
the savers (read: common households). Hence it is self-defeating. Having said that
pulling the plug on monetary stimulus could result in potential busting of both bank and
private sector balance sheets, with a cascading catastrophe on the investors exposed to
stressed assets.
- Orderly debt deleveraging among the private sectors across both developed and
developing economies, without inflating the magnitude of bad debt provisioning by
banks and financial institutions. This would need active support from governments and
central banks to help restructure debts and reconstruct distressed assets.
- Recapitalization of banks to make them look beyond retail lending and support credit
growth to private investments.
The kind of structural adjustments and sweeping reforms such global unwinding entails
makes it anybody’s guess regarding how likely it is to happen or how long it might take to
restore global economic equilibrium. Hence it makes it compelling to acknowledge the
current weakness in private investment as a new normal rather than as a typical business
capex cycle.
Meanwhile, in the face of hugely under-utilized excess capacities and inventories, the supply
prices have to move down the slope in the supply curve so as to establish a new equilibrium
with the curve of effective demand. When the sales volumes and price realizations are under
downward pressure it impacts the operating margin and profitability of the business, and in
many cases the viability of the business itself depending upon the capital structure,
borrowing costs, and operating margins.
Again in the words of Jeff Immelt “These are
new realities, not mere cycles. We must adjust
to a slower-growth world, hemmed in by
populism and protectionism”
When we are faced with such new realities
both in the short and medium term, we must
resist our time tested impulse to pull
conventional levers in the realm of strategy and
operations, since the challenges we are faced
with are not the ones related to conventional
business cycle. We are faced with new realities
which needs new methods of responding.
While the realm of adjustments and strategic reorientation would still continue to be across
all core business processes and functions, we must seek and avail the new transformative
capabilities and degrees of freedom offered by a set of new digital technologies so as to go
beyond tactical manipulation and respond to the new realities with an evolutionary mindset.
9. 9
This is where the lure of business transformation based on digital adoption looks compelling
and liberating.
DIGITAL ADOPTION AND MULTI-SPEED ECONOMY:
Given the fact that digital technologies are disrupting legacy business models and creating a
multispeed economy i.e., one that is asset lite, high on multifactor productivity and value
creation, and another that is asset heavy, low on multifactor productivity and delivers low
or moderate returns, it makes
tremendous sense to look at what
aspects, framework, and business
models of digital economy can be
leveraged by the industrial age
enterprises so as to embark on a
proactive creative disruption and
adjustment.
Undoubtedly pace of creative
disruption and opportunity for new
value creation enabled by digital
technologies and business model innovations is already knocking at the doors of industrial
age business enterprises. There are indeed few early adopters of digital technologies and
their business transformation journey and results are very encouraging. That should give
enough incentive and motivation for other industrial age business enterprises to proactively
embark upon a business transformation based on digital adoption.
Business transformation led by digital adoption is far from being a check the box activity,
and demands quality time from the business leadership and management. It requires
reimagining the concept, framework, boundaries, steps, tools, outcome and interlinkages
among all of the core business processes of an organization. The nature of this business
transformation would be multi-disciplinary and multi-dimensional.
There are many new dimensions like connectedness (real-time), unfettered dynamic flow of
data, insights and analytics, instant sharing and collaboration, elimination of intermediaries
and gate keepers, reach and penetration, autonomy and decentralization, mobility and
empowerment, and agility that needs to be taken in to consideration while redesigning the
core business processes in a digital environment. Legacy organization design, rigid
hierarchies, top down command and control, information enclaves, and decision & approval
bottlenecks would be some of the early casualties in this business transformation.
Infact the centre of gravity of this business transformation is less anchored in technology
itself and is more towards reimagining and redesigning the people and process aspects of
the business. It is about leveraging smartly from the boutique of available digital
technologies and creating a cohesive, overarching, dynamic, collaborative, innovative,
10. 10
inclusive and decentralized virtual business network or ecosystem or platform that extends
beyond the conventional boundaries, notions and touch points of the organization and
includes diverse external stakeholders so as to create an unique compelling experience and
value to its customers.
Adjusting to slower growth by
driving change towards simpler
organizations, efficient operations
and new business models, and
Leading the organization towards
a creative and proactive digital
business transformation are two
sides to the same coin. They are
not mutually exclusive set of
initiatives. They complement each
other. They both necessitate
reimagining and enhancing
capabilities around strategy
development and execution, operations efficiency, analytics, customer experience, and
business model innovation, and leadership impact.
The need of the hour is visionary leadership that communicates the compelling vision, sets
the tone, rallies the organization and leads from the front in navigating the digital business
transformation that could armor the business against the challenges of slower growth and
prospect of adverse digital disruption.
Subramanya Raja.V is a Founder Director in Pearlstellar Business
Management Pvt. Ltd. He is a keen observer of global economy, business,
technology, politics, and social affairs. His area of expertise include strategy,
operations excellence, organization design, leadership impact,
performance management, change management, and customer
engagement. He is passionate about collaborating with business leaders
and chief executive officers in their endeavor to improve business
performance. He can be reached at v.subramanyaraja@pearlstellar.com
Pearlstellar Business Management Private Limited
Unit 701 & 702, 7th Floor, Pentagon P1, Magarpatta City, Hadapsar, Pune 411013, India
Tel: +91 20-66488623 | Fax: +91 20-66488603
Mail: info@pearlstellar.com | Web: https://www.pearlstellar.com
