Going for growth in a go-slow world
No matter what happens, investors will reward companies that master the art of growing under pressure.
September 2011 | By Lowell Bryan, John Horn, and Sven Smit
It was a summer of downwardly revised forecasts, wildly gyrating stock markets, slipping consumer confidence, and the ongoing drama of the eurozone sovereign-debt crisis. The forecast for autumn does not reassure. The Chicago Board Options Exchange Volatility Index (VIX) is following a pattern eerily reminiscent of 2008 immediately before Lehman failed and the financial crisis hit in earnest. The potential for a new financial earthquake in the next few months seems real.
Even if we avoid a new crisis, hopes for a desirable, V-shaped recovery that would deliver annual medium-term GDP growth of 2 to 3 percent in the developed world are no longer realistic. We do not make economic forecasts or pretend to have a crystal ball. But scenarios we developed in 2009 to frame the global economy’s uncertainties have proved to be generally in line with what has happened globally over the last two years. Now persistent stagnation in Europe and renewed weakness in the United States suggest that our scenarios need downward adjustment as we move ahead.
Today, the real issue is whether the developed world’s GDP will grow modestly, at around 1 percent, or remain flat or decline, perhaps seriously. Executives are feeling the gloom. In our most recent poll,1 29 percent said they believe that stalled globalization, in both developed and emerging markets, is the likeliest among four choices—the largest share ever choosing that answer since we started asking the question, in January 2011. Only 31 percent believe that the developed world will return to strong growth over the next decade.2 Indeed, the developed world's debt load, compared with that of emerging markets, provides a convincing basis for this view (see chart).
In retrospect, none of this should come as a surprise. The attempts of governments to provide short-term relief through fiscal and monetary stimulus aside, history suggests that any rebound after a financial crisis caused by too much leverage is long and difficult. As our colleagues at the McKinsey Global Institute (MGI) have pointed out, the drag on global growth may prove even more persistent this time because the process of deleveraging is starting later and will take longer. The sharp rise in government borrowing means that the difficult “belt tightening” process that MGI’s analysis of history suggests we can expect—in which the ratio of total public and private debt to GDP could eventually fall by as much as 25 percent—has not yet even begun.
Despite the headwinds, many businesses—especially large multinationals in the developed world—steam steadily ahead. Corporate earnings and cash flows have never been stronger. Most companies have used this financial muscle over the last few years to build large cash reserves and to become better capitalized. Best of all, the fundamentals driving economic growth in emerging markets still seem likely to prove self-sustaining, promising decent future economic growth in most of these countries, even if the developed world continues to struggle.
For executives, the corporate sector’s relative strength offers two broad areas of opportunity. At the macro level, restoring growth will require policy makers to finally take the hard steps to address fundamentals, including fostering private investment and savings, speeding an orderly process of deleveraging, increasing labor participation rates, and reducing structural fiscal deficits. Businesses can support these efforts and help create a firmer foundation for future growth by working alongside government—for example, by expanding the use of private equity to support critical new infrastructure investment. (For more, see the accompanying article, “What business can do to restart growth,” by Richard Dobbs, James Manyika, and Charles Roxburgh.)
More important, the past three years have demonstrated that even in the most severe downturns, significant opportunities emerge at the industry and sector level. For executives, the key is to zero in on the pockets of opportunity within broad trends—the shift of economic power from West to East, for example, or the insistent drive for resource productivity—that play to a company’s strengths. MGI research, for example, suggests that some 400 largely unknown midsize cities in emerging markets will generate 40 percent of global growth over the next 15 years.3 This insight means that you don’t want, say, an “India strategy”; you want a strategy that bets on specific Indian cities promising particularly rich target markets.
Equally, in developed markets, smarter and more intensive use of business analytics offers a potent weapon to focus on the most profitable customers. Banks, for example, already can process and analyze troves of internal and external data to generate far better customer information than they would ever get by relying just on credit scores. Such fine-grained insights will be critical to forming new business models in a generally slow-growth environment.4
Resilience and flexibility will be hallmarks of companies that thrive in a go-slow but volatile economic environment. Along with rock-solid balance sheets, this approach will require business leaders to evolve their strategies in response to changing conditions as certainty increases. Consider the case of Apple, where Steve Jobs first built a market for the iPod, which then begat the iPhone and the iPad—future successes that were not apparent when the original strategy was launched. Jobs found the right time to disrupt markets and to scale his investments. Google has taken a similarly successful incremental path in pushing into mobile-phone markets, culminating in its recent big bet: the $12.5 billion bid for Motorola Mobility.
Finally, no company that aspires to grow can assume away macroeconomic uncertainty or the risk of large future shocks. It will be imperative for executives to stress-test the critical assumptions that underpin their strategies and business models. What happens to your plans if, for example, the dollar depreciates by 40 percent against the renminbi over a six-month period or if oil prices leap to $200 a barrel? To cope, business leaders will need to master the tools for decision making under uncertainty: decision trees, Monte Carlo simulation, scenario planning, and war gaming. They will also need to reinforce their companies’ core financial resilience (liquidity and diversification of assets) and to develop a more diverse talent base (skills, cultures, and languages).
What executives cannot do, however, is stand still. Despite the tough overall environment, companies that make the right moves will unlock huge new markets and create enormous wealth over the rest of this decade. Investors are certain to punish companies that freeze in the headlights of an unforgiving economy. But they will richly reward those that master the art of growing under pressure.
Lowell Bryan is a director in McKinsey’s New York office; John Horn is a consultant in the Washington, DC, office; and Sven Smit is a director in the Amsterdam office.