The New Advanced Economies

In 1990, only one-third of the people in the developing world were middle class. Today, more than half are middle class consumers with disposable income. They live in countries that include China, South Korea, Brazil, India, Russia, Turkey, Mexico and Indonesia.

A bigger share of wealth

In 2004, emerging and developing nations produced 21% of global GDP (Gross Domestic Product). That could increase to more than 36% by 2014. That is phenomenal growth in only ten years.

Who is rich?

Today, 33 of the top 200 companies in the world are from New Rich countries—China, Russia, South Korea, Brazil, India, Saudi Arabia, Mexico and Taiwan. New Rich markets felt fewer negative effects from the recent economic recession. Growth recovered faster and at a higher level than in the Old Rich nations.

A shift in market strategy

To remain competitive, European companies are already changing. They are beginning to offer differentiated, highest-quality products and services. These are often combined in a custom-designed solution backed up by expertise to solve clients’ problems. This is the best—if not the only way—for European companies to go to global markets.

In the next 10 years, 80% of economic growth is expected to come from what is called “the emerging markets”.
 

Demographics Drive Development

Shifts in European markets

The population is getting older and more people are retiring in Traditionally Rich markets. The old formula of consumer-fuelled growth is not the key to success.
The new focus needs to be on value-added products and services that are more individualized and customized than in the past.

Traditionally Rich Countries: Paying down Debt and Saving Money

Consumers in Traditionally Rich countries — especially in the US and UK — are spending less and saving more. They are paying down debts they acquired in the years leading up to the financial crisis. They already own most of what they need. Most purchases are for replacement purposes only.

Growth in New Rich markets

The biggest growth potential is in the New Rich and emerging markets. There are millions of emerging middle class consumers ready to buy their first car, TV, mobile phone, computer, fashion, etc. Consumption growth is high and is expected to intensify over the next ten years. European companies need to compete locally in New Rich economies. To do this, they need to gain an intimate understanding of local customers’ needs, and delete unnecessary product or service features while they maintain quality at lower price levels.

Different needs for a younger population

New Rich market needs are different. Companies can no longer just sell their standard products around the world. They have to adapt to local market needs, cultural norms and business practices.

Energy: the commodity that drives everything

To generate more electricity will require a significant investment in technology and infrastructure. And, while generation from solar, wind-power and other alternative sources will increase, most of the generation will rely on traditional energy sources.

Where the energy comes from

Oil In 2008 oil prices reached more than $147 per barrel. When the financial crisis hit, oil prices dropped to $30. But it didn’t take long to climb back to $80. Higher prices and instability are likely in the future.

Natural gas Natural gas prices are currently down. New technology that extracts natural gas from unconventional sources is the reason for lower prices. But as market players start to control supply again, prices will rise.

Nuclear energy Nuclear energy—despite its drawbacks—is becoming a more attractive alternative. There are many new nuclear power plant construction projects underway. Most will come on line in the next 5 to 10 years.

Renewable energy resources attract a lot of interest and investment. But the output today of renewable energy is not enough to power the basic needs of an economy. The EU aims, as part of its 2020 strategy, to get 20% of its energy from renewables by 2020. Today more than 15% comes from renewables, mostly from hydro power.

Reducing carbon emissions

Governments are concerned about carbon and other emissions as a source of climate change, poor air and water quality, and the effects on human health. The International Energy Agency proposes investing in a mix of strategies to reduce carbon emissions by 34% from 2010 to 2030.

Energy efficiency to reduce carbon

Energy efficiency is the most promising source of carbon emissions reduction. Many businesses are discovering that investing in their own energy efficiency lowers costs within a reasonable payback period. Investing in new energy infrastructures can also save money in the long term.

Business opportunities in energy efficiency

Energy efficiency solutions are big business. Governments are working on plans to partner with businesses in innovative schemes to reduce carbon emissions. Governments are also likely to be a source of financing. At the same time, they are working on tougher regulations for business and taxes on emissions. For businesses, there are tremendous opportunities to help customers be more energy-efficient in their industrial processes, transport, buildings, homes and consumer behaviour.

Driving innovation: Green and clean technology

Energy efficiency, green tech, and clean tech will stimulate innovation and economic development in the coming years. The US, EU and China are in competition to be the green solution supplier to the world. Being a leader in green solutions requires new skills, financing, and a different way of thinking and managing.

Companies will invest in energy sources that limit or do not emit carbon. Whether they save energy by improving their own processes, or whether they offer solutions to help others improve their energy efficiency, everyone will benefit. Green and clean will drive growth in the coming years. The opportunities are enormous.

Producing more food for a growing population – from 7 billion today to 9 billion in 2050

When more people in the world decide to eat more resource-intensive foods, prices rise and there is more pressure on the existing agricultural infrastructure. But in spite of the potential for disaster, the reality is that there are plenty of opportunities for a second agricultural revolution. The global population has doubled since 1960. But food production has increased by even more. We have found better farming techniques, as well as better storage and distribution.

Development of land for agriculture in Africa and South America

Across the world, 10 million km2 of land is still available for agriculture. That is 15 times the size of France. But, the available land is not distributed evenly around the planet. Not only does land need to be developed in these areas, but also an entire infrastructure and services for getting produce to market

What does this mean for business?

It is becoming clear that the world needs to preserve and to develop natural resources wisely. The world’s appetite for energy is growing. We need to produce more food for more people. And we need to use water resources more efficiently.
In all of this, there are many opportunities for business and commerce, including:

• From basic raw materials to food, commodity prices will be volatile, and most prices will increase
• Water resources will be increasingly privatized and traded.
• Energy will be increasingly expensive.
• Agriculture and its related industries will re-emerge as key business areas
• The rising price of energy offers an incentive to innovate, experiment and create alternative solutions
• Consumers and businesses want help in reducing their energy usage and costs
• Products and services for reducing the environmental impact of human and industrial activities are now marketable
• There will be plenty of work for those who build infrastructure and distribution systems for energy, food, water
• New farms in fertile but undeveloped areas need transportation to get produce efficiently to market
• Getting water and electricity to the places where they are needed creates business opportunities in developing areas

Worries about Water

About 70% of the planet’s surface is covered with water. But less than 1% of that water is fit for human use. And, it is not spread democratically around the world. Today more than 2 billion people are affected by water shortages.

Moving water to where it is needed

Some parts of the world have natural water shortages. In other areas, such as large parts of Africa, there is plenty of water but no infrastructure to access, treat and distribute it where it is needed. In some parts of the world, water is already privatized and being sold at a profit. Some cash-rich countries in the Middle East and other investors are buying farmland with underground water in developing nations. They want to secure food supplies and access to water.

Conserving and recycling water

Water efficiency, through conservation and recycling, is a fast-growing business. The OECD predicts $600bn will be invested in it over the next 20 years. It will fund desalination projects, repair infrastructure, be invested in digging deeper wells, shipping water (Barcelona currently ships water in from France), reworking industrial processes, recycling waste water, and making more water-efficient appliances and homes.

Efficient use of water

Agriculture, the biggest user of water, holds some of the biggest opportunities for efficiency – for example, genetically modified crops that need less water or can be grown in salt water, drip irrigation, and satellite-based precision watering technologies.

10 Trends in Technology

From “Clouds, big data, and smart assets: Ten tech-enabled business trends to watch”, McKinsey and Company 2010.

1 Profiting from online communities

Companies are using communities of web participants to develop, market, and support their products/services. Companies watch what bloggers write about them and try to get recommended.

2 Networked organizations

Companies are getting more work done faster and cheaper by connecting their outside experts, subcontractors, academic and government partners online.

3 Virtual collaboration

Knowledge workers need to access info and collaborate quickly with each other. Their productivity increases when they can share ideas and info in blogs, wikis, or shared documents.

4 Smart objects

Objects embedded with sensors, actuators, and communicators can absorb and transmit information. Examples: Cars that can sense and avoid collision, patient sensors that can monitor and communicate vital signs and alert doctors/nurses.

5 Big data crunching

It’s cheap and easy to collect and analyse data: customer behaviour, employee engagement, business performance. This enables decision-making that is driven by data and evidence.

6 Sustainability

ITC’s impact on the environment is 14% of world carbon emissions. This will quadruple by 2020. But, ITC has the potential to save 5x more carbon than it uses: It enables smart power grids and energy storage, efficient buildings and better logistics planning.

7 Services instead of products

ICT enables customers to rent units of service rather than make large capital outlays for something they do not use at 100% capacity.

8 Multi-sided business models

Old model: Be the middleman between seller and buyer. New model: Be the website where potential buyers and sellers connect. Make money by sometimes offering free access to one group, while charging another group for access.

“Freemium” model: A free subscription to the basic service is subsidized by premium subscriber revenue. The more users there are, the greater the value of the network.

9 Developing-world innovations

Lack of money and infrastructure in poor markets sparks innovations to solve problems. Examples: mobile phone-based payment systems and high-efficiency, high-quality healthcare.

10 Public good

IT enables efficient government work. Examples: smart public transport systems, interlinked security systems, monitoring of water and sanitation systems, online tax filing, vehicle registration and administration of benefits.

6 New models for growth

Sustainability

Sustainability is living and working in ways that do not endanger our current and future social, environmental and economic resources.

Globalization

Old rich countries have higher cost structures and stronger currencies and can’t compete on low prices. Their growth opportunity is in making specialty, high-value-added products and services.

Localization

The energy, ecological and cost impacts of transport will lead to a re-think of global supply chains. Companies will bring more manufacturing home, or closer to home.

Innovation

European expertise and manufacturing capability for clean and efficient energy, clean technologies, crop science, public transport systems, water management, biotech, precision instruments and ICT are competitive advantages that can be exported.

Healthcare

Given the ageing societies in old rich markets, productivity gains are needed in healthcare.

Services

The demand for services is increasing. Older workers, elderly retirees, families with both parents working have specialized service needs.

The move away from basics and commodities

In the Traditionally Rich countries, there may be a return to manufacturing. But this time, it won’t be about basic or low-tech products. The New Rich countries now occupy that territory and offer lower prices. Europe and other mature economies have to differentiate from New Rich competitors with specialty, high-value-added products and customized solutions.

What does this mean for business?

Differentiation

Companies cannot afford to keep pushing standard products at standard prices. They must either offer comparable quality at a low price, or provide high quality, services or the ability to customize in a way customers care about.

New Management Approach

Traditional management practices were developed for standard-product companies in growing markets. To produce highly customized products or services, you need a very different management approach.

Focus on the Customer

To compete for the attention of customers, the entire company must be orchestrated around the customer value proposition and the customers’ needs. The idea of having only internal customers has to disappear. Everyone needs a clear line of sight to the customer and to act accordingly.

Frameworks to shape the new economy

Government regulation is needed to create the right frameworks to make the new economic model work. Governments acted quickly to inject money into the system, avoiding a big recession turning into depression. They stepped in to fix the problems created by a derailed financial system.

Three key areas of focus

The EU is sending strong signals about the areas where regulatory reforms will be focused. It is clear that:

• Financial responsibility
• Green and efficient manufacturing practices and
• Getting ready for a more diverse workforce

…are on the list.

Governments regulate—and invest

Businesses can benefit from government investment in financial schemes, green schemes and in developing workforces, including education. Investment priorities are likely to be in these areas.

How will governments reduce debt?

Governments will need to raise more revenues and spend more efficiently. They will look for internal efficiencies. They will also insist on efficiencies and cost-effectiveness in their partners and suppliers, e.g. healthcare, defense. Higher taxes on labour will be unpopular and keep employment depressed. So pollution and consumer spending are likely to be the next tax targets. Governments will provide a mix of incentives for people to work longer. This will make unemployment and retirement less attractive and it will make work more attractive.

What does this mean for business?

• Anticipate Regulation Many companies do not wait for new regulation to be announced. They anticipate and prepare for it. They even go beyond regulatory requirement to gain competitive advantage with sustainability-minded customers.
• Form a Partnership with Government Propose projects to meet government aims. And keep gathering information about new projects looking for organizations willing to do the work. There are many.
• Help Government Help governments cut costs, improve efficiency, and free up more funds for meeting the societal and environmental programmes we all face.
• Plan for Less Business from Government Contracts If the government is your customer, be prepared for a review of the relationship. Governments may reduce how much they order. Or, they may change to a cheaper or more effective supplier. Now is the time to look for other contracts and customers.

Consumers in New Rich Markets: Affordability, Utility and Durability

For the first time, people in the New Rich countries can afford products and services like cars, TVs, mobile phones and internet connections. There is still plenty of potential in these high-growth markets.

The middle class in these countries look for affordability, utility and durability to stand up to harsh conditions. The $2,000 very good Tata Nano car cannot keep up with demand. Renault Nissan is teaming up with a Chinese company to produce an even cheaper car.

Value for money

Customers—whether B2B or B2C—want real value for their money. They want their needs to be listened to and met. Nobody believes the claims companies make in ads. They want to find out about real value through people and channels they trust. Old-fashioned word-of- mouth advertising is magnified many times by modern-day social networking. This is where customer loyalty makes a real difference.

Buying through different channels

Today, customers are more knowledgeable about products and services they want to buy. They inform themselves, purchase and seek services through a variety of channels, including the Internet. This is also true in B2B markets.

Gaining the loyalty of your customers

Companies need to keep the customers they have. They need to think seriously about the total customer experience, from deciding to buying, to owning and using, to servicing and even to disposing of a product. They have to manage their reputations by delighting their customers and by stimulating positively the word-of-mouth that is being generated about their products and services.

What does this mean for business?

• Communicate through different channels Customers everywhere have a lot more choice, and they no longer believe everything they see on TV or in ads. Sell through trusted networks, by engaging rather than boasting.
• Be authentic If your actions do not reflect your brand, customers will see through it. They will communicate about it and you will lose credibility. “Live the brand” really means “live up to the brand”. It is not a cliché.
• Have different strategies To succeed in many different markets, you need to understand the history, values and culture that drive customer choice in each location. The result is many strategies.
• Anticipate demographic shifts Don’t wait for change to happen. Anticipate it and capture the value.

Global competition for qualified talent is becoming a reality

In the EU, many jobs go unfilled because companies cannot find people with the relevant skills. The Middle East has difficulty filling skilled jobs in IT, engineering and project management. Other parts of the world report similar skill shortages.

Talent in traditionally rich countries

Attracting talent from other countries is difficult. Skilled workers around the world have many more global employers to choose from, and many of them are in their home country. Businesses need to be seen as a more attractive employer to job-seekers.

Educating and integrating immigrant talent

Many of the unskilled immigrants who come to Europe create large families. Often, the children of immigrants grow up marginalized and unemployed. When that happens, Europe misses the chance to develop young talent to gradually replace its ageing workforce. Companies can step in with programmes to develop native and immigrant talent in areas where the needs are greatest.

Working with older employees

Governments have started raising the retirement age to reflect the fact that people are living longer. Meanwhile, companies need the skills and knowledge of older employees. They will be working alongside younger generations, who might be demotivated by slower career advancement while their seniors remain the decision-makers longer.

Using diversity as an advantage

Organizations will have to get better at managing diversity. Traditional hi-potential programmes still favour white males from the same schools. They miss talent that comes from different sources.

More women in roles formerly occupied by men

Women are graduating in higher numbers than men. Women in lower management ranks will advance to higher positions. What impact will this gender-shift have on the way businesses operate?

Adapting business management to the new realities of global markets

No one in business today has seen so much change, so quickly, in the global economy. Neither professors nor celebrity CEOs know exactly what to do. As a manager in a business, you are writing the book.

Discovering and inventing the way forward

Tried and tested business school models or benchmarking may no longer work. Each situation needs to be seen in the context of your strategy and goals versus the current situation. What worked in the past is no longer a reliable guide.

Examine and challenge traditional methods

To stay competitive, you may have to replace standardization with a customized offering. Instead of specialists, you may need generalists. Imposing a top-down hierarchy to control, monitor and stifle dissent will almost certainly kill your organization today. Think instead about how you can do things differently. Be clear about your customer value proposition and your strategy. When they understand these, your people can see for themselves what to do. They don’t have to wait for you to tell them what to do.