Image credit: John5199/Wikipedia

How to succeed in a slow growth economy

Forget the financial crisis, GDP growth has been slowing for decades. So what does innovation look like when output's flatlining?

by Adam Gale
Last Updated: 19 May 2017

For a century and a half, we’ve been unwittingly carried by the economic tailwinds of GDP growth. Even if firms veered off course with a poor investment, there was always the comforting knowledge that next year would bring more consumers, more spending power, more opportunities.

The problem with being on the uptick of a sigmoid curve is that everything looks like it will keep on going up forever, until suddenly it doesn’t. That’s when you realise you were living on borrowed time. This moment came in the West not during the financial crisis – periodic downturns are a familar fact of life – but in the years following, when meaningful growth didn’t return. We’ve stopped sinking, but the sails are empty.

This isn’t a new development. In fact, research from growth consultants Kantar Futures shows underlying GDP growth has been slowing for 50 years. After each successive recession we’ve had, economic growth has come back weaker than before. 

Real GDP growth, annual percentage change, 1961-2014, courtesy of Kantar Futures. Both slowing population and productivity growth are to blame.

It’s natural, when you see a chart like that, to wonder what on earth happened. Where did we go wrong? But that would be to suppose that growth rates of 3-4% a year are somehow normal. In fact, in the long sweep of world history, the heady days of the last century and a half were a remarkable anomaly.

In the 19th and 20th centuries, there was a deep reorganisation of the economy, as we left subsistence farming behind for cities, mass production and mass specialisation. As we diversified and technology advanced, productivity exploded. The simultaneous boom in population and the entry of women into the market place meanwhile not only boosted GDP but also provided ample demand to soak up all the new goods that our new factories were churning out. It was a virtuous circle. 

But these were all one-off changes, in effect the puberty of nations. We can’t urbanise anymore because we already live in cities, we can’t bring women into the workplace again because they’re already there. So while there are still important changes occurring in the structure of the economy, they will never be as profound as they were before – unless, that is, we all lose our jobs to AI.


Interested in how how businesses like Diageo and Macmillan Cancer Support are innovating? Click the image below to hear what they had to say at the Kantar Futures New Rules of Innovation event, in association with MT.


Even the rise of the robots isn’t much of a source of optimism. After all, the digital age hasn’t been as kind to the economy as most people assume. 

‘You can see the internet and ICT everywhere except productivity figures, as Robert Solow said,’ says Kantar Futures’ Joe Ballantyne. ‘Actually many of these innovations take demand out of the economy. The number of people employed in the music industry is substantially smaller than it was, even though access to music is wider and far more records are being produced. Uber arguably sucks demand out of the economy too, because we used to have lots of well paid cab drivers, not lots of Uber drivers who barely make ends meet.’

This is the conundrum businesses face. On the one hand, slower economic growth encourages more caution: the consequences of a poor investment are all the greater without the certainty of stronger future demand to compensate for it. On the other hand, says Ballantyne’s colleague Andrew Curry, it makes innovation even more of an imperative.

‘It’s a dirty little secret that most businesses grow at the underlying rate of the economy, but shareholders typically have historic expectations. There’s much more pressure from them, so that means businesses are going to have to make slightly bigger and more dangerous bets to keep their growth rates up,’ Curry says.

So what do these bigger bets look like? Curry and Ballantyne propose that most corporate innovations fall into four categories: upserving, extracting, bundling and market-making.

Upserving

‘Slowing growth doesn’t mean people will spend less money on everything equally. It means people will make sharper decisions on what they choose to spend money on or not. For organisations, the question is how to create a product or service that people are willing to spend more money on,’ explains Ballantyne.

Upserving (despite being a rather hideous word) can be about pursuing the wealthier consumer, or finding ways of bringing the elite experience to the masses. The latter is particularly prominent, especially in sectors where the top-end product isn’t that much better than the mass market: unless you want it encrusted with precious jewels, an iPhone is still an iPhone.

‘Upserving doesn’t have to be that we’re all buying designer handbags. Look at the explosion of the coffee market in the UK. It used to be £1 for a Nescafe, now you can spend £3 every day on a flat white. It’s about understanding what people really value and are willing to spend money on,’ says Ballantyne.

Extracting

If upserving is reaching upmarket, extracting is appealing to the lowest common denominator by taking things out of the process, reducing costs and often passing some of that onto the customer. The classic example is Ryanair, with its no frills appeal to the mass market, but Curry points to supermarkets as another case.

‘There were signs before the financial crisis that people were getting fed up of too much choice. The supermarkets that responded to that were the ones that did well out of the crisis. One of the interesting lessons about Tesco is that, because it was driven for so long on choice and price, it didn’t seem to understand some of the things Aldi and Lidl did other than discounting, such as removing product lines  in dull categories that take up their customers’ mental space,’ says Curry.

Bundling

Whereas extracting and upserving are both ways of reimagining how you deliver in your current category, bundling and market-making are both about trying to develop new customer behaviours. ‘If you get them right you’re likely to make more money, but it’s longer and harder and you’re likely to need deeper pockets,’ says Curry.

Bundling is essentially about combining different products into a new one, often in ways that stretch across sectors. The most obvious example is product-as-a-service – Zipcar and Spotify both demonstrate bundling at work.

Market-making

‘This is a bit of a holy grail, both the hardest and most profitable to do,’ says Ballantyne. ‘It’s not saying we’re going to compete with existing players, it’s saying we’re going to create an entirely new set of behaviour.’

Essentially, it’s finding and serving a market that didn’t exist before. Examples would include Airbnb and Deliveroo. ‘Before you could order from the local curry house, but it wasn’t a particularly high value experience. The way Deliveroo talks about itself, it’s not stealing share from the curry houses, it’s creating an entirely different approach to eating and drinking,’ says Ballantyne.

In practice

You can see these patterns broadly across various businesses, but as ever the devil is in the detail. In the hotel and hospitality sector, for example, you have the likes of Premier Inn extracting at one end - stripping out costs to appeal to people who need to somewhere safe and comfortable to stay on the cheap – and Airbnb market-making at the other. Staying in a stranger’s home on holiday is a new set of behaviour if ever there was one. 

In most hotel chains, however, the trends are somewhat subtler: towards the ‘social lobby’ (apparently we’re fed up of spending our stay locked away in our rooms), using data to target and engage customers outside of their visit, and improving the guest experience through pop-up events that reflect the neighbourhood the hotel’s in.

That’s largely upserving and bundling, a pattern that’s repeated in the cinema sector. There also, experience and data are words on everyone’s lips. Odeon’s chief operating officer Ian Shepherd doesn’t think that should come as a surprise.

‘The way to drive attendance in the cinema industry is to realise you’re fundamentally a hospitality business. I don’t really compete with Cineworld or Vue, I compete with going for a meal or the pub, or most critically with inertia, choosing to do nothing,’ says Shepherd.

A cinema’s financial year has far more to do with the films the studios release than the wider economic climate, he says, but Odeon’s investments in staff training and the physical experience (e.g. better seats, better toilets) have enabled it to outgrow the market – in 2015, a record setting year, it grew 14% against the industry average of 9%.

‘To what extent did we grow faster because we stole from our competitors? The answer is very little. All the evidence is that a cinema with competitors next door is largely an isolated market. The lion’s share of the 5% difference was getting people to come more.’

Innovation clearly doesn’t have to be revolutionary to be effective. If you look across at the drinks sector, it’s a surprisingly similar story. Market-making, in the sense of creating entirely new behaviours, is not the easiest way to grow.

‘We’ve got to be quite careful ethically,’ says Diageo’s global head of consumer planning Andrew Geoghegan. ‘What we don’t do is create new consumers of alcohol.’

Bundling is also difficult, because in many markets such as the USA there’s a strict separation between production, sale and distribution. ‘Unlike taxis, our business has been disintermediated forever. The Uberisation of alcohol has already happened, so it’s incumbent on us to think about how we better serve our customers,’ says Geoghegan.

That leaves upserving and extracting. Both are going on to differing extents, says Geoghegan. Surprisingly, although the alcohol sector is largely resilient to the unfavourable economic winds (millions of new customers are coming of age in developing markets, while disposable income –at least for booze- remains strangely high in the west), it is experiencing the dreaded ‘squeezed middle’.

‘There’s been a big shift towards more accessible price points. People are able to get the same quality at lower price points, or they’re looking for a better experience. They might drink less, but they’ll choose to drink better.’

While Diageo is using technology such as data analytics to cut costs (frankly, who isn’t?), it is focusing more on upserving. ‘It’s in our DNA. We grow by penetration and by premiumisation. As the world is stretched for cash, we recognise that people are willing to pay a bit more for a better experience.’

Finding your way

Clearly, the broader economic slowing affects different sectors very differently. These are but a few examples. But wherever you look, it’s increasingly clear that innovation isn’t just something that happens in the R&D department. In most firms, it increasingly takes forms like the examples of upserving and bundling seen above – business model and marketing innovations. To an extent that’s even true for tech firms – the Apple brand is as responsible for its success as its latest iWidget is.

‘Combining secular, social trends with trends in tech and economics – it’s kind of how innovation happens all the time. It’s impossible to imagine Airbnb existing before now, even if we’d had the technology, because people didn’t travel as much, they had less money and they also wouldn’t have been willing to travel with that degree of informality. Similarly Zipcar partly exists because young people find it hard to afford car insurance and are less likely to see owning a car a status symbol,’ says Curry.

The problem with business model and marketing innovations is that they might be good for the company, but they aren’t so obviously beneficial for the wider economy. A new car factory increases car output, and so long as there are people willing and able to buy the new cars, GDP therefore rises. Cinemas installing bigger seats may the firm make more profit, but ultimately every pound Barry from Basingstoke spends at the pictures is a pound he doesn’t spend in the local pub or nightclub. It’s becoming a zero sum game, which means more than ever that there will be losers as well as winners.

But at least that means the economy will still reward businesses that offer people things they actually want. If business model innovations or technologies like ride-hailing mean we get more for less, but that doesn’t show up in GDP calculations, then maybe the problem is with the way we measure prosperity, not with the innovation.

For firms, the new reality may ultimately require a calming of expectations as much as anything else. But it’s not a time to lose hope. Business growth may prove harder to come by, but the market will still respond to smart innovation, particularly where that means figuring out better ways of giving people what they want. In the end, isn’t that why most of us are in business in the first place? 


Will AI make us redundant?


Image credit: John5199/Wikipedia

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