Sunday, June 3, 2012

What to do when economic forecasts are wrong?

This articles does not necessarily answer the question asked in the title, but it does present incentive for thought regarding the issue. As part of the reading assignments for week three, I was particularly intrigued by the content and the thrust of the argument in the article titled "What happens next? Five crucibles of innovation that will shape the coming decade" because it purported to foresee the eventualities of global economies and suggested that forward looking companies should take the opinions expressed in the article into consideration when developing a corresponding forward-looking strategies. I was compelled to pay particular attention to the main points of what it terms as its 'crucibles' mostly because as I read all five of them, the ideas expressed in them seemed to portend contradictory results.

In totality, the article rightly identified the world as a complex, multipolar, and interconnected world, in which the biggest challenge facing forward-looking businesses will not be their capability to respond to their known competitors, but their ability to learning how to respond to a world in which the frame and basis of competition is in perpetual flux, thereby requiring these businesses adapt to the inevitable changes that will result from emerging market economies. Because these dynamics will be affecting strategies heavily, particularly in the way these emerging-market economies' evolve, innovation will lead to leaps and bounds of prosperity. However, a few underlying premises regarding the innovations and the demographic dynamics presented within the article itself seem to contradict its own premises. So, let's look at what was stated and how a forward-looking business intending on developing a worldwide strategy should adjust its plan and strategy in light of the chance that forecasts could be erroneous.

In Crucible 1, the article made two underpinning arguments, i.e., first, emerging economies will have "simultaneous labor force growth and rapidly declining birth rates" which equates to "more workers plus fewer mouths to feed [which in turn] equals more disposable income." The second is that "China and India are seeing labor productivity grow at more than five times the rate of most Western countries." The first premise is inherently myopic. In fact, in Crucible 2, where the article addresses the productivity imperative, it discusses productivity, employee skillets and the expansion of economies. In particular, it cites the  United States, for example, as having 85 percent of the new jobs created in the past decade requiring complex knowledge skills i.e., analyzing information, problem solving, rendering judgment, and thinking creatively. But, if people in emerging economies are not having offspring or there are not enough people to support the consumption of goods that support an emerging market economy and the Social Security equivalent structures within these economies, these highly educated consumers will divert their disposable income toward their retirement future rather than spend in the near term, therefore causing a slump in demand for goods in the economy and a consequent slowdown of the discussed economies.

The economies that will remain vibrant into the future will be economies that have a mechanism that continually infuses its middle classes with vibrant energetic workforces. A type of workforce whose discretionary income is growing, and whose progeny also increases, or perhaps, where there will be younger immigrants that will fill the role of working class to provide for and fill the monetary vacuum needed to cover for the lack of total retirement investment money used for other activities such as shopping. This is not to assert that consumers cannot concurrently shore up an economy through consumption and save for retirement, only that for economies to keep growing and consumers have to have enough to do both consumption and saving for retirement at a proportion that is healthy enough to support economic growth. That sort of support will usually result from innovative economy that some would argue are in the emerging market economies, but which I assert are also more prevalent in the western economies.

Franky, there needs to be some degree of clarity with regard to the definition of innovation. The articles appears to use the term to mean that innovation is the localized clever use of enabling technologies to reach high levels of productivity, whereas innovation should also be viewed more broadly as the enabling technology absent which its clever use will not be possible. These enabling technologies often emerge, not from emerging market economies, rather from industrialized nations. The research that led to the technology that enabled Tata’s 'innovative' Nano $2,200 car came not from an emerging economy but from research institutions in the West. These industrial nations may also continue to grow, though not as rapidly, at least in the short run, as the emerging market economies, because, in comparison to the emerging market economies, there is already some degree of saturation that limits the rapid expansion of consumption since its middle classes have long been consuming. So, for a business spoiling to expand its operations and market share in the worldwide economy, it would be wise to develop a strategic plan that is nimble enough to adapt to the sinusoidal move of consumption that will inevitably vary according to the fluctuations of the consumer populations. A strategy that excludes demographic dynamics likely does so at its peril.

Question: Should companies continuously be on the look-out for signs of change in the market that could render their strategic plans obsolete, so as to be able to to effectively adapt their strategy?

[1] Economic Facts about BRIC countries and Western economies.

[2] What happens next?
Five crucibles of innovation that will shape the coming decade (assigned case). Peter Bisson, Rik Kirkland, Elizabeth Stephenson, and Patrick Viguerie. McKinsey & Company.

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