Uncertainty is weighing on the global economic recovery and there is mounting consensus that the decelerating growth of recent years is a prelude to prolonged sluggishness.

After reaching 5.2 percent in 2010, global GDP growth dropped to 4 percent in 2011 and further to 3.2 percent in 2012. Forecasts for this year see the global economy rising around 3 percent.

Protracted low growth appears inevitable since it will take considerable time for countries that had implemented extreme measures during the global financial crisis to restore and normalize their economies. This dim view is shared in Korea. In a Samsung Economic Research Institute survey of CEOs conducted in April, half of the 603 respondents predicted low growth would continue for more than three years.

Compared with previous downturns, the current conditions are very different in terms of length, scale and structure, and will necessitate a fundamental shift in business strategies. If business cycles were categorized in meteorological terms, a recession would be “winter,” but a long period of low growth would be a “Little Ice Age” because its continuous abnormal temperatures would cause a drastic change in the ecosystem. Just as nature undergoes fundamental changes when the average temperature varies 1 to 2 degrees, a 1 to 2 percentage point decline in economic growth rate for several years will inevitably alter the corporate ecosystem.

Companies will have to accept low growth as a new economic order, or a “new normal,” and adjust accordingly to maintain competitiveness and financial health.

Strategies for low-growth environment

Prolonged underperformance among global economies will obviously undermine the external performance and internal dynamism of companies. New business opportunities will shrink and competition will intensify, squeezing profit margins as more money is devoted to protecting market share. If a company lacks a competitive edge, its survival could eventually become questionable.

When performance deteriorates, companies naturally lose financial firepower to maintain operations such as research and development or to retain human capital and will fall behind. With resources for future growth exhausted, success will be more and more difficult to achieve and that will further hamper the building up of capabilities and an effective workforce. At the extreme, the negative loop will reduce entrepreneurship and employees’ motivation, which form the basis of a company’s competitiveness.

Once corporate vitality collapses, it cannot be restored easily. One or two short-term plans are not sufficient for a low growth period. Long-term plans are necessary. They should promote three areas: “sensing,” “focusing,” and “energizing.”

Sensing

Consumer sentiment contracts and market opportunities are reduced in low-growth periods. In this environment, nothing may be more important than to find and exploit new business opportunities. Companies should create new demand through constant observation of consumer actions and analysis of their underlying sentiment.

In other words, a “close sensing” of customer and market behavior is crucial. Global insurance group Allianz employs a “demand-first innovation” model: It examines customers’ actions and emotions for several months and sets up a team comprised of related workers as well as psychologists and cultural anthropologists to analyze the potential consciousness of customers.

Focusing

During a long slowdown, it is difficult to recover from strategic mistakes. It is thus crucial to focus resources in the most promising areas to raise the probability of success.

Companies should constantly redefine businesses by concentrating on areas where they can optimize existing resources and strengths. Marubeni Corp., Japan’s major integrated trading conglomerate, expanded into the grain business based on its core commodity business operations.

In a low-growth economy, it is important to accumulate small successes, which will help instill confidence in overcoming a tepid business climate. Thus, realistic goals and concrete growth channels should be established rather than abstract objectives.

Energizing

In a low-growth period, employees can become discouraged and lose their commitment and enthusiasm.

Energizing the organization is thus very important. Executives should transparently share with employees the strategies and current business status, to ease fears of job insecurity, withdrawal of business and wage reductions.

This would require a creation of a “strategic consensus” across the company. IBM built an “Enterprise Dashboard” on its intranet to help employees access the company’s monthly performance, work promotion state and participating workers in real time.

Fair evaluation and compensation is another issue. Giving high evaluations to senior-ranked employees or those who are up for promotion should be avoided. Regular training for those involved in the evaluation process is also necessary and feedback should be given to them for continuous improvement of the employee evaluation system.

Role of CEO

A realistic understanding of the current situation and strong commitment to make a breakthrough is the starting point for overcoming low growth. The CEO should accurately be aware of the threats and opportunities, and strengthen communication with employees on his or her strategic directions. When asked to identify the important qualities that CEOs need to have to overcome low growth, “communication” and “vision presentation” were cited the most by Korean CEOs surveyed.

The specialties of just one or two functions are not enough to obtain aforementioned three areas. Sales and marketing, planning and financing, human resources and production and development functions should converge. Google and Microsoft recently integrated their businesses and organizations. If functions overlap causing concerns of confusion, the CEO should present principles to prevent or resolve conflict.

In a low-growth period, leaders must grapple with fewer resources, causing worries of burnout. The organizational system should be set up by which employees are empowered so the CEO’s decision-making is not overtaxed. In particular, the CEO should continuously explain and guide employees toward transformational changes so that short-term performance is not over emphasized.

The key to overcoming a long-term struggle is to enhance execution ability for change based on trust throughout the company. 


This article was contributed by Samsung Economic Research Institute. The opinions reflected in the article are its own. ― Ed.