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Saturday, April 19, 2014

How Companies Can Leverage Global Trends to Drive Growth 04-19

How Companies Can Leverage Global Trends to Drive Growth

The business landscape for companies is changing as a result of global trends such as aging populations in the U.S. and other major economies, corruption, geo-political risks, and the potential of 3-D printing and robotics, among others. 
Mauro Guillen, a Wharton management professor and director of Wharton’s Lauder Institute, spoke recently with Knowledge@Wharton about how companies can leverage these trends to come up with strategies to drive profitable growth. Guillen will also teach a free online course on this theme via Coursera starting May 5. 
An edited transcript of the conversation appears below.
Knowledge@Wharton: Let’s imagine that we have here with us a group of executives from multinational corporations. What are some of the most important global trends that they should be paying attention to?
Mauro Guillen: Well, there are several of these trends. And, of course, all these trends can be seen as threats on some level. But they actually represent major opportunities. We’re seeing, for example, major trends in terms of population shifts around the world.
 The centers of gravity of the global economy are shifting away from Europe, the United States and Japan toward the emerging economies. That is where the markets of the future will be. That’s where the middle class of the future will be. And hence, consumer markets are going to be gravitating towards those parts of the world.
We also see trends in terms of geo-politics where the risks are where the natural resources are in the world. And finally, we are seeing very important financial trends. We’re seeing that there are certain countries in the world that are accumulating more and more reserves.
 They are accumulating more and more firepower for the future. That’s going to bring about realignments in currencies around the world. As a result of those shifts, companies will need to change the structure of their operations.
Knowledge@Wharton: These are a great group of topics that you’ve laid out. Why don’t we start with the demographics? In some other contexts, you have referred to the fact that this is probably the first time in history that you have more grandparents living in the world than grandchildren. What are the consequences of the aging population? How does this affect, say, banks or other companies’ products and services?
Guillen: Well, you’re exactly right. Population aging is a very important phenomenon. It has been going on for the last 20 years but at this time and moving forward into the next five or 10 years, it’s going to reach critical levels. For banks, for example, what this means is that they are going to find it harder to attract deposits. 
Deposits are the easiest and cheapest way for banks to get funding. So, banks will have to look for alternative sources of funding, precisely at a time when regulators are asking them to maintain higher capital ratios. Also, the kinds of products banks sell to customers are will have to change as a result of older populations around the world. They will need other kinds of savings and investment products.
But companies in any industry will have to watch this trend towards population aging very carefully. And, once again, there are some threats. Some companies will see business lines shrink, [and] their markets disappear. But at the same time, these more graphic trends also create new opportunities that can be measured in the hundreds of billions of dollars.
Knowledge@Wharton: What’s an example of a new opportunity that has been created either for a bank or some other company because of this aging population?
Guillen: Well, for banks, new types of financial products such as reverse mortgages or investment products with downside protection are now so much more popular because we have more customers of banks that happen to be in their 60s, 70s or 80s. And for companies, [it would be] any type of product or service that has to do with the so-called leisure industries.
 People in their 60s or 70s or 80s, many of them retired, have more time. They would like to use that time productively. So, as a result, there are huge opportunities for launching new products and services that essentially keep people busy in retirement.
Knowledge@Wharton: For example, would you say that industries like travel and tourism may see an increase [in business] because of what you just said?
Guillen: Absolutely. And in particular, certain segments within the tourism industry are going to grow — for example, cultural tourism. Given that today, grandparents in the world are actually much better educated than say, 20 or 40 or 60 years ago, the tourism industry and the leisure industry need to move away from just beach and sun and toward cultural tourism, for example.
Knowledge@Wharton: What about industries like health care or real estate? How can they come up with products and services aimed at an older demographic client base?
Guillen: Health care obviously will go through very rapid growth in many parts of the world, especially in the American economies. Let’s not forget that population aging is not only taking place in Europe, Japan and the United States but it’s also a very important trend in China. 
It’s also a very important trend in Russia. In other words, one should expect major investments in health care, in medical equipment, in health care personnel and so on and so forth in some of the American economies.
Knowledge@Wharton: One of the things that sometimes concerns me is if everybody in the world sees this trend, that the population is aging, and they all rush to create reverse mortgages and products and services for the elderly, isn’t there likely to be a considerable oversupply and actually, people will be worse off because of that?
Guillen: Eventually there will be a lot of companies and a lot of banks interested in providing goods and services for that segment of the population. But right now, way more than half of the current needs are still going unsatisfied in the marketplace. This is true in the United States. This is true, I think, in many countries around the world. 
At the same time, just the sheer number of people in their 60s or their 70s or their 80s is going to grow very, very quickly. My sense right now is that supply, meaning the number  of companies that are offering these goods and services, is lagging seriously behind the demand. That will continue to be the case for the next five or 10 years.
Knowledge@Wharton: Let us switch to global financial trends. Until now we have had the U.S. dollar almost solely as the reserve currency for the world because it’s accepted everywhere. But slowly, the Chinese renminbi seems to be becoming stronger. What do you think is likely to happen? How should companies factor that into their growth plans?
Guillen: We are going through a transition phase in terms of the global financial architecture. As you pointed out, the dollar has played a dominant role in the global system for the last 60 years or so. But then that … post World War II period was a time when the U.S. economy was the biggest by a wide margin and when the U.S. was the biggest trading nation in the world. Right now, China is already the biggest trading nation. And the Chinese economy may, within five years or at most 10 years, become the largest economy in the world.
So, the global economy needs the Chinese currency to play a role. And we’re starting to see the beginnings of that, especially in East Asia. Countries such as Thailand or Indonesia or the Philippines are starting to think about how to increasingly link their economies to China, not only in terms of trade flows but also in terms of financial flows and currencies. 
This is going to change the landscape for all companies, even if they don’t operate in China because companies will need to do hedging, for example, in a different way. They will need to revisit their cash flows around the world. So, the treasury functions at major multinational firms are going to have to do a lot of homework in order to adapt to the new realities in the global financial architecture.
Knowledge@Wharton: What are the implications for the world economy were the renminbi to become a dominant currency?
Guillen: First of all, I don’t think it’s going to become a dominant currency in the sense that [it will] displace the dollar. We are moving into a kind of world in which the renminbi at some point will play a role alongside with the dollar and the euro and perhaps a couple of other currencies. The Indian rupee, at some point in the next 20 or 30 years, will also play a role if growth in India continues. 
But the important thing to keep in mind is that multinational firms, because of the complexity of their operations, move money around the world because they generate revenue in one part of the world [and] get funds from another part of the world. They keep their money in certain parts of the world because maybe taxes are lower and so on.
What I’m suggesting is that in the next five to 10 years, most of these companies will need to revisit the assumptions that they have been working with when it comes to making decisions [on] money flows inside of the firm.
 If they don’t, that’s going to have a big impact on their profitability and on the amount of money at the end of the year they’ll be able to offer their shareholders in return for the funds they have given the company to operate.
Knowledge@Wharton: That’s clearly both an opportunity and a risk. What are some of the other major risks, especially on the geo-political front? How companies should hedge their risks — or are there opportunities in those risks?
Guillen: The biggest risk now and looking down the road for the next five years or so has to do with a combination of factors. There are certain parts of the world where we see very young populations. The population is growing rapidly. At the same time, we see that corruption is a problem, [especially] government corruption. We also see political instability. On top of all of that, these are countries that happen to have a lot of natural resources — energy, minerals and so on.
I’m referring to some parts of Latin America, but mostly to sub-Saharan Africa, the Middle East and some parts of South Asia. This so-called “long arc of instability in the world” that stretches from Latin America all the way to Southeast Asia and then reaches a climax in sub-Saharan Africa — [is] a major source of volatility and risk to the entire global economy. 
One cannot understand, for example, nowadays, the fluctuations in commodity prices or in energy prices [and] the extreme volatility, without taking into account this combination of factors.
Knowledge@Wharton: How do we hedge those risks? What do we do?
Guillen: Well, companies on an individual basis certainly need to be very careful as to where they invest, but more importantly, how they invest. The issue is not, “Oh, are there a number of countries out there that I need to avoid?”
 No, I don’t think that’s the right way of thinking about the problem. The right way of thinking about the problem is, “If I want to be a multinational firm, a truly global company, I need to operate in a variety of markets. Based on that assumption, what is the best way of operating?”
I would, in particular, recommend that companies think about staging their investments, [and] keep their options open. If unpredictable events happen, then they can quickly rearrange their operations in such a way that a crisis in a particular part of the world doesn’t affect their operations and their profitability on a worldwide basis.
Knowledge@Wharton: One more risk that we hear about a lot these days is cyber terrorism. Part of the challenge seems to be that very often the threat may come either from some governments or from amorphous groups of hackers that don’t have a state. What is likely to happen as far as that is concerned?
Guillen: Yes, cyber risks or risks related to our increasing reliance on information systems and telecommunications and the transfer of information all over the world are clearly going to be on the increase. We have obtained many advantages from the information and telecommunications revolutions.
 We have cut costs. We have enabled companies to essentially pursue opportunities in many different kinds of markets, to relate to their customers in different markets, to look for the lowest-cost platforms on which to manufacture their products and so on.
There are many benefits to information and telecommunications technologies, both [for] the firm and [for] society as a whole. But there are also risks. Increasingly, over the last three to five years, we’ve seen an increase in precisely those kinds of risks that come in some cases from governments, but most likely from individuals who essentially want to make a dent.
 [They would] maybe spend a few years in jail and then leave and become consultants to major multinational firms or governments, which is what some of them do — which is a replay of “Catch Me If You Can,” the movie.
The issue here is essentially, what should individual companies do? [They should] ensure that nothing that they view as a strategic asset or resource can be affected by a cyber-attack. Not all resources [or] assets inside of a corporation are equally vital. 
The company needs to make sure that it understands where the five or six or seven things are that they don’t want anybody to lay their hands on. And they have to protect those things very carefully.
Knowledge@Wharton: Fifteen years ago if you were to look at the Internet, it would have been very difficult for anyone to predict that social media would become a powerful force. Or that a company like Twitter may come into existence and its platform will have the power even to topple governments. Looking at the next 15 years, what do you see?
Guillen: There are at least two very exciting and promising areas [where we will] see a lot of action. One is the intersection of information technologies and robotics. This is going to transform manufacturing. It is going to transform the way in which we consume goods and services. It is going to transform education.
 I wouldn’t be surprised if in five years from now I am redundant as a professor and we can have a robot in the classroom actually doing probably a much better job. This is going to transform the automobile industry, as we know. It’s already transforming surgical procedures at hospitals.
This combination of informatics and robotics … [is where] we see a lot of activity, both in terms of startups and also established corporations that are making big investments.
The other area is more broadly in the use of artificial intelligence. A third area [is] 3-D printing. Right now, most of the visionary applications one reads about strike one as being crazy or outlandish. But we are only at the beginnings of a major trend in terms of decentralizing manufacturing, especially of very specific parts and components. 
So, 3-D printing has the potential of revolutionizing quite a few things. [It can also enable] poor and disadvantaged people and countries and communities to perhaps play a more important role in the global economy.

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