Is a new economic crisis approaching and how deep will it be?
According to world financial and banking institutions, as well as highlighted economists and analysts, the world is in the beginning of a serious economic slowdown, which is expected to propagate further at the end of this year and the early next one. The latest argument, which strongly tilts the balance to such an expectation, is the reversal of the yield curve between US three-month and ten-year government bonds. In the latest IMF report released on 9 April, the forecast for global GDP growth for 2019 is revised downward for the second time only within the last three months and it is now at 3.3% or lower by 0.4 pp. compared to the IMF October 2018 WEO forecast. Of course, the protectionist measures and trade wars, the uncertainty surrounding Brexit, the slowdown of China’s economy and of EU countries, taking into account that Italy is already officially in recession, and Germany may be in soon lie in the bottom of such expectations.
In this article we will look at the challenges facing businesses in a situation of imminent crisis as well as the opportunities that open up to them and can help them become stronger once the crisis is over.
Of course, the main recommendations that go to entrepreneurs and company leaderships in every crisis have been known for a long time. There are several basic principles of corporate behaviour during a crisis, which include the following:
- Focusing on the core business of the company;
- Optimizing company costs;
- Outsourcing certain administrative and maintenance activities;
- Staff optimisation made with responsibility to the dismissed employees;
- Working with the most loyal partners that offer high quality services.
Here, we will not go into detail on these recommendations because they can be found anywhere on any of the more popular corporate governance sites. These types of actions are not very inspirational, and rather offer a reactive survival strategy rather than unleashing the company’s potential and turning the negative challenges into opportunity for development and change to underpin the future growth of the business.
That is why we will outline the picture of the future business environment on a global scale to enable business owners to understand the challenges they face in the long run and eventually to undertake strategies for change and growth.
Characteristics of modern market leadership
It must be clear that big successful companies are increasing their market power and, in the long run, precisely this rise of company’s power can become the cause for a global economic slowdown and increase of income inequality. The concentration of assets and the company consolidation is a widespread phenomenon and is a consequence of the need for huge corporate mastodons to continue to grow at a steady pace and to increase the wealth of their shareholders and owners. Today’s business is supranational, and the only way to gain more market share is to concentrate resources, cut costs and implement synergy. This path of growth allows profits to be increased, which is the result not only of optimizing costs but also of achieving monopolistic or oligopolistic positions in many markets. Increased market power can be measured and the approach used by the IMF is to calculate the market mark-up that companies charge over their costs and include in the price of the end-products they offer. On the basis of 1 million companies surveyed in 27 developed and emerging economies since 2000, it appeared that during the period under review the mark-ups of firms increased by an average of 8% in developed economies and by less than 2% in emerging ones. The increase in mark-ups affects almost all industries, but mainly those outside the manufacture industry and especially IT industries.
It is important to note that, in fact, the largest increase in mark-ups is observed in a very small percentage of companies, and in particular, the first 10% of surveyed companies increase their mark-ups for the period by over 30%, while those of the remaining 90% firms remain almost unchanged.
This significant increase of market leaders’ mark-ups, however, has its own economic logic. These companies are more profitable than their competitors on average by 50%, are on average by 30% more productive and possess on average 30% more intangible assets, such as patents and software products. Market leaders are not just big companies. There are enough small firms that are market leaders in particular niche businesses, although big companies have a very large share in final sales.
Common features among market leaders and key features of their success
- As mentioned, market leaders are much more productive. Assuming that the main factors of production are capital and people, under the same initial conditions, more productive companies multiply the capabilities of the original factors, allowing them faster expansion, larger sales and, ultimately, larger profits.
- Market leaders are much more innovative, which is related to targeting vast amounts of resources to innovation and R&D rather than acquiring tangible assets such as production halls, machines, logistics bases and retail space.
- They possess great capability to maximize the use of their own intangible assets, which means employing extremely good professionals and serious investments in HR development, in terms of qualification and loyalty.
- These companies build their corporate model around networking practices, fostering informal relationships at the expense of formal corporate relations. It is the informal connections between employees that are at the core of the high productivity, because the personal support by a specific specialist, despite his/her formal position in the corporate hierarchy, is often in the basis of a product’s market performance.
- And lastly, economies of scale play a crucial role in company’s success, which reduces unit costs while increasing production.
Market threats from mark-ups surge
Market power also has serious negative aspects. When a company’s market power grows, its drive to compete, improve and diversify its products diminishes. Moreover, it may deliberately delay the introduction of new technologies or innovative solutions to save costs by increasing its profits as a result of higher prices it can afford by reducing supply. This approach results in a reduction in investment. That is what has happened since the beginning of 2000s, when the increased mark-ups led to lower investments. And it is known that investments are at the heart of economic growth. According to the IMF, if the mark-ups had remained at their 2000 level today, capital assets or assets that would be available as a result of higher investments would be by 3% more, and global GDP would be by 1% larger. The decrease in investment, which is the result of the increased market power of the companies, leads to a decrease in aggregate demand and hence to a longer recovery from 2008 crisis.
As a result of the lower investment, there is a loss of income for workers, which the IMF estimates to have dropped by 10% (or from 0.2 percentage points to 2 percentage points) in the workers’ incomes as a share of total national income. Ultimately, such a development leads to higher income inequality, as the increased return on capital favours mostly the richer part of the population. It is here the state intervention to find solutions to such a negative development mostly needed.
Guidelines for successful corporate development
However, since this material is aimed at pointing out positive solutions for corporate success, the guidelines that can be set for a successful corporate development would be the following:
- Based on your good knowledge of your strengths and weaknesses, discover the products and services you are best at and the market niches that you think you can be successful in.
- A distinctive feature of today’s market leaders is the availability of IT technologies. Seven of the top 10 public companies in the world are technological (Amazon, Microsoft, Alphabet, Apple, Facebook, Tencent, Alibaba), one is investment (Berkshire Hathaway), is a pharmaceutical (Johnson & Johnson) and one is a bank (JPMorgan Chase). Please note that this ranking is constantly changing and may not be correct at the time of reading the article, but the conclusion is very clear: 70% of market leaders are technology companies. Which does not mean that only such companies can be market leaders, but the introduction of modern technology gives a significant market advantage.
- Direct a serious percentage of your revenue and profit into innovation. An inspiring example is the Chinese technology leader Huawei, which has become a multinational corporate leader rivalling with Amazon and Alphabet from a small provincial subcontractor of foreign companies in less than 30 years ago. Huawei spends about 15% of its revenue for innovation, equivalent to about $ 15 billion a year, with 45% of its 80,000 employees engaged in R&D activities. Without investment in innovation, success in the Industrial Revolution 4.0 is impossible.
- Appoint the best among the best professionals, taking into account that the main distinguishing feature of your employees is not the ego but empathy. Leadership based on the authoritarian approach is already in the past. The core value of today’s leadership is teamwork, tolerant approach to problems, encouragement of initiative, and the understanding that support in a difficult time builds loyalty.
- Finally, create a friendly and well-meaning corporate culture! Stick to the following principle: The strategy is nothing but a quest to understand what the future reality will be, which people cannot predict. Corporate culture is the foundation upon which each strategy is set. If you have a well-built corporate culture, you can handle any challenge faced by you.
Chapter 2: The Rise of Corporate Market Power and Its Macroeconomic Effects, IMF, WEO 2019, (Наличен на: