Opinion

Managing in the age of macroeconomic uncertainty

By Michael Thorneman, Johnson Chng and Andrew Schwedel
Updated: 2010-10-27 13:45

While the Chinese government's recent announcement that it will allow a more flexible yuan is not expected to be large enough to significantly impact the price of commodities, managers will do their best to hedge against the rising cost of raw materials. But now they must also think differently about ways to achieve better pricing and economics. How can they build customer loyalty without resorting to more and more discounting? The answer will likely involve a tighter focus on core businesses and capabilities which can add value to products and services that customers will pay more for. That's going to require segmenting customer groups and figuring out how to serve both high value and low value customers profitably. Despite the actions they have already taken, companies must also figure out how to keep driving costs out of their operations without cutting into muscle. In many cases, that will require radically simplifying their entire business systems, from product offerings to organizations, and supply chains.

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There's little doubt that the loss of eight million jobs in the US during the recession will hold back consumer spending coming out of the recession and is likely to dampen demand through the first half of the new decade. But we also see other reasons that spending growth will be uneven – both at home and abroad. In the US, household balance sheets have been decimated by the twin ravages of collapsed home values and falling stock prices. Even with the recent swings, stocks have recovered from their 2008 lows. But as a factor that drives consumer spending, stock prices are the weaker of the two. Shrinking home values will continue to weigh heavily.

The shock of lost wealth is likely to change behavior. Savings rates in the US should head higher as households try to back-fill for the losses they've incurred. Some consumers may revert to their old free-spending ways, but for an aging population facing imminent retirement, rebuilding savings will be a necessity, not simply a good idea. In China, the trend is reversed. Traditionally a nation of savers, it now is the largest generator of savings in the world.

Although demand from China and other developing countries could help offset some sluggishness in the US, these markets will take time to pick up the slack, despite such trends as rising wages in China's export manufacturer hubs like Shanghai and Guangdong.

In a global economy, successfully tracking and adapting to such trends has been fundamental to competing over the past decade. Leading global companies have become adept at boosting the value they offer customers while forging lean, highly productive organizations that source from around the world. What's changed is that competing globally has become that much harder. Recovery is taking hold, which is encouraging for the global economy. But for most business leaders, it isn't likely to provide much of a breather. In China, as elsewhere, there still is a lot of uncertainty.

Michael Thorneman is a Bain & Company partner in Shanghai and head of the firm's Greater China practice. Johnson Chng is a partner in Beijing, where he leads the firm's Financial Services practice for Greater China. Andrew Schwedel, a partner based in New York, is the head of Bain's Financial Services practice in the Americas and leads the Bain Macro Trends Group.

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