THE CHALLENGE of SLOW by Martin Reeves, Ryoji Kimura, Hiroaki Sugita, Saumeet Nanda, and James Yuji Grosvenor

THE CHALLENGE OF SLOW By Martin Reeves, Ryoji Kimura, Hiroaki Sugita, Saumeet Nanda, and James Yuji Grosvenor

he coronavirus crisis has caused In other words, companies need to think Tunprecedented disruption to business- and operate on multiple timescales—both es and economies around the world, faster and slower. But navigating slow forcing companies to respond on accelerat- changes is not necessarily as easy as it ed timescales. Even prior to the pandemic, might appear. Even when a slow phenome- business environments around the world non is well understood and highly predict- were changing faster than ever before, and able, as in the case of demographic change, outperformance was fading faster than it it can nevertheless be challenging for com- used to. Business leaders are therefore panies to navigate. Why do companies fal- understandably focused on increasing the ter in preparing for slow changes? What do agility of their organizations. the ones who successfully navigate slow change do differently? We looked into how Yet while companies worry about fast and companies responded to demographic unforeseen changes, there are also many change to find out more. important slow-moving social, political, and ecological changes to navigate, too. These include the impact of climate change, Demographic Aging: Slow increasing inequality, the rise of China as Poison for Growth an economic superpower, the development Fertility rates are decreasing in almost of Africa, and the growing importance of all countries in the world. As a result, AI—all of which could have a significant population growth has slowed, and some impact on businesses in the long term. countries—including Germany, Italy, Japan, Even the COVID-19 outbreak presents a and Portugal—have already experienced number of slower-moving challenges, such population decline. Fertility decline, com- as shifts in attitudes and consumer bined with increasing life expectancy, is behavior that will persist into the leading to population aging. The age distri- postcrisis future. bution of the world population is moving from a pyramid shape to a rectangle. (See cline in shareholder returns—even though Exhibit 1.) While this trend is now visible the past decade has, paradoxically, seen worldwide, it started earlier in wealthier record-breaking market returns. This dis- countries, which are already experiencing connect between high market returns and its effects on economic growth. depressed economic growth in developed economies is driven by temporary factors, Economic growth in the long run is driven such as increased debt and low interest by two factors: growth in the labor force rates fueling growth in P/E ratios, which and growth in labor productivity. Growth in cannot continue forever. A demographical- the labor force contributed about 30% of ly driven decline in GDP growth in major economic growth in the US from 1960 to growth markets, such as China (which 2010. However, retirement of the post– helped many companies compensate for World War II boomer generation and the sluggish domestic growth), and the rise of subsequent decline in fertility rate have de- protectionism around the world will make pressed labor force growth. The impact on this kind of market outperformance less economic growth is already visible: accord- likely to occur in the future. However, in- ing to Oxford Economics, the 20-year aver- vestor expectations, which tend to be heav- age GDP growth rate has already declined ily influenced by past performance, may from above 3% before 2007 to 2.2% in 2018 continue to be high in the near to medium and is expected to stabilize around 1.75% term, though they must eventually decline. to 2% during the next 20 years. The same As a result, it is crucial for business leaders story is playing out at different speeds and to find the right strategy for growth in an with different time frames in all major impending lower-growth environment. economies.

Economists forecast steady decline in Japan: A Test Case for Adjusting world GDP growth from about 3.6% in to Population Aging 2018 to 2.4% in the next 30 years. (See Ex- Fertility rate decline and societal aging hibit 2.) A long-term decline in economic started in Japan 10 to 20 years before other growth will likely lead to a long-term de- developed economies and impacted both

Exhibit 1 | A Decline in the Fertility Rate Is Leading to an Aging Population

Fertility rate estimates across income categories Global population distribution by age Age groups 70 0- 50-5 0 0- yramid 0- 0- 0- 0- 70 0- 50-5 00 0- Hybrid 0- 0- 0- 0-

70 0- 50-5 0 00 0- Rectange 0- 0 0 000 00 0- 0- 0- Low-income countries High-income countries Medium-income countries Proportion of population

Sources: UN Department of Economic and Social Affairs, population division; BCG Henderson Institute analysis. Note: The categorization of income status is as per the United Nations.

Boston Consulting Group | BCG Henderson Institute 2 Exhibit 2 | World GDP Growth Is Expected to Slow Down Around the Globe

World GDP growth with key contributors

5 201 200 actual predicted

000 00 00 00 00 050

hina US India European Union Others

Sources: Oxford Economics; BCG Henderson Institute analysis. Note: Real GDP growth and projections were adjusted for purchasing-power parity. GDP predictions are as of 2019 and do not take coronavirus impact into account. Short-term GDP forecasts have been further depressed ever since.

labor force and consumption; both have domestic consumption by moving into been more or less stagnant for the past 20 higher-growth international markets. The years. (See Exhibit 3.) This has contributed other was to refocus on specific segments to a sustained period of low economic in the domestic market, which actually growth and returns for Japanese companies. benefited from the demographic shift. Dia- per, personal hygiene, and household Japanese businesses and policymakers cleaning products manufacturer Unicharm were well aware of the impending demo- is a perfect example of a company that graphic pressures and their likely impact made both these strategies the cornerstone from early on. The 50-year population pre- of its growth plan. In its 2001 annual re- dictions made by the cabinet office of the port, the company announced that it had Japanese government in 1999 have, so far, targeted two business opportunities: to de- been more than 99% accurate. In 1996, in velop its business in Asia and in the do- his very first press conference as prime mestic adult incontinence sector. minister, Ryutaro Hashimoto identified demographic change as the greatest threat to Anticipating the growth slowdown in Japan’s economy: “…from this demograph- Japan, Unicharm started expanding into ic change alone, it is clear that we have to foreign markets as early as 1984, when it reform the system of the country. Other- entered the Taiwanese market via a joint wise, the reality is that the country will venture. After building presence in stop functioning.” multiple Asian markets in the late 1980s and 1990s, the company dramatically The basic strategies for businesses to com- accelerated its business expansion in Asia bat a demographics-led slowdown focus on in the early 2000s and established itself as two core issues: stagnation in consumption a market leader in its key product and a shortage of labor. segments in such fast-growing markets as Thailand, Indonesia, and Vietnam. Foreign On the demand side, one option for Japa- markets now contribute an impressive 60% nese corporations was to circumvent low of the company’s revenues. This simple

Boston Consulting Group | BCG Henderson Institute 3 Exhibit 3 | Japan Experienced a Slowdown in Population Growth and the Aging of Its Population Earlier Than All Other Nations

Japans population is declining while the senior Japan is 00 years ahead of other developed nations population is growing in terms of population aging

Population millions Population 5 population as a share of total population decline begins 50 0 Japan Tota ouation trend line K 00 0 Germany SA

China

50 0 India

Depicts when Japan reached ouation an indicated nations 00 aging level 0 0

0 0 000 00 0 0 000 00 Year Year

Sources: UN Department of Economic and Social Affairs, population division; BCG Henderson Institute analysis.

strategy has been adopted by other using them. With a differentiated product companies as well. Twelve out of the 14 line that offered diapers designed for three Japanese large-cap companies that different levels of incontinence, Unicharm achieved annual shareholder returns of actively expanded its market by educating more than 10% for the period 1995 to 2018 customers. As of 2018, Unicharm was the earn more than 40% of their revenues from market leader, with a share of more than foreign markets. In contrast to these early 50% in the adult diaper market. P&G, the movers, the majority of Japanese global leader in the total diaper market, companies did not move aggressively to did not focus on this high-growth segment capture foreign markets, in spite of facing and failed to capture significant share. As a declining consumption growth in the 1990s. result, P&G exited the Japanese adult As late as 2002, only 13% of listed Japanese incontinence market in 2007. companies reported income from foreign countries—a number that almost tripled, On the supply side, utilizing readily avail- to 38%, by 2018. able and lower-cost labor in foreign countries became a much-discussed potential Even with aggregate stagnation in strategy in the 1980s to combat high local consumption, there were specific areas of wages and tight labor markets. While many domestic consumption growth. A good Japanese manufacturers started establish- example is the diaper market in Japan. ing production facilities in low-cost econo- While adult diapers constitute only 15% of mies, they were very cautious in moving the total diaper market worldwide, they significant amount of production overseas. constitute more than 50% of the Japanese By 1992, when General Motors had moved diaper market, driven by an aged 40%, and IBM had moved 46%, of produc- population. Unicharm realized the tion outside the US, only 20% of Toyota’s potential of the incontinence market early and 8% of Hitachi’s production had moved and introduced its first diaper brand for offshore. Even as late as 2005, when 63% of adults in 1987. While customers with Japanese manufacturers had foreign pro- significant incontinence issues always duction facilities, only 20% of the produc- required adult diapers, those with minor tion in these companies was performed off- incontinence often avoided purchasing shore. This has contributed to 2.5 million them due to lack of knowledge about unfilled job openings in Japan, a number products and social stigma associated with that is growing by 6% per year.

Boston Consulting Group | BCG Henderson Institute 4 Population aging leads not only to labor Why Do Companies Fail to shortages but also to changes in the age Adapt to Slow Changes? mix of the labor force. As previously noted, This brings us to the core question: why do the global population structure is moving the majority of companies fail to adapt to from a pyramid shape to a rectangle. (See slow changes? Three types of organization- Exhibit 4.) However, hierarchical al failures weaken a company’s ability to organizational structures largely remain deal with slow changes. pyramid shaped, creating a shortage of young workers for entry-level jobs and a Failure to See. When evaluating future surplus of older workers. This leads to high choices, we use discount rates to adjust competition for young talent and limited future outcomes to present value, so that prospects for getting senior managerial they can be compared and strategic choices roles. Although few companies have can be made. In certain contexts, individu- seriously tried to tackle this challenge, als and organizations tend to apply hyper- some success stories include such bolic discounting. This is a phenomenon companies as retail giant AEON and where discount rates increase with longer furniture retailer Nitori, which try to make timescales. Because the present is clear, nonmanagerial jobs more feasible for older while the future is often hazy, there is a workers by using tools to simplify bias toward maximizing the present at the physically strenuous work and providing cost of the future. Slow-moving changes special facilities, such as resting places. can have a significant long-term impact, Other companies are moving away from but future scenarios may be hard to predict traditional rigid and hierarchical or imagine. This pushes many business organizational structures to allow for more leaders to focus on optimizing current flexible career paths. For instance, SB business models rather than imagining Technology has introduced grade skips, new ones. In 2007, for instance, P&G saw and software company Line has opted to adult incontinence as a niche market, compensate its engineers with differential significant only in the unique market salaries based on technical expertise. structure in Japan. Hence, the company However, such examples are rare among a sold its Japanese adult diaper brand to sea of companies that have not changed concentrate on products with more global their organizational setups significantly. appeal. But P&G failed to visualize the

Exhibit 4 | Mismatch Between Global Population and Organizational Structure

1980–2000 2040–2060

ouation surus High competition for career growth

ouation shortage Low availability at entry level and Age Hierarchy

obs and People

Organizational structure Population structure

Source: BCG Henderson Institute analysis.

Boston Consulting Group | BCG Henderson Institute 5 potential of the adult incontinence market Failure to Act. There is a tendency of mature not only in Japan but also in the rapidly and successful organizations to continue on aging economies of Europe and North their current trajectory due to organizational America, and it had to change course some inertia. MIT Sloan professor Donald Sull years later. In 2014, the company launched states that organizational inertia stems from a new adult diaper brand in order to avoid a company’s inability to change its routines, losing out on the growing market in the US. relationships, values and, most important, strategic frame—the set of assumptions that Slow changes can give rise to a perception determine how managers view and think that there is plenty of time to deal with about their businesses. them. However, this illusion of time can prove dangerous because dealing with The failure of Japanese companies to move slow changes may require immediately sufficient production offshore despite open- embarking on long-term investments. For ing foreign factories can be ascribed to such instance, establishing yourself in a foreign organizational inertia. Relationships and market is an expensive and time-consum- processes established with domestic ven- ing strategy. Many companies in Japan de- dors, as well as relationships with employ- layed the process of expanding abroad ees and local communities, stopped compa- during a high-growth period in the 1970s nies from downsizing Japanese factories, in and 1980s. As a result, after the slump of spite of the writing on the wall. False be- the late 1980s, they were too busy firefight- liefs, such as assuming that precision or ing in their domestic markets to seize over- quality manufacturing is impossible in for- seas opportunities. eign countries, only reinforced this inertia.

It is important to note that our Japan ex- In extreme cases, companies end up active- ample deals with the unusual situation of ly reinforcing narratives that rationalize very predictable long-term change. The chal- sticking to the status quo. This phenome- lenges discussed here are further exacer- non is exacerbated by the ostrich effect—a bated with phenomena that are much less bias against receiving or acknowledging in- predictable, such as the rise of service ro- formation that can point to a contrary view bots and the impact of climate change. Un- of the future. certainty creates further barriers to imagining and preparing for the future. How to Avoid Such Failures? Failure to Care. Another key factor that Companies can take five actions to make contributes to hyperbolic discounting is sure they respond adequately to slow- the incentive structure for business leaders, moving change. which is primarily focused on achieving success on a timescale of one to five years Visualize. Clear visualization of the future because of both market pressures and and quantitative exploration of options career promotion cycles. Slow changes, by help dispel hyperbolic discounting.1 (See their nature, have minimal impact on the sidebar “An Illustration of the Power of short timescales. Hence, they have a high Visualization.”) When clear forecasting of tendency to get overlooked, especially if the future is not possible, scenario analysis the strategy to deal with them involves is a very useful tool for examining multiple significant investments that don’t reap plausible futures and their consequences. immediate rewards or penalties for leaders but will impact their successors. Many It is important to visualize not only the fu- companies have scenario-planning exercis- ture environment but also the potential re- es, but it’s hard to act against a future sponse of competitors. Unicharm’s analysis possibility if it involves siphoning funds rightly identified the impending growth from a sure-bet current business, especial- slowdown in Japan and the consumption ly in a company that is run on short-term boom in other Asian markets. But the com- financial metrics. pany also anticipated competition from

Boston Consulting Group | BCG Henderson Institute 6 AN ILLUSTRATION OF THE POWER OF VISUALIZATION

A classic experiment in hyperbolic significantly higher number of partici- discounting asked participants to choose pants chose the delayed reward with the between receiving $50 today or $70 in a more explicit articulation. The fewest year. Scientists then ran another experi- participants opted for the delayed ment with a more explicit articulation of options when they were asked to choose the same choices: $50 today and $0 in a between $50 today or $70 at some year or $0 today and $70 in a year. A unspecified later time. global fast-moving consumer goods giants, company produce spectacular growth. Bezos which would eventually act on similar had identified the digitization of goods and analyses. Assuming that these companies services as a slow change that would have a would focus on the largest markets, such as massive impact on the business in the China and India, Unicharm decided initial- coming decades, because he believed that ly to invest heavily in relatively smaller books, music, and videos—the three major high-growth markets, such as Indonesia, contributors to Amazon’s sales at the Thailand, and Vietnam in order to attain time—would be easily digitizable. Bezos market leadership. created a sense of urgency to both digitize and rapidly diversify into other product Align incentives. Central to the success of categories. In the three core categories, any long-term strategy is leadership’s Amazon became the disruptor itself, with vision and commitment. Hence, it is critical the introduction a decade later of the for company leaders to have a stake in its Kindle ecosystem, Amazon prime music, long-term future. Takahisa Takahara, the and Amazon Prime Video. And diversifica- son of Unicharm founder Keiichiro Takaha- tion decreased the risk of this transition. ra, joined the company in 1991 and held various management positions before In addition to scenario planning, urgency becoming its president in 2001—a position toward slow changes can be triggered by that he still occupies today. His long history two other sources: threat of action from in the company and extended leadership competitors and shifting demands from tenure supported his visionary leadership customers. Unicharm’s urgent need to en- style and allowed him to focus on finding ter the markets in Indonesia, Thailand, and the next source of long-term growth. Vietnam was driven by the fear of losing out to global giants, such as P&G. The com- This long-term perspective is reinforced by pany’s focus on expanding in the adult in- the fact that Unicharm is a family compa- continency market was driven by declining ny, albeit a public one. Our research shows domestic demand for their baby and child- that family companies tend to take a more care products. prudent and long-term view, presumably because, for them, the force of market pres- Exercises can be constructed to exploit sures is balanced by long-term incentives. these two sources of fear and to drive companies to take timely actions. A maverick Create urgency. Slow changes are often scan involves evaluating the investments treated as nonurgent, which exacerbates being made by venture funds and disrup- organizational inertia. Creating a sense of tors in your markets or in adjacent ones. In urgency is, therefore, a necessary antidote. the exercise, you need to understand the In 1999, Jeff Bezos, the founder and CEO of essence of the bets made by these maver- Amazon, pulled 300 of the company’s icks against your business model and the employees into a room and announced that consequences for you if these bets are cor- Amazon was dying. This was a surprise to rect. This helps you understand the condi- the employees, who had just seen their tions for these bets to work and your best

Boston Consulting Group | BCG Henderson Institute 7 strategy in this scenario. While most mav- supply chain headquarters was moved erick strategies are risky, an improved abili- from Tokyo to Shanghai in order to support ty to predict when they can work helps you Asian markets. It is important to note that self-disrupt or build your defenses in a all of these investments came at the cost of timely manner. reduced resource allocation to the Japanese market, which still contributed more than Another useful exercise is to understand 85% of the company’s revenues in 2000. customers in emerging niches who are not di- Since then, Unicharm has seen about 9% rect targets of your core offering. The pur- year-over-year revenue growth, with almost pose of this exercise is to form a strategy 75% of the growth contributed by foreign for a scenario in which this customer seg- markets—which, in total, now account for ment is the only one that you have to cater 60% of Unicharm’s revenues. to. For instance, adult diapers were seen as a niche health care product catering to cus- Develop action bias. Companies that focus tomers with severe incontinence issues. on heavily exploiting existing competitive However, by understanding customers with advantages find it hard to change them- minor incontinence issues, Unicharm was selves. Companies that are biased toward able to imagine, build, and dominate a experimentation and exploring new options new, attractive market segment. New sig- tend to suffer less organizational inertia. nals from new, potential, or existing cus- The real reason why Amazon could re- tomers can help drive up urgency within spond to Jeff Bezos’s call for urgency is an organization a lot more effectively than because the organization is perpetually in internal change advocates can. motion—a trait that Bezos has famously popularized as the “Day 1 mindset.” Wheth- Commit resources. Slow-moving changes er through incremental changes (adding are often well known. Most companies new product categories and automating today have a climate action group. Most warehouses, for example) or quantum leaps leadership teams are aware of growing (adding new verticals, such as AWS and markets for the elderly, the rise of AI, and Kindle), the company is always changing— greater health consciousness in society. and thus has never fallen into the comfort Still, only a small proportion of companies zone of a fixed routine. As Bezos has said, have gone beyond token actions against “Day 2 is stasis. Followed by irrelevance. these trends. A key reason underlying why Followed by excruciating, painful decline. many Japanese companies could not do Followed by death. And that is why it is what Unicharm did was their discomfort in always Day 1.” Such vitality in companies is shifting resources away from existing, essential to deal with fast changes. It also successful businesses. improves their ability to implement strategy to combat slow changes. After declaring their intention to move into Asian markets, Unicharm was ready to ded- In a rapidly changing, technology-fueled icate the resources required to succeed. The world, leaders need to become attuned to a company moved some of its top executives faster pace of change. But they must also to lead foreign businesses. The head of attend to the significant challenges and op- sales, one of the top five leaders of the portunities presented by slower change. company, became the head of Chinese They need to become multi-clock-speed or- business, and the deputy head of sales led ganizations. the Indonesian business. Unicharm invest- ed heavily to acquire local companies to build a sales network and market share in new markets. The R&D resources of the Note company were focused on building low- 1. Eran Magen, Carol S. Dweck, and James J. Gross, “The Hidden Zero Effect: Representing a Single cost products customized for each new for- Choice as an Extended Sequence Reduces Impulsive eign market. The manufacturing footprint choice,” Psychological Science, 2008 Jul; 19(7): 648–649. was shifted to low-cost economies, and the

Boston Consulting Group | BCG Henderson Institute 8 About the Authors Martin Reeves is a managing director and senior partner in the San Francisco office of Boston Consult- ing Group. He is the chairman of the BCG Henderson Institute. You may contact him by email at [email protected].

Ryoji Kimura is a managing director and partner in the firm’s Tokyo office. He is the global leader of BCG’s Corporate Finance & Strategy Practice. You may contact him by email at [email protected].

Hiroaki Sugita is a managing director and senior partner in BCG’s Tokyo office. You may contact him by email at [email protected].

Saumeet Nanda is a consultant in the firm’s San Francisco office. You may contact him by email at [email protected].

James Yuji Grosvenor is a consultant in BCG’s Tokyo office. You may contact him by email at [email protected].

Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we help clients with total transformation—inspiring complex change, enabling organizations to grow, building competitive advantage, and driving bottom-line impact.

To succeed, organizations must blend digital and human capabilities. Our diverse, global teams bring deep industry and functional expertise and a range of perspectives to spark change. BCG delivers solutions through leading-edge management consulting along with technology and design, corporate and digital ventures—and business purpose. We work in a uniquely collaborative model across the firm and through- out all levels of the client organization, generating results that allow our clients to thrive.

About BCG Henderson Institute The BCG Henderson Institute is the Boston Consulting Group’s strategy think tank, dedicated to exploring and developing valuable new insights from business, technology, and science by embracing the powerful technology of ideas. The Institute engages leaders in provocative discussion and experimentation to ex- pand the boundaries of business theory and practice and to translate innovative ideas from within and beyond business. For more ideas and inspiration, sign up to receive BHI INSIGHTS, our monthly news- letter, and follow us on LinkedIn and Twitter: @BCGHenderson.

For information or permission to reprint, please contact BCG at [email protected]. To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcg.com. Follow Boston Consulting Group on Facebook and Twitter.

Boston Consulting Group | BCG Henderson Institute 9