Tuesday, November 9, 2010

Trends that are shaping the World – part 4

Whereas in the previous weeks we have looked at megatrends affecting emerging countries, this weeks’ blog will mainly focus on societal changes in developed countries. It is an aspect that almost all western countries face, often referred to as the ageing population as in the increase of the proportion of people older than 65. In Germany this proportion was as large as 20% in 2009. In the UK and the US it amounted up to 16% and 13% respectively and is rising. In comparison with China on a mere 5%, these numbers are very elevated. Why is this proportion so high in western countries and how should the public and private sector react to it?

Due to improved quality in health care and a relatively higher fertility rate in the 1950s and 1960s, there has been an increase in the ageing population. Another driver which further increases this proportion is the higher independency of women since the 1980s.

Unless more funds are made available to support the ageing population, the burden of this growing segment will continue to impact the economy further. To counteract this, if productivity can be increased especially in the public sector, more resources are freed to finance the elders’ pension schemes of tomorrow. There are a number of ways to improve performance that include organizational redesign, strategic procurement and operational design.

Firstly, organizational redesign is the broad term for streamlining processes to provide more of a focus on the end-customer. Secondly, a better understanding of a suppliers’ economics and the environment in which a public institutions operates in, often leads to positive savings and therefore performance improvement. Lastly, through redesigning the operations and subsequently reducing waste and duplication of effort, improvement can be achieved.

These three ways of performance improvement are already established methods in the private sector, why aren’t they commonplace in the public sector? It is often stated that in the absence of competition, managers do not have an incentive to take risks or to improve their business. This is what happens in most monopolies and why governments prohibit them in many industries. The same goes for public institutions: choices should be created for the end-user to create competition and private companies should be able to bid for social service contracts.

In terms of the private sector, businesses in B2C should position themselves to be able to address the growing segment of older people. The elderly of today and tomorrow are wealthier and more outgoing than yesterdays’. Hence, the right brand image and products could prove fruitful when tackling this growing segment.

The ageing population in western countries is a fact and poses a major change in the external environment of public and private entities. Therefore both types of entities should proactively approach this societal change.

Monday, November 1, 2010

Trends that are shaping the World – part 3

The third trend of seven is the increasing population migration from rural to urban areas – Urbanisation. The economic development witnessed in emerging economies has led to huge urban migrations as cities continue to be main drivers of GDP growth. This migration is occurring at a tremendous pace; the urbanisation rate in China for example has reached around 45% last year from a level of around 35% in 2000. This means that in less than 10 years over 130 million people or about a half of the US current population, have migrated to major cities in China and this looks set to continue. By comparison, urbanisation in the US stands at about 80% (i.e. 4 out of 5 people in the US live in urban areas).

What are the triggers for this explosion in urbanisation in emerging countries? Economic growth in urban areas far outstrips that of rural ones. This in turn provides jobs which then drives migration. Beyond this, services and infrastructure investment further accelerate the economic development and the cycle continues. It is this reinforcing spiral of demand, corporate investment and job opportunities which will continue to drive urbanisation of the next 10-15 years.

As urbanisation continues, there will be significant pressure points that Governments and the private sector will have to address if economic development is to continue. A study conducted by McKinsey identifies these pressure points as land, funding, human and natural resources.

Firstly, the land issue relates to urban sprawl, loss of arable land and traffic congestion. Governments should anticipate the growing proportion of people living in urban areas by providing the availability of decent housing and larger and more effective mass public transport.

Next to this, funding will be needed not only for infrastructure, but also for the provision of services. The provision of health care and educational services for migrants will become an important factor.  As an increasing proportion of the urban population will be from rural areas, there will be a huge need to develop skills for urban jobs in industrial and services sectors. This leads to the third pressure point, namely the need for high-skilled labour forces.

Even though the number of university graduates will rise significantly in the coming years, these people will move to mega-cities where more job opportunities with better benefits are. If an evenly distribution of talent is to be achieved, governments should address this issue, as otherwise shortages in labour supply will occur in small to mid-sized cities in emerging countries.

Finally, the demand for energy and water resources will likely surge as urbanisation increases. If continued economic development is to be achieved, resource efficiency will become very important.

Planning must be conducted across these four areas in order for the current and forecasted rate of urbanisation to be sustainable and for emerging economies to drive economic growth.