by Jim McKerlie

People: where they live; their age; how educated they are; how much they earn; and their changing preferences are the key drivers to some underlying and powerful economic changes.

This is a time for huge opportunities, huge risks and for many businesses, an alternative future.







In this article we are going to look at some of the key global demographic trends, and then examine what these might mean for business strategy. So what are some key trends?

1. For a long time demographers have been concerned about the global population explosion. Latest predictions are that the population is still growing overall but the rate of growth is declining and may actually decline in the future. Asian and African regions are booming, but Europe is in decline.
2. Birth rates are declining in developed economies with average family size reducing and also in some developing economies that have had effective public policies to control the population growth rate.
3. The vast majority of people are living in today’s developing economies - in Asia, Africa and Latin America - creating what is called the Demographic Divide. This polarization is expected to continue.
4. Some countries from these regions will emerge as global economic powers in the future.
5. People are living longer in both developed and developing economies
6. Developed economies have aging populations with this being the new demographic concern (taking over from population explosion).
7. Immigration will increase (as a result of the Demographic Divide) and as developed economies look for sources of labor.
8. The changing population has an impact on economic growth. The population can be classified as workers and non-workers. When the relative balance of workers to non-workers is higher, there is a positive impact on the economy. Conversely, when there are relatively more non-workers (like children and the aged), there is a lower contribution to the economy. Babies and the aged consume more resources than they generate. This is called the Demographic Dividend.
9. Developed economies with lower birth rates and people living longer will experience a lower Demographic Dividend than developing economies.
10. The declining work force will induce people to work longer and retire later.
11. Immigration will provide a supplement to the work force in developed economies.

 

There are many impacts on business and these are wide ranging.

Clearly international trade will continue to grow. The significant improvements in communications, transportation and trade regulation mean we will be doing more cross border business. More importantly, a growing population, especially one with more disposable income, creates demand for goods and services. The world will consume more - and inevitably this will create demand for natural resources, and contribute more to environmental degradation. In the next edition of Accelerator we will specifically examine growing and declining economies.

The battle for talent will continue and getting good people may become harder in developed economies. Conversely, there is a growing talent pool in the developing economies as more people gain full educations. This all points to a labor market that will become more global, and this will support further immigration. Any talent shortage will also mean employers will adopt increasingly flexible approaches to employment, allowing part time and remote working.

We are all aware of the significant growth in IT development outsourcing to India and China; the use of off shore call centers; the outsourcing of many accounting processing (including income tax return preparation); and many other activities. In the future even more business functions will be outsourced. Once again, improvements in communications technology will overcome the tyrannies of distance previously experienced.

DEMOGRAPHIC CHANGE IMPACTS ON BUSINESS International trade will continue to grow The battle for talent will get harder in developed economies More business functions will be outsourced Health and aged care services will be outsourced or privatized Investors will seek new markets

Business support functions are being increasingly provided by service providers. Payroll was one of the earliest, but all sorts of functions are now outsourced. Recent trends have seen outsourced processes now include email hosting and exchange server hosting. These will be provided from low cost centers, typically offshore. This trend will continue. As more business processes become technology-based, and with broadband becoming ubiquitous, it will be easier and more cost effective to outsource than finding qualified employees to perform tasks in-house.

Aging populations will put additional strains on governments to deliver health and aged care services. The private sector’s role in these areas will rise as governments move to outsource the delivery of these services, or simply privatize them.

Target investments will move beyond the traditional equity and property markets which are already overheated in terms of valuation.  As people grow older they tend to have more money (savings) than young people. Just look at the massive growth in funds held in structured pension funds and in other forms of personal investment. Where will these funds be invested? They may well provide the capital for the privatization of some of these public services.

Certainly, public infrastructure like roads, tollways, airports, telecommunications, railways and so on will become attractive targets for institutions that have billions of dollars to invest. Some of these investments will be in developing economies where country risk is substantially reducing. 

 

Let’s look at some of the demographic facts about the impact an aging population has on the ability of privately owned businesses to transition to new ownership.

1. The baby boomer generation represents a significant proportion of privately owned businesses.
2. Family members are less inclined to join and take over family owned businesses. Many migrant families who started their own businesses have often educated their children to take on professional and other careers, which they viewed as being more desirable, prestigious and financially rewarding, rather than come through into the business.
3. Owner managers are looking to retire earlier.
4. Demographic trends are not the only driver of owners selling out; many fear consolidation and increasing competition in their sector.
5. Over the next decade an unprecedented number of privately owned businesses around the world – estimated to exceed 20 million in number – are going to come up for sale.
6. This is a major economic consequence potentially involving:
   1. 30 million owner managers
   2. revenues up to US$100 billion
   3. 100 to 200 million employees
   4. 25 million or more business locations (leased and owned property)
   5. billions of dollars in shareholder value, the largest transfer of wealth in history in free market economies
7. There will be a strong supply of businesses on the market and possibly a diminished number of buyers. Many potential buyers of businesses today are ex-employees who will not be so easily enticed into self employment, when you take into account the attractive alternative on offer to them – namely, the strong demand for talented labor which is driving improved terms and conditions of employment.

It is quite possible that the growth in the number of businesses on the market, particularly smaller business, will lead to industry consolidations. Existing operators will see an opportunity to increase their market share by buying a competitor.







There will also be growth in e-commerce as a significant part of the $100 billion in revenue migrates from brick and mortar based businesses to those who provide on-line services. Just the migration from customers shopping and taking home their purchases themselves to on-line ordering with the vendor arranging delivery to the customers address demonstrates how “doing business” will change. Contemplate the “outsourcing” opportunities for a delivery business, the growth in credit transactions versus cash, the need for on-line customer service systems and so it goes on.

It is not easy to predict what the consequences of these major demographic changes will have on business, but they will have an impact. Many opportunities will arise, and fortunes will be both made and lost as our small business boat bobs its way in the global ocean currents.

Bibliographic Sources: While many sources were used in researching this article, I would particularly recommend 'Global Demographic Divide' by Mary M. Hendy and Carl Haub in Population Bulletin, Vol 60, no 4, December 2005 published by the Population Reference Bureau.

About the Author
Jim McKerlie has more than twenty-five years of consulting experience working with clients around the world. His client base includes numerous major international public companies, the public sector and privately owned businesses. Jim has consulted extensively in North America, Asia Pacific, Europe and Africa. He has held positions as Managing Partner with Deloitte & Touche and with KPMG Consulting for Asia. In between he founded McKerlie Consulting, a major specialist strategy consultancy, which was later acquired by KPMG. In 2002 he founded ROCG and is currently Global Chairman.