Liu Shaorong
2024 is the bottom of the macroeconomic cycle, and also a fulcrum for various changes and turning points. In such a trough, how can we achieve high-quality growth for our enterprises? What is the deeper meaning behind the "new quality productive forces" recently mentioned by the central government? This article is divided into two parts: the first part analyzes the overall macro trends of 2024 and identifies four key influencing factors. The second part proposes three key points to help enterprises cross the trough and achieve transformation.
Macro 2024: Dangers and Opportunities in a Trough Year
The macro trends of 2024 have four important keywords:
Macro turning point and uncertainty; Demand transformation and uncertainty; Industrial transformation and uncertainty; Deepening technology and uncertainty.
1. Macro gradual bottoming out and comprehensive turning point
1.1 The globalizing power of economy and technology versus the anti-globalization wave in politics
Thanks to globalization, China's economy has made tremendous leaps in the past. With the sweeping anti-globalization wave, we now face many challenges. However, some democratic developed countries are promoting political anti-globalization, which to some extent has not completely blocked the globalizing power of economy and technology. Therefore, we can see that China's export data in 2023 was not as pessimistic as expected; exports achieved certain growth, and the trade surplus also expanded. This proves that multinational enterprises still have the motivation to embrace globalization, and market forces and technological innovators have the drive to embrace and expand globalization. However, to protect the interests of the "left-behind" middle and lower classes, the main political stance of political parties in developed countries remains to curb globalization. The US and Europe's containment of China—trade wars, technological competition, and various export controls—has posed a series of challenges to China's export momentum, and is the biggest problem China's economy has faced in the past. The anti-globalization wave not only affects China's economy but also has profound impacts on the global economy. Decoupling and supply chain fragmentation have led to a sharp rise in supply chain costs, causing final consumer goods prices to keep rising. The restructuring of global supply chains has led to duplicated layouts, ultimately shifting the rising costs of consumer goods to consumers in developed countries, increasing inflation. Coupled with the suppression of inflation by the US-led countries, this has created a stagflationary situation. The global economic growth rate has long hovered at a low level of 2%-3%, and the reason behind this is the anti-globalization wave. Currently, the world is still at the peak of the anti-globalization wave. In 2024, it is difficult to see a reversal trend in anti-globalization.
1.2 Rigid governance under the centennial blueprint and short-term pressures and conflicts
Recently, Ni Hong, Minister of Housing and Urban-Rural Development, stated at a press conference on people's livelihood during the National People's Congress that real estate enterprises that are severely insolvent should be handled through bankruptcy or restructuring. At the same time, during the Two Sessions, Premier Li Qiang of the State Council made clear in the government work report that the proactive fiscal policy in 2024 will be moderately strengthened, improve quality and efficiency, and the deficit ratio for 2024 is planned at 3%, not raised above 4% as some market participants expected. From the above information, we can see that the central government's governance is very clear, firm, and rigid. The negative impact is short-term pressure and conflict. If the deficit ratio is not loosened, the government's potential debt space for economic rescue may be limited, and economic growth expectations will not be too high. Thus, the rigid governance concept under the centennial blueprint will have many maladjustments in the short term, which will hinder improving the current economic difficulties and reviving the economy.
1.3 The comparative advantage of labor- and resource-intensive industries is declining, while the comparative advantage of innovative industries is gradually forming
From the perspective of national economic endowments, the comparative advantage of China's labor- and resource-intensive industries is rapidly declining. Trade decoupling has led multinational companies and their accompanying industrial transfers to move away, but more importantly, our competitiveness in large-scale production factors such as land and labor is waning. A series of labor-intensive and resource-intensive manufacturing industries have shifted to other countries, giving rise to the Vietnamese miracle and the Mexican miracle. Although our innovative industries are not fully formed, in recent years, hard transformation has made significant breakthroughs in innovative industries: our main export products have changed from the "old three items" (clothing, furniture, home appliances) to the "new three items" (electric passenger vehicles, electronic components, new energy). R&D investment in the national economy has increased significantly, making us the world's second-largest R&D spender. An indirect benefit of decoupling and supply chain fragmentation is import substitution; many local brands have begun to rise. These enterprises have made significant improvements in technology R&D and product technology competitiveness, which is a signal of gratifying changes in our development of innovative industries. However, to some extent, various innovative industries have not yet achieved a stable situation. At the lower end, they face competition from emerging economies like Vietnam and Mexico; at the upper end, they face suppression from developed countries like the US, Japan, and Europe. Our technological foundation and industrial position in innovative industries are not solid. We are in a transitional stage from traditional industries and resource endowments to new innovative industries and new resource endowments. This further confirms that from a macro perspective in 2024, we are still at the trough of the turning point and face significant challenges.
2. Demand becomes demanding, with both upgrading and downgrading coexisting
Whether it is consumer goods or B2B industrial products, demand has undergone a sharp turning point in recent years: from homogeneous, scale demand to demanding, extreme demand. Consumers are becoming more demanding, and demand is becoming more extreme, leading to changes in many industries and unstable industrial positions. There are two very important elements in the transformation of customer demand:
First, segmentation and specialization. Take the apparel industry as an example. The apparel industry has completed the popularization of all categories, from men's wear, women's wear to underwear, socks and shoes. All categories are fully popularized and have entered a fierce red ocean. All industries face sharply declining gross margins, and involution makes it difficult for all enterprises in the industry to survive. The real growth opportunities in the entire apparel industry are distributed in some emerging new segmented tracks, such as outdoor skiing, golf, and other new segmented scenarios, where demand is emerging on a large scale. In addition to the apparel industry, other industries will also see highly segmented and specialized demand. At the moment when demand is turning, enterprises in various industries need to deeply discuss what they will define themselves to do in the next few years, where their focus points are, and deeply discuss the fission of customer scenario segmentation. We can see that in recent years, a huge wave has emerged in the mass consumption and mass service industries, restructuring industries. This wave is deconstruction. For example, the traditional beauty salon has now been deconstructed into various segmented categories, including ear cleaning and care, facial cleaning and care, massage, light medical aesthetics, and heavy medical aesthetics. The original complex and broad product line has been deconstructed into so-called "single products," developing into a model of thousands of stores. In the catering industry, many single-category stores have also emerged, such as hot pot, sauerkraut fish, and other single-category stores, developing into larger-scale chain operations. The service industry and consumer chain industry are both showing this trend: categories are more specialized, scenarios are more segmented, new segmented categories and demands are constantly emerging, and new demands quickly complete market popularization.
Second, rationalization and demandingness. In segmented markets, after quickly competing to the red ocean stage, gross margins continue to decline, and consumers and customers become more rational. The rationalization and demandingness of customers form the underlying driving force of consumer demand. Highly segmented, deeply professional, and extreme cost-performance requirements, extreme customer-oriented requirements, including service quality, response speed, cost-performance, etc., have become very important keywords in mass consumption. Enterprises must face these keywords squarely, design their future development models, define the value they provide to customers, and redefine the categories they can offer. These are deep thoughts in responding to the changes in the consumption wave. Some industries have completed deconstruction and deep restructuring, but many industries are now at the critical point of restructuring. We must be aware of these demands and changes in advance, actively embrace or even lead the changes, and become the new leaders in the trough.
3. Deep involution and creative destruction in industries
The first industrial pattern trend is homogeneous vicious involution. 95% of industries have seen very vicious involution, with price wars, resource wars, and other vicious competition fully emerging. Vicious competition has forced many enterprises to exit the market, and even most enterprises cannot make profits. Vicious involution and extreme competition have led to the elimination of a large number of participants in many industries, completing the clearing of the supply side.
The second industrial pattern trend is the emergence of disruptive innovation. There are two very important types of disruptive innovation. One is the deconstruction of industries, breaking the original industry into more segmented, more professional, and more vertical development models, just like the catering industry becoming giants in various categories, and the beauty industry becoming chains of various segmented products. Various service industries have begun to evolve. Such a series of deep specialization and disruptive innovation in vertical categories will destroy the original industry pattern, causing a large number of innovators to emerge in the entire industry. Innovators or professional extreme competitors will impact the original market pattern, causing the original large and comprehensive enterprises to face bankruptcy. In the fitness industry, almost all of the traditional top 20 have gone bankrupt, from Haosa to Comfortable, these fitness chains have fallen into bankruptcy crises. This industry has been deconstructed into various segmented innovative product lines, and these innovators have restructured the industry.
The third industrial pattern trend is industrial coverage and dimensionality reduction strikes. New participants entering the industry from a higher dimension will completely cover the industry, causing the original leading enterprises to gradually go bankrupt and die out. This is a dimensionality reduction strike. With the complete formation of digital and intelligent ecosystems, larger ecosystems and sub-ecosystem enterprises enter another segmented ecosystem, forming a complete impact on the original ecosystem. Such patterns are constantly emerging.
4. Deepening of the technological revolution and paradigm change
The discussion about digital and intelligent transformation has lasted for a long time, but it was not until the last two or three years that technological change entered the deep water zone. More and more segmented industries have formed industrial internet platforms, and more and more callable infrastructure or middle-platform facilities have emerged. These shareable infrastructure or industrial internet platforms have had a strong impact on industries, restructuring the development models of industries. Productive forces determine production relations. Technological change directly determines the paradigm change of the main participants in the economy, and both development models and organizational models have undergone deep changes. The first technological change was the Industrial Revolution, which produced category champions. The Industrial Revolution invented machine manufacturing and assembly lines, promoting the emergence of category kings. Supporting this were hierarchical organizations, professional division of labor, process-oriented, centralized and decentralized decision-making, and a centralized decision-making pyramid organizational model that fully supported the development model of giant industrial enterprises. In the era of logistics and information revolution, commercial enterprises began to deploy global communications, invest in logistics, and build infrastructure such as ports, highways, and airports. The paradigm revolution produced by the logistics and information revolution was solution giants centered on retail, which we now call "commercial giants." Today, giants like Walmart and IKEA, which are still popular globally, were born in the era of logistics and information revolution. Their typical characteristics are retail-centric, providing customers with solutions and retail interfaces as the core of their development model, and integrating the product chain through retail to form a solution framework. Their organizational model produced matrix organizations, with both regional and product dimensions, supporting multi-category and multi-region development. This organizational model is a new paradigm produced under the wave of logistics and information revolution. Today, the digital and intelligent revolution has entered the bottom of many industries, producing many leaders of digital and intelligent platform ecosystems. Serving the entire ecosystem or regional industrial chain through platforms is a model of platform ecosystems, using digital and intelligent infrastructure to empower participants in the region or industry. The organization supporting this industrial form is open, with a platform-based organizational model where the middle and back offices empower the front office. Therefore, we can see that the wave of technological revolution produces paradigm changes, and we have now entered the deep water zone of the third paradigm revolution. More and more industries will see the emergence of such digital and intelligent platform ecosystem leaders, and their organizational forms will increasingly approach this open, high-incentive, mission-identification-based governance, and open-sharing and co-governance model, which will become the mainstream form under the wave of digital and intelligent technology.
How can Chinese enterprises achieve high-quality growth?
How should we respond to the above four complex turning points and leap from the trough to the high ground? Seize three key elements:
First, a new strategy that fits the new normal. The development model that supported enterprises in achieving scale growth and status improvement in the past few decades cannot be maintained in the future. In 2024, we must think about what the main theme of the future is and what growth model we should focus on in the future.
Second, a new organization that echoes new technology. The technological foundation and management logic of enterprises are both undergoing changes. The development of underlying technologies such as digitalization and artificial intelligence has put forward more requirements for the original governance model and changed a series of logics of the original organizational form. In the era of artificial intelligence and industrial internet, a new revolution similar to the Coase revolution in the industrial era has actually occurred. Today, the main entities in the business world are still the industrial giants produced by the Coase revolution. However, technological changes such as digital internet and artificial intelligence will give birth to new entities, which are neither like the industrial enterprises of the Industrial Revolution nor like a purely open market. They are a carrier between the market and industrial enterprises—having both the characteristics of free market transactions and market pricing, and the characteristics of moderate centralization, professional division of labor, and simplified transaction processes of industrial enterprises. We call this combination of the two a platform ecosystem network, a new organizational paradigm formed under the background of new technology. How to adapt to such organizational requirements to transform the organizational structure and the operation mode of the organization is the second very important issue.
Third, new operations that achieve sustainability. In the next few years, the macroeconomic tone and industrial development will not be too ideal. Under the background of unsatisfactory growth rates and environmental uncertainty, how enterprises can achieve sustainable and steady operations is the third important issue.
What is the core of these three elements, and how to complete the switch? In the past era of globalization dividends, when our economic resource endowment cost advantage was very strong, most industries were in the stage of grabbing resources, and most Chinese enterprises' profits came from Ricardian profits. Ricardian profits are resource monopoly rents. The grabbing of scarce resources and the formation of monopoly rents were the most important source of profits for Chinese enterprises in the past. Many listed companies invested in real estate and used real estate income as a source of profit, which is an extreme case of using monopoly rents to form company profit sources. In the last two years, we can see that enterprises relying on Ricardian profits have not developed well. For example, Red Star Macalline and many retail enterprises have monopolized a large amount of land resources in the past and grabbed the best locations, but now they are facing difficulties or even bankruptcy. In today's context, enterprises cannot rely solely on Ricardian rents. Digital and intelligent technology has made location advantages disappear. The transformation of resource endowments has weakened the competitiveness of large-scale resources in the past, and the monopoly profits generated by relying on original resources are slowly disappearing, leading to the dilemma of enterprises like Red Star Macalline. Today, enterprises must complete the switch from original rent profits to innovation profits, create business models, create new customer value, new organizational forms, create new digital assets, and create a series of non-replicable professional heterogeneous resources that generate profits. This is the most important proposition in enterprise development, that is, the core of the transformation of Chinese enterprises' growth model: switching from Ricardian profits to Schumpeterian profits.
1. New strategy based on innovative resources
1.1 Form a new mission focused on social problems
In the past, most Chinese enterprises did not pay attention to mission. They discussed medium- and long-term goals, or replaced medium- and long-term goals with vision, and replaced short-term goals with financial figures or balanced scorecard financial goals. Enterprises only discussed what status they wanted to achieve and what scale they wanted to form, but rarely discussed what problems they wanted to solve and what the meaning of their existence was. But today, due to the disappearance of monopoly rents, the demandingness of demand, and the expectations of society and government for balanced development, there is an increased expectation for enterprises as social citizens to solve problems. To a certain extent, companies that can survive sustainably in the future must be companies with a very clear mission. The mission should clearly explain: what problems the enterprise wants to solve in the long-term future, and what the ultimate proposition it wants to tackle is. The bigger the problem an enterprise solves, the greater its value. The core of the value gap between enterprises is: enterprises that truly think about solving endgame problems and core social problems must be enterprises that can create huge social value.
1.2 Restructure new value that breaks fundamental customer compromises
Customer compromise refers to the situation where, due to technological limitations and business structure limitations, customers have to obey some invisible rules. For example, in the apparel industry, to have good fabrics, comfort, and designer styles, you must pay a high price and may have to wait for a period of delivery. Today, the restructuring of business models has broken the limitations of rules, allowing customers to meet the above requirements while also having high cost-performance and a fast delivery experience for satisfactory clothing. Similarly, in the fresh food industry, it was difficult to ensure freshness and health while also providing high cost-performance, convenience, and rich choices. In the process of retail industry transformation and restructuring, with the introduction of new technologies and new industrial structures, customer compromises are constantly being broken, and value innovation is constantly emerging, changing the customer value that could not be met in the past—making China's fresh food industry gradually move from a very low-end and backward level to the world's most competitive industrial structure. How to break customer compromises, break the constraints of past industrial technology foundations, and choose new value combinations is the second perspective of strategic capability.
1.3 Build a new model based on innovative resource endowments
The model must be built on the basis of innovative resource endowments, and cannot be invested in industries that rely on large-scale personnel input, large-scale energy consumption, land resource consumption, and low floor efficiency. We need to think more about the resource endowments highlighted by the national economy at the current stage of development, find competitive core resources, and rely on the resource endowments or resource competitiveness of the entire country or regional economy, even including the city where we are located.
2. New industrial organization based on a new technology foundation
2.1 Create a new architecture where the front line calls for firepower and the middle platform empowers the front line
The market is becoming more and more complex, and we are still at a very low trough with many uncertainties. This means that the entire organization cannot operate according to the original model. We must change the original model of upper-level decision-making and lower-level execution, let the front line grasp the signals of uncertainty, build a highly agile front end, let the front line call for firepower, and let the middle platform empower the front line to achieve a new architecture of professional competitiveness upgrading.
2.2 Build a new mechanism combining open sharing, high-incentive, and low-control
Combine low-control management with high-incentive, and focus on the traction of high-incentive. In today's uncertain context, enterprises are very difficult. On the one hand, they need high efficiency; on the other hand, they need high benefits. This requires all participants and operators of the enterprise to have a sense of ownership and entrepreneurship, to invest like entrepreneurs, to achieve a significant improvement in labor efficiency and resource efficiency. To this end, enterprises must also reform their systems so that front-line operators and core management can truly bind together, become a community of shared destiny, and become a team with entrepreneurial spirit and entrepreneurial investment.
2.3 Form a new culture of professionalism, openness, transparency, and co-construction and sharing
New technology promotes the innovation of the entire organizational paradigm and organizational form, and new organizational paradigms and forms require new values.
a. Professionalism
Regardless of the market positioning, professionalism is the foundation of an enterprise. In this context, enterprises must follow the basic logic of professional operation. Every link, every product line, and every employee must truly operate professionally, so that the entire company or platform can achieve professionalism.
b. Openness
Whether entrepreneurs or management, they must integrate social resources, integrate resources inside and outside the industry, have the concept of openness, sharing, and co-governance, and integrate various resources to build a highly competitive enterprise.
c. Transparency
The emperor's mind games were widely sought after in past corporate governance, but in the context of digital information interconnection and in the era when the post-00s gradually become the main body of the workplace, transparent governance may be the only choice. Entrepreneurs must be transparent to employees, customers, and partners. Transparency and standardization are another important foundation of an enterprise.
d. Co-construction and sharing
Whether it is the team or the entrepreneur themselves, they must have more sharing awareness. Everyone can share the benefits, and participants jointly build and participate, and share the results.
3. Lean management for sustainable survival and development
3.1 Lean cycle operation loop
Uncertainty and more and more innovations are emerging. In an increasingly complex context, enterprise operations must become more standardized, incorporating uncertain events into standardized operating processes for management. Let the organization digest a large amount of uncertainty and external change signals by itself, freeing up the energy of entrepreneurs and core management to focus on responding to major uncertain events and seizing opportunities. Enterprises need to make timely decisions, dynamically adjust and review through a rolling operation closed loop, continuously decompose tasks, check tasks, and adjust tasks. The combination of long, medium, and short-term cycle operation loops is the most important tool for enterprises to achieve lean management. Many enterprises have monthly meetings, quarterly and semi-annual reviews, and also make annual goals and three-to-five-year strategies and medium- and long-term plans, but they do not complete the closed loop. I have summarized a set of lean cycle operation loops:
"5-3-1", where 5 represents the five-year medium- and long-term plan, 3 represents the three-year medium-term plan, and 1 represents the annual plan;
"1/2" is the semi-annual plan review and adjustment;
"1/4" is the quarterly operation review and adjustment;
"1/12" represents the monthly operation review and adjustment.
Enterprises should quickly fill in and improve the operation closed loop. Only in this way can the organization digest various external signals by itself and achieve the set goals. On the one hand, every operation goal can be implemented; on the other hand, goals can be continuously adjusted to respond to external changes.
3.2 Operation and change management system that pays equal attention to departmental plans and company-level strategic projects
Departmental operation plans and company-level strategic change projects should be separated into two very important operation subjects, and they should complement each other. Many companies only have decomposition plans from the company to departments, but no company-level major change system. This means that the company cannot reach the future and will always live on the track of completing current tasks. The complex overall change of the company lacks managers, making it impossible to operate. We must separate daily task operation, goal decomposition and operation, and major uncertain changes. On the one hand, we must manage the goals and tasks to be completed now; on the other hand, we must move toward future growth. Therefore, major complex changes facing future growth should be included in the company-level strategic management system.
3.3 A framework for the trinity of planning, budgeting, and performance, with decomposition and dynamic control
In each operation closed loop, we must unify planning, budgeting, and performance into a trinity system. Every plan must have supporting budget and supporting assessment system. If a plan does not have supporting budget and assessment system, the accuracy of the plan's implementation is very limited, and it may even fail to land. It is impossible to achieve the desired goals under limited resource investment. The trinity system, on the one hand, must complete refined decomposition, and on the other hand, must build a dynamic closed loop. Every quarter, we must review plan completion, budget achievement, and performance achievement, and make dynamic adjustments. Only in this way can we ensure the set of stable operating goals, and enterprises can develop sustainably.
Conclusion: Firm confidence in the future
To a certain extent, we must look at macro signals. The macro situation is closely related to enterprises. We must see the turning point of the macro situation with certainty. Being at the trough also means that the switch is about to be completed. Traditional participants in the industry will be eliminated, and new supply forces are about to emerge. Pessimists may always be right, but only optimists can move forward. We must see that the future is bright, and the turning point will definitely happen. We must firmly move in the direction of the turning point.
First, we must firm our confidence in the future.
Second, adhere to the value of professionalism. Consumer demand is becoming more and more professional, and the foundation of industrial competition is professional strength. We must deeply deconstruct every product line, every customer service and delivery, firmly provide professional value, and adhere to the value of professional innovation. At the same time, we must firmly believe that long-term struggle can solve problems. Achieving high-quality growth and new quality productive forces is not achieved overnight.
Finally, adhere to seeking progress while maintaining stability, and seeking stability through progress. We must see the future and continuously change. At the same time, we must survive steadily and sustainably, maintain a steady mindset, a steady management system, achieve a balance between profit, cash flow, risk, and scale, and achieve sustainable growth facing the future. I wish everyone can use the crisis, seize opportunities, and successfully achieve transformation.
Recommended Reading