Changing Economic Times Means Rethinking Strategy

For decades, companies in the U.S. have built strategies on a three-way economic split: lower income Americans, the middle class, and luxury goods. Giant corporations from General Motors to Procter & Gamble built immense businesses based on that socio-economic model, as anyone with a business degree knows.

But the world has changed. In areas like Denver and Chicago, many who used to be in the middle class are losing income and even sliding into poverty. Companies can no longer count on the 40 percent of the country with household incomes of between $50,000 and $140,000. Almost half of all consumer spending comes from 10 percent of consumer households, which account for about a third of the country’s GDP, according to the American Affluence Research Council.

The U.S. ranks third among advanced economies in income inequality. The new income means an increased number at the top and bottom ends and a hollowing out of the middle. The figures may bring up important questions about society and its sustainability, but they also raise other ones. Executives must reassess business models that once were considered beyond question.

Proctor & Gamble is a perfect example of a corporation that has had to adjust its approach to products and marketing. P&G recently launched a dish soap at low price intended to attract consumers who have fallen into an economic hole … ditch detergent, if you will. It’s the first time in nearly four decades — since the major recession of the 1970s — that the company made such a move. The company had no choice. Lower-priced competitors had eaten into P&G’s market share in a number of important product categories. But the company also saw improved sales in some of its more up-scale brands of personal care products.

The experiences of individual companies don’t suggest that all must immediately reconsider the demographics of their target markets. But it’s imperative for all people in management to at least examine their strategies in the face of changing macroeconomic conditions and determine whether they’re still matching the right products and services with the most appropriate customer segments. It’s also not the only company finding that life is more secure at either the top or the bottom of the economic scale (the hourglass economy, as Citi Group calls it).

Such chains as Dollar General or Family Dollar Stores are growing faster than a Wal-Mart or Target that depends heavily on middle class support. A number of luxury brands — including Tiffany & Co. and Coach Inc — had strong holiday seasons last year and have continued to do well.