MONDAY*

Issue #1 | September–October 2014

THREE DEMOGRAPHIC TRENDS THE C-SUITE CAN’T AFFORD TO MISS

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BRIEFING

Even though most executives will tell you that demographics are important, Peter Drucker believed that all too many managers don’t actually pay much attention to them. With that in mind, we’ve identified three population trends that no leader—whether in business, the nonprofit world or a government agency—can afford to ignore. The first is the way that Americans are clustering together according to their political beliefs: reds living with reds and blues with blues. The second is China’s fertility rate, which promises that, after decades of soaring population growth, each new generation will be 25% smaller than the preceding one. And the third is that by 2020, the United States will have a serious shortage of college-educated workers.

THREE DEMOGRAPHIC TRENDS THE C-SUITE CAN’T AFFORD TO MISS

The homes in Corona View, a Toll Brothers development in Corona, Calif., each stand on nearly an acre of land.

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Located about 50 miles southeast of Los Angeles, the area is quiet, wealthy and automobile-dependent—some of the lots have four cars visible on the property. The residents will tell you that they came here to enjoy a sense of “peace” and the wide-open “space.”

From these few clues, one could make a very safe bet as to which party the vast majority of Corona View residents are going to vote for in the next election.

In a Pew poll released in June, about three-quarters of “consistent conservatives” reported that they preferred to live in a community where “the houses are larger and farther apart,” even if “schools, stores and restaurants are several miles away.” This is in sharp contrast to 77% of “consistent liberals,” who say they want to live where “the houses are smaller and closer to each other” and “schools, stores and restaurants are within walking distance.”

This is in part a political phenomenon. But it is also a demographic trend—one of several that those in the executive suite can’t afford to miss, whether at a corporation, nonprofit or government agency.

But miss them you might. Of all the external changes that a manager must consider, “demographics—defined as changes in population, its size, age structure, composition, employment, educational status and income—are the clearest,” Peter Drucker wrote. “They are unambiguous. They have the most predictable consequences.” Despite this, however, many executives fail to act on them, often out of a mistaken belief that “they occur so slowly and over such long time spans as to be of little concern.”

FRAME WORK

The Drucker Institute’s Phalana Tiller visits Toll Brothers developments in California and New Jersey to make sense of “The Big Sort.”

The flip side is that because so many organizational leaders ignore demographics, “those who watch them and exploit them can reap great rewards.” Here, then, is a look at three such opportunities:

RED AMERICA, BLUE AMERICA

The kind of clustering that is happening in Corona View—and in communities across America—was identified in the 2008 book The Big Sort by journalist Bill Bishop. But it’s something that has been unfolding for decades, and with greater and greater intensity.

In 1976, about 27% of Americans lived in “landslide counties”—that is, counties in which the winning candidate in a presidential election won by 20 percentage points or more. By 2008, nearly half of Americans lived in such counties.

Simply put, reds and blues are separating along political and ideological lines, but the separation is spilling over to all sorts of other things, like preferences for certain types of housing. “As politics becomes more about lifestyle than about policy, where you live becomes a question of ‘who I am,’” Bishop explains. “People ask, ‘Does this place represent me?’” Red-leaners in blue areas want to move out and join fellow reds; blue-leaners in red areas want to move out and join fellow blues.

And there’s little reason to expect this trend to reverse anytime soon, at least not as long as Americans can vote with their feet. “Instead of voting for what you want, just move to what you want,” Bishop says. “Why sit around and beat your head against the wall?” For businesses, in particular, this sets up an interesting strategic choice: Do you concentrate on going after only reds or only blues, or do you try to cater to each group in different ways in different places?

Instead of voting for what you want just move to what you want. Why sit around and beat your head against the wall?

BILL BISHOP
Author, The Big Sort

Cracker Barrel Old Country Store, which has more than 600 locations, seems to have chosen the monochromatic approach: It is widely seen as catering to red-leaning customers with its down-home cooking. Yet it succeeds in Massachusetts, a decidedly blue state, by placing three of its four stores in red municipalities: Sturbridge, Wrentham and Tewksbury. (The fourth, in blue-leaning Holyoke, is near a junction of major highways, just a few miles from the borders of several red-leaning towns to the west and south.)

VOX BOX

THE GREAT FALL

Because of its low fertility rate, demographers expect China’s population to decline for at least half a century or so.

For businesses hoping to expand their customer base from red areas into blue ones, or vice versa, a change of products and messaging may be necessary. Toll Brothers is known for building large houses—very large houses, like the ones in Corona View—but it has been quietly building apartment complexes in big blue cities such as New York and denser developments in blue cities like Ann Arbor, Mich., and Hoboken, N.J.

Not that the shift is always easy. In Ann Arbor, locals have mobilized to resist plans by Toll Brothers to construct a community of more than 500 residences on the northeast side of the city. People in the area say it will be too crowded. But Toll Brothers is pressing onward—and, despite the naysayers, shrewdly so. Most people attracted to the new development will share the liberal-left political leanings of Ann Arbor. And that means they will on average prefer to live in the type of environment that Toll Brothers is attempting to create: one that is dense and walkable. And these newcomers, not the protesters, are the customers.

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The Big Sort will be no less felt among nonprofits, especially as they try to figure out how to target their fundraising. As a rule, conservatives give more to religious organizations; liberals give more to secular nonprofits. (Red-state residents tend to give a larger share of their income to charity overall than blue-state residents, but that gap seems to disappear when donations to religious causes are removed from consideration.) In any case, social-sector executives may have to be increasingly conscious of how to appeal to people on either side of the blue-red divide.

In 2012, the International Journal of Research in Marketing published a study that found that fundraising pitches and mission statements received more support when they were aligned with the “moral identity” of their audience. Specifically, researchers found that the most effective nonprofits tailored two sets of messages—one for liberals and another for conservatives.

This didn’t mean that the effective nonprofits changed their core values or pretended to be something they weren’t. Both sets of messages were authentic. Yet these organizations were careful to use a vocabulary more suited to each group. Republicans became more likely to donate when the emphasis was on “tradition,” while Democrats became more likely to donate when the emphasis was on “protection.”

An alternative approach is to look for language that transcends red and blue. This is an aim of Irv Katz, president and CEO of the National Human Services Assembly, a Washington-based association of leading nonprofits, including the American Red Cross, Boys & Girls Clubs of America and United Way Worldwide.

Working with partners at an entity called the Frameworks Institute, Katz’s organization has been focusing on how to present human services to the public in a more effective way, taking into account the variety of lenses through which different groups of Americans view the same thing. This is made more challenging by political polarization. However, says Katz, “there are some things that Americans value regardless of political persuasion. We’ve been trying to find those sweet spots.” Among them: “opportunity,” “well-being” and “health.”

As for government, policymakers in Washington and in statehouses across the country are well aware of the Big Sort. But less examined is the effect of the Big Sort on governance at the local level. There, interestingly, homogenization may make it easier to communicate with constituents and deliver services effectively. After all, Bishop says, “they know what the community wants.”

THE CHINESE BIRTH BUBBLE BURSTS

While cataclysms and miracles can disrupt demographic trends, both would be necessary to disrupt what is happening in China. For decades, the population of China grew at dizzying speed, rocketing from 544 million in 1950 to 1.3 billion today. The nation’s total population is expected to reach 1.4 billion by 2030.

But then things will change. Dramatically.

China’s population will go into rapid and unprecedented decline. Deaths will outpace births, and China will grow old before having grown rich.

How can we be certain of this? It’s because, as Drucker noted, “demographic events have known lead times.” For more than three decades, China has had a one-child policy in its cities, and today its total fertility rate is 1.5 to 1.6 children per family, below the replacement rate (which would be 2.2 per family). Although China’s population has grown based on sheer momentum, with a young age structure leading to more births than deaths, within two decades that momentum will shift in the other direction, with more deaths than births. As long as China maintains its current fertility rate, each generation will be nearly 25% smaller than the preceding one.

What’s more, demographers expect this falloff to last a long time. “Even if China can restore fertility to replacement level within 10 years after the country reaches its population peak, population will still exhibit a decline nearly half a century long, with a net population loss of over 200 million, if not more,” Feng Wang, a professor at the University of California at Irvine, warns in a paper called “China’s Population Destiny: The Looming Crisis.”

As China’s population shrinks, it will also age. Chinese life expectancy is now 75 years (a rise from under 45 in 1960), and the country is already starting to grapple with what has been dubbed the “four-two-one” phenomenon: four grandparents, two parents and one child. On that one child rests the responsibility of supporting all those elders.

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CLASS STRUGGLE

Younger Americans are not attaining enough college degrees to make up for the workers being lost or to meet the jobs opening up.

By 2050, the median age of the nation, which was 22 in 1980, could rise to nearly 50. Meanwhile, Wang points out, the number of Chinese who are 20 to 24—the age of entrants to the labor force—will fall by nearly half, from 125 million to 68 million, in just the next 10 years. Adding to the friction are some 20 to 30 million boys who will, as men, be unable to find wives, because selective abortions in favor of boys over girls has skewed China’s sex ratio.

It’s certainly not hard to imagine how the confluence of these forces could translate into increasing turbulence in Chinese society—with major implications for nonprofit and local government executives in the United States. This demographic cauldron could, for example, prompt many more Chinese to come to America (either legally or illegally). And that, in turn, could put pressure on services in metropolitan areas where Chinese immigrants tend to flock—New York, Los Angeles, San Francisco, San Jose, Seattle, Chicago, Houston, Philadelphia, Boston and Washington.

“Aging can be a pretty dangerous thing,” says demographer Phillip Longman, a fellow at the New America Foundation and author of The Empty Cradle: How Falling Birthrates Threaten World Prosperity and What to Do About It. “And then you combine that with the Chinese regime’s need to scapegoat other people. They’re actually getting very bellicose.”

For their part, corporate executives have their own lessons to draw from China’s demographic inevitabilities. The simplest, perhaps, is that for certain industries, the time to have invested heavily in China was probably yesterday—not today, and certainly not tomorrow.

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As its population decreases, the country will not remain the great manufacturing bargain that it used to be (a reality already being felt). Rural Chinese will continue to migrate to cities to work in factories, but in smaller and smaller numbers. They will also have more choices as to where to work, placing further upward pressure on wages. At the same time, companies selling to the Chinese market might also want to prepare for a slowdown. Yes, China will continue to get richer, but the most eager consumers are young people, whose numbers are shrinking.

“You still have enormous productivity growth, but there are major transitions going on, and the demographic problem is one more stressor,” says Neil Howe, president of the consulting company LifeCourse Associates and author of numerous books on generations in society. “So be cautious about expansion into China and overly bullish expectations.”

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THE SHEEPSKIN SHORTAGE

Complaints have been mounting among U.S. employers that qualified workers are hard to come by, even as the national unemployment rate continues to hover above 6%. Others question whether this “skills gap” or “skills mismatch” is for real.

In coming years, however, there really shouldn’t be any debate: By 2020, America will have a shortage of college-educated workers.

“Demand for workers with college educations will outpace supply to the tune of 300,000 per year,” Anthony Carnevale, director of the Georgetown University Center on Education and the Workforce, and his co-authors caution in a report called “Help Wanted: Projections of Job and Education Requirements Through 2018.” Within the next four years, “the postsecondary system will have produced 3 million fewer college graduates than demanded by the labor market.”

Demand for workers with college educations will outpace supply to the tune of 300,000 per year.

ANTHONY CARNEVALE
Director, Georgetown University Center on Education and the Workforce

Part of this deficiency is being driven by increased demand. By 2018, Carnevale says, 63% of all U.S. jobs will require some level of postsecondary education, an increase from 59% in 2010—no surprise as we move deeper and deeper into an age in which, as Drucker wrote, “knowledge will be its key resource, and knowledge workers will be the dominant group in its workforce.”

Another part of the shortage is being driven by a decrease in supply, thanks to two factors. The first is that many college-educated Americans are reaching retirement age. “Workers over age 45 are key members of nearly every organization—performing both as senior and middle level managers as well as skilled ‘individual contributor’ positions,” notes a report produced by IBM Business Consulting Services. “As this generation retires, organizations will face major challenges in replacing them.” The drop-off, notes University of Southern California demographer Dowell Myers, will be especially severe in sectors that ramped up during the 1960s and ’70s, such as energy and government, with electrical utilities seeing an exodus of thousands of their most important employees.

The second factor is that younger Americans are not attaining college educations in sufficiently high numbers to make up for the workers being lost or to meet the jobs opening up. This is especially true in the southwest United States, where first-generation immigrants on average lack the educational background of older retiring workers.

Economists David Neumark, Hans Johnson and Marisol Cuellar Mejia have cited California, Texas, Florida, Arizona, Colorado, New Mexico and Nevada as the most pressing examples. But the decline is also being felt in less expected places.

“New England states will find a decreasing percentage of their young population will hold a bachelor’s or higher-level degree in years to come,” asserts a 2006 workforce report commissioned by the Quincy, Mass.-based Nellie Mae Education Foundation.

In short, the sheepskin shortage is likely to affect most every organization, no matter what sector it operates in. The question is what to do.

Don Atwater, an economist at Pepperdine University’s Graziadio School of Business and Management, has written extensively about dealing with talent shortages, and he spotlights a number of inventive remedies that organizations have used. One is to recruit more aggressively from overseas. Another is to bypass the process of individual hiring and absorb smaller well-run entities completely—employees and all. Cities can’t do this, of course, but they can woo proven workers from elsewhere. As Deborah Reed, a vice president of Mathematica Policy Research, puts it, “The question becomes, ‘How do we get talent from that neighbor city?’”

Finally, smart organizations hold onto the good people they have. “They typically pay more, have rotating assignments and change the nature of the jobs,” Atwater says. In other words, faced with a demographic squeeze, their executives do what all leaders should always be doing: treating people as their greatest asset. *

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