This blog primarily focuses on businesses. But in Create Marketplace Disruption I point out that Success Formulas exist at multiple levels – not just companies. At a higher level, Success Formulas exist for functional groups, work teams and individuals. At a lower level than companies, Success Formulas exist for industries and even entire economies. When a shift happens at any level, all levels above that have to adjust for that shift. Over the last few weeks, we’ve been witnessing the impact of shifts in economies that are having a tumultuous impact on the financial services industry – and the companies participating in that industry.
With last week’s announcement of higher expected first time unemployment claims (see article here), The U.S. is confirmed to be headed into a recession (if not already there [article here].) But beyond the U.S., the economies of the developed economies in 2009 is expected to grow .6% -the weakest since 1982. The emerging markets are expected to grow at 6.1% (weakest since 2003) – 5.5 percentage points higher – 10x developed markets – 4x the average difference in growth rates during the 1990s. This is a pretty massive change. (Read article here)
The U.S. banking crisis has been the result of lots of bad loans on everything from mortgages to autos and credit cards. As asset values (principally homes) and incomes declined, the number of unpaid loans went up. It turned out that many of these loans had been packaged and sold off, and derivative instruments were created on those assets to help increase returns, causing not only the lenders to get into trouble by defaults, but investors (like insurance companies). Sort of a "domino effect" – or some say the falling of a "house of cards." While this explains why U.S. banks and insurance companies stumbled, why are we also seeing a rash of problems across Europe and some in Asia (read article here). The governments are "bailing out" banks and other financial companies from Ireland to Iceland – while putting in place lots of additional regulations (like banning short sales [article here] – a tactic also being used in the USA.)
In the USA, banks and investment banks allowed ever-increasing risk to creep into the debt market via higher lending limits on asset values and incomes. They were seeking ways to maintain results by manufacturing ever riskier transactions dependent on fast rising asset values and incomes – even if there was no reason to believe they would happen. They were looking for ways to Defend & Extend their Success Formula. We now can see that was happening all around the developed markets. Emerging market governments were buying secure U.S. Treasuries. But everywhere else institutions were trying to find higher yields in order to Defend & Extend their Success Formulas. As a result they bought mortgaged-backed securities and other even riskier instruments. Now that those securities are defaulting, all the developed markets are seeing big financial industry problems. The unwinding of risk is causing big problems all across the developed markets where actually making things – manufacturing, IT code, services – has been declining.
At the base of the pyramid, the economy, we can now see that the markets which make things are doing a lot better than those which have been outsourcing. This had already made a big difference in many manufacturing industries. And now we can see it in financial services. What underlies these industry problems is that the relative competitiveness of the economies is shifting. Every industry, company, functional manager, work team and individual will have to alter their Success Formulas to deal with this change – or face declining returns. Some started making these changes years ago (such as GE and IBM), and others have not (such as GM and Ford).
If there is not going to be a wholesale realignment of global economic leadership, it will require the government, industry and company leaders in the developed countries to make substantial changes in their Success Formulas. The recent U.S. financial services industry bail-out bill only addressed the current debt and cash flow crisis. It did not address the fundamental changes in the economic competitiveness. We can soon expect similar requests for government bail-outs from the auto industry, homebuilding industry, appliance industry, etc. Until government leaders develop a different economic model, the developed countries will struggle. And the industries that formerly led in these countries will continue to see market dominance shift as it has done in IT services, customer service, furniture manufacturing and several others. Success Formulas must be changed from the bottom to the top – including those of the individuals who are seeing the changes in competition affect them.
What’s needed now more than ever is White Space to address these market Challenges. Just as the New Deal in the 1930s and the dramatic tax reductions of the 1980s allowed for experimentation and creation of entirely new Success Formulas to changed market conditions – similar White Space is needed in government today. And those who lead their industries and companies must begin using more White Space to find new ways to compete – rather than trying to Defend & Extend despite declining returns. Equally, functional group heads and work team leaders will find themselves having to use more White Space to address competitive needs – rather than falling back on old assumptions about what works.
Those who implement White Space and develop new Success Formulas they can migrate toward will be able to improve their competitiveness and survive – possibly thrive! Those that don’t will find the future very tough sledding. There is no doubt about the global shifts that started a decade ago and are continuing today. Trying to wind the clock backward will never happen. Old competitive models are now obsolete. The winners will be those who follow the Phoenix Principle and use White Space to migrate their Success Formulas.