by Adam Hartung | Apr 29, 2009 | Books, Current Affairs, Defend & Extend, General, In the Swamp, Leadership, Lock-in, Openness
Today the U.S. Federal Reserve indicated that the worst of America's economic downturn may be over, according to "Fed stands pat, and says worst may be over" at Marketwatch.com. Fed officials seem to think that the rate of decline has slowed. Note, they didn't say the economy is growing. The rate of decline is slowing. They hope this points to a bottoming, and eventually a return to growth.
With interest rates between banks at 0%, and short-term rates for strong companies near that level, there really isn't much more the Fed can do to create growth. It will keep buying Treasury securities and keep pushing banks to loan. But growth requires the private sector. That means businesses – or what reporters call "Main Street."
The government doesn't create growth. It can stimulate growth with low interest rates and money that will stimulate business investment. Growth requires people make products or services, and sell them. Those who are waiting on the government to create a growing economy will never gain anything from their wait, because it's up to them. Only by making and selling things do you get economic growth.
Recent events, closing banks and massive write-offs, are a big Challenge to old ways of doing business. Those who keep applying old practices are struggling to generate profits. The tried-and-true practices of American industrialism just aren't turning out gains like the once did. And they won't. The world has shifted. Entrepreneurs in India, Malaysia and China – places we like to think of as poor and "third world" – are building fortunes in the information economy. American businesses have to shift. If you make posts to install on highway sides, well lots of people can do that and competition is intense. To make money you need to make products that help move more people on the highway faster and safer – some kind of post that perhaps can provide traffic information to web sites and aid people to look for alternate routes. Posts aren't what people want, they want better traffic flow and today that ties to more information about the highway, who's using it, and what's happening on it.
Growth will return when businesspeople move toward supplying the shifted market with what it wants. Like Apple with a solution for digital music that involved players and distribution. Or Amazon with a solution for digitally obtaining books, magazines and newspapers, storing them, presenting them and even reading them to you. These companies, and products, appeal to the changed market – the market that values the music or the words and not the vinyl/tape/CD or the ink-on-paper. The customers that want the information, not necessarily the tangible item we used to use to get the information.
For the economy to grow requires a lot more businesses realize this market shift is permanent, and adjust. During the Great Depression those who refused to shift from agriculture to industrial production found the next 40 years pretty miserable – as rural land prices dropped, commodity prices dropped and the number of people working in agriculture dropped. Agrarianism wasn't bad, it just wasn't profitable. And going forward, industrialism isn't bad – but to grow revenues and profits we have to start thinking about how to deliver what people want – not what we know how to make. You have to deliver what the market wants to grow sales – even if it's different from what you used to make.
Starbucks offered people a lot of different things. And the old CEO tried to capitalize upon that by expanding his brand into liquor, music recording, agency for entertainers, movie production, and a widespread set of products in his stores – including food. But then an even older CEO returned, and he said Starbucks was all about coffee. He launched some new flavors, and he pushed out an instant coffee product. But a year later "Starbucks profit falls 77% on store closure charges" reports Marketwatch.com. His "focus" efforts have cut revenues, and cut profits enormously. He's cut out growth in his effort to "save" the company.
By trying to go backward, Chairman Schultz has seriously damaged the brand and the company. He has closed 570 stores – which were a big part of the brand and perhaps the thing of greatest value. Stores attracted people for a lot more than just coffee. People met at the stores, and buying coffee was just one activity they undertook. So as the stores were shuttered, the brand began to look in serious trouble and people started staying away. The vicious cycle fed on itself, and same store sales are down 8%. No new flavor or packaged frozen coffee bits for take home use is going to turn around this troubled business. It will take a change to giving people what they need – not what Mr. Schultz wants to sell.
With more and more people working from home the "virtual office" for many small businesspeople can still be a local Starbucks. When you can't afford take a client out for a snazzy lunch you can afford to take them for a coffee. When your wasteline can't take ice cream, you can afford a no-cal hot coffee in a great environment. Starbucks never was about the coffee, it was about meeting customer needs in a shifted market. And when the CEO realizes this he has the chance to save the company by taking into the new markets where customers want to go. Not by bringing out new instant coffee granules.
Starbucks is sort of a model of the recession. When you try to do what you always did, and you blame the lousy economy for your troubles, you'll see results worsen. As businesspeople we must realize that the recession was due to a market shift. We went off the proverbial cliff trying to extend the old business – just like Apple almost did by trying to be the Mac and only the Mac. To get the economy growing we have to look to see what people really want, and supply that. And what they want may be somewhat, or a whole lot, different from what we used to give them. But when we start supplying this changed market what it wants then the economy will quit contracting and start growing.
So be more like Steve Jobs, and less like Charles Schultz. Quit trying to go backward and regain some past glory. Instead, look into the future to figure out what people want and that competitiors aren't giving them. Be willing to Disrupt your business in order to take Disruptive solutons to the market. And get your ideas into White Space where you can develop them into profitable businesses. Don't wait for someone else to turn the economy around – just to find out then it's too late for you to compete.
by Adam Hartung | Mar 6, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
"U.S. Unemployment Rate Jumps to 25 Year High" is Crain's headline today (see article here). "Payrolls sink 651,000; jobless rate soars to 8.1%" headlines MarketWatch (see article here). It's the fourth consecutive month job losses exceeded 600,000 we are reminded, as 4.4 million becomes the latest tally of those losing jobs in this recession. Those unemployed plus those with part-time-only work has risen to 14.8% of the population – a number that the labor department says may reach 1930s proportions. There are fewer people working full time in the USA today than in 2000 – a combination of the "jobless recovery" followed by a whopping recession.
I remember 25 years ago when the unemployement numbers were this high. I was graduating business school, and there was a real fear that not all graduates would find a job (a horrible situation at a place like HBS). The economy was in terrible shape after several years of economy micro-rule under President Carter. A stickler for detail, and a workaholic, Carter had implemented complex regulations to control prices of oil and other energy products, as well as most agricultural products and commodities. The oil price shocks, combined with runaway printing of money by a highly accomodative Federal Reserve during the 1970s, had sent the American economy into "stag-flation" where growth was abysmal and inflation had skyrocketed.
In 1982, things didn't look good. And the Reagan-led republicans introduced an amazing set of recommendations to break out of the rut America's economy was in. A bold experiment was set up, to test whether "supply siders" were right and if we put our resources into creating supply (capacity) would demand follow and drive up the economy. The big test was a combination of historical tax cuts combined with increased federal spending on defense projects run by industry (in other words, changing from giving money directly to people through welfare or government jobs and instead giving money to businesses to build things – infrastructure and military.)
No one knew if it would work. Smaller government and lower taxes had been a political mantra for various political parties since the days of Benjamin Franklin. But what most Americans believed when they elected Ronald Reagan was that what had recently been tried was not working – it was time to try some new things.
Today is 2009, and while unemployment rates may look similar – not much else is like 1982. Then, marginal federal income tax rates were 80%, and most states relied heavily on "revenue sharing" money from the feds back into states to pay for many progroms – like roads and schools. Today, top rates are in the low 30s, and states have jacked up (from 2x to 10x) sales taxes, property taxes and even state income taxes to cover the loss of federal dollars. Interest rates on home mortgages were 14% to 18% in 1982 – and that was on a variable rate loan with 20% down – because you couldn't get a bank to offer a 30 year mortgage (for fear of inflaction wiping out the loan's value) and no one offered low-downpayment loans. There was a housing shortage, but people struggled to afford a home with interest rates that high! And materials cost (due to inflation) was driving up construction costs more than 12-15%/year. Today mortgages are available at 5% fixed for 30 years, and the prices of homes are dropping more than 10% annually while empty properties seem to be everywhere begging for buyers at discounted prices.
The signs of an impending collapse have been pretty clear for the last few years. First, there was the "jobless recovery." While the economists kept saying the economy was doing well, the fact that there were no new jobs was quite obvious to a lot of people. There was even considerable surprise at how robust the economy was, given that it had no job creation. But it didn't take long for several economists to recognize that the source of growth was largely a considerably more indebted consumer. From the government (federal, state or municipality) to the individual. Those who did have jobs were taking advantage of low interest rates to purchase. On metrics debt/person, debt/GDP, debt/earnings dollars, debt/payroll dollars were all hitting record high numbers as lower quality debt (lower quality because there was increasingly less earnings behind each loan) provided the economic fuel. The economic research team at no less a conservative stalwart than Merrill Lynch was predicting as early as 2006 big problems – and a revisting of 650 on the S&P 500.
Although the economy in 2005-2007 looked nothing like that of the late 1970s, it was pretty clear that a declining economy and high unemployment were soon to come. The 1980s solution, which unleashed the longest running bull market in history, dealt with the problems of the 1970s. But, as the decades passed increasingly the 1980 tools had less and less impact on sustaining growth. Cutting marginal tax rates on dividends when marginal rates on income is already at 30% has far less impact than halving tax rates on everyone! Lowering SEC regulations on capital market access for new hedge funds has less impact than deregulating pricing and labor costs for whole industries like airlines and trucking! What worked well in the past, and became Locked-in to the American economy, simply had lower marginal impact. Year after year of Lock-in produced weaker and weaker results. And opened the doors for aggressive competitors to copy those practices unleashing prodiguous competition for American companies – in places like Asia, India and South America.
All Locked-in systems become victim to these declining results. It's not that the ideas are bad, they just get copied and executed by aggressive competitors who catch up. Markets shift and needs change. People that once focused on buying a new car start focusing on how to retire. People that once wanted great schools want better parking. People that wanted cheaper and better restaurants want cheaper and better health care. The old approaches aren't bad, but trying to do more, better, faster, cheaper of the same thing simply has declining marginal benefit. Results slowly start declining, until eventually they fail to respond to old efforts at all.
Comparing our unemployment rate today to that in 1982 is an interesting historical exercise. We can see similar outcomes. And what's similar about the cause is that Lock-in to outdated practices led to declining performance. That the practices were about 180 degrees apart isn't the issue. Debating the merits of the practices in a vacuum – as if only one set of practices can ever work – simply ignores the pasasage of time and the fact that different times create different problems and require different solutions. The successful practices that fired a tremendously successful business community and stock market in the 1960s ran out of gas by the 1980s. Now, the practices of the 1980s have run out of gas in the competitive global economy of 2009. In both instances, those leading the economy – the companies, economists, banks, regulators – stayed too long with a set of Locked-in practices.
Today we need new ideas. To overcome rising unemployment requires we look to the future, not the past for our recommendations. We must start obsessing about competitors in China, Hong Kong, Singapore, Brazil, Argentina, Sri Lanka, Thailand and India – competitors we belittled and ignored for too long. We must be willing to Disrupt old practices to try new things – and use White Space to experiment. The Missile Defense Shield (mid-80s) turned out to be a project that wasn't appropriate for its time – but that we tried it gave a shot in the arm to all kinds of imaging and computing technologies which helped improve business. Those kinds of experiments are critical to figuring out how we will create jobs and economic growth in a fiercely competitive global economy where value is increasingly based on information (and neither land nor fixed assets - which dominated the last 2 long waves of growth for America).
