Why Traditional Recession Tactics Are Doomed to Fail This Time

Boardrooms need to recognize that the macro crisis requires decision makers to confront fundamental transformation on three levels, argues Umair Haque

By Umair Haque

Posted on Edge Economy: October 21, 2008 1:11 PM

How should boardrooms respond to the macro crisis? Is it just a case of recession-as-usual: budget-paring, personnel-slashing, and portfolio-trimming?

Not a chance. The tactics of recession-as-usual are neither necessary nor sufficient for firms to weather the global economic superstorm—because it's no ordinary squall, but a once-in-a-lifetime gale ripping up the very foundations of the global economic order. Rather, the macro crisis requires decision makers to confront fundamental transformation on three levels.

The first and simplest level is a change in global patterns of savings, investment, and consumption. For too long, the poor have financed the rich. China and other emerging markets have lent to the US so Americans could buy Hummers, McMansions, and Frappuccinos. But this never made sense—it was deeply unsustainable; the macroeconomic equivalent of a giant planetary fossil fuel engine. The days of export-led growth—and it's flipside, force-fed consumption—are numbered.

Strategists in the boardroom face a new global macroeconomic picture. Overconsumption in developed countries must slow sharply, and capital must be redirected to long-run investment, especially in public goods. Conversely, emerging markets must shift from financing consumption in developed countries, and begin investing in the basic institutions of a vital microeconomic environment and power long-run growth.

What does that mean, concretely? Let's take a simple example. If Starbucks wants to grow in the States via new stores and new products, its corporate strategy must support the clear macroeconomic need to shift overconsumption to long-run investment. That means relying less on Vivannos, and more on, for example, Starbucks as a platform for communities to build and invest in local resources. Conversely, if Starbucks wants to grow in developing countries, it cannot just rely on a handful of new stores serving fatter-margined deluxe water to a new global bourgeoisie—rather, to make growth sustainable, Starbucks must reinforce and support fair trade, responsible relationships, and account not just to count profits—but to gain insight into long-run value created.

On a second, and deeper level, strategists must rediscover the lost art of authentic value creation. Authentic, long-run value isn't created through arbitrage or gamesmanship—what we too often confuse strategy for. Games of off-balance sheet accounting, currency hedging, capital structuring, so-called labour arbitrage—where corporations simply shift to the lowest-cost, or most poorly regulated, sources of manpower—don't create value. They just shift it around. Corporations who play this game of economic musical chairs are in for a rude awakening—because the music just stopped. And so they must rediscover the simple fact that value creation flows from making economic activities not just profitable in the short- run—but meaningful over the long-run.

Let's go back to our Starbucks example. Starbucks tried to grow by selling us more junk we don't need—music, mugs, and mouse pads. That was orthodox, textbook, industrial-era strategy: grow by seizing share in adjacent markets. But it's also defunct in a world where we don't need more useless junk.

What do we need in the 21st century—not just as brain-dead consumers, but as global citizens? We need opportunities to grow and amplify our capabilities. For Starbucks, that might mean, instead of hawking mugs and chocolates, training baristas to teach classes in coffee-making, letting communities use Starbucks as a venue for local government, or, at the limit, training local suppliers from developing countries as Baristas in developed ones. How cool would that be? Very.