Companies & Industries

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

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.

On the third, and deepest, level, strategists must rediscover entirely new sources of advantage as old ones fade and decay. Once we rediscover how to create value, we must learn how to sustain and maintain it. But the sources of advantage we teach in business schools and boardrooms alike were built for an industrial-era—not a hyperconnected, hypercomplex 21st century. For example, brands ain't what they used to be—and, as the investment banks just showed us, neither is scale, proprietary knowledge, or top-notch relationships.

Tomorrow's sources of advantage aren't like yesterday's. They're not built on being able to exploit, dominate, or coerce more strongly than others—they don't result from being harder, better, faster, stronger. They're about exactly the opposite: being softer, better able to fail, having the ability to be slower, gaining the capacity for tolerance and difference. Ultimately, they are about a true advantage—one that accrues not just to the corporation, at the expense of people, society, or the environment; but one that accrues to all.

Let's go back to our Starbucks example. If Starbucks wants to survive the 21st century, it must get radically experimental, learn to tap the power of network effects, shift to becoming resilient, develop and live a sense of purpose, or learn to occupy the creative high ground. It is only through new economic avenues like those that Starbucks can make sure its own advantage isn't just the flipside of Detroit's, Dar es Salaam, or Dhaka's disadvantage—that it's not just, like the investment banks, building an economic house of cards.

That's incredibly difficult—because industrial era DNA is built to power a nakedly competitive advantage; one that's deliberately blind to being unfair, unsustainable, or flat-out imaginary.

There's a different way to say that. Discovering new sources of advantage depends on new DNA—on building new kinds of institutions with entirely new capacities. Because, at root—and as we'll discuss at length shortly—the macro crisis isn't really a financial crisis, an economic crisis, a liquidity crisis, or a solvency crisis. It's an institutional crisis: the economic institutions of capitalism are in shock.

And though it's a scary, frustrating time—the cool part is this: it's up to us to reimagine, reconceive, and reinvent them. We get to rethink the institutions of capitalism for a new century.

What could be cooler than that?


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