These are tougher times for managers - and uncertain ones, which makes matters worse. Even sadder, the sombre present compares with a very recent past in which the world economy was in a purple patch that (to the optimists) seemed likely to last for ever. Indeed, the worst that the pessimists could and did say was that nothing does last forever. One day, as sure as eggs is eggs, lovely boom would turn to horrible bust - but since nobody knew how or when, who cared?
As always, the optimists had a plausible story to support their blind faith. The Old Order, they argued, had been swept away by new, powerful and permanent developments. The Panglossians even coined a phrase for their view that managers had entered the best of all possible worlds - low inflation and high growth were powered by advanced technology and inexhaustible markets that were generating, and would go on generating, unexampled rises in productivity. This was the New Economy - which in reality was as new as the Emperor's New Clothes, and just as transparent.
OLD ECONOMY LAWS
In early 2001, the iron laws of the Old Economy have reasserted themselves. One of those laws is that success breeds excess, and that the excesses have to be corrected. The longer the boom, and the larger the bubble, the sharper and deeper the eventual, inevitable correction. But wise readers of the runes are no more carried away by downturns than they are by booms. They look for trends - and those of today happen to be unusually clear, very powerful and absolutely irresistible. The trends affect every aspect of every company and every manager's life with sweeping changes. They affect....
• how companies are managed (e.g.: flat structures and bottom-up decision-making)
• how they compete (e.g.: strategic alliances in which they 'co-opete' with competitors)
• where they do business (e.g.: by direct participation in global markets)
• how they serve customers (e.g.: through multi-media 'contact centres')
• how they communicate (e.g.: by interaction over active websites and e-mail)
• how they operate (e.g.: by optimising the efficiency of the entire, end-to-end business system)
• how they win competitive advantage (e.g.: by disrupting markets to change the rules and unhorse competitors).
These changes have been working their way through against a background of remarkable economic growth - though the actual rate of expansion has been exaggerated, in general perception, by the stock market bubble. While the length of the upward cycle in the US was exceptional, the underlying pace in the real economy was not. The upturn was also highly predictable for followers of the great Soviet economist, Nikolai Kondratieff. He detected long cycles of 20-25 years in economic history in which (much like the Seven Fat and Seven Lean Years of Biblical Egypt) slow growth alternated with faster expansion.
The oil price crisis of 1973 triggered a marked Kondratieff growth downturn which (as I used to predict to unbelieving audiences) was likely to give way to faster expansion in the middle Nineties. That Kondratieff upturn should now have a dozen years at least to run and could last all the way to 2020 or so. Moreover, the last two cycles - the slow period and the fast - share two important characteristics.
BOOM IN NEW CREATIONS
First, the pace of creation of important new businesses and new technologies quite plainly accelerated in both periods. Second, the pillars of the Old Economy (the smokestack and other capital-intensive old-line businesses) entered a process of general relative decline that is clearly still continuing.
The reason is equally clear. The economic leaders once had a near-monopoly of capital and valuable skills, including management and technological know-how. They now compete on virtually equal terms. To return to the trends highlighted above, companies of any size can compete with any giant in the speed and the efficiency of their communications; their service and retention of the customer; their competitive edge; the cost of production; their global spread; their strategic alliances and joint ventures; and, above all, the excellence and excellent performance of their managers.
The enormous impact of this change is shown by the astonishing transformation of IBM, from the world's leading technological powerhouse to also-ran in most of its markets. I wrote long ago that the old IBM was nibbled to death by mice. When Microsoft inflicted the deadly blow of Windows on its erstwhile PC partner, Bill Gates's baby had half-a-billion dollar of sales, a tiny percentage of IBM's massive market. One after the other, the mice took control of the markets that should have belonged to IBM in perpetuity - or so its managers believed.
The mice became huge, sometimes savage beasts, devouring markets whose wealth and growth even matched IBM's mainframes. Two exogenous forces determined this fabulous outcome. First, the technology expanded and diversified at a pace that made it impossible for any company, even one as wealthy and multi-faceted as IBM, to control all, or even most, avenues to the captive customer. Second, that customer no longer wanted to be captive.
For all manner of reasons, supply has become permanently super-abundant, and suppliers have multiplied. The great brands are still great, but the owners can no longer - in most cases - use the brands to produce and protect lush margins. In this new world, a brand is only as good as its last sale. The trend can only be contradicted in those areas (Microsoft in operating and bundled software, Intel in microprocessors) where the supplier ahs achieved quasi-monopoly, either by conditions of trade (Microsoft) or by dominance of supply (Intel).
SOARING MARKET VALUE
But something paradoxical has happened as other big companies confronted their less promising conditions. The market values - the prices of the businesses - have soared. The 50 largest companies in the US were 'worth' $840 billion in spring 1991. In mid-2001, that number had swollen to a gigantic $4,008 billion, a rise of 377%. This couldn't be justified by any other yardstick: in company after company, the ephemeral figure for market value rose much faster than either profits or sales.
In other words, a given quantity of revenues and/or profits simply became 'worth' much more. This puts the performance of the corporate stars in a new light. At General Electric, for example, earnings over the decade rose by a solid 12.1% a year. But return to shareholders - reflecting a sevenfold rise in market value - was a huge 28.7%. The $449 billion increase in market capitalisation for GE, which achieved Jack Welch's ambition to make it the world's most highly valued company, owes much to his managerial skills, to be sure. But the Kondratieff upturn, and still more the upward valuation of all companies, were indispensable conditions of Welch's and GE's rise.
There's a lesson for all managers in this. You should always seek to disentangle your own achievements, which have everything to do with you, from the effects of the environment, which you don't control. Ask yourself these annoying, but soul-searching questions.
• What is the baseline for my performance - the level of turnover, revenues and unit sales that is the minimal benchmark?
• What improvements over the benchmark figures resulted from external influences outside my control?
• How did my performance compare with that of the competition?
• What was the contribution of the initiatives that differentiated our performance and made it superior?
This analysis is a very tough procedure. It's a safe bet that most managers will be disinclined to undertake such a post-mortem after a successful year. This is a big mistake - similar to that of managers who fall foul of Charles Handy's Sigmoid Curve. As mentioned before in Thinking Managers, the Curve describes the life cycle of companies, most of which blithely and fatally miss the point, well before the cycle peaks, when only the start of a new and different cycle will sustain growth.
Continued high profits and sales blind management (see IBM again) to the fierce reality: their underlying strengths are diminishing. When the impact of this deterioration fully breaks through, it's usually too late to undo the damage - and the high cash flow and good morale of peak performance have probably given way to much worse finances and demoralisation (especially if the company starts downsizing in the usually forlorn effort to restore its fortunes by cutting back).
UNPLEASANT TRUTHS
In sum, you need to search out the unpleasant truths before you begin to congratulate yourself on the pleasant ones. If a particular strategy or tactic is succeeding, by all means pile on the pressure and the pleasure, repeating and (if possible) improving what has worked. The New Zealand entrepreneur who gave his name to, and made millions from, Macleans toothpaste was a firm believer in heavily backing success. But Sir Alexander's simple and effective formula had another part: never reinforce failure. If a product didn't sell, Maclean scrubbed it from the portfolio.
The present growing uncertainties offer a necessary opportunity to adopt the Maclean method. Look through the corporate portfolio of everything - not only products, but processes of all kinds, including management. Use the Turnaround Formula:
1. Set up a small steering group with strong leadership.
2. The more sacred a cow is, the sooner it needs examination and possible slaughter.
3. Use digital means to raise internal and external communications to the highest possible standard.
4. Get task forces to look at, and rectify as needed, every basic of the business.
5. Use going digital to symbolise that you are deadly serious about change.
6. Set tight deadlines for every report, decision and action, and insist that they are kept.
This programme won't avert the evil hour, if that's what the immediate future holds, but it will turn threat into opportunity. That's the key word. As noted earlier, even the Kondratieff down-cycle saw more new products, processes, businesses and fortunes created than any period in history - only to be surpassed by the last amazing decade. How many opportunities did you spot, create or exploit? The answer is probably 'None' - which may even (but wrongly) produce a warm glow when you contemplate the sight of people whose dreams perished in the dot.com fires.
ENTREPRENEURIAL RISK
The mistakes made by the lost dreamers did not include the dream itself. The opportunity of the Internet is real. The risk is the risk of all enterprise - that you'll do the wrong thing or do the right thing badly. It's perfectly true that you can avoid that risk by doing nothing. But nothing leads to nothing. The typical dot.com flop committed suicide. The losers...
1. Failed to define a business model which would generate revenues in excess of operating costs.
2. Spent large sums on non-essential items.
3. Ran a small start-up as if it were a large company.
4. Confused raising capital (easy in those heady days) with running a business (hard at any time).
Any business, not just a dot.com, would have flopped under that four-fold burden. The slowdown is an opportunity in itself to create your own upturn while others are sitting on their hands. Don't sit on anything. Move - and move fast!
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