The Aftermath of the Go-Go Economy
The Good News: If History Is Our Guide, Economic Growth Will Return Sooner Than Expected
Read just the corporate agenda to fit today's new realities. This is something that business people are thinking about constantly, and justifiably so.
The aftermath of our past go-go economy requires abandoning unproductive and obsolete activities, streamlining and re-engineering business processes, finding new sources of revenue growth and rethinking many of yesterday's decisions.
Management guru Peter Drucker noted that every 50 or 60 years there has been a time period where business people, economists and politicians conveniently rationalized speculative growth would continue at an exponential rate.
According to Drucker, "Every such era believed there would be no limit to growth. And every one ended in debacle and left behind a massive hang-over."
After every go-go decade, Drucker observed, prophecies of the end of world order, zero growth, slow growth, depression, recession and even the need for more government intervention became popular.
But except for the years between World War I and World War II, vigorous economic growth always either continued or resumed very soon after the economy fizzled. Further, the recuperative powers of our nation were always a subject of amazement and astonishment.
However, Drucker stressed, time and again, the message is that the aftermath of a fast-growth era always brings substantial structural changes in the economy. Economic growth always changes and shifts to new foundations.
For example, consumer spending fueled the recent go-go decades. Easy credit and home equity borrowings were the factors most responsible for enabling consumers to purchase goods and services at an astonishing pace. That's now fast history.
From now on, economic growth will be in areas that require massive capital investments—energy, rebuilding city and state infrastructures, the environment, transportation, terrorism prevention and response, utility grids, traffic management, food distribution, health care and the like.
Managing the Fundamentals and Managing for Tomorrow
Some of the inevitable changes that we can now expect are very much in keeping with the practices Drucker recommended for managing in a turbulent economy.
For starters, the balance sheet is quickly becoming more important than the profit and loss statement. Cash flow and liquidity are now more important than price-earnings ratios. The return on total assets will quickly emerge as a better indicator of the health of an organization than earnings per share.
Organizations of all kinds and sizes will begin managing the productivity of all assets with renewed vigor. This means making work productive and the worker achieving. It means doing the right things and doing things right. Further, it means shrinking to grow, that is, abandoning what no longer contributes.
Thankfully, today's Six Sigma/process improvement diagnostic tools, techniques and technologies provide management with a step-by-step methodology for putting into action many of the ideas and concepts originally formulated by Drucker.
Productivity Will be the Major Economic Challenge of the Next Five Years
Continuous productivity improvement is the key to managing the inflation that may occur in all developed countries as a result of the financial crisis. (It should be mentioned—indeed, emphasized—that many economists believe inflation will not run rampant.)
To have price stability, wages cannot rise faster than productivity. For example, if wages rise by 10 percent and productivity increases by only 3 percent, prices would be predicted to increase by 7 percent (wage increases minus productivity increases equals price increases).
The bulk of our workforce is knowledge workers. They have received advanced educations and work in knowledge jobs—as market researchers, search optimization specialists, quality-control experts, managers, X-ray technicians and so on.
The cost squeeze that we are beginning to hear about is really a productivity squeeze. The only way out is to make work and knowledge workers more productive.
This can be done in a variety of ways, namely improving and re-designing business processes, improving customer feedback systems, providing better training, redesigning organizational structures and having effective utilization of today's social media technologies for enabling formalized sharing of best internal practices.
Further, the use of measurement and internal benchmarking is proving to be a powerful weapon in maintaining and growing profitability. Studying what successful units within an organization are doing to get superior results/measurements and having the worst performers learn from the best performers is a sure-fire way of increasing individual and organizational productivity.
Most importantly, making organizations more effective requires the reallocation of resources from low-yield activities to high-yield activities. In many instances this will require the creation of new and different businesses, funded by established organizations that are unified with the core mission of an organization.
This is our interpretation of Drucker's primary prescription for a world turned upside down. Organizations have to face up to the fact that yesterday's reality is over.
Companies will have to specialize/create niches/differentiate. They will have to organize around the flow of customer information. They'll have to provide superior service. They will have to pursue fast-paced innovation In order to accommodate today's new customer needs.
Every organization must prepare today's business for the future. As Drucker asked, "What do we have to do today to deserve tomorrow?"
First published on Human Resources IQ.