Awake at 2 o'clock?

Never, never, never, never give up.

Posted on October 23, 2011 by John F. Dini

I kind of see everything as connected. Last week we hosted Larry Linne, author of “Make the Noise Go Away,” a book about the roles of first-in-commands and second-in-commands. I will be writing about a couple of things Larry said in his presentation in the next few weeks.

One Larry’s key points was about the tendency of a first-in-command to give up. Not giving up on the business, or on working hard, but giving up on change. We get so much push back from those we employ. “Not another change! The way we do it is working well!” “I just got comfortable with the old way.”

He made a joke about the employees who weren’t at the event. How they were back at the business saying “Oh no! She’s at one of those business seminars again! She is going to want to change things when she gets back.”

The CEOs in the audience laughed. They know that it’s true. How may employees say some version of “I wish they would just leave me alone so I can do my job?”

You didn’t become the owner of a business by doing things the way they were always done. You would still have your old job if that were the case. You changed things. If they didn’t work, you changed them again, and again. You experimented, and probably paid some uncomfortable prices for experiments that didn’t work out.

When things start to work, we stop changing them. You may think they could work better, but there is always a risk that they won’t. Your employees certainly aren’t as comfortable with risk as you are; that’s why they work for you. They push back, you have doubts, so you leave things the way they are. “If it ain’t broke…don’t fix it.”

That way lies mediocrity. It’s one of those sayings that tries to make Hunters into Farmers. “We didn’t do it that way last season. What if it doesn’t work? What if the crop fails?” Farming seeks incremental change. Let’s see if we can increase yields by a few percent. Hunting is new and different every time you step out the front door.

I explain to my employees that it is their job to follow procedures. It is my job not to. You have a responsibility to try new things, because you are the best qualified to judge if those things can accomplish what you want for my business.

Of course, if new ideas don’t work out, You are also the one who bears the consequences. In the end, the cost of everyone’s experiments is yours. That gives you, not them, the right to experiment.

A client of mine had a manager who began changing things. As happens so often, the “new” things he tried had been done and discarded as bad ideas a long time ago. When asked why he wasn’t following procedure, the manger replied “I have my own vision about the way things should be done in this business.”

The owner’s reply was beautiful. He said “You are welcome to your own ideas and your own vision, but you’ll have to go start your own business. This one is mine.”

Last night I put on an old t-shirt from one of my son’s wrestling tournaments at Winston Churchill High School. It made a connection for me. The wrestling team’s motto was the Churchill quote; “Never, never, never, never give up.”

That should be a universal motto for business owners who want to try new things. It’s your job, and don’t let anyone tell you to stop doing it.

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Fighting on Level Ground

Posted on October 16, 2011 by John F. Dini

Poland has been conquered numerous times in history. Since the 11th century, it has been partially occupied, partitioned, or fully subjugated by the Germans, Russians, Austrians, Mongols, Tartar Muslims, French (under Napoleon), Prussians and Hungarians.

The Poles aren’t a timid people, and they have given good account of themselves in numerous battles. Their role as repeated door mat is largely due to a single factor. Bad luck.

First, Poland straddles a historical divide between western Europe and Western Asia. It is on the path of anyone from either side who wants to get to the other.

Second, Poland is mostly rolling plains with limited forests. It’s the easy way through. It was also ideal terrain for cavalry manuevers, and later for tanks. If you want to put your military muscle and technology to good use, Poland is just the place to do it.

Understanding the Battlefield

This is the last of a five-part series on dealing with a flat economy. Like Poland, you are just suffering a spot of bad luck. If you were running your business in the 1960’s, 70’s, 80’s or 90’s you had a rising tide. The economy was growing, the population was growing. Americans were largely young, ambitious and hard-working. Technology was driving productivity. Like a tank commander in Poland, if you pointed in the right direction and didn’t run into problems, you could go a long way.

Now you are a foot soldier, and it is winter. Think of Napoleon’s long retreat from Russia (which included Poland at the time). He invaded Russia with 500,000 men. He left with 40,000. I don’t think the business climate of the next few years will be that bad, but it will not be kind to the unwary and unprepared. If you think that the recession will end, and things will go back to the way they used to be, you are among the businesses at risk.

I will briefly summarize again, at the risk of sounding strident. The largest and most ambitious generation in American history is leaving the workforce. Technology continues to drive productivity, but at the cost of eviscerating the middle class. Consumers are saddled with massive debt, largely secured by overvalued real estate that has collapsed. Emerging economies are permanent and powerful competitors in the world market. An economy that is predicated on people performing services for other people is facing precipitous shrinkage in both their prime target customers (Boomers who were too busy earning money to do things) and the disposable income of all their customers.

These are neither predictions or opinions. They are facts. If you take them into consideration as you plan your business, you can still win. Ignoring them is like pretending that it won’t snow in Russia this winter.

The Battle Plan

We borrow many business terms and vocabulary from the military. One of those is strategy. Roman commanders were discussing strategy 2,000 years before there were corporate “retreats” (another military term that hasn’t fared as well in the translation).

You’ve heard it before, but now it is time to pay attention. Businesses that have written plans are far more successful than those who don’t. Most of the studies done by academia are on “strategic” plans for start-ups, and they show little correlation between the plan and funding.

You are not running a startup. You are running a business with people who need to know what is expected of them. Who need a yardstick to tell them if they are on target or not. Who need to understand when they are supposed to have something done. That is a business plan, not a strategic plan.

Begin with SWOT (Strengths, Weaknesses, Opportunities and Threats.) Strengths and Weaknesses are internal to your organization. Opportunities and Threats are external.

Validate them! If you think your strength is great customer service, survey your customers to see if they agree. If one threat you identify is an industry that is in decline (yours or your customers’), dig through economic or trade association reports to see if it’s true, and by how much.

Now you can set goals for the coming year. How do you develop goals? It’s easy. Think of things that will leverage a strength, fix a weakness, capture an opportunity or eliminate a threat. For example, opening a new market for your labeling machines, which have traditionally sold to bulk mail houses, might come under any of the four. Leverage your expertise in processing (strength), diversify from a customer concentration (weakness), pursue new markets (opportunity) and exit from a failing industry (threat).

Limit your goals to a few (In The Alternative Board we focus on three to five) and make sure they are Specific, Measurable, Attainable, Realistic and Time-sensitive. You are now 90% through the “difficult” part of planning. All that remains is laying out the steps for execution.

In our label machine example, you can easily fill in the blanks. What do you need to do? Understand the other industries that need labeling machines. Find out which one is biggest, or most lucrative, has weak competitors, or would benefit most from your expertise. Get a list of prospects. Test their receptiveness to your product. Roll out a marketing and sales plan.

At any step along the way, you might decide that this isn’t a good idea. That’s the whole point! You move on to the next idea while your competitor continues to knock on the doors of the wrong prospects, or promotes the wrong product. If you fail in a new initiative that was begun on the fly, you seldom know whether it is a bad idea, or whether you abandoned a good idea just because you executed it badly. Goals that are approached step-by-step help you avoid that vagueness, and the wasted resources associated with the lack of a plan.

Battlefield Tactics

With goals you pick the ground you plan to take (or defend). Now you have to deploy the resources to make it happen.

Here I will bow to Sun Tzu, the Chinese warrior who wrote down the basic concepts of battle tactics 2,600 years ago. He gave us the major concepts you need to employ to grow in a flat economy.

“Find out the conditions by comparing five things- the way, the weather, the terrain, the leadership and the discipline.”

The way: Do you have a plan, and do your employees know what it is? Do they know what they are expected to do?

The weather: Watch for competitors who don’t consider the weather. Prepare to flank those who stall or get bogged down. There isn’t enough business for everyone. When a competitor looks weak, focus your efforts on making him weaker. Target his customers, recruit his employees, solicit his vendors. This isn’t a game, and we can’t all win.

The terrain: You know it is going to be flat. That means you are putting your attention towards finding new business and diversification. (An army can take ground with cavalry, but can only hold onto it with infantry.) Let others cut back and wait for things to get better. You can’t economize your way to growth, and they will still be waiting for things to improve when you have moved past them.

The leadership:Your ability to inspire and retain good people is critical. (See last week’s post.) More on that further down.

The discipline: Here is where many entrepreneurs fail. You have to stick to the plan. You will get tired. You will get discouraged. There’s more on his topic in today’s post, as well.

Leading the Troops

Good employees will still be hard to find, and keeping them will be harder. In “Beating the Boomer Bust,” the presentation I give to business owners around the country, I discuss the differing values and motivations of the next generation of management.

You will need to lead all the time. Many of us are accustomed to charging up the hill, and then resting for a while. The pressure will be constant, and resting will find you later trying to make up for lost ground.

Share results, I belive every company should have at least a limited form of open book management. Employees want to know that they are doing a good job, and that their work helps to make your business successful.

Build loyalty. All that “warm and fuzzy” stuff means more to the current generation of workers than to any before them. Recognition needs to be built into the system. Your business will have to be a place where they can grow, even if it means helping them to move on to the next phase of their lives. They aren’t going to stay forever, but they will stay longer if they like what they are doing.

Winning the War

What is your long-term objective? If you are over 50, it is probably a lucrative exit. If you are younger than that, it is growth and financial success.

All of your strategy and tactics need to support the long-term objective. If you are in growth mode, watch competitors for acquisition opportunities. Make acquisition planning a business goal. Talk to your banker and local business brokers to see what it would take to but a company. You might be surprised at how inexpensively a business can be bought from a tired owner with declining profits.

If you are looking for an exit, begin planning how to make your company more attractive than others. It will be a competitive, buyers’ market as the Boomers sell their businesses. You may need to reduce your extra perquisites to improve operating margins. You should know your industry numbers, and how you stack up. You’ll need a stable management team that can function without you.

In fact, I advocate building your own exit strategy, by developing your managers as the next generation of owners. Here is a shameless plug: Check out my exit planning website; The Exit Map® or my book “11 Things You Absolutely Need to Know about Selling Your Business.”

Protecting the General

Did you ever notice how troop formations are arranged to give the maximum protection to the top officers? (Another military-to-business term, there.) There is a reason. Armies have understood for millenia that if the general gets killed, they lose.

You have to protect yourself for the good of your company. If you are working harder than ever before, stop! You need to pace yourself for a long run. If you are saving money by doing the work of three people, stop! You don’t have time to plan, to innovate, and to analyze the world around you. That is far more dangerous than the cost of an extra salary.

Once you accept that things aren’t going back to the way they were, or at least they aren’t for quite some time, then you can start to look at your business with fresh eyes.

Once you understand that doing more of what you used to do won’t change the world around you, you can do something different.

And here is the last piece of good news; the ray of sunshine in all this talk about battles and war. You are a guerilla fighter, the indigenous resistance movement of the business world.

A small business doesn’t have to take over a whole country. You don’t have to protect a long supply line, or defend cities. You get to choose where and when you will fight. You pick the time and the place, execute your plan, win and go home.

And as proven in wars from the American Revolution to Viet Nam, those tactics can work very well for a long, long time. In fact, they can work until the bigger, more powerful and more sophisticated armies give up and go home.

Posted in Exit Planning, Leadership, Thoughts and Opinions | Tagged business as war, business batlle, business planning, business strategy, economy, entrepreneurship, leadership, recession, small business advice, sun tzu | 1 Comment

One Response to Fighting on Level Ground

Al Bellenchia says:

October 17, 2011 at 8:17 am

A terrific conclusion to an informative and important series, John. The case for business planning has never been laid out as clearly or cogently as you have. Bravo.

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Being Brave in a Brave New World

Posted on October 12, 2011 by John F. Dini

In the first three posts in this series I’ve outlined a number of reasons why the American economy is unlikely to grow in the next few years. All of my reasons are factual. The numbers don’t lie, and these numbers can’t be fixed by looser monetary policy, or stimulus bills, or consumer confidence. They will only be cured with time.

One client accused me of trying to “scare” him out of expanding. Nothing could be further from the truth. There is an old trader’s axiom: “When there is blood in the streets, buy real estate.” A moribund economy, weakened competitors, frightened employees, frozen financial markets and demanding customers all offer differing and substantial opportunities.

The SWOT process (Strengths, Weaknesses, Opportunities, Threats) is so effective because it breaks your world into two distinct parts, inside and outside. Then you just have to look at the good and bad parts of each. Strengths and Weaknesses are internal, opportunities and threats are external.

Similarly, we will look at the internal issues, those over which you presumably have some degree of control, in this column. Next week we will finish up with the external opportunities. Your internal challenges are to shore up strengths and reduce weaknesses. They fall into a few key areas: productivity, finance, and employee relationships.

The Productivity Challenge

It sounds trite, but now is a time to be doing more with less. That means using technology instead of man hours. You need to free yourself from day-to-day management duties, and at the same time not create a reporting structure that ties down your employees.

A small business can’t afford staff that doesn’t contribute to revenue. Everyone should be focusing 80% of their time of revenue producing activities. I watched “Gosford Park” the other night. It’s about the contrast between the wealthy British and their servants in the early 20th century. The number of servants in a single household seems astonishing to us today. Cooks, maids, valets, butlers, servers, gardeners, game keepers, and so forth. Just for a few of the nobility.

Fast forward 50 years, when letters were sent down to the typing pool for multiple copies. Scores of your women typing all day long at rooms full of side by side desks. Those days are gone, and it isn’t because of political equality, or gender equality, or mere technology. It’s because no one can afford to pay minimally productive staff any longer.

It is the same in your business. One contracting company I work with has gone from 14 support staff to 6. They still get the work done, but it required an investment in new systems to do it.

Technology doesn’t have to be fancy. For many businesses, simple excel spreadsheets are fine. Since the dawn of the industrial revolution, technology has been about automating repetition. If you perform an activity every day, it is a candidate for automation.

How do you maintain regular contact with customers when you’ve reduced sales staff? Technology. How do you trace who has purchased, who hasn’t, and how much time passed in between? Technology. How do you predict what you need to purchase, or identify when your customer’s buying habits have changed? Technology.

Technology, especially information technology, is what allows your human assets to work more effectively. Teach your staff to look at those electronic things on their desk creatively. They are fast enough to adopt the latest social media, but at work most limit themselves to what the computer is “supposed” to do. If you are going to be as productive as possible, you’ll have to harness their creativity.

Simply let your employees know that additional bodies to share the work aren’t in the plan. Most workers have been indoctrinated to believe that when the work becomes more than they can do in a day, it is time to add more people. In my business, the staff understands that they will never be “caught up.” There is always more work than we can handle. How they manage it and how much of it they process decides their reviews and compensation.

Many small business owners still blanch at the idea of buying a new computer. Do you realize that the average new computer now costs less that ONE WEEK of salary and benefits for the person who operates it? Adding new software, additional monitors and faster systems are usually the cheapest productivity enhancer you can find.

The Cash Challenge

Finance challenges are going to be pretty simple to describe. If you don’t need money, there will be plenty. If you need a loan, you won’t qualify for one.

“So what else is new?” you may be saying. True enough, but expect it to be worse than just the typical conservative banking policies. Defaulting real estate, both residential and commercial is combining with strengthened equity ratio requirements to keep lending difficult. Just as the credit markets were ridiculously overheated though the 20-aughts, so they will be in the deep freeze for most of the 20-teens.

When credit is tight, cash isn’t king; it’s a demigod. The ability to pay quickly is a great negotiating tool, and for product based businesses there will be bargains galore. Closeouts and bankruptcies are happy hunting grounds for those with a fat wallet.

In service businesses, acquisitions both due to financial distress as well as due to retiring Boomers will be widely available. We’ll talk more about these in external opportunities.

Suffice to say that cash is a good thing. More cash is better thing. Tons of cash is a great thing. Too much cash is a nonexistent thing. Point made.

The Employee Challenge

Technology and global competition are eroding American society’s economic middle class. A faltering education system and shifting generational values are eroding the “middle class” of workers in your business. The dichotomy between the talented employees you want and those you don’t is growing, and everyone else wants the talented ones as well.

The unemployed workers without a college education outnumber those who have a degree by almost four to one, as a proportion of their numbers. As firms focus on getting and keeping employees who can be more productive (and more dependable) in a technological environment, their availability will decrease. At the same time, the number of applicants for every opening should increase.

Your first employee challenge will be hiring the right players. If you aren’t currently testing for both skills and behaviors, it is time to start. Business owners seem to have an innate belief that they can judge character and ability by talking to someone. Nothing is further from the truth. Develop a comprehensive, step-by-step screening and hiring process. With a larger percentage of underqualified people pursuing positions, your odds of taking on someone who is more glib than talented increase dramatically.

The second employee challenge is training. Going strictly with OTJ just doesn’t cut it anymore. Employees have to be ramped up to productivity faster, and any investment you make in training is insignificant when compared to the benefits it returns. Training is perceived by most workers as a benefit. They understand that you are investing in them, and appreciate it. If they don’t, you made the wrong hire.

With fewer employees, requiring greater skills and doing more work, retention becomes critical. You will compete with both other business owners and large corporations for the best, and you can’t afford the luxury of second best. Keeping employees as a top priority may seem counter-intuitive in a time of high unemployment, but it will be critical. Don’t fall into the trap of thinking that just because there are a lot of folks looking for work, there will be a commensurate proportion of good ones to select from.

All these internal challenges lead to the single inescapable strategy. In a flat market, the only way to grow your revenue is to take it from someone else. That will be the focus of our next discussion.

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Changes in the new landscape

Posted on October 2, 2011 by John F. Dini

Last week we talked about an economy where we can expect things to stay flat, or at least feel like they are flat, for a long time. The ageing Boomers, a long recovery in real estate and construction, shrinking government spending, weakness in the financial markets and increasing global competition will prevent anything like former fast recoveries for the forseeable future.

What does that mean for the business climate? It’s one thing to say that things will be flat, but another to translate “flat” into day-to-day operating examples. What can we expect to be different in the next few years from what we were accustomed to before 2007?

Integrity and Loyalty

In a recent keynote speech in San Diego, Frank Abagnale , the subject of “Catch Me if You Can” reportedly announced that “Integrity in business is gone.” With 40 years as a consultant on fraud prevention in business, he is probably in a position to know. What does that mean in the course of normal business transactions?

Most business owners, or at least those whose companies are still profitable, have have made some difficult decisions in the past four years. Employees who were merely “good enough” in good times had to be let go. Vendors relationships based on friendship and service were replaced for ones based on price. Customers for whom they went the extra mile “just because we like them” were told that their level of service would be based only on what they paid for.

My friend, and a brilliant consultant now retired, George Dawson once told me something typically smart and insightful. “I stopped helping business owners who were in deep trouble,” he said. “I realized that a desperate owner would stoop to doing anything to anyone to save his business, and that included screwing the guy who was helping him.”

We’ve all become more aware of customers who represent a danger to us. We don’t have the slack to carry them longer, “in case they turn it around.” To the person who dealt with you for years, getting cut off may appear to be a lack on integrity on your part. To you, it is simply about the survival of your business.

I’ve seen several cases lately of businesses that found a way to save their customer a substantial amount of money. They added value by their expertise, only to have the customer take the idea to another vendor who lacked that expertise, but would cut the price even further using the improvements. That certainly seems like an integrity issue to me, but maybe it didn’t seem that way to the customer.

Many companies, especially larger players who patronize smaller businesses, have used the recession to change terms unilaterally. I know scores of owners who have received notices that account terms of “net 30 days” would now be paid in 60 days, or even 90. Scores more received notices that the prices previously agreed to had to be reduced, or else the relationship would be dropped. Is changing agreed-upon terms a lack of integrity, or just hard-nosed business? The first few times it happens, it seem to be the former. After a while, we start to accept it as the latter.

Whether the changes in business relationships are a matter of a lack of integrity or a lack of trust, the result is the same. If you experience a lack of integrity from several customers or vendors, then new customers and vendors will be approached with less trust. It is self-fulfilling.

Pricing and Profits

I saw a sign in a snack bar last week. It said “We apologize for our price changes due to the cost of beef.” Most people won’t change their habits over a quarter increase in a hamburger, but world demand and monetary policies are inflating raw materials and commodities at an increasing pace.

Yet most small business are reluctant to increase prices. Customers are more inclined than ever to switch vendors. The Internet has given us a worldwide price exchange, available in minutes to anyone. Business owners complain constantly that their customers compare everything online; the “Google Effect.” Their standard response is “Online vendors can’t supply the service that we do.” That may be true, but a customer looking to eke out a few more points of margin this month isn’t looking down the road to long-term benefits.

On the other hand, a substantial minority of our clients had record years for profitability in 2009 and 2010. They watched costs like never before, and focused on customers or markets that maximized their returns. A few were frankly surprised at how much profit was available in their businesses. Those clients aren’t going back to the old ways. They will continue to watch every expense with an eagle eye. Any price increases to them will trigger a review of the entire relationship.

Increased competition from Asia is a factor that is huge, and can’t be fully addressed here. Whether it is outsourcing an executive secretary with an Oxford accent in Mumbai, or fabricating steel without environmental compliance costs in Huangchuan, the world is simply more competitive than it was 10 years ago.

The last factor I need to address in this section is speed of decisions. Customers are simply more reluctant to pull the trigger. When they were booming, it was more important to get what you needed, when you needed it, than it was to pay the very best price. Going back to last week’s column, when things are flat you can see a long way. It’s like driving in the desert. You have a long time to make decisions. (“Giant Ball of String- Only 153 miles!)

Customers have discovered the advantages of waiting. Maybe the price will go down. Maybe a better model will come out. Maybe my business will dip, and I won’t need it anyway. Maybe I should wait until next year. Maybe I should wait until it breaks.

Your sales process will have to be broadened to take timing into consideration. It’s no longer sufficient to explain the features and benefits of using your product. You need to explain the benefits of using it now.

Employees

The third major change has been in employee relationships. For thousands of small business, the old standby “We are like a family- we take care of our employees,” was left as roadkill in the last few years.

Small businesses cut pay, cut benefits, and cut bodies. In a buyer’s market for employment, they found that their people would sit still for a lot more than the owners thought they would.

Our high unemployment numbers are astonishing, and will remain so for a long time to come. Gallup Polls don’t “adjust” for seasonality, major layoffs or the other things that the Federal government uses to make the numbers more palatable. They simply ask if someone is looking for work, or looking for more work than they are able to find. That number remains at over 18% of the workforce.

But unemployment is also seeing the effects of the Gini Coefficient (see last post) on separation between the highest and lowest segments of the population. Drilling down into the unemployment figures shows that this recession hasn’t impacted the educated, experienced or skilled workers nearly as much as it has those who lack those attributes. It has been brutal on construction workers, white-collar administrators, entry-level service employees, and new graduates.

Employers are accomplishing more with fewer people, but that has a corollary. It means that each person is more important to the business than before. In small companies, cross-training has always been an ideal seldom fully implemented in reality. With less time, and more work, you’ll have structural tension between two forces.

For every new job, you will have more choices of applicants. But every job now requires someone who can perform at a higher level, do more things, and act with less supervision. You can no longer afford to hire three people to do the work of two. In reality, you are looking for one person who can do the work of two. That person is still hard to find.

Good employees will get over the headlines about unemployment soon. They are beginning to realize that they play a bigger role than ever in the company’s success, and that their contributions are worth compensation. Employers will learn that the headlines about how easy it is to find employees don’t mean great employees, they are just body counts.

The New Order

If it sounds like all this makes doing business more difficult, don’t despair. It does make doing business the way you used to do it harder or impossible. It does require new thinking, and a return to some old thinking.

The first three columns in this series were to set the table of expectations. I may be myopic, but I think what I see is, by and large, what our situation looks like. Next week, we start talking about how to win in this brave (and frightening) new environment.

Posted in Thoughts and Opinions | Tagged business strategy, economy, employees, small business advice | 1 Comment

One Response to Changes in the new landscape

Marshall Hatfield says:

October 11, 2011 at 8:59 pm

John,

Your assessment – and Frank Abagnale’s – is right on according to my own experiences as well.

I’ve thought about the issues of business integrity & client loyalty (or lack thereof) my entire career … and rarely found either to be often present.

The prevalence of scams & frauds – especially in the service economy boom of the late-90’s / early-2000’s – has taken its tole on trust in the global market place & in business at all levels. As a Los Angeles resident, I have fast seen the majority of locally advertised business services devolve into nothing more than white collar crime. It is truly depressing.

Looking forward to your upcoming posts on the topic.

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“When everything is flat, you can see a long way.”

Posted on September 25, 2011 by John F. Dini

That statement was made by Van Palmer of Palmer Technology Systems after a lengthy discussion about economic trends. It perfectly describes why we should be positioning our businesses differently from how we did it at the end of previous recessions.

Since World War II, the United States has enjoyed a growing number of working adults as a percentage of the population. This was an effect of both the baby boom, which added 58% to the US population in only 20 years, and the baby bust, the trough in birthrates that kept the number of children at a relatively low level through the 70’s and 80’s.

A rising tide lifts all boats. (I don’t know who first said that.) When the number of workers in a society is expanding relative to the economy as a whole, everyone prospers. One major reason for America’s rise to dominance in the 195o’s and 60’s was that our economy was relatively intact after World War II, and it outpaced those in Europe that were rebuilding from the war.

Have you noticed how many economic comparisons include the term “World War II?” The worse recession since WWII. The highest deficit since WWII. The longest sustained unemployment since WWII. That is because the last 60 years have been fueled by the Baby Boom. Each recession, or “correction” as we became fond of calling them, was followed by a new period of sustained growth.

The Boomers are the pig in the python of American history. (see my website www.theboomerbust.com ) As they age, they will once more transform the basic underpinnings of the US economy. Will it be better? Not for those who build their business plans on assumptions of inevitable growth. Will there be opportunities? Absolutely.

That’s why I am undertaking this series on positioning your business to compete in a flat economy. It’s not because I’m a doom and gloom kind of guy. I’m not. But I do think that things have changed in the overall landscape of American small business. Those who recognize that change and adapt to it will do much better than those who don’t.

The rest of this column is going to list the reasons why we will be in this type of economy for quite some time. I believe it is like gravity. It’s there, and you have to deal with it. If reading this stuff depresses you, then skip it and wait for my next column. I feel that it is necessary to set the table for the thoughts on winning in this environment that will follow.

Inflation and Unemployment

I’m not going to spend a lot of time on how the government has continually shifted the statistics to make them look better. Sometimes it makes me think of the old Soviet 5-year plans. Suffice to say that the U-6 unemployment rate, which includes people who have given up looking for work and those who are working part-time because they can get nothing else, stands at 16.2%. Many of the lost jobs are in finance and construction.

One analyst told me two weeks ago that using 1983 government standards of measurement, our inflation rate currently approaches 10%. I don’t know how he calculates that, but anyone who goes to the supermarket knows that the rate isn’t as low as the Feds say it is.

In finance, high employment was driven by the trading and debt bubble. At one point in the mid 2000’s financial companies accounted for 25% of the market value of the Dow. That was an anomaly, and we will not return to those levels in the forseeable future.

Construction is the largest single employer in our economy. The collapse of the real estate bubble, combined with restricted Federal and state budgets, doesn’t promise millions of new construction jobs any time soon.

There are other factors, including the Gini Coefficient (named for the Italian statistician), that measures the increasing shrinkage in the middle class, largely due to technology. Relatively low-skilled, high-wage jobs in office work and manufacturing are being disproportionately impacted by technological advances in productivity. Suffice to say that we can expect unemployment to be a continued drag on our markets for some time to come.

As an employer, we can expect more candidates for some jobs, and reduced expectations about what employers have to provide. That will take some regional evening-out, as many middle class workers are still chained to their devalued homes. It will happen eventually, although technical skills and sciences will remain in short supply.

Real Estate

Housing prices in many areas of the country have fallen by almost 50%. Assuming we return to more normal patterns of growth, that should increase by something like 4% to 5% annually. In the absence of another boom, that means it will take 7-10 years to clear out the negative equity and bad loans in the system.

As I noted in 2009, the amount of retail space built during the boom almost doubled square footage per capita between the late 1980’s and 2008. That was a function of easy money, both to build and for the consumers who bought on credit. This, too, is a market that will take some time before demand catches up with capacity.

Of course, if your company is growing and you need space, it will be a good time to shop.

Government Spending and Deficits.

Many people have campaigned for the end of the wars in Afghanistan and Iraq as wasteful and contributing to the deficit. Regardless of your political opinion, winding down the wars is shrinking spending on materials and services by several billion dollars a week.In the long run, getting the country on a sound economic footing is a necessity. In the short run, it will be painful.

Similarly, shrinking the government payroll is a favorite bugaboo of conservatives. The average Federal employee now makes more than the average private sector employee. Those employees, however, are also the epitome of middle class white collar workers. They eat in restaurants, buy new cars and have their clothes dry cleaned. Reducing that workforce will add to the pressures on the job market and consumer spending.

South America, Asia and Africa

The emerging economies and their increasingly prosperous workforces represent new markets. In many cases, they have become new markets for each other. China’s trade with South America will surpass its trade with the US this year. Much of what was formerly termed the “third world” is humming along without much help from us.

We will remain the wealthiest market in the world for at least the rest of my lifetime. China’s economy will inevitably outgrow ours, but it will still be spread over nearly 5 times as many people.

That doesn’t mean every small business in America has to become an exporter. There will be plenty of opportunity domestically. It does mean that we will have to be cognizant of new competition in almost every industry.

The Ageing Population

Back to the Baby Boomers again. As the largest generation in American history retires, there will be slower growth in the workforce (an issue in the Southern Mediterranean countries right now). Unless major steps are taken, and Obamacare did not take those steps, health care will become a major inflationary force, and draw from other areas of the economy.

The head of the S&P Sovereign Debt Rating bureau was questioned a few weeks ago about the lowering of US debt from AAA to AA+. He said that the average time for a first world nation (Canada, Finland, Australia) to regain their prime rating after a reduction was between 7 and 14 years. When asked if the US would have to wait that long, he ducked the question by answering “People have to realize that this country’s demographic peak was ten years ago.”

That demographic peak was the Boomer generation all between the ages of 35 and 55, their top of the productivity curve.

The recessions of 1973, 1981, 1990, and 2001 were all followed by periods of rapid growth. Part of that was technical. Financial recession like the ones in 1929 and 1937 take longer to recover from. Part of those recoveries were due to the Boomers driving increased productivity and consumption.

No country has ever seen as large a percentage of their population in active retirement as we will experience. The Boomers are relatively healthy, and have $10,000,000,000,000 (that’s trillion) in assets. Their productivity will be missed in the workforce, but some of that should be offset by their spending.

The ageing Boomers have changed the business landscape. They have driven cosmetic surgery, health clubs, vitamins, pharmaceuticals, athletic clothing, diet plans, work out videos, and high-end equipment from bicycles to running shoes.

How their spending will impact the economy of the next 15 years isn’t clear, but it is certain that they won’t be their previous, depression-scarred parents. They are not going to sit home and hoard their savings. The Boomers will continue to spend.

Gravity

There are a lot of other things on the doom and gloom front that the media will keep reminding us of. We will continue to deal with bank failures, a flood of mortgage foreclosures, default in Europe, and a debt hangover. These will all eventually be addressed, and we will work through them.

You can see a long way when things are flat, and we can look forward quite a distance. My point isn’t that this is the end of the world as we know it. I’m just saying that the business environment of the next 7 to 10 years will look a lot like it does right now. The problems we are dealing with can’t be disposed of in a year or two, regardless of how much we would like them to be gone.

We have one more area to discuss before we get to strategies for thriving in a flat economic environment. That is to recognize how our way of doing business is changing. Just as assumptions of inevitable growth are outdated, so may of our beliefs about customer relationships, value pricing and efficiency have to be adjusted. That will be next week.

Posted in Exit Planning, Thoughts and Opinions | 2 Comments

2 Responses to “When everything is flat, you can see a long way.”

Brad Elmhorst says:

September 28, 2011 at 8:12 am

Well stated…also check out the article about health care in today’s Express News showing how government intervention increases costs. Regardless of Texas’ high rate of uninsured, where is the investigative reporting of who has been denied coverage or service if they applied for it? Perhaps a portion of the Texas population has made a decision to not have coverage, in the same manner that my employees can opt-out of coverage offered by the company. Health insurance will become the new ‘company car’, a perk that was once offered (driving the auto industry to new heights in the 70’s & 80’s), but no longer offered by many companies. It has been eliminated or reduced to mileage reimbursement or if you are lucky a car allowance.

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Todd Marquardt says:

September 28, 2011 at 9:18 am

I get it. We should adapt. How do you suggest we adapt?

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