Recession Survival: Industry Contagion, Structural Change and Business Strategy


Structural Change

My last two entries introduced the challenge of structural change. I have drawn attention to the fact that recessions don’t just mean a period of economic contraction, they also bring the prospect of economic restructuring. And economic restructuring has fundamental implications for business strategy.

I used financial services in the UK as my example. To recap, in the late 1970s manufacturing employed over 25% of the workforce. This figure is now around 10% (and reports are that it will now take a further hammering). Fortunately, financial services came to the rescue in the 1980s and created jobs that swelled this sector to take eventually 21% of the workforce – up from 10% in the late 1970s.

That was good then.

But having an economy dominated by financial services could be bad now.

I have already pointed in earlier posts to at least two reasons why financial services won’t bounce back. One of these is regulation. It is clear from the action plan that emerged from November’s inaugural G20 summit that the blame for the current recession is being laid squarely at the feet of the financial services sectors of the world’s advanced economies. The G20 action plan focuses upon establishing a global regulatory framework that will prevent another financial services led implosion. And that regulation may restrict innovation and therefore future sector growth prospects.

But this leads us to another problem. And it’s particularly a UK problem.

I have been considering for about two years now the long-term viability of services led economies. My theory is that as manufacturing drifted towards the emerged and emerging economies so eventually would services. Indeed, there is the argument that entry barriers to services would fall as the educational capability of the newly emerged economies increased. Certainly, there is evidence that the newly emerged economies, and China in particular, will focus upon developing its own service sector capabilities to swell indigenous employment. In so doing it is reasonable for it to acquire, through acquisition, the intellectual knowledge held in the advanced economies. And as we have learnt through financial services offshoring, employees do not necessarily have to be located within the countries where the service is delivered.  These factors could dampen the resurgence, from an employment perspective, of financial services in the UK and other advanced economies.

Now, there is a related message from others calling for first order macroeconomic adjustment in the UK[1]. Broadly, the view is that financial services based economies are just too volatile. Essentially, to ensure stability the advanced economies should go back to the past and focus on re-establishing manufacturing, retail and healthcare sectors. Interestingly, some quarters[2] are calling upon President-elect Obama to move resources out of financial services into the “real” sectors of technology and manufacturing.

Industrial Contagion

Whether of not we see this type of economic restructuring depends upon a number of factors, one of the most important of which I will refer to as industrial contagion. By industrial contagion I mean the appearance of the corporate liquidity domino effect – the need for nationally funded corporate bail outs spreading from banking and financial services into other industry sectors.

And there is of course one sector already on the brink -automobile manufacturers and their component suppliers. If the support announced and mooted over the three days 19 21 December fails to stop the big US auto manufacturers collapsing (or only ensures a slow lingering death) then the whole question of the industrial structure of advanced economies will come under the main spotlight. For collapse of the big auto manufacturers in the US will bring almost unprecedented levels of human suffering in the US and beyond.

Over 3m unemployed and unemployment in some US states being pushed up by nearly 9%[3].

This is the type of event that can, and probably will, redefine both industry structures and the role of private enterprise in society.

So industry contagion is a leading indicator of structural change in advanced economies and, regrettably, the appearance of and “L” shaped, and not as hoped for a short-lived “V” shaped downturn.

Business Strategy

What has this to do with business strategy?

Everything probably.

It means that if we do enter an “L” shaped recession when we come out of it chances are that your target customers – whether consumer or business – will look and behave completely differently.

This could also herald an era where the balance of power starts to shift away from the boardroom towards governments, regulators and of course the new shareholder, the public.

It may also bring to end the view that businesses should be driven just to maximise shareholder value. It seems likely that contribution to a broader social agenda will sit alongside profit generation in organisations future balanced scorecards.

Therefore, we should now be using industry contagion not just to judge the shape of the downturn but more importantly how capitalism could change.

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Information Sources

[1] S. Johnson, P. Boone, and J. Kwak, “Get Ready for an L-Shaped Slump,”

Peterson Institute: Real Time Economic Issues Watch, Dec. 2008;

http://www.petersoninstitute.org/realtime/?p=330.

[2] P. Boone, S. Johnson, and J. Kwak, “Op-ed: An Economic Strategy for Mr.

Obama,” Peterson Institute, Nov. 2008;

http://www.petersoninstitute.org/publications/opeds/oped.cfm?ResearchID=1046.

[3] R. Scott, “Automaker bankruptcies would cost up to 3.3 million U.S. jobs,”

Economic Policy Institute, Dec. 2008;

http://www.epi.org/content.cfm/webfeatures_snapshots_20081217.