The Return of Growth?

In my travels I have talked to many entrepreneurs who are standing pat, and waiting for the economy to start growing again. Our expectations may be somewhat distorted. Between 1991 and 2011, the U.S Gross National Product increased between 2-6% in every year (with the exception of 2009 and 2010)[i].  An economy growing at only 2% feels entirely inadequate, even though it presents a meager statistical difference from a booming economy, where we perceive consumers and businesses to be spending more freely.

Entrepreneurs tend to follow the business news with fascination, looking for any possible insight as to the pace of economic growth. Economic news has become a crutch; it is the rally cry when results are good, and the excuse when they disappoint. The opportunity is to create companies that are resilient and relevant, regardless of economic and industry conditions. In most businesses, the value proposition must be dynamic (and not static) because the status quo is an economy flattened like a pancake.  Most of the time, the benefits that won business 3 years ago, will not be the same ones that will resonate 3 years from now.

Clearly, some sectors of the economy (such as technology and finance) are heating up.  Yet, any objective view of the economy should temper enthusiasm. The European economy contracted in the last quarter, 25% of U.S. mortgages are still under water and depressed wages (and unemployment) hinder the middle class from participating in any recovery. We as business leaders can not act as victims to these circumstances.

Further, a single economic cycle is something of a misnomer.  Industry demand is affected by a myriad of factors including the economic cycle, monetary cycle, the industry life cycle and company life cycle.  Conflicting reports about the economy create confusion and fear, and much of our sentiment about the economy is irrational.

U.S. history is riddled with periods of growth and decline steered by the mood of the nation. After the panic and fear of the Great Depression, the U.S. settled into a period of profound optimism and growth. With scant warning, the JFK assassination inflicted a deep wound, a precursor to two decades of violence and the crisis in Iran.  On the heels of the U.S. Hockey Team Gold medal in 1980, Ronald Regan proclaimed it was “’morning in America”[ii]. In the ensuing decade, the Dow Jones Industrial Average increased by a value of 8 times. Our human tendency is to overact to stimuli in the form of euphoria or despair.

It is time for businesses to plan for growth independent of the momentum of the overall economy. In many sectors, the loss of pricing power, and margin erosion are not a result of the economic cycle. The confluence of Moore’s Law, globalization and hyper-competition has permanently altered the competitive landscape. Instead of waiting for a fundamental shift in the economy, entrepreneurs should recognize the structural changes in our economic ecosystem, and take advantage of them.

For example, a recent study suggests that the rate of change in technology is escalating faster than Moore’s Law (Gordon Moore’s theory that processing speed would double every two years while prices decline)[iii]. This trend has profound implications for markets, as the rate of technology change is directly linked to the race to the bottom (commoditization).  It is probable that pricing power will deteriorate further, requiring that companies fight to demonstrate their value and better leverage the technological advances that are changing the way we live and work. .”Big Data” will enable companies to mine data and integrate systems in ways that were inconceivable just 2-3 years ago.

The businesses that are succeeding today (clearly Vistage members are outpacing the market) are not satisfied with the status quo, and are retooling their value propositions. For companies who may have been spoiled by annual price increases in the past, growth will not come through traditional means. Companies will have to manufacture growth by taking share, doing something new, or acquiring businesses in other sectors. When revenue and margin are eroding, and there is not a clear strategic impetus to reverse the trend, it is incumbent on the entrepreneur to make bold moves.

These principles may sound familiar, but the economic malaise may provide newfound motivation for entrepreneurs to seek transformational investments.  The dilemma for many businesses is the specter of new investments into new products and services, not knowing how much demand there will be. Perhaps business owners can take solace in knowing that developing new business or attacking adjacent markets is enabled by lower marketing costs, and access to tools such as e-Commerce.

While U.S. earnings are strong, public companies are clearly far more reliant on revenue and profit from their operations oversees. As they ran out of runway, many looked for new markets to exploit, and small companies will need to do the same.

Of course every business is different, some are still growing and others are looking for answers. Regardless of a company’s rate of growth, entrepreneurs should not just wait out a fundamental shift in the economy, because it may not come for many years. Be bold, the future of your business may rely on it.

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