As anyone who runs a publicly-traded company quickly learns, the markets are insatiable. Double-digit growth, year after year, without fail is a price of admission; succeed at that, and it becomes increasing the rate of growth of your growth. (Since the actual game is to get to the point where the stock can be hammered down to create a “buying opportunity” by shaking out “the weak hands”, the investment community has less concern than you might think about the irrationality of ever-increasing growth.)
Still, we bias everything toward the notion of growth. A “zero growth” budget is one that covers price and labour cost increases, with maybe a little left over. Yet we, as a business, need growth simply to hit the zero mark. A true “flat year”, without growth, is felt as a serious cutback. A fall in income leads to slashing and burning. Our zero point is not set at zero.
Nor can it be, when the underlying policy bias is a gentle increase in the money supply (not that the recent changes in the money supply and debt in most countries have been anything but gentle).
Still, we need to recognize that a constellation of factors are coming together to suggest that growth, in at least North America and Western Europe, might be hard to come by. The excess demand for energy over available easy supply is one reason that growth may be curtailed: growth needs energy. Another is the over-expansion of consumer debt and poor savings rates, forcing retrenchment in spending in economies led by consumer activity. A third is that, frankly, Western societies are essentially low demand: when people “below the poverty line” have viable cars, televisions, etc. the distribution of goods has been reasonably extensive. Desire might not end, but it can abate — and with it, growth.
We are therefore going to face one or more operating geographies that, at best, are “flat” (defined as, at best, low single digit growth). The challenge facing the business will therefore be best use of resources: the cost of capital will be extremely high in real terms (access, effective rates) as the credit markets continue their journey back toward equilibrium, and the reduction in demand will be deflationary in any event (even though prices of commodities in short supply, or in contention for resources due to that, will see price increases). Jurisdictions facing revenue shortfalls will likewise raise taxes and fees, adding increased cost pressure there, and on customers. A coherent program of managing cost will be required.
But this cannot be simple-minded. This time, the conditions may hold in this configuration for a decade or more: this is not a matter of simply tightening across the board, deferring projects for a year or two, and coming out the other side. No, we are going to have to manage in a deflationary environment, where cash is king, and the ability to generate conservable cash is significant — yet investment will have to be made. Think Japan in the 1990s and the picture comes clear.
The managerial task looks something like this: “what should we change” comes coupled with “what do we give up to get there” (and the person who says either “we can’t give anything up” or “nothing needs to change” is someone who needs to be educated!), and managers need to know that this is no longer about “empires”, but about making choices. The ones who are better at seeing this imperative and responding appropriately are also the ones more likely to take capital that you make available and turn it into profits by stripping out activity, finding less expensive ways to do repetitive tasks, and getting more done for the same effort.
What this suggests to us is that, in amongst the business cases and prioritization of the activity you are willing to take on, it’s important to pay attention to character and understanding on the part of those who want to be funded. The big payoff is probably suspect — where will the general growth come to make that possible in something closer to a zero-sum game? — but the right man or woman will deliver, and that is what will matter.
Those who build a culture of this sort will find themselves more than covering their capital formation needs, moving forward smartly into such opportunities as present themselves, and continuing to generate the results needed to sustain the firm, even if, on the income statement, the revenue lines look flat — and they’ll do it without crippling the business for the future.