Sometime in early 2008, before the financial system completely broke down, The Boston Consulting Group's David Rhodes and Daniel Stelter were working on a series of whitepapers calling for ways to navigate the challenging financial future. After gaining some traction within their own firm, the two were convinced they had hit a nerve after they watched Lehman Brothers and Bear Sterns collapse in the fall of that same year. Those "Collateral Damage" whitepapers came to be the book Accelerating Out of the Great Recession—How to Win in a Slow-Growth Economy . Rhodes recently sat down recently with Consulting to discuss the book, the economy, his clients and where we go from here.
Consulting: How did you get from a series of white papers to this book?
David Rhodes: Daniel and I were together in China before the collapse of Lehman Brothers, and we both agreed that things were going to be worse, and last longer, than most people were saying. We thought we should put together a point-a-view for our own colleagues, and as we were in the process of writing it, Lehman fell apart—that convinced us even more. We wrote something for internal use first and people started asking if they could share it externally. We got great feedback from colleagues, and we knew we were on to something so we continued writing. At some point in the process, Daniel had the idea to write a book. I supported it, and a publisher got involved and that was it—the book was written.
Consulting: What were your main objectives in writing this book?
Rhodes: We had two objectives, really: One, was to counter the overly optimistic perceptions of a "V" shaped recession; and two, to stop all the hand-ringing and be very practical as to what companies should do to protect their business and then take advantage of what we thought would be prolonged tough times. We took a look at previous downturns and looked at what companies had done to prosper in those times.
Consulting: How bad is it?
Rhodes: We argue in the book—and continue to argue—that we are headed to a period of slow growth, at least in the West. It's empirically true that after great recessions synchronized with systemic financial stress, the recessions are deeper and the recovery is slower. It's so easy to make it sound like doomsday. It's not like there will be no growth, but slow growth and that has its own consequences for companies.
In slow-growth worlds, the competitive intensity increases dramatically because you move in a world were a company can grow by moving with the market to a world where the company has to gain share to grow. In the book, we look at three periods—the Great Depression, the U.S. Period of Stagflation in the 1970s and the Japanese Lost Decade. Many companies excelled in each of those periods. We point out what they did and why they succeeded.
Consulting: What can companies do to counteract this slow growth period?
Rhodes: The key lesson to me is that while everyone else was sitting around and waiting to see what would happen, plenty of companies took a view—and having first secured their financial fundamentals—they pursued strategies that allowed them to build their business, grow share and take market. It was decisive leadership and a willingness to act. In tough times, companies can prosper by taking the initiative.
When times are tough, most CFOs cut marketing, R&D and the investment budget. When everybody was cutting back on advertising during the Great Depression, Procter & Gamble continued to spend. Share of voice becomes easier to get at lower costs. Procter & Gamble launched soap operas during the Great Depression, and they built market share. Spending when other companies can't gets you more bang for your buck. In good times, the airwaves are more cluttered and it's more expensive. Procter & Gamble launched or bought more brands during the Great Depression than in the ten years before or after it.
Consulting: The book provides plenty of success stories. What are some that stand out?
Rhodes: Well, there was Dupont during the Great Depression. It re-oriented the R&D pipeline to produce products that would have near return commercial impact. Dupont developed Neoprene and Nylon during the Great Depression. IBM anticipated that in difficult times companies would need accounting machines, so they continued to invest in accounting machines, which they sold in large quantities during the Great Depression. And they anticipated the New Deal and counted on government having huge demand for these machines.
General Electric kept its R&D up during the Great depression and developed the refrigerator, the vacuum cleaner and the washing machine. If you've got what a consumer wants, they'll find the money. The same is true, by the way, with Sony electronics last decade and Apple today. And during the American stagflation period, Burger King cut back it's restaurant openings to 200 a year, while McDonalds maintained 500 a year. By the end of that period, McDonalds had won the hamburger war.
Consulting: Is that more difficult today with companies under pressure to drive constant revenue because of quarterly results?
Rhodes: Yes, the tyranny of corporate earnings has a real downside. The upside is it helps to maintain discipline, but the downside is that you're always trying to manage to next quarter's numbers. We did a survey about a year ago of investors, and they were saying they understood times were tough and they needed to build for the future. That message, unfortunately, is getting diluted and the perception is that the worst is over, and I think we're back to trying to make next quarter's numbers. I think a whole bunch of people potentially didn't act early enough to the downturn because while the bubble was still inflating, even management felt there was cause for concern and didn't dare take action because they would've underperformed their peers for a period. It's like [former CEO of Citi Group] Chuck Prince said, 'while the music keeps playing you ought to keep dancing.'
Consulting: What will make the difference this time around?
Rhodes: I often tell companies not to look for a magic bullet. The strategic elements are timeless. It's about securing the financial fundamentals, getting the cost-base right, negotiating with suppliers… all those things remains. Then it's about decisive leadership and the decisions that are made to not slash advertising and R&D. It's about recognizing that three-year R&D projects take three years. Smart companies don't mortgage the future just to deliver earnings this quarter. It's about taking advantage of the situation. For instance, if you're company relies heavily on IT, last year would've been a good time to invest because IT resources were more plentiful and cheaper. Also, look where government is spending. Look for fiscal stimulus opportunities. And, finally, through all great periods of recession the thing that spurs the next great wave of growth is innovation.
Consulting: Speaking of government spending and stimulus… what's your feeling on the U.S. response? How'd we do?
Rhodes: It still remains to be seen if the U.S. has done a good job. The Fed has poured money into the economy, and the government poured in fiscal stimulus. Jobs were lost at a very high rate—the underlying rate of unemployment in the United States is closer to 17 percent and not the 9.7 percent. That takes into account the people working part-time who would like to work full-time etc. The fiscal stimulus and the monetary easing have arguably nearly displaced in time the consequences of the downturn because we're not at a point where consumers have regained a lot of confidence.
Part of the reason for that is that we have a bit of a jobless upturn at the moment. You have a consumer base that is saving more, paying down debt and is worried about jobs, retirement and asset prices. There are 11 million U.S. households that are in negative equity. So, it would be premature to claim victory of any sort. Should the government pat itself on the back? Well, the government contributed to the mess in the first place. Low-interest rates after the dot-com boom, when we should have been in recession, also delayed it. Allowing loose regulation and rules around leverage for consumers, and it wasn't just the banks that were greedy. The U.S. government had an interest in growth; it plays well in the voting booth.
In two years time, President Obama will be seeking re-election, and he'll trumpet healthcare as an achievement, but that won't look very good if the underlying rate of unemployment is 16 to 17 percent, and we're only growing 1 percent a year while China is growing at 8 percent. Exporting American prosperity to China probably wouldn't play well in the voting booth.
Consulting: Where are we today as far as the global economy?
Rhodes: We're in something of a two-speed world at the moment. In the fast lane we have Asia. Even Asian countries with high budget deficits like Malaysia are still only at 45 or 50 percent debt to GDP. The debt levels are low and the banks are well capitalized. They have high deposits-to-loan ratios because the Asian governments learned from the 1998-99 crisis. They are much more conservative; they have a growing population; they have pent-up demand. The real question is how long can Asia continue to grow. China's been growing off the back of exports and much of that is the United States.
In Europe and the U.S., the debt levels make it harder to stimulate investment. You've also got unfavorable demographics, unfavorable unemployment, high personal debt, high government debt and pending Social Security problems. Those all limit the room to maneuver.
Consulting: What do you see as the major economic themes of the future?
Rhodes: In the last chapter, we talk about the 'new capitalism.' I think there's a new capitalism emerging. This might not be true in America, but the view from Europe and Asia is that Anglo-Saxon capitalism has failed. We need to have compensation that is linked to long-term performance of a company and boards that fully understand the business of a company and hold management accountable.
There's a question in my mind about whether the globalization model will disadvantage mature companies in the West. First, the model was to manufacture products in the West and sell them in emerging markets. Then it was the labor arbitrage, which was about Western companies manufacturing abroad to sell back at home. Then it was manufacture abroad to sell abroad. Now, we have the latest twist, home-grown companies from rapidly developing economies manufacturing at home and shipping back to the West.
There's a real fear that western economies will get caught in a job squeeze, where they've exported the low-value-added jobs, but the high-tech jobs are being snapped up by companies in the emerging markets. That links into this idea of protectionism and government intervention. This is part of the new form of capitalism. Governments feel empowered after decades of pushing back the boundaries of the state. Now, the feeling is that private companies couldn't be trusted. This concept of a 'new capitalism' is going to be a major factor in the future.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.