What Happens When’s There’s No Growth to Manage

October 6, 2012 Editor 0

The 1980s and 1990s was an unprecedented period of economic expansion in the United States. America doubled down on a strategy of suburbs, automobiles, housing, and the debt-fueled trappings of a consumer economy, which worked like gangbusters, boosting GDP for the nation, creating millions of jobs, and swelling corporate profits left and right. Not surprisingly, thousands of business books by American authors were translated into dozens of languages so that business students around the world could learn from what came to be known as “best practices.”

Lately, of course, the old magic seems to be gone. Corporate profits have been doing fine so far, but U.S.-style corporate management seems to be leading in an unproductive direction. Standards of living are falling, jobs are hard to come by, and national coffers are empty. Meanwhile several industries are caught smack in the middle of major disruptions — media, retail, and automotive, just to name a few.
In other words, the best practices developed during the booming ’80s and ’90s, taught in MBA programs around the world, and liberally applied to industry after industry might be based on outdated assumptions. A look at a few different macroeconomic trend lines suggests that maybe we need to rethink a few things.

We need to ask if a significant portion of MBA thinking is based on a faulty assumption that global GDP will keep growing in perpetuity. Perhaps the growth we experienced in recent decades was based on a few extraordinary conditions.

I originally got this idea from energy analyst Gregor MacDonald, who was asked why economists seemed so slow to include world energy markets in any of their assumptions. Gregor replied that policies developed in a time when energy inputs got cheaper every year were not very useful these days, because the effect of more expensive energy inputs was basically unthinkable. Graphically, he put it like this:

It’s not like nobody ever thought about energy inputs before. Benjamin Franklin created the efficient Franklin stove on the grounds of national security. To be economically and militarily safe, he reasoned, America needed to protect its energy assets — forests and firewood! But people whose formative years go from 1985 to 1999 might have been seduced by the belief that cheap energy was a permanent fixture.

What are some other assumptions managers might not be examining when making strategy? Let’s take a look at retail, the cornerstone of the 20th century consumer economy. Even after the crash of 2008, I heard many executives in the U.S. predicting a return to growth in the suburban big box retail space. It was unthinkable to them that this model was broken. Yet the U.S. has vastly more retail space than other wealthy nations — over 23 square feet per person, compared with to 3.3 in Sweden and 2.3 in France, a country that pioneered the department store with Printemps and Galéries Lafayette. Many American executives have argued that America is physically larger, and so retail will continue to grow. But the trends say otherwise. We’re now at a fraction of the retail space growth of the last four decades.

Then there’s housing, that great driver of consumerism, the center of the American Dream that The Atlantic recently reported isn’t on the radar of younger generations. The drop off in new housing completions is precipitous — beyond the boom and bust cycle of prior decades:

But wait, this is just cyclical, right? Surely the next generation of consumers, The Millennials, will reach the right age and begin buying like its 1987!

Yeah, about that. First, there’s never been a generation in so much debt:

And moreover, it is not like the job market is rising to meet Millennials to help them pay off that record debt. It’s like the recession of 1980, only with billions more in school loans and maxed credit cards.

There are tons of stats showing we’re in a brand new world. Generations of MBAs have been following a playbook that teaches how to lead a company in times of unprecedented growth. If the model for growth has changed — perhaps permanently — shouldn’t this be a moment to reconsider management techniques? There is plenty to discuss.

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Categories: HBR, Insights

Tags: consumer economy, growth