BOOK REVIEW: FRANK DILLONreviews The Upside of the Downturn – 10 Management Strategies to Prevail in the Recession and Thrive in the Aftermathby Geoff Colvin Nicolas Brealey Publishing; €20
Geoff Colvin is editor-at-large of Fortune magazine, a position that gives him access to some of the leading boardrooms of the United States and time to ruminate about what he finds there. If his latest book has one major flaw, it is that it is written purely through a US lens and readers will need to judge for themselves whether the trends he finds are universally applicable. Nonetheless, his research throws up some interesting food for thought.
Colvin says the current recession represents much more than the usual cyclical downturn and is changing the economic landscape fundamentally. The US economy is becoming less consumer driven and consumer focused; social attitudes towards working, saving, spending and borrowing are shifting; investors will remain spooked for a long time and Government will play an increasing role. And he does at least acknowledge that the world economy is becoming less US-centric.
Some businesses, he says, will emerge from this downturn stronger and more dominant than when they started while others will weaken and ultimately fail. It all depends on the choices that they make now. While the future may be hard to see, there are lessons in history.
In the Great Depression when US unemployment reached 25 per cent, Colvin notes that there was a boom in radio listenership. Social workers found that Americans who needed to raise money to pay the rent would sell their fridges, bathtubs, telephones and beds before they would part with their radios. The effects of this were transformative for radio set manufacturers, station owners, broadcast artists, ad agencies and advertisers.
During the two most recent recessions (1990 and 2001) US consumers cut their spending on food outside the home. While there was no surprise there, they also cut consumption of tobacco products, despite the addictive nature of those items and on leisure activities. They increased expenditure on healthcare and pension plans and invested strongly in improving their education.
Being attuned to these trends is the key, but Colvin says some companies fail even to see what appears obvious. The current recession, for example, favours netbook producers producing cheap functional computers, so companies such as Acer and Asus are stealing a march on Dell and HP, who have yet to wake up to the trend. History may be repeating itself here. Digital chief executive Ken Olsen’s famous remark about why anyone would want a personal computer – and his subsequent drawn-out attempts to cling on to this belief in the face of overwhelming evidence that he was simply wrong – is cited as a case in point.
One of the more interesting trends the author sees developing is co-creation, the idea that the most successful companies no longer invent or create products on their own. Instead, they create them along with their customers. Few companies own enough resources to control markets so they must organise a constantly shifting global web of suppliers and partners to do the job. Facebook is a good example – being neither a product nor service but a platform on which users create their own experiences.
This approach could be extended to other areas. The well-regarded management writer Prof C K Prahalad has envisaged a system where health insurance premiums of a subscriber with a known disease such as a diabetes could be reset continually based on the monitoring of a persons vital signs and compliance with a diet, exercise and medication regime. The service, and its pricing point, are continually co-created by the customer and the company in conjunction with a network of doctors, exercise facilities and drug companies that participate in the relationship.
Most companies, Colvin acknowledges, are organised in exactly the wrong way to capitalise on such an approach and lack an intuitive feel for how this new model could work. Newer firms could steal a march on them if they are not careful.
Another argument explored in this book is that creativity and imagination will lead economic growth rather than science and technological breakthroughs. There is a growing school of thought that says technology advances will cease to confer competitive advantage. Apples iPod and iTunes online store is a case in point. The MP3 player had been around as a technology for some time before Steve Jobs intervention in the market but the ingenuity of the Apple interface and the game changing music store, created an overwhelmingly dominant business model.
Ironically, the recession could be a hotbed of disruptive innovations such as this, as the incentive to cling to old once proven business models melts away and companies realise that incrementalism won’t save them.
Creating better value propositions for customers is another area of competitive advantage. Amazon’s online business model, for example, allows it to test new value propositions quickly and easily, by altering the shipping options it offers or fine-tuning the checkout process. The company typically tries such experiments on carefully chosen subsets of customers and frequently conducts up to 300 experiments a day. Statistically significant results can be generated within hours and new service offerings, based on the findings, can be rolled out on the same day.
As to the rest of his insights, flexibility and long-term thinking is the recurring theme. During booms, businesses need to question how their models would play in a downturn. Some business models, such as Wal-Mart or Southwest Airlines work well through all stages of the cycle, but others don’t. Some hedge their bets successfully. FedEx, for example, makes sure that its jet fleet includes a number of older planes that are fully depreciated. In bad times, it parks them in the desert.
Colvin’s book is an easy read and his points are all well peppered with examples and anecdotes. The magpie approach honed in his journalism day job clearly works in his favour here.
