Tuesday, May 3, 2011

The "New Way" of Business

 I have been talking with a lot of people recently about the changes that are taking place in the United States and elsewhere.  More and more people are discussing the possibility that the world is changing in a way that only happens every once every eighty years or so.  These people are saying that whatever comes out in the 2010s and 2020s will be incredibly different than what was there before 2000.  In essence, the sixties are dead!

They seem to be saying that what came out of the 1940s and 1950s was “different” from what existed in the 1920s.

An interesting case-in-point is the recent demise of Osama bin Laden.  Although the general response to this action has been that this was an important occurrence, there is also the undertone that the “times have changed”; maybe the world has moved on and the significance of this event lies more in the past than the future.

In this the “protestors” and the “street” in the Middle East have become more important than the purveyors of a closed fundamentalist group that promotes jihad and the return to a model of society that is more from the Middle Ages than from the 21st century. 

To these people seeking broader rights, the passing of bin Laden is just a footnote to the real battle.  To these people the cell phones and the social networks represent the path to freedom and self-respect.  Osama bin Laden was legacy, coming from the age of the television where he saw and rejected the creeping intrusion of Western culture into his image of what the Middle East should be. 

Where Osama bin Laden saw the end of the “old way”, the young people now protesting in the streets see the “new way” of opportunity and greater self-determination.

The “old way” was movies, newspapers, and television.  The “new way” is instantaneous photographs, videos, tweets and texts. 

Maybe this is the way we need to look at business and finance.  That is, the “new way” which is the time after 2000, and the “old way” which live in a time before 2000. 

The “old way” is the time of General Motors, United States Steel, and General Electric.  The “new way” is the time of Microsoft, Google, and Facebook.

The “old way” is the production line; the “new way” is the instantaneous trading of stocks and the presence of an immense amount of information at our fingertips.

Exciting to me is the headline “Rejecting Wall Street, Graduates Turn to Entrepreneurship,” found in the morning New York Times (http://dealbook.nytimes.com/2011/05/02/rejecting-wall-street-graduates-turn-to-entrepreneurship/?ref=business)

This article discusses the rapid increase in new companies started by students at Harvard and at the Wharton School, UPENN.  The article states “Graduates (of Harvard) from the class of 2010 started 30 to 40 businesses last year, a 50 percent increase from the previous year.”     

And, I have directly experienced some of the effort and energy of these students the article talks about through the angel networks and venture networks in which I participate.

The ideas for the new companies generally come from the students themselves.  They see something missing in the markets they work within.  For example, in the New York Times article, one of the young entrepreneurs discussed got his idea “after trying to find diapers for his son during a family trip to Rio de Janeiro…  Struck by the lack of high-quality baby care goods (the young entrepreneur) saw an opportunity in Brazil’s fast-growing markets, where more than three million babies are born every year…” His grades suffered this year as he often traveled from Cambridge, MA to Brazil to develop his new business. 

The company was one of the top three winners of Harvard’s annual Business Plan Contest, which added to other capital the founders, raised for the new business.  The “fund-raising effort, which valued the company at $5.6 million, included several well-known venture capitalists…”

And, these schools are contributing to this movement by starting other initiatives on campus to encourage interested students in new ventures and to encourage them to talk with one another and bounce ideas around.  They also have money and space where “entrepreneurs-in-residence” can get started.

I see this kind of entrepreneurial activity going on all over the place.  It is exciting, energizing, and cause for hope.  It is the new world based on information technology, not the old world based on physical capital.  And, in my mind, its future dominance is unstoppable.

We are transitioning to this new period in our history.  And, transitions cause pain.  Let’s look at three areas, the current business structure, financial structure, and work force.

In terms of the current business structure, shifts have been taking place for several decades now.  The emphasis on manufacturing and the capacity utilization of industry is receding.  Capacity utilization of US manufacturing, which was over 90 percent in the 1960s has been declining constantly through the late twentieth century and now hovers below 80 percent as the economy now recovers. 

Physical output is going to continue to decline as a proportion of what the US economy does.  Ideas are going to come from all over the place.  As observed above, more and more people are going to find “missing markets” and attempt to fill them in.  Much of this activity will be information based.  The evolution into this new structure will take time and this is one of the reasons why the economy is not picking up that quickly: a restructuring is taking place and people are not being hired back into the jobs they lost in the Great Recession. 

This gets us to the work force.  There is a very powerful article in the Economist this week, (the April 30 issue) titled “Decline of the Working Man.”  The sub-title is “Why ever fewer low-skilled American men have jobs.”  The big culprit?  Education.  The less education you have the less likely you are to be fully employed and this is consistent with the restructuring going on in American industry. And note, the article is about American men…American women have learned this lesson and are way ahead of men in this area.

But, this means that the old Keynesian idea that when there is unemployment, fiscal stimulus can just put people back to work in their old jobs, is not really valid: especially if you want to help the “low-skilled” find meaningful, long-term employment.

And finance?  More and more financial capital is coming from angel finance networks, private equity, and hedge funds…the shadow banking industry.  This is the kind of finance that the young entrepreneurs need.  And they are getting it.  It is not coming, nor will it come, from the commercial banks, especially the smaller ones, who have come to rely more and more on residential real estate loans and commercial real estate loans…not on business loans. 

Yesterday, the Chrysler Group posted its first quarterly profit since 2006.  To me, as with the other news reported above, this should be just a footnote.  This is news about the “old way.”  We need to focus on the “new way” and like some of the other revolutions taking place, the “new way” in business is found in non-traditional places.  But, that is what information technology allows us. 

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