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 21^st 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. 

The Need for an American Economic Strategy

The lead article in this week’s Business Week (November 10, 2008) is by Michael Porter, the Bishop William Lawrence University Professor at the Harvard Business School. Porter is calling for the next President to formulate an economic strategy for the United States.

Formulating and promoting such a strategy will help the country in two ways. First, it will start to provide some leadership to the country in economic affairs…leadership that has been sorely missing in recent years. Second, it will provide a framework that “embodies clear priorities” and will lay out an understanding of the strengths that the United States needs to preserve and the weaknesses that threaten the prosperity of the United States the most. Porter strongly argues that the “United States lacks a coherent strategy for addressing its own challenges.”

I could not agree more that the new President needs to provide strong leadership in establishing the goals and objectives to be strived for in the area of economic strategy and needs to direct everything that he does to reflect the effort to attain these goals and objectives. In my experience running companies or leading organizations I felt it was my responsibility as the leader of the organization to make clear what we were striving for and then back up this vision with my performance: that is by being consistent with this vision in all my actions and in all my statements.

Let me now highlight what I think are the most important things in Porter’s list of what should be included in the economic strategy. I can’t argue with the general thrust of what Porter says, but, of course, I have my own priorities. I will discuss three specific areas: education, innovation and entrepreneurship, and global integration.

This country was founded upon the spread of information and the role that education plays in this spread. To me, the modern world really started when moveable type was invented because this allowed for the printing of books and pamphlets and newspapers and all sorts of other things. With this invention, information spread and people got to read things they had never seen before and compare ideas in a way they never had a chance to do before. With this new knowledge they could debate different theories, see and compare different data sets, and argue and debate and dialogue. The result was the Reformation, the Counter-Reformation, the Enlightenment, Modernity, and even Post-Modernity along with many other less well known movements.

The founding of America was also a result of this spread of information and early on it was argued that a democracy such as this should have an educated people so that they could be aware of the issues being faced by the country and could intelligently elect their leaders. Being able to read was also considered to be very important in establishing the type of moral climate that would support a democratically elected government. Being able to read meant that citizens could read the Bible for themselves and interpret it for themselves…something that was not always allowed in the Old World. Schools…and colleges were important…education was stressed. And so major institutions of higher learning were established…Harvard, Yale, Columbia, Princeton, the University of Pennsylvania, and William and Mary, to name a few.

Americans found out later that having schools and colleges contributed to the expansion of knowledge and the expansion of knowledge was good for innovation and the expansion of trade. Technical schools and colleges evolved. And, this allowed for information to continue to spread and for new ideas to circulate and for new things to be tried…and the country grew and prospered.

The American success story hinges to a great deal on the creation, evolution, and enhancement of higher education in the United States. But, Porter writes, “America now ranks 12th in tertiary (college or higher) educational attainment for 25- to 34-year-olds. We have made no progress in this vital area over the past 30 years, unlike almost every other country.”
He goes on, “All Americans know that the public education system is a serious weakness….In the global economy, just being an American is no longer enough to guarantee a good job at a good wage. Without world-class education and skills, Americans must compete with workers in other countries for jobs that could be moved anywhere.” Early in this decade I spent four years taking classes in Princeton. I was amazed to see who populated the Firestone Library. I could not argue that Americans were even a significant minority in attendance there. I have also noticed a similar situation at Penn State’s main campus. Education is not a major priority of Americans these days, yet Americans will be the first to decry the movement of jobs elsewhere in the world.

Innovation and entrepreneurship have been the workhorses of the American economy. Porter writes, “The United States has an unparalleled environment for entrepreneurship and starting new companies.” He adds, “United States entrepreneurship has been fed by a science, technology, and innovation machine that remains by far the best in the world.” We have this engine as the primary driver of American growth and prosperity. Yet, “America’s belief in competition is waning.” Also, there is resentment and fear directed at new ways of doing things and new directions of research. People on the edge of their professions or fields of study are referred to as “elites”, as “celebrities”, as “anti-religious.” Change threatens people. New ideas threaten people. People that others don’t understand threaten people.

America is facing a split, as are other areas of the world. See my post, “The Split in America,” October 29, 2008, http://masepoliticalcommentary.blogspot.com/. We cannot allow the environment of innovation and entrepreneurship that has existed in the United States to fall away. The next President of the United States must work hard to ensure the continued presence of an environment that is receptive and encouraging to those that want to step out and take chances.

Finally, the next President must work to encourage a feeling of trust and partnership within the world community when it comes to economics and finance. For too much of the past eight years or so, America has tended to act unilaterally when it comes to policies and programs related to international trade and finance. The United States can no longer continue to do this. The current world crisis, if it shows anything, shows that the world is too integrated and nations are too dependent upon one another to act in any other way than in partnership with one another.

People believed at one time that other major economies could “disconnect” from the United States if the United States wanted to continue acting independently of them. This has proven to be a fallacy. Somehow, someway nations and the leaders of nations are going to have to work together to begin to build, even the most elemental and rudimentary parts of, a world system. We can all retreat into our own little shells like the nations did after World War I. But, like they found out then, this can only lead to further conflict and possibly an even worse war. American, even though it remains the largest economy and the most powerful nation in the world, must act as a partner and help to build up other nations, not ignore them or put them down.

The next President has a lot of business already on his plate. But, if America is going to move forward, the next President is going to have to show some leadership. Porter writes that “America’s political system, especially as it has evolved in recent times, almost guarantees an absence of strategic thinking at the federal level. Government leaders react to current events piecemeal, rather than developing a strategy that unfolds over years.”

The next President can deal in this little area or that little program or with this little disturbance if he wants to. What America really needs, however, is for the next President to give us a vision…something we can get behind…so that we, at least, know what direction he is trying to move us in.

“Now is the moment when the United States needs to break this cycle,” Porter cries. Now is the moment for some leadership.

Mr. President-elect…go for it!