Klaus Meyer - Blog: Business during the Global Financial Crisis

Klaus Meyer's Blog

On Business and Economics in Volatile Times

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March 2009

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Related Blog's by Economists:

Paul Krugman, Nobel prize winning economist, Princeton University & New York Times.
Willem Buiter, on Economics & Finance, London School of Economics & Financial Times.

Related Blog's by Business Academics:

Andre Samartino, on Business & Strategy, University of Melbourne.
anyone else???

Related Blog's by Journalists:

Case Study: Canned Soup

April 29, 2009

The Wall Street Journal published in interesting case study on how a company that is probably representative for many reacts to falling demand and shifting consumer behaviour. In the U.S., Campbell Soup is a household name that has gradually moved up-market in their positioning over recent decades. The case tells how their regular monitoring of consumers' eating and buying patters revealed subtle shifts in how they spend their money, and what they pay attention to.

For example, anxiety about loosing a job induces people to eat out less, to set budgets for their trips to the supermarket, to reduce the number of visits to the supermarket, to make more use of coupons (common in the U.S., but not in Europe), but use fewer multi-buy items. Campbell Soups responds, among other initiatives, by shifting their advertising messages from 'quality' to 'help you save'. For example, they publicize recipes that can be prepared cost-efficiently using Campbell products, and cater for coupon-using consumers. Videos of their current advertising campaign are also available on the WSJ website. It would be interesting to contrast them with campaign videos they used a year or two ago.

Jargon, J. (2009): "Food Companies cook up ways to combat rare slump in sales", Wall Street Journal (European edition, 22.4.2009, page 16-17)

The Economist's Budget Response

April 26

In the U.K., we have the peculiar habit that key changes in taxation and in government spending plans are not negotiated by the political parties in parliament, but cooked up in the Treasury and then announced to the public by the Chancellor in one big speech. Last week, we had a such a "Budget Day", and it was probably most remarkable for the bad news about state finances that were made public.

The media have been abash with criticisms, yet it seemed to be in the spirit of kicking those already on the ground - few commentators produced sensible suggestions on alternative roads forward. Even The Economist can’t come with better ideas. Rarely have I seen The Economist so devoid of constructive ideas. Their analysis of the causes of the recession is succinct and knowledgeable as ever, but I read this magazine in search of ideas for the future, not to reconstruct (recent) history.

In terms of advice, all The Economist offers is do more “about sorting out the public finances”. Isn’t that just a euphemism for cutting back on expenses now? Such a policy reminiscent of Herbert Hoover’s doomed presidency of 1929 to 1933 is likely to make the recession much worse [see e.g. my entry on March 12]. The question that The Economist really ought to discuss is, what sectors, activities and technologies may drive the next upswing? The recession has, more than in other countries, revealed structural problems in Britain. The last boom has been driven by unsustainable booms in banking, financial services and housing – neither of which can be expected to get the country of recession again.

The future has to be in new industries, perhaps green energy, health care, education and tourism. In few of these industries, Britain is well positioned. Moving forward, new industries have to be created, and new capabilities have to be built. Thus, the most worrying piece of news from the budget report is that public investment is planned to fall as a share of GDP from 3.1% to 1.3% in 2013/14. In other words, the real problem with this budget is not the size of the deficit, but the way that this deficit is spend – far too little is invested in infrastructure, capabilities or technologies that may drive the next upswing!

The Economist (2009): “Desperate Measures”, “Hubris and Nemesis”, and “A Glimmer of Hope?” (all April 24, 2009)

Should the U.S. learn from (the IMF's experience in) Russia?

April 17

It is not unusual to hear capitalism critique these days, nor is it unusual to hear arguments for radical break ups of the major banks. Yet, such critique now comes from someone who has been in a leadership role in the IMF, Simon Johnson, Professor at MIT's Sloan School of Management. In his role at the IMF, he been involved with bail outs in countries such as Ukraine, Russia, Thailand, Indonesia and South Korea.

In a provocative yet insightful article that has just been published in The Atlantic, Johnson argues that the U.S. authorities ought to learn from the IMF's experience in these countries. Though, he does not expect his advice to be received enthusiastically. As an IMF adviser, he acknowledges "You’re never at the top of anyone’s dance card" because, essentially, "IMF specializes in telling its clients what they don’t want to hear".

The advice that U.S. political and financial leaders probably won't like to hear boils down to this: Desperate economic situations are often caused by elites overreaching themselves - and the necessary reforms involve cutting the financial wealth as well as the political influence of these elites. Johnson's words:

"Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone, and the government cannot afford to take over private-sector debt completely. So the IMF staff looks into the eyes of the minister of finance and decides whether the government is serious yet. The fund will give even a country like Russia a loan eventually, but first it wants to make sure Prime Minister Putin is ready, willing, and able to be tough on some of his friends."

Now for the difficult bit, which may not come down well in New York and Washington: The challenges faced by the U.S.A. today are not that different from those experienced by Russia a decade ago. Johnson argues that:

"elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive."

The article is well written and does contain more detailed analysis, well worth reading. Martin Wolf of the F.T. seems to think that Johnson is a bit overly pessimistic in his outlook, but he agrees with many of his arguments and he reaches similar policy implications:

"... two things must be achieved: first, the core financial institutions must become credibly solvent; and, second, no profit-seeking private institution can remain too big to fail. That is not capitalism, but socialism. That is one of the points on which the right and the left agree. They are right. Bankruptcy – and so losses for unsecured creditors – must be a part of any durable solution."

I find it quite remarkable that such heavy weights as Simon Johnson and Martin Wolf both argue for such radical reforms of the banking sector.

Johnson, Simon (2009): The Quiet Coup, The Atlantic, May Issue (but already online)
Wolf, Martin (2009): Is America the New Russia, Financial Times, April 14, 2009.

Now is a good time to be an entrepreneur

April 15

I have just been listening to a fascinating radio program called 'In Business', which was broadcast on BBC4. Aspiring entrepreneurs tell an incredulous journalists that now is a good idea to push forward with entrepreneurial initiatives. The turbulence in the markets creates opportunities for new ideas - and if my earlier argument is right, we are experiencing the start of a new economy which will be driven by new business models and business segments. Historically, a lot of major business have started in recessionary times. Britain has few strong traditional manufacturing firms, and thus the program stresses the need to develop new entrepreneurial businesses.

The program provided a lot of leads and names that people with ideas may find useful. For example they introduce "Open Coffee", an entrepreneurial meeting place set up up by Saul Klein to facilitate informal exchange between entrepreneurs. Interviewees include Jonathan Kestenbaum, CEO of NESTA, a foundation set up with money from the National Lottery that aims to promote entrepreneurship by university based scholars, and Graham Richards of Oxford Mulecular, a scientists who moved from scholarly work to setting up his own business (I found his story on the web, and he also wrote a book on the topic). A further case study of an entrepreneurial university spin-off is "Camfridge", set up by Neil Wilson and others.

The broadcast is available on the BBC website until the end of the week. I tried to identify some of the companies and organizations mentioned, may these links help those eager to take the plunge...

Analyzing the Crisis from a Strategy Perspective

April 12

The financial crisis has created a structural break that shifts many of the competitive parameters that corporate strategies were build on. It has created shifts in many pivotal markets of the global economy - from finance to consumer goods - all of which have become more volatile, while consumer expectations (and thus consumption decisions) and government policies have become less predictable.

Hence, companies have to comprehensively reassess and often redesign their strategies, both to survive the crisis, and to benefit from the next economic upswing. While some have pronounced the end of globalization, I do believe that the fundamental arguments for global business remain valid. Many businesses have created global strategies, operations and resources that position them quite differently than during earlier recessions. This may have accelerated the contagion of the crisis, and it makes assessing the consequences more complex. Yet, a global presence also enables firms to better manage the consequences of the crisis, and to pursue forward-looking restructuring in search of the ‘new economy’ that will drive the next upswing. Strategizing during the financial crisis thus should pursue advantages of global strategies, rather than narrowing the focus to domestic operations only.

Strategizing has to address two distinct challenges, a survival strategy for the downturn, and a strategic position for the next upswing. Businesses thus have to strategize at two levels, short term ("survival strategies") and long term ("strategic positioning"). Survival strategies may for instance focus on ‘value for money’ segments, on resilient consumer segments such as home entertainment, or on businesses that help others to reduce costs or reduce uncertainty. At the same time, businesses have to develop foresight to use the crisis to position themselves for a new economy that may look quite different than the financial bubble driven economy of recent years. They thus need to develop a strategic vision on the new economy, however imprecise it may be. My discussion paper "Corporate Strategy During the Downturn" explores how MNEs outside the financial sector may manage these twin challenges of the crisis.

Any New Ideas from Harvard Business Review?

April 9

Business leaders looking for new ideas read publications that are somewhere half way between the conventional academic journals and the glossy weekly magazines. The leading outlet of this sort is the Harvard Business Review. What guidance does HBR provide for businesses struggling with the crisis? The main message that I took from reading through numerous articles in HBR and similar publications is: do your business more efficiently, identify and serve your customer needs, and keep your cash expenditures under control! In other words, do what a sensible business person always would be doing - just do it better. Articles written by consultants often left me with a sense of 'old wine in new bottles'. However, there are two articles that I find worthwhile recommending.

Both focus on the shift of consumer spending to the value for money segment, which I discussed in earlier blog entries. Peter Williamson and Ming Zeng suggest that a lot of expertise on how best to serve this growing segment can be found in businesses in emerging economies. These businesses have developed competences and business models specifically geared towards serving large numbers of customers with good quality at an affordable price. Williamson and Zeng thus recommend partnering with emerging market businesses, not only to access their market, but to learn how better to serve one's own changing home market.

Quelch and Jocz analyze the shift towards value for money from a marketing perspective. They suggest to segment markets using two scales based on the psychology of consumers reaction to tightening budgets and rising uncertainty. Firstly, consumers' reaction varies as some 'slam-on-the-brakes' to cut all but essential expenditures, while others 'live-for-today' as if nothing much has happened. The second scale classifies products by the degree of need in essentials, treats, postponables and expendables. With these two scales, they suggest a 4x4 matrix and make suggestions for each segment. Moreover, they offer suggestions on how cut advertising expenditures without, it is hoped, cutting effectiveness of the advertising.

All these contributions focus on what I would call "survival strategies". What I have not seen much in HBR is suggestions for the "strategic positioning" that will carry the next upswing.

Quelch, J.A. and Jocz, K.E. (2009): How to Market in a Recession, Harvard Business Review, April, p. 52-62.
Williamson, P.J. and Zeng, M. (2009): Value-for-Money Strategies in Recessionary Times, Harvard Business Review, March, p. 66-74.

Lessons from Asia: M&A in the Crisis Period

April 7

Sometimes, forgotten books suddenly become popular again. In my web statistics for last month, a book review that I had written several years ago surged to new heights. In the quest for ideas how to handle the current crisis, studies of earlier economic crisis are, rightly, explored for relevant insights, thus the reviving interest in the Asia crisis of 1997.

The book, "Business Restructuring in Asia: Cross-Border M&As in the Crisis Period" by James Zhan and Terutomo Ozawa, focuses on policy implications arising from the M&A trends of the late 1990s. Re-reading the book a few years later, I note similarities and differences to the current crisis. The similarities pertain to macroeconomic and financial imbalances causing the crisis, or at least being exposed by the crisis. In Asia in the late 1990s, firms facing structural weaknesses or liquidity shortages became available for acquisition at substantially discounted prices. The subsequent restructuring of the corporate sector strengthened businesses, and arguably left them better prepared for the crisis of 2008/09.

However, there are important differences that limit our ability to learn from the Asian crisis. In particular, the shortage of financial liquidity is essentially worldwide, thus there are few outside investors left able to inject liquidity on a large scale. Secondly, the Asian crisis led to a devaluation of the currencies of the most severely hit countries; in contrast the US$ is rather strong despite the crisis. Third, Asian economies conducted tight monetary and fiscal policies under pressure from the IMF and other external lenders and advisors, which contrasts with loose monetary and expansive fiscal policy in 2008/09. Despite these macroeconomic differences, however, some of the corporate experiences reported by Zhan and Ozawa may still be relevant for analysts of contemporary M&As.

Zhan, J. and Ozawa, T. (2001): Business Restructuring in Asia: Cross-border M&As in the Crisis Period, Copenhagen: Copenhagen Business School Press.

Observations in a Toyshop: The Future of British Engineering

April 6, 2009

The shortage of qualified engineers and natural scientists is is a commonly acknowledged challenge in Britain (as well as some other European economies). The relative contribution of manufacturing to GDP has shrunk since the 1980s, when the Thatcher government promoted the shift to services, combined with a hands-off approach to industrial policy. By 2006, manufacturing contributed only some 13% to GDP, and universities were moaning about their difficulties to attract young people to study sciences and engineering. The brightest students with strong quantitative skills were choosing careers in finance, with the prospect of high salaries and bonuses, rather than the laborious task of creating real value through new technologies and products.

The economic crisis has exposed these weaknesses. With the financial services sector imploding, the search is on for other sectors that may carry the next economic upswing, and many people realize how small the manufacturing sector has become. Once upon a time, British engineers were leading the world, constructing the first railways (including the "Great Western" line on which I am travelling while typing this blog). Yet that is over a century and half ago. The problem is widely acknowledged; for instance Alan Wilson, a former VC of the University of Leeds makes a passionate appeal in the Times Higher Education for university physics departments to become involved in setting curricula and standards at high schools to ensure the availability of students qualified to pursue science careers.

However, this may be much too late, as became evident for me on a recent trip to a local toyshop. I was looking for gifts for by nephews, preferably some sort of construction set such as the Lego or Fischer Technik that we used to have as kids, and which I know they play with in Germany. Yet, I strolled the alleys of the largest toy shop in town for probably an hour, but didn't find anything worth my money. Only a few Lego items graced the shelves, mainly 'Star Wars' spaceships and vehicles - call me old fashioned but war toys don't belong in children's hands, be they star wars or real wars. So, I left empty handed. However, I soon came to realize the greater economic significance of my 'field research': If Britain wants to recover its great engineering tradition, the revolution has to start in children's playrooms!

Wilson, A. (2009): Universities must step in to reverse atrophy of A-level physics standards, Times Higher Education, March 26.

Industries of the Future

April 2, 2009

I have been discussing with various groups, including students and executives, what industries might become growth industries if and when the economy swings upwards again. My scholarly colleagues typically preferred not to venture any suggestions as one is highly likely to be wrong when saying something about the future. Yet, if we want to design the future, we have to think forward, however hazardous such an exercise might be. So, here comes the result of my collective brainstorming - may it stimulate your business and investment plans:

Green energy, which includes for instance energy saving technologies in businesses and home as well as alternative energy generation technologies such as wind energy, solar panels and tidal wave power plants.
Heath and social care, which includes services as diverse as hospitals, beauty treatment, child care, and care for the elderly as well as equipment manufacturers supplying these services, and new technologies growing out of for example biotechnology.
Nutrition and foods helping a healthy lifestyle, for instance organic foods and new forms of delivering fresh foods to households and restaurants.
Entertainment in a broad sense including for instance movies and theme parks as well as various forms of home entertainment such as video games, and entertainment delivered via the Internet.
Education, again, in a broad sense, including pre-school, primary, vocational, higher (scholarly) education, and training in specialized professional skills and foreign languages, the latter being a particular opportunity for England.
Cost-efficient provision of basic needs, especially at the base of the pyramid but – at least during the crisis – also in some mature market economies.

Across industries, two trends are likely to be important. Firstly, the distinction between manufacturing and services is diminishing as companies increasing conceptualize their offerings in terms of the 'customer experience' they offer, rather than as physical goods. Secondly, business models are continuously evolving, and if indeed we are in a structural break then experimentation with new business models may generate the winner for the next decade.

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