by Arik Johnson
The New "New Economy": With Growth Slowing as We Move into 2001, Effective Competitive Intelligence is Now More Important Than Ever - Translation a Slowing Economy Means CI Takes Center Stage
We've all heard the warning signs lately - rotten Christmas retail season, rising energy costs, stock market woes, layoffs beginning, industrial production slowing down, Fed cutting interest rates -- we're headed for a slowdown. Whether it's a protracted recessionary trend or relatively brief, one thing's for sure -- if you thought you needed to watch competitors and plan your strategy during boom times, think again -- that was just a warm-up. Competitive forces will be MUCH stronger for organizations when slower-growing markets mean less to go around for everybody.
While many in the press superstitiously wonder whether even talking about a slowdown might be a self-fulfilling prophecy - essentially bringing one on by shaking consumer confidence -- U.S. fourth quarter economic growth slowed to 2.2 percent and not even Greenspan's interest rate cut can stop the slide on the stock market. Uncertainty about the Bush Administration's ability to steer this longest economic expansion in U.S. history toward a soft landing, means consumers are spending less and looked for bargains this past Christmas season. In fact, it was the worst Christmas shopping season for retailers in 10 years.
Scarcity Breeds Ruthlessness
The question for all of us is not whether the U.S. economy is turning the corner, but how long the slowdown will last? And, what will it mean for the businesses accustomed to competing for shares of faster growing markets where there was usually enough relatively easy money to go around for all players? Scarcity ultimately breeds ruthlessness.
This means that, market intelligence and competitive strategy as a cornerstone business discipline will become more important than ever. As businesses formerly comfortable with lax competition in all but the most white-hot markets, traditional retailers, manufacturers and even consumer goods and services firms will be faced with the need to adapt to a slower-growing (or even shrinking) pie from which to cut a piece. These characteristics (hyper-competition) will drive conditions in the coming months, and perhaps even years, of the New Economy.
Even worse than the current stats on the economic outlook, there's little room for error. Any negative shock - like a Mid-East crisis to drive up energy prices even further or a continued stock market downturn - may tip the economy into recession; and Fed interest rate cuts won't be fully felt for 12 to 18 months. Plus, if you primarily market to moderate-income households, watch out - higher energy bills have already soaked up a good portion of disposable income, debt levels have never been higher and financial service firms are going to tighten credit access due to increased delinquencies and bankruptcies, while wage growth is slowing in direct proportion to increases in unemployment.
Finally, financial markets are vulnerable to downward-spiraling expectations. If profits are worse than expected, stock prices could drop off further, terms on business loans would tighten up and venture capital would seek out safer territory. That would bring investment and productivity gains nearly to a halt - possibly reversing the virtuous cycle that drove the current expansion. And, because the American economy is the single largest driver of trade and international investment, a slowdown in the U.S. would mean a disaster for the global economy.
Throttling Competitive Strategy
All of this means that forces in the marketplace will cause every firm to either leave the market or compete more effectively for the scarce dollars and slower growth that exists while they throttle competitive strategies to capture the greatest advantage no matter how long the slowdown lasts. Whether 2001 brings a mere slowdown in growth or a more negative, deeper recession, companies are preparing for battle by releasing new products and services and intensifying efforts to boost the efficiency of their operations. Increased efficiency will chiefly come through industry consolidation and by faster adoption of technological and management innovations. Differentiate or die, humble manager - rapid price commoditization will be the sure fate of those who ignore the need to be more aggressive.
Ironically, there are some positive effects. As I was thinking of the deviousness of consumer and food products manufacturers - that is, the longtime practice of releasing their new year's packaging with less stuff and the same price to avoid more opaque price increases - I relish the idea that flagging demand may slide these prices back down again. Counter-inflationary effects are one of the only benefits to consumers, however - I priced laptop computers recently and saw an average 16 percent reduction in retail prices overall on the models I looked at -- very unscientifically (and unfortunate, for PC makers) deciding they had even deeper downside in them and I can afford to wait.
Counterintuitively, the flattened slope of the Business Cycle actually results in healthier economies long-term - this is uniquely "evolutionary" in its effects - the strong surviving because of the very characteristics that make them strong. In fact, economic booms fundamentally undermine longer-term corporate profitability because "easy money" encourages more sellers to bring more capacity online in all markets. Witness the almost drunken spending of the weakest of dot-coms in the Great Land-Grab of '99!
During a slowdown, increased competition among available suppliers makes it tougher for all of these players to turn a profit and attract slower-growing market demand to eat up that supply. The shakeout that follows forces out the weakest competitors and makes the strongest a lot stronger. These strong companies become even more efficient and markets become more profitable for those left standing. Like the change of seasons in nature, the business cycle separates the weak from the strong, so only the strong survive - in fact, this "consolidation phase" is a necessary correction to its opposite "expansionary phase". Wasn't it Nietzsche that said, "What does not kill me makes me stronger"?
Contrarian Dominance Approach to Pricing - Exerting Maximum Pain on Struggling Competitors
Predictably, the key to market success during a consolidation phase is different than in the easier and more robust expansionary phase. The virtues of speed, creativity and widespread partnering become comparatively less important, as discipline, efficiency, patience and fierce competitiveness become much more valuable. For example, those that survive and thrive will set their prices, not just to acquire incremental new customers, but also to boost profits in areas where they are dominant in order to finance a program of exerting maximum pain on struggling competitors in new markets by slashing prices. The goal is a simple one - to kill off or assimilate weak competitors by driving out those that are competing in emerging, yet desirable and profitable, new markets. Think of how recently Amazon.com has been increasing prices in its dominant market for online books, even while slashing prices in emerging areas such as electronics.
Importance of Acquisitiveness
Tightening economic conditions in an industry also tests acquisition decision-making skills. While jittery investors ditch practically all technology businesses, company valuations fall precipitously. Many of them are poorly conceived and should be allowed to fail, while others are solid businesses, offering valuable intellectual property, scarce talent or a robust customer base. Rather than the much more characteristic and introverted fallback to protection of an existing business, wise managers would consider how to extend their control over markets by buying up these weak competitors cheaply and focus on integrating them well.
For those that can hold out until the second half of 2001 when Fed interest rate cuts start to kick in, survival is more than likely - even higher profits in dominant sectors as weaker competitors are crushed under foot. For those that are weak already or for new entrants in hotly competitive markets with other more dominant players, good luck -- you're going to need it.
Arik R. Johnson is Managing Director of the Competitive Intelligence (CI) outsourcing & support bureau Aurora WDC. Learn more about Arik at his firm's Web site www.AuroraWDC.com/arik.htm.