Reinventing Business For the New Economy

Many commentators are saying that the recent economic downturn is not just another recession but a “resetting” (or “rebooting”) of the economy. There are a number of different reasons for such statements, and they tend to vary according to any commentator’s personal interests or field of expertise. This in no way invalidates them, but you do need to be careful how you interpret them.

You see, any recession is, virtually by definition, a resetting of the economy. Furthermore resetting an appliance or rebooting a computer implies that the device will effectively sort itself out and restart quite normally. There is no clear expectation of change from this analogy. Thus there is a danger in glibly accepting it, for without any shadow of doubt, this economic crisis presages change. We simply cannot afford to continue the way we were going.

In previous recessions the remedy has been to spend our way out of trouble. This has been facilitated by stimulating borrowing. Cheap credit has encouraged optimism and fueled growth. In this instance, however, excessive lending caused the recession and makes that a more risky strategy. You can argue that excessive borrowing is the cause of all recessions, but this one is different because the amounts borrowed to rescue the failed banking system have created unprecedented levels of debt. This limits the potential for future borrowing. Consequently, there is no longer the same scope to grow through additional borrowing. You could say that there will be a new normal for the amount of trade that will be possible and it is likely to be considerably lower than the pre-recession trade levels.

As a result “business as usual” is no longer an option. There is a new normal and the businesses that survive and thrive will be those that adapt to this more readily. Businesses are going to have to be more efficient and productive than ever before. This requires you to rethink the way you operate your business.

The area that offers you the most potential for this is the way you manage people. Efficiency can be created through new systems and processes but productivity is first and foremost a people issue. In order to optimize the new systems and processes you have to have people who:

  • Understand the systems processes and the thinking that underpins them; and
  • Are engaged and committed and looking out for the organization’s best interests.

In short this means that you need people who work smarter and who learn more quickly and are more responsive and adaptable. This makes people management your most pressing priority.

There is, however, another even more important reason for this. You can no longer afford the waste associated with the traditional management approach of “hiring people in good times and laying them off in bad times.” In a more constrained marketplace you cannot afford the cost of non-productive severance packages. You have to recognize that people are an investment and thus:

  • If you invest wisely they are the resource that can do most to pull you through tough times;
  • Every time you retrench people or make them redundant, you are actually writing off past investment. This is something that has long been under-recognized and not properly accounted for.

The information age may not be over, but people power is definitely making a comeback. If you want to ensure your business remains competitive in the new economy you are going to have to manage your people differently.

The Sluggish Housing Market Continues

A number of economic forecasters are predicting that the overall economy will be sluggish in 2011. The principle reason for this is that a major portion of economic activity is related to the housing industry, and the prospect of a double dip recession in the housing industry seems to be a stronger possibility as time goes on. The main reasons for this dour forecast are the fact that the unsold inventory of homes is very high, job creation overall is weak, the housing market is flooded with foreclosures and has more on the way, and housing prices have been trending down for a number of months. This article will discuss each of these issues.

The inventory of unsold homes on the market is very high. In fact it is about 80% higher than normal. Most housing analysts feel that until this figure is brought down to a normal level it is likely that home prices will continue to drop. Currently the level is about 3.7 million unsold homes. In general, when potential buyers feel that housing prices are going to go down, they will not be motivated to buy and will wait to get a better price.

Everyone is acutely aware that the level of unemployment is very high. This fact is clearly holding down home investments. Beyond this, however, is the fact that even people who hold jobs seem to be lacking confidence about how secure their employment picture is. They are in many cases afraid that one or both spouses will lose their jobs or might have hours cut back. They are afraid that if that were to happen then they would become one of those statistics of people who owned a home but could not afford to pay for it.

A large percentage of the homes that are being purchased are distressed properties, which are either foreclosures or short sales. For various reasons these homes have been hard to move. There is also a large backlog of homes upon which the foreclosure process has begun, but the homes are not yet for sale. This is referred to as the shadow foreclosure inventory. It has been predicted that the number of homes that will be foreclosed upon in the United States in 2011 will be about the same number that occurred in 2010. This number was about one million homes. These homes pull prices down, and until the number becomes closer to normal, the housing market in general will not be normal.

Housing prices looked like they were firming up in the spring and early summer of 2010. It appears this occurred because the U.S. federal government had incentives in place making the purchase of a home attractive for first time buyers. These incentives were extended but have finally run out, so home prices have dropped again in the second half of 2010. Predictions of additional drops of 5-10% are fairly common in housing industry articles and discussions these days.

Interest rates have been at or near historical low levels for much of 2010, but they too have been creeping up in recent months. Despite such low interest rates, the above factors have prevailed and prevented the housing market from picking up steam. Until job confidence and consumer confidence get stronger and the number of foreclosures and unsold housing inventory decreases, we will continue to see the housing industry and the overall economy muddle along in a lackluster fashion.