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Forget the soothsayers. Here are tools to analyze the economy yourself

By Randall Smith

During my summer camp years of long ago, I remember a chant that always went up in the mess hall.

“The worst is yet to come. The worst is yet to come. The worst is yet to come.”
In those days, the focus was on the next course of food. In reality, none of our meals were that bad. But it was fun to shout those words.

Randall Smith

I have thought of those days when I’ve listened to television programs about the economy and read business stories online and in the newspaper. It is always easier to say that the glass is half empty than it is half full.

As we begin 2011, the only certainty is that we’re in a time of transformation. The process of manufacturing is being reshaped by a new invention, additive technology. The Internet will touch everything from farming to book publishing. Our world is getting fatter and more populated, outstripping our ability to grow enough food. And in a time of melting icebergs, too many do not have enough fresh water to drink.

So what does it all mean?

Instead of quoting soothsayers about what the year will bring, I think that it’s far wiser to give business journalists some tools that’ll help them decipher whether local businesses are well positioned to survive in these changing and challenging times.

POINT 1: Talk to experts and look at research

Recently, I asked Alan Veeck, a venture capitalist and a PhD in chemistry, to look at the future with my class at Missouri. He sees two businesses growing in coming years, and they surprised me.

U.S. economy

Reuters video images

One is warehousing, and the reason is that we’ll be consuming more with an improving economy. The second is businesses around the disease of diabetes, because the nation’s large appetite has translated into a wider girth.

Currently, I’m in the middle of research on the impact of President Obama’s plan to bring high-speed broadband to rural America. From what we’re seeing in Missouri, it will have dramatic implications on farming, where it’ll help regulate heating and lighting in barns and help make farmers smarter about planting, weather, and their business practices.

POINT 2: Beware of incumbent’s disease

Some warning signs: When you hear a senior executive say that the sour economy is the sole reason that business is lagging; when you ask company officials about competition and they dismiss new entrants too easily; and when you see too little research and development money invested in future strategies and products.

No company can be so blind? Unfortunately, the historical landscape is littered with them – from the old Western Union, which dismissed Alexander Graham Bell, to Borders, which missed the digital revolution in book publishing.

Enter Barnes & Noble, as I did on a snowy day about two weeks ago. You’ll be greeted by a sales person at the entrance who wants to introduce you to the Nook, which is the Barnes & Noble version of the reading tablet.

A question: How many other booksellers are doing this?

POINT 3: Look at competitive pressures

In business school, it’s called external analysis, and it’s summarized by five classical business forces: threat of new entrants, the power of suppliers; the power of buyers; product substitutes; and the intensity of rivalry.

Within recent weeks, Rupert Murdoch announced a newspaper made for the iPad called, The Daily. Murdoch has reportedly spent $30 million on the product and is hoping readers will pay $40/year or 99 cents/week for the application.


By Flickr user Tim Pierce

Do the math. How many subscriptions would it take to pay the initial investment back and run the paper at a cost an estimated $500,000/week? Don’t forget to add in Apple’s 30 percent charge for using its iPad platform.

To be fair, Murdoch is certainly headed the right way. Within a few short months, industry reports say there will be more mobile devices in delivery than there are personal computers. That means the arrival of many more mobile news platforms will be here sooner than the three-to-five years that experts have been predicting.

But Murdoch’s product has two flaws. First, it takes a long time to download, and this is when most potential users get frustrated and go to a competitor. Second, as previously stated, do the math.

Who might succeed? Do some investigation on new entrants and those who are providing them with research/development. The intensity of this rivalry will no doubt create dozens of possibilities in coming months.

Also, look at those who are doing nothing. They are most likely to soon become part of the past.

POINT 4: Think about Resources, Processes and Values

This tool was developed by Harvard professor Clayton Christensen, and he says that you can use it to judge an incumbent’s reaction to new competitors.

In other words, look at all of the resources that a company possesses – warehouses, plants, office space, computers, etc. Look at the processes that they use, particularly in how they make decisions. And finally, look at the values that guide the company’s behavior.

This summer, I stumbled into a new form of manufacturing technology in China. My brother is an import/export entrepreneur in Hong Kong, and he told me how industrial plants were being converted to a brand new way of building products, called additive technology.

Essentially, 3-D technology will eventually allow new tools to build everything from a piano to a robot to airplanes. They’ll build it at the pace of one layer at a time, hence the name additive technology.

Jobs Fair line

Photo by Flickr user mjcrodez

The Economist has made the concept a recent cover piece, and predicts that it will eventually reset the economics of manufacturing.

The revolutionary thing, according to The Economist: This new process can build one product for the same price as it costs to build thousands. So the principle of “economies of scale” is no longer valid.

Already, my brother says the Chinese are seeing the potential to transpose dirty cities like Guangzhou into greener spaces, and move dirtier businesses into the inner parts of the country where they’ll keep people employed and help build the needed infrastructure.

How will incumbent companies react to this new technology? A way to judge them, according to Christensen’s theory, is by their resources, values and processes. Expect an innovator like Apple to adjust immediately. But how many Apples are out there?
The Economist and my brother raise some interesting questions: Might this technology upend what’s left of American manufacturing? Or might it feed the imagination of a new set of entrepreneurs and move the manufacturing centers back to our shores?

POINT 5: The Power of Why?

Simon Sinek, the author of the book, “Start with Why?,” points out in his lectures that most businesses are great about telling us the “what” and “how” of what they’re doing.  An example: Our company makes great cars. (This is the “what” of that they do.) We do it in ten great plants around the country. (This is the “how” of what they do.)

But few tell us what motivates them, the real reason the company was founded. There is a long and historical list of businesses that have been successful because they’ve been able to enunciate the basic value of why they’re important to the consumer on a gut level, says Sinek.

They range from the Wright brothers, who built the first flying machines, to Microsoft, which was founded by Bill Gates.

Gates was helping the city of Seattle as a young man to synchronize traffic lights to help improve the lives of others. In an online interview, Sinek says that’s the key reason behind why Gates founded Microsoft and the Gates Foundation.

San Francisco skyline

Photo of the San Francisco skyline by Flickr user striatic

Look around your city and ask this question: What businesses and leaders do I admire? Why do they do what they do?

The answer may very well give you a list of those who will survive this economic downturn. Those who’ve created businesses to take advantage of short-term market gains will rarely be those who grow into larger companies, says Sinek.

Point 6: None of us can predict the future

We can learn, however, from what happens to us.

When Egypt erupted in demonstrations that resulted in regime change, there was worldwide surprise. Not even Israel, which borders Egypt and has one of the finest counter intelligence units, had a sense of the volatility.

Perhaps the world’s diplomatic corps can learn a lesson I discovered during a visit to McDonalds’ headquarters in the 1990s. Many years ago, hamburger sales fell on Fridays during Lent.

But McDonalds did not despair. They simply talked to customers.

They learned that hamburger eaters had given up meat on Fridays during the holy days. From those conversations, the fish sandwich was born.

When faced with the hamburger crisis, it would have been easy for McDonalds to chant: The worst is yet to come.

But a negative outlook rarely solves a problem.

Randall Smith is the Reynolds Endowed Chair in Business Journalism at the University of Missouri School of Journalism in Columbia.

In Basics, Economy, Featured.

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