Sowing the Seeds of the Future

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The Business Cycle

In my view, the aggregation of statistics from firms into industry groups and over emphasis on macro statistics, that are both late published and misleading anyway, causes us to have wrong notions about business cycles.  In the macro economy we can see that the rise and fall like the path of a bouncing ball.  In the view of most economists these fluctuations are the rule, they are "normal", they are considered the signal of a healthy changing economy. 

Every downturn in the economic cycle creates new opportunity, assets are released that become low cost inputs to some other process, people are dislocated, creditors and shareholders suffer financial pain, people are forced to think seriously about how to improve.  It's totally unpleasant, sometimes highly destructive, but necessary.  The secret seems to be in using the downturn to evaluate your assets and your data so that you can develop a creative and innovative new plan for the future.  It takes great courage to admit past mistakes and to make new plans and to initiate new innovations when the downturn is likely to be signalling "caution; caution". 

The Company Cycle

David L Birch in his book "Job Creation in America" has tried to investigate the business cycle by studying the behaviour of individual firms.  The changes within individual firms are even more dramatic than changes in the macro economy.  The present status of a firm is virtually no indicator of it's future status.  So much so, that Birch says that a superior way to pick winners of the future is to choose only from firms doing poorly now.  This is most evident when you compare the fate of firms rated as winners in one period and firms rated as losers in the same period, with the performance of the same firms two years later.

Winners and Losers Among Firms - Change Over Two Years
Period 1 Winner's  
Period 2
Loser's  
Period 2
Liquidation  
Period 2
478528 = 100% Winners 12.5% 10.8% 10.4%
243078 = 100% Losers 16.75% 7.25% 11.4%

Birch studied 1556375 firms in the USA looking at business growth as indicated by changes in employment.  To pick one of the highlights he quotes the following statistics.  Of 478528 firms judged to be big winners in 1970-1972, only 12.5% were still in that category two years later, 10.8% were now big losers and 10.4% had been liquidated.  Of all the 243078 losing firms in 1970-1972, 16.75% were big winners two years later, 7.25 were still big losers, and only 11.4% had been liquidated.  Across firms of all types about 67% had no change in development in the two years.  What happens to any firm depends on both external events and internal events.  External events both positive and negative must impact upon firms of all types and are not under the control of company management. 

Internal changes are under managerial control, and Birch's figures show that losers try harder.  If the future is to be different and somewhat under managerial control, firms need to provide new investment, new ideas and new effort to ensure the seeds of future success are sown and nurtured.  This is self evident to all firms.  All firms make the effort, but the results are very uneven.  Firms who succeed in the future inject something new into the equation, they improve some aspect of their performance by innovation.  Where the present effect is adverse people are forced to look at their operation.  In my view this involves understanding reality, appreciation of your strengths and weaknesses, and making plans for a better future. 

The Critical Role of Innovation

The "seeds of the future" are in our hands now.  Every company knows that, every firm tries to improve.  Birch's figures also make it clear that most firms (about 67%) remain relatively stable despite the business cycle and despite their effort to be innovative.  Why then are so many firms unsuccessful in their efforts to be innovative?  I my view the problem is that good "seed" and bad "seed" are mixed.  Once "seed" is planted, we need to give the same care and attention to both good "seed" and bad "seed", the difference being that the good "seed" will produce a desirable result (crop or returns) and the bad "seed" won't.  Collecting and sorting "seed" is a very important task.  In the information age most "seed" comes in the form of ideas.  Unsorted ideas are just data, a meaningless accumulation of both the useful and the useless.  Good innovation depends on choosing the best "seed". 

I have written extensively on innovation.  I suggest a good place to begin to accumulate "good seed" is in your personal business journal.  Reading and understanding the article "Sources of Innovation" is time well spent.

John Veitch

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