It’s time for the Fortune 500 company to act like a river reed instead of a mighty oak. But how?
THE STEADY-STATE ENTERPRISE
That’s the question I’ve been getting from CEOs for the past ten years or so, and it’s the main reason I chose to write this book in the first place: they’re ready to listen. They don’t call me up asking, “What do I do if I can’t grow my company anymore?” It’s usually after I’ve given a speech about digital economics and the possibilities for a more sustainable approach to enterprise that one of them asks me to lunch or offers me a ride to my hotel.
We talk about technology, nature, and the future but invariably—just as we’re saying good-bye—the real questions emerge. How do I transition from a postwar growth corporation to what we really are? And how do I tell my shareholders the news?
They’re always relieved to know that the steady decline in profit over net worth they’ve been suffering is not their own secret problem but a widespread symptom of this period in economic and technological history. The only lingering question is whether it’s simply a cycle repeating itself or a unique and unprecedented challenge to our economic operating system. Although they would be the last to see it this way, even the corporations would be better off if things are happening truly differently this time out.
According to political economist Carlota Perez, who has conducted the most comprehensive analysis of how entire economies respond to technological revolutions,37 we have passed this way before. In every instance so far of a major technological revolution—whether the steam engine, electricity, the automobile, or television—we have gone through the same five phases.
In the first phase, maturity, established companies from the previous technological revolution plant the seeds for a new paradigm. Electric companies invested in the first radio and television companies; Xerox, an office machines company, invested in research for the first computer user interfaces; Kodak developed the first digital cameras. Companies use their capital to invest in the technologies and industries that eventually replace them. The next phase, called irruption, is the technological breakthrough itself, and the disruption of the previous technology as well as the industry that built up around it. The automobile disrupts the horse trade, TV disrupts radio, the Internet disrupts TV, and so on. Next comes frenzy, when we see the formation of speculative bubbles, increasing unemployment, and the beginning of unrest. That’s likely where we are today, with the absurd valuation of every remotely plausible new platform monopoly, as well as the joblessness and upset that the successful ones generate: cabdrivers protesting Uber, hotel workers complaining about Airbnb, and San Francisco residents throwing rocks at Google buses over inflated rent prices.
Then the stock market bubble pops. Perez sees that as the turning point, when wealth disparity between the winners and losers reaches an extreme, civil unrest reaches a peak, and government is forced to act through regulation. For instance, the irruption and frenzy phases of automobiles and mass-produced appliances led to the Roaring Twenties and eventually the 1929 crash. So government and even industry begrudgingly supported the New Deal and the welfare state. Only then followed the more stable, regulated period—a golden age—when the middle class actually got to benefit from industrial technologies. This period, what Perez calls synergy, leads to a wider assortment of industries that support the original technological revolution but in ways that give more people access. In Perez’s examples, driving schools supported the widespread adoption of automobiles, while new import and export industries extended the benefits of canals. As such industries grow and mature, they form the basis for the next round of technological innovation.
Without government intervention and initially painful regulations, however, these revolutions would never have made it through the turning point to a golden age. The industry-driven American dream of an automobile and a home in the suburbs was made possible by the welfare state. The GI Bill provided the down payments for homes, and unemployment insurance allowed workers to keep up mortgage and car payments between jobs. Without such welfare accommodations, cars would have been repossessed and homes foreclosed on whenever a factory paused production and laid off workers. This would have crippled the automobile and homebuilding industries, which were then still a backbone of the American industrial economy.
But we’ve seen extreme wealth disparity as well as two stock market crashes so far—the dot-com crash of 2000 and the digital finance crash of 2007—and no sign of a widespread populist cry for more regulation or a welfare state. A popular uprising for government intervention seems unlikely when current populists, such as the Tea Party, see government as the cause of, rather than the fix for, the inequities they are suffering. Even a government-supervised marketplace of corporate health insurance plans is understood by many as a form of capitalism-killing socialism. Meanwhile, progressive populists (such as the members of the Occupy Wall Street movement) went from demanding government reform to simply taking care of issues themselves, through mutual-aid efforts and debt buyback programs. Things would have to get much worse, I fear, for today’s crop of populists from either side of the political spectrum to seek redress in the form of government intervention. And then we would need an entirely more functional Congress in order to execute any genuine reform.
Besides, even if we somehow made it through the frenzy, there’s no great opportunity for a “synergy” of new ancillary businesses waiting on the other side of the crisis. The young companies of today’s technological revolution don’t require as many employees or support industries as those of the past. That’s why our predicament is not so much a case of creative destruction as one of destructive destruction. Real businesses and profitable interactions are destroyed, and in their place comes a corporation that does not even have an operating profit. All the money—all the value—is in the stock, and the new company is responsible for generating less total economic activity than there was before its existence. This is not an altogether bad thing—especially if we don’t see economic activity as the goal—but it is an increasingly true thing.
Or think of it this way: A music industry that once supported everyone from musicians and writers to recording engineers, record manufacturers, distributors, illustrators, and store owners, is disrupted by MP3s and a few apps that let people play them. And those apps don’t actually make money. Most often, they are money-losing propositions for everyone except the original investors, who have already executed their exit strategies. Amazon replaces thousands of brick-and-mortar stores, as well as all the industries that supported them—from window dressers to shelving manufacturers to the eateries where the shoppers lunched. Airbnb destroys far more jobs, income, and health insurance plans than it creates.
Instead of rethinking the innovations of the industrial age, we extended them into that “second machine age” envisioned by the MIT economists. Rather than transcending industrialism’s antihuman values, we digitized them.
Some of these examples will be elucidated in the coming chapters, but what should already be clear is that the financial and marketing innovations we associate with the digital age are less disruptions than extensions of established business practices—new ways of exercising the same old corporatism. The chartered monopoly of the industrial age sees its expression in the platform monopolies of Uber and Amazon, and so on. Even unintended consequences, such as the havoc wrought by algorithms on the stock exchanges or of new technology companies on existing markets, find their origins in these embedded values of our industrial operating system.
Luckily, some companies are looking for another way out. Every executive who asks me how to overcome the growth requirement is actually another person in a position of power willing to look at what’s going on and to try something new. CEOs are as likely candidates as any to supply human intervention here. After all, it’s the CEOs who witness most directly how the free-market principles on which their businesses are based are themselves be
ing undermined in the frenzy. Previous technological revolutions could be understood as creative destruction. It might have been bad for one’s existing business, but at least there were new sectors where one could redeploy or invest. There’s always a bull market somewhere. And to be fair, even in spite of the seventy-year trend toward lower corporate profitability over net worth,38 even in spite of the fact that we’ve reached the limits of our planet’s environment, there are still a few growth areas left. There are the morbidly robust sectors, such as military hardware and toxic cleanup. Right along with them are Big Pharma and medical insurance—industries that both grow along with the catastrophic health challenges wrought by war, pollution, and the stresses of a bad economy. Still, these are “crowded trades” already, and hardly safe refuge for the entirety of corporate America.
CEOs have tried hiding behind acquisitions, layoffs, outsourcing, and write-downs. Now, however, the smarter ones are looking to get in front of what appears to be an irreversible contraction. This is good news. Instead of waiting for government to intervene, they are choosing to intervene themselves. Besides, if this technological revolution is so inextricably married to the core values of the corporate program, it isn’t going to spawn new opportunities for growth or labor, anyway. It is consuming the very landscape on which additional corporate activity would occur; at the same time, the highly centralized corporate model is being disrupted and in some cases replaced by the more distributed, peer-to-peer potentials of local and digital networks. Any way you look at it, traditional corporatism cannot survive indefinitely in a digital economy.
So here are some key concepts and strategies for moving forward. Each of them undermines at least one of corporatism’s original core commands but ends up serving a corporation’s constituencies better in the long run.
1. Get Over Growth
The only real choice for corporations that want to prosper in this volatile but ultimately contracting landscape is to reject the core commands of the chartered monopolies on which they are based, starting with growth itself. Instead of thinking of a company as an entity that must continue to show growth, think of it as an entity that must continue to generate enough revenue to pay its employees.
If infinite growth is no longer a possibility or even desirable, then you must shift your sights away from the big “win” in the form of an IPO, acquisition, or growth target. Instead, focus on achieving a more sustainable equilibrium. Think of it less like a war, where total victory is the only option, and a bit more like peace, where the objective is to find a way to keep it going. Running a business in this fashion feels less like a traditional football game with winners and losers and more like fantasy role-playing or a video arcade, where the object is to play as long as possible. Everything has to be kept viable, from the consumers and employees to the landscape in which you are operating.
Great family businesses have understood this for centuries: hire your friends and family, invest in people as if their personal fates matter to you, and think of your business less as a means of extraction than as a sustainable legacy. You can’t “flip” your family, so why try to flip your business, your community, or your planet? Interestingly, while companies with more dispersed ownership structures tend to do a little better during boom economies, those run by families are a great deal more stable and profitable during downturns. This is because families tend to be less speculative with their own money and more risk averse when their children’s futures are depending on the outcome of their decisions. As the chairman of Riso Gallo, an Italian rice producer since 1856, puts it, “We say that we didn’t get the company from my parents, we are borrowing it from our children. And this is important. We are thinking of how it affects our offspring. We don’t think in quarters, we think in generations.”39
Unlike CEOs, who are incentivized to outperform each quarter, managers of family businesses are most concerned with increasing their odds of survival and finding good positions for their relatives. They carry little debt, make fewer and smaller acquisitions, retain their talent better, and enter foreign markets more patiently and organically. As a result, according to a Harvard Business Review study, the average long-term financial performance for family businesses exceeds that of their nonfamily peers by more than a few percentage points.40
Running a steady-state business means working against the extractive bias of the traditional corporation and looking instead toward investment and reinvestment in the markets on which the company depends. Customers, neighborhoods, and resources matter as much as the coffers. In fact, accumulating a war chest becomes understood as a liability—a dead zone of wasted capital that not only lowers profit over net worth but stands to lose value compared with inflation. Worse, the extraction of value from a company’s own marketplace prevents that market from continuing to deliver dividends over time. It’s like a loan shark killing his debtor; it may scare others, but it doesn’t get the money back.
Instead, look to maximize ongoing revenue, stable profits, a healthy workforce, and a satisfied customer base. If anything, CEOs should be suspicious of sudden spikes in business activity and see them as potentially unsustainable growth trajectories. Rather than building a new factory to meet rapidly rising demand, the steady-state CEO rents temporary facilities to increase capacity while testing a new market’s sustainability. Instead of using a temporary fad as an excuse to “grow the company,” the CEO uses it as an exercise in resilience and scaling. The company should be equally ready to return to the previous size as to scale up even more—or take on some partners.
If a company can exist perpetually on a particular scale—be it a single shop, Web site, or factory—where is the obligation for it to continue to grow? For a business to find its appropriate size—even if this means scaling down—is not a Communist plot. Neither is creating a four-day workweek at full pay for the employees who got the company to sustainability in the first place. It may be counterintuitive in an age when CEOs are incentivized to grow now and pay later, but it is entirely more consonant with the efficiencies that digital technology brings to business.
The more Darwinian libertarians among us may feel compelled to reject a steady state as an affront to nature. True enough, nature is highly competitive, and species continue to adapt over time. On an evolutionary level, if you snooze, you lose. But this doesn’t mean species have to keep growing, either in size or in population, to remain competitive. The ratio of owls to mice in a forest finds an optimal range, beneficial to both species. If the owls are too successful, they will run out of food. Likewise, an individual life form is allowed to become “full grown.” Growth is part of an individual’s childhood, not its adult phase. A world where everything is required to keep growing in order to stay alive makes no sense.
Instead, we must assemble businesses more in the fashion of ecosystems, such as a coral reef. Species can still iterate and adapt new approaches—evolve—but they are doing so within a greater stable matrix. Likewise, a steady-state business still makes progress. It still has research and development, but it is motivated by a need to serve better and more efficiently, not to fuel some artificially imposed growth target. The equivalence between growth and progress is not only artificial and unproductive but also unsustainable in a contracting marketplace and on a planet with limited resources.
In 2014, Toyota Motor Corporation publicly shrugged off a year of record growth and a $10 billion surge in operating profit because it saw overexpansion as a greater risk than slow or even negative growth. “If we make plans based on the pace of growth we have experienced over the last few years, things will not turn out well,” one executive told Reuters.41 Toyota’s president, Akio Toyoda, went so far as to blame the company’s aggressive expansion for both expensive product recalls (fittingly, cars accelerated by themselves) and its vulnerability to the economic crisis of the past decade. While competitor Volkswagen continues to pursue aggressive growth targets (ten million cars a year by 2018), Toyo
da remains calm. “If a tree suddenly grows very fast,” he explains, “the rings of the trunk will be unstable and the tree will be weak.”42
2. Take a Hybrid Approach
Even CEOs willing to challenge the growth imperative can’t turn their corporations on a dime without angering shareholders or violating their fiduciary responsibilities under their corporate constitutions. But they can begin testing new, sustainable strategies for a more distributed landscape by dedicating limited resources to them while still running their main businesses the old, extractive way. Such hybrid approaches give businesses the ability to feel more like they’re merely hedging their bets on the future of the digital economy.
So, for example, one ingrained corporate behavior that might prove self-destructive in a digital climate is secrecy. Sometimes secrecy fails because of explicitly digital factors. For instance, proprietary security software for corporations and banks is proving less secure in the long term than open-source solutions. Why? Because secretly developed software is built and tested by fewer people in fewer scenarios. Open-source software has the benefit of hundreds or even thousands of developers, banging on it from all imaginable directions. Its openness is not a weakness but a strength. If a firewall’s impenetrability is based on keeping how it works a secret, it’s not a firewall at all; it’s a security leak waiting to happen.
We can generalize on this principle to the greater business environment in a digital age. Today, open sharing and collaboration are proving better long-term corporate strategies than sequestering research and development. Hiding one’s secret formulas suggests to the public—and to investors—that the company is depending on the innovations of the past and fears it won’t continue to develop new ideas into the future. Its best days are behind it, and now all the company can do is play defense. In contrast, the confidently innovating company shares its developments in the hope of incorporating the insights of others. It welcomes contributions from the outside. People with great ideas can be hired. Companies that can identify areas for improvement can become new partners. If nothing else, demonstrating such openness expresses a company’s expertise, leadership, and commitment to the culture it’s supposed to be serving. Making better stuff is more important than who gets the credit.
Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity Page 12
