For the past two weeks I have posed the same question to several members of my Vistage groups here in south Florida with fascinating results. That question is, what if the economic situation has masked a paradigm shift in your industry? Most of us only really know that revenue has fallen, often sharply compared to 2007 and is now advancing. Diminished revenue required that businesses reduce overhead costs and of course direct labor costs. That’s what produced unemployment at that averaged 9% in the US just a couple of years ago and still stands at 7.6% according to department of labor figures. Some of the factors that could drive significant shifts in product or service acceptance follow. There are many more:
- Change in technology
- Change in relative value perception compared to other directly or indirectly competitive products and services
- Change in customer attitudes concerning what they can afford
The section of economics called Binary Economics holds that capital and labor combined produces growth. If one looks into this literature one discovers extensive arguments concerning the relationship of labor to labor saving devices. Much ink is laid down in the debate on whether the capital investment itself is more responsible for an increase in productivity or if labor participates in productivity and growth driven by new capital investment and therefore deserves a portion of the productivity in the form of wages.
I believe the point is missed. While this is an engaging argument I believe it is currently true that virtually all of the value of productivity increases accrue to the owner of capital. In the past two decades we have experienced a widening gap in income and wealth compared to cost of living with the middle class on the losing end of the equation. Due to the current economic situation this shift continues. Due to lower incomes and increasing cost of living a much higher percentage of the population is now spending all of their income. Some are saving. Some are paying down debt. Consumer spending has not accelerated significantly. Yet, investors are accumulating earnings (both active and passive) for investment and are will not spend at the same rate per dollar earned as those who are not earning money beyond their current cost of living. The theory of Binary Economics holds that economic growth is the result of spending. Has a spending paradigm shift already taken place that will alter many markets? Are we seeing a weak recovery or a new real market level due to new decisions that ripple back from consumers who can’t spend at the rates they used to permanently? Finally, does this ripple back or trickle up to all businesses?
If it is so, what will you do? Does this mean adjusting to a new economic size? Does it mean you need to shift your own capital to a different business? Are your infrastructure and staff appropriate to the new size or another business activity? When will you know if your business is permanently affected?
These are vitally important questions for every business owner. Those who answer them correctly and execute sound plans will be the winners. Those who join Vistage groups will have talented peers and experienced business coaching to help them meet the challenge.