We have all heard of the term Reset and probably all used it many times as we reset our clocks, or our odometers in our cars and even as we reset or re-boot systems that stall.
How we at the Business Value Group interpret the term in the context of the economy of '08/09 is that there needed to be a correction, as the economic system could not sustain itself due to the shaky nature of the foundations upon which it was built.
We have come up with a few conclusions and predictions about what the future is likely to hold, based on what has happened. Clearly the rapid constriction on the flow of capital coupled with accelerated decline in asset values (most all of which is linked to housing value collapse) brought many companies to the verge of Bankruptcy as their capital structure and liquidity came under extreme pressure. Much will be spoken of the collapse of the US Investment Banks of Lehman Brothers and Bear Stearns as two of the biggest symbols of the overall system collapse.
Our Model Explained :
What we see from a growth perspective, for the developed world at least, is that while the reset did not send everything back to zero, it had an exceptionally dramatic drop. A good macro indicator of the severity was that annual new car sales in the USA were running at approximately sixteen million units per year in 2007 and this droped to a run rate of nine (9) in the '08/'09 timeframe and analysts are expecting it to get to eleven (11) or maybe twelve (12) million units per year next year.
So what we expect to see is a growth curve with a drastically lower trajectory than before but what we are also expecting is for the growth to be somewhat tentative and appear like multiple little corrections as the people and corporation's spending behavior shifts, based on other macro factors such as interest rates, unemployment level, debt levels, leverage levels, savings rate, home valuations e.t.c.
We are also expecting a continuation of the already greater due diligence in the new businesses that get funding from the private capital markets. There will be continued significant pressure on start ups or early stage companies to be extremely cash conscious. This source of capital will be entering the system alot slower and at alot lower level so this front end (as well as the back end with Customers) will also contribute to an overall slower rhythm for businesses.
We do also believe that the market will struggle to find its rhythm for another reason and that is, that at least for Public companies, little has been done or probably can be done, to dampen the impact that traders and speculators have on company share prices and overall valuations. Clearly everyone knows that business cycles are alot longer than the short term investing behavior would have you believe, so Executive teams and Boards of Directors will have to be much more engaged and rigorous in the management of the business, and be much more judicious and discerning on the judgements they make about company investment stragegies and overall performance. They must take up and lead the way in holding the medium to long term view while at the same time not get blindsided by some disruptive force, such that the enterprise can focus on taking the right steps for long term sustainablity.
Warren Buffet is the Master in this regard and his results over time have proven that there is an alternate to the reactive, short term mindset of save this quarter and we'll worry about next quarter tomorrow.
I think that many Executives will have to learn or re-learn that the numbers are a result or are outcomes of decisions made and actions taken MUCH MUCH earlier in the business process. In periods of economic uncertainty it is going to be even more difficult for people that manage quarter by quarter to shift into longer cycles of thinking. That's one of the reasons that management and leadership is difficult and this will be a time when you need to bring your A game to the table.
If you want a thought partner to help navigate through your particular situation then give us a call. It might be the most important call you'll make this year. +1-408-904-8195