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Crisis is good!

July 19, 2017

(adaptation of a 2009 article; part 1 of 2)

 

First let me say, I am not the type of person that believes everything was better in the old days. On the contrary, I love progress and evolution, sometimes even revolution. I love the promises of nano-technology and quantum physics, artificial intelligence and other technological developments for example.

 

On the other hand, however,  I am an economist of equilibrium. I believe that balance and equilibria emerge automatically and therefore sometimes the old needs to balance the new. In my opinion, this has to do with the inherent urge of survival of nature. And by nature I also mean homo sapiens.

I believe I was about 9 or 10 years old, when I went Christmas shopping with my mother. I loved going with her, because on the way back, after very straining shopping obligations, we would always pass by THE candystore. I remember lively the older couple owning and running the store. And while their candy was amazing, passing by at Christmas time was ultimate! Because then they would sell their homemade sugarplate; a traditional Dutch candy particular for the holidays. The bag always was empty by the time we reached the car…

 

In time, the mom-n-pop store disappeared. This store however, is representative for a large number of other stores, factories and organizations that have disappeared. But let me be positive: they will be back (just to quote a Californian governor)…

 

But first, let me highlight the reasons why they disappeared in the first place. Many large organizations grow either by adding staff and support departments or by buying up other, smaller organizations. This is symptomatic of their biggest issue: they have great difficulty in developing creative ideas and truly understand their markets. The implications of this are 3 parallel developments.

 

Firstly, these organizations have grown uncontrolledly and uncontrollably in their pursuit of ever higher growth figures to keep shareholders happy. They only bought other organizations to mask their own lack of understanding of customers and markets. By centralizing functions they had been able to show positive financial growth year after year without actual, sustainable added value for their customers or shareholders. There is a way of wishing someone to have a lot of employees; I would rephrase it to wishing someone a lot of shareholders!

 

Secondly, this way they were able to realize a continual stream of investment and financing by banks, solely because of this increasing scale. By the way, these banks did the exact same thing, causing in effect the problems of the 2008 crisis! With these money flows, they would buy smaller companies that were closer to their market segments and who understood their customer groups better. The Moloch had lost this essential quality a long time ago!

 

Thirdly, (local) governments are perhaps the best example of a type of organization that has big trouble in understanding its customer groups (citizens). And despite the fact that since 2009 in the Netherlands local governments have really made progress in this department, because of their nature they still mostly create opportunities for those big organizations in terms of building and housing. Through this revenue-driven mechanism, the big ones push the mom-n-pop stores out of the market. And mind you: not because they have superior products or because they have a better understanding of the market, but only because of their scale and propensity to float.

 

But there is light at the end of the tunnel. The customers of the original products of those little, flexible organizations haven’t disappeared. They just can’t find their products anymore, at least not offline. They prefer high quality vegetables, better bread, better clothing, safer and more special cars and more products, produced by those specialized pioneer organizations. By the way, this means that the future for smaller retail outlets and organizations is right there: ask yourself what the added value is of your core competencies for your existing or new customers and market segments. When you are able to make this assessment, you will not just survive, you will reign over offline retail channels.

 

In short, the crisis in 2008 and the one now about to occur in Oman and oil-producing countries was and is caused by the drive to reach centralization and efficiency by lack of effectiveness and the lost focus on added value. And in or shortly after a crisis, these gigantic organizations are falling apart one again.

 

The thing that creative, pioneering organizations need to understand, is that they will have to retrieve their customers and find new ones on the basis of what they do best. They will have to able again to produce the high quality meat, the traditionally baked bread and the safer cars by investing directly into reaching customers, production and operations. Essential question: do you know what you do best?

 

At the same time, local governments are faced with empty retail outlets and office space as these huge organizations are losing ground. Their need for efficiency has automatically led to leaving ‘inefficient’ markets and areas. Does this mean that organizations cannot make money in these markets and areas? Of course they can, but not if they have to support such an organization. Because the funny thing is: for organizations aimed at efficiency, they are surprisingly inefficient!

This will have as a consequence that real estate prices drop and that effective, pioneering organizations are able to establish themselves again, hence the enormous increase in (successful) startups in recent years.

 

Because of decreasing scales combined with increasing customer and segment customization, flexible, pioneering organizations will be able to serve niches and smaller segments. But only companies truly understanding their customers and markets and focusing accordingly will be successful. Tadaaa: the balance in the market between big and small has reestablished itself.

And who knows?

 

Maybe next Christmas I can buy the traditional home-made sugar plate again…

 

End note:

I wrote this article in 2009, when an economic crisis hit global demand and local economies. From our experiences in Oman, we see similar things happening to a smaller scale, fortunately, but for the same reasons. I hope, we can learn from our experiences and build on it and I will describe my views on it in the next blogpost.

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