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Zombie economy

What happens to a business in a flat economy and what strategies can it adopt to thrive?

26 Jan 2012

By Matt Howes

Zombie FD

I DO not know if you have noticed, but it is quite tough out there. The euro is in turmoil, sovereign debt is mounting and credit is still hard to come by. But overriding all of this is one really big problem: growth - or, rather, the lack of it.

When economists or, even worse, journalists talk about economic growth, the main focus is on whether it is positive or negative; by this they mean where we are in the economic cycle.

Gordon Brown insisted that he had rid the country of “boom and bust” - by which he presumably meant a state of continual economic growth instead. The truth is rather more dull: we could face a prolonged period of zero growth. It may no longer be a choice between prosperity and austerity, but just flat-lining. You may have heard the phrase “Zombie Economy” - dead… but alive.

It has happened before. Japan’s “Lost Decade” from 1990 to pretty much now was/is a period when a collapse in asset prices and a lending bubble led to a period of no growth. There is also a branch of economic theory that sees flat growth as a good thing - it views the pursuit of growth as inherently unstable and creates uncertainty in the business environment. It is an interesting thought but I am not sure it is sustainable in the long term. Boards must deliver ever-increasing value for their demanding shareholders. Politicians need feel-good factors to keep them in power.

However, whether we like it or not, this may be where the economy will be for some time. So what happens to a business in a flat economy and what strategies can it adopt to thrive?

The good news is that survival is more than likely. Twenty-five percent of US businesses went bust in the few years after the Wall Street crash. Being a “glass-half-full” sort of chap, I read that as 75% kept going in the midst of the biggest economic downturn in history.

There is plenty of advice out there on thriving in a Zombie Economy. Much of it states the obvious (stay liquid, keep debt low, keep costs tight) or over-uses the zombie analogy (“they eat the fat ones first”), which also means stay liquid, keep debt low and keep costs tight. But among all of this is something more profound, and it is about products, processes and markets.

Business is all about innovation. We seek out new products and new markets. Japan survived its lost decade partly due to austerity but mainly due to the growth of China’s economy on its doorstep. But how much of China’s success was due to innovation and how much was down to price and most importantly exploiting markets and products Europe and the US no longer cared about?

Perhaps in chasing new products or new forms of finance such as derivatives, the established economies lost something - delivering products and services people actually want at prices they can afford. Perhaps this is the lesson for any business that seeks to thrive in conditions of zero economic growth. We throw away good ideas too easily in an endless chase for growth in value and innovation. When times are tight it may be time to recycle.

Fifteen years ago the CD had all but killed off vinyl records. In 2010, worldwide vinyl sales increased while CD sales declined. Why? Better quality for the connoisseur as downloads took over the mass market. The internet was also going to kill off the postal industry - yet through eBay and Amazon it has been its saviour. Innovation in a flat world is as much about looking around you as looking forward. I am not suggesting simply replicating the old ways of doing things but recognising that, at a time when research, development, capital and marketing budgets are likely to be under pressure, keeping control of established products, markets and processes plays a significant strategic role. ■

Matthew Howes is a principal at the FD Centre

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