- We are currently amid a "crash diet" as companies trim down and focus on their core businesses.
- The smart leaders in this new environment will embrace pragmatism when it comes to doing more with fewer resources.
- A more long-term view on the definition of success is now the new normal.
Each decade comes with its own set of geopolitical forces, cultural shifts and scientific milestones that drive evolution in how best to lead and operate businesses. This sole message is clear: What worked before won’t necessarily work this time.
The post-World War Two era saw an immense inflow into the workforce and dramatic increases in productivity as scientific progress made during the war translated into American business dominance. Manufacturing was king, and per capita income and quality of life soared.
The 1970s and 1980s brought us “stagflation” and deep questions around whether the Japanese business model was superior. Ford, General Motors and Chrysler, the previous corporate leaders, were being challenged by Toyota and Mitsubishi. This was a long winter only undone by the next shift which was the most dramatic of the 20th century.
The 1990s saw the re-emergence of technological progress in the United States that drove extraordinary global economic growth until the internet bust in 2001. Amazon, eBay, and PayPal were started, and Microsoft and Cisco became behemoths. While the consequent recession was painful in early 2001, it was also short (and contained to high-flying dot-coms) as we saw Google and Facebook emerge from the ashes.
The Great Financial Crisis (GFC) in 2009 had global consequences, but the poster-children of that era’s excess, Webvan and Pets.com, re-emerged as high-quality businesses like Instacart and Chewy. While we grew slowly out of the GFC, the United States again roared back as the global innovator, with mobile phones, apps and the sharing economy in the 2010s. Apple, Airbnb, Uber and Snapchat defined the next shift in the global economy.
Since then, geopolitical stability and the resulting ‘peace dividend’ — along with abnormally low interest rates — created excess capital that was inefficiently deployed. Additionally, the stimulus from Covid along with sudden persistent shifts in consumer behavior (work from home; Zoom; the ‘order anything’ mindset) produced the conditions for another crash — as we saw in 2022.
We had hoped that the 2020s would roar like the 1920s, but instead we got a new set of challenges that have — and will — require structural changes in the way we lead and grow businesses.
Thankfully, this crash has not been as severe as the previous few: low unemployment and steady consumer demand have counteracted the higher cost of capital and the disruptive emergence of AI. Instead we are in the midst of a ‘crash diet’ as companies trim down and cancel speculative projects to focus on their core businesses.
Those industries that had not yet proven that a big market existed, like crypto, have failed or gone into hibernation due to questions about their utility. Also, the worries about global supply chains and reaction to the negative effects of free trade have dashed hopes that we will return to the era of globalization and low cost of capital any time soon.
Leading through this sudden shift in sentiment and structure will require new approaches not described in the business books on your shelves. Here are some of the practices that leaders should employ right now:
- Reset the leader-employee balance. Long gone are the days of rigid corporate hierarchies and unfettered employee autonomy layered with lavish perks. Google, once a bastion of napping pods and quinoa for lunch, has cut, reorganized, enforced performance goals and retracted some WFH policies. Leaders have a once-in-a-generation opportunity to re-cast toward a more balanced relationship with their employees. The job market is currently robust, but the bidding wars for engineers and the $500,000 per year product manager fresh out of college are last generation relics.
- Adopt a “zero-based budget” mindset. For companies large and small, it’s been almost 15 years since the “free money” era began, and now scarcity and discipline are back. Applying standard business rules isn’t a muscle that many have had to exercise in a while, if ever. This is the perfect opportunity to think about your business with a “zero-based budget” mindset: in other words, start your budgeting process with the assumption that you have zero dollars to spend and then begin allocating funds to projects based on the revenue or potential value they will generate to ensure that every dollar is spent with purpose. This is the opposite of ‘you can grow your budget by 5% to match expected growth’ or ‘cut your budget by 10% based on reduced revenue expectations.’ The clarity and bloat-prevention that will naturally result can ensure that your company’s culture adapts as well. Transitioning employees back toward a longer-term view of how to build sustainable businesses, and matching rewards more closely with successes, is an enormous opportunity. These fundamentals will ensure a company’s survival during lean times and will build a foundation that allows for extraordinary growth during boom times, as they most surely will reappear.
- Don’t ignore growth. Beware of those who tell you to ignore growth. For venture-backed start-ups growth equates to “product-market fit” — which means that your company’s product or service has reached a point where it is evident, with high confidence, that customers will pay for what you provide while generating a profit for your company when all the costs of delivering the product or service are accounted for. For more mature companies, market-share matters a lot right now as it’s a proxy for long-term success. Investors don’t expect Verizon or DirecTV to grow 20% per year amid cord-cutting and fierce competition from smaller rivals like T-Mobile. However, investors do expect that you have a plan to maintain your market share, grow your share of the consumer’s wallet and invest in adjacent business lines that leverage your brand and distribution strengths. It’s no longer sexy for a wireless company to buy a media company on a wish and a prayer, but it is attractive to drive new products, like 5G home Wi-Fi and provide streaming TV, to your existing customers.
- Inspire, motivate and embrace pragmatism. Inspiration and motivation are more important than ever during this reversion to the mean of normal business rules. Teams must be looped into the strategy of what it means to operate in an era of scarcity, but at the same time, be motivated that the rewards of a successful business can be the same and more durable, albeit over longer time frames. The playbook is changing — as companies build for the long-term, risk-taking should be commensurate with resources, and performance measurement should be re-prioritized. While there’s no fail-proof equation to ensure success, the smart leaders in this new environment will embrace pragmatism when it comes to doing more with fewer resources; translate the structural changes happening in the business environment back to their companies; and educate employees that a longer view on the definition of success is now the new normal. Instead of unbounded optimism and staggering amounts of available capital, a somewhat more sober approach to growth will build companies poised for sustainable, long-term success, prepared to weather the winds of changes that lie ahead.
Leadership in business has always required adaptability and nimbleness, but these traits are in higher demand now that the world is no longer giving a free pass to vision-only companies.