Business Blog: Hoover’s Business Insight Zone

In February, Fast Company ran a special section on oil companies and their efforts at sustainability. You can find an overview and links to various sections here:

Sensible Investing: Oil

The approach of the section puts me in mind of something I’ve been thinking about a lot lately, namely how business evolves to incorporate elements that were previously regarded as externalities. Sometimes it happens because of new regulation, sometimes in response to the concerns of customers, sometimes in response to events beyond any one company’s control. Some historical examples:

• Two hundred years ago, as the Industrial Revolution got underway, workers in Britain, the United States, and other industrializing countries had little legal protection from accidents on the job. If you lost a finger or a hand tending a loom, those were the breaks. Employers would be concerned about this only insofar as they needed to keep a supply of workers close to hand, or else only out of the goodness of their hearts.

  

• A century ago, the U.S. meatpacking industry underwent huge upheaval after Upton Sinclair published The Jungle, which exposed the industry’s health and safety shortcomings. The Pure Food and Drug Act forced meatpackers like Armour and Swift, along with companies in related industries, to come to grips with the demands of food safety — even when that meant large outlays of money.
• In the postwar boom of the 1950s, many major U.S. employers started offering health insurance and similar benefits as a way of attracting workers. What had once been an externality well outside employers’ purview became a key selling point in recruiting new employees.
• During the 1980s, anti-Apartheid activists forced many U.S.-based companies like Coca-Cola to rethink, revamp, or even retract their activities in South Africa, despite the money that the companies were making there. Coke and other companies were forced to bring political externalities into their calculations about how to do business in a major overseas market.
• Since the rise of the World Wide Web in the early 1990s, more companies than ever are offering telecommuting and other flexible work-life arrangements to attract and retain the best talent. In the old days, a company could afford to ignore issues like this, and indeed to insist that workers pattern their time around an 8-to-5 schedule. That seems to be decreasingly true.

Today, of course, the major issue is climate change. For now, companies like Exxon Mobil continue to focus on pumping hydrocarbons out of the ground, convinced — maybe rightly — that oil & gas will continue to be the world’s key sources of energy for decades to come. Other oil majors, like Shell, are taking substantial steps to reduce their carbon footprints now, since they figure that some sort of regulation on carbon (a tax, a cap-and-trade system, or the like) is probably inevitable.

Once upon a time, the key challenges of life were getting enough to eat, avoiding illness or injury, and raising one’s children to adulthood. These days, most of these basic needs are pretty well met for Americans and their economic peers. Yet the world continues to face major problems, including one — climate change — that could be The Problem for this century and beyond.

No doubt different companies and different governments will take varied approaches to bringing these new externalities inside companies’ circle of concern. But however it unfolds, the whole process can’t fail to be interesting.

If you care at all about relations between the United States and China — and in my book, you should — do yourself a favor and read anything James Fallows writes on the subject in The Atlantic Monthly. Fallows has been living in China for the past couple of years, filing story after story on the commercial, economic, and political realities at work in the world’s most populous country.

Particularly interesting is this article from the beginning of this year, in which he discusses the strange financial relationship that prevails between the two powers:

The $1.4 Trillion Question

The whole thing is worth a read, but here’s the nut graf:

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.

Read more

On Friday I mentioned my appearance on Bloomberg TV, in which I discussed the IPO market for the first quarter of 2008, and where I think the IPO market may be headed for the rest of the year. The Bloomberg host seemed disappointed that I wasn’t more sanguine, but right now I just don’t see much reason for optimism about the IPO environment.

Reasons Not to Be Optimistic about IPOs:

>> We’ve been seeing few new IPO filings from week to week, and there’s a large backlog of filings from earlier quarters for companies that have either withdrawn or indefinitely postponed their IPO plans. So even without any prognostication, we can conclude that potential IPO companies and their financial advisers are leery of going forward with these plans.

>> In general, unless you have a history and brand position like Visa’s or Google’s, you want Read more

The subprime mortgage meltdown was already going strong when we started this blog a year ago, yet we continue to hear a drumbeat of worse and worse economic news every day.

Here’s a simple question for the audience, then:

• Who’s to blame for the current mess the U.S. economy is in?

I’m open to suggestions — please leave yours in the comments below.

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(Image: via the Virginia Land Rights Coalition, a famous Thomas Nast cartoon depicting the Tammany Hall ring.)

Who ya gonna believe?

You could be forgiven for experiencing whiplash from the latest economic headlines:

• Bernanke Says Economy May Slip Into Recession
• IMF cuts forecasts for U.S., global economies
• Wall Street Shows Optimism That Crisis Is Fading

Check that last headline again: Just when you think you’re getting a grip on how badly the economy’s doing, something — a good day on Wall Street, a favorable economic indicator, etc. — gets people wondering whether things aren’t quite that bad. It’s hard to know what to think about where the economy’s headed. But clearly . . . it ain’t that good.

Especially since I’m a business-news junkie, I have to be careful not to spend too much time reading the economic tea leaves. And given my interest in 20th century history, it would be fascinating to spend all day deciding whether I agree with the IMF that the current financial crisis is the worst since the Great Depression.

Ignore the forecasts; stick to the knitting instead.

But who cares? Sure, economists do, and regulators should. Talk about the chances of a recession with your friends over dinner, if it interests you. Button up your portfolios, if you haven’t already. (Although it’s a wee bit late, by this point.) But you know what? It’s not worth that much worry — not for most people.

I submit that most of us are better off more or less ignoring macroeconomic data as it applies to us personally. Sure, think about what it means in terms of your company’s strategic and tactical approaches. Lean times call for different measures — both offensive and defensive — according to what business you’re in, and according to what business function you perform. But does it genuinely matter to the marketers and product managers sitting around me here at Hoover’s World HQ whether we’re technically in a recession or not? No. It’s enough to know the basic trajectory and how it affects our customers.

And it’s still more important to serve customers well and to act on their feedback. I know I’m not telling you anything you don’t already know, but given the flood of financial reporting that threatens to drown us, it bears repeating: the macro-economy is usually nowhere near as important to your career as the quality of your relationships with your customers and the quality of your business execution from day to day.

Execute, execute, execute.

I’m in the same camp as Tom Peters when he says that getting your strategy right is a really important first 2% of business . . . but that the “other 98%” of execution is much more important, because that’s where your business actually stands or falls.

Great businesses have been started in every sort of economic weather. Somewhere, there’s an entrepreneur who’s starting a business that will be very successful despite current business conditions, or maybe even because of current business conditions. Heck, I have a buddy in Northern California whose real-estate business is expanding rapidly right now. He has more work than he can keep up with, even in one of the toughest geographic markets — and toughest periods — the real-estate business has ever faced. And what does my buddy do every day? Focuses on his business. Executes the details.

What YOU do to your business is more important than what the economy does.

My advice: Keep an eye on those storm clouds. Glance over those economic headlines. Batten down your financial hatches as necessary.

But then pull on a poncho and get to work.

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Previously in this vein:

• Landscape and weather in the business world.

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UPDATE, Thursday morning: Wordpress isn’t cooperating with me, so I’ll add here the comment I tried to add in response to dblwyo’s comment below:

Hi, Dave - Great to hear from you.

I don’t disagree with your point. Yes, folks need to be aware of what’s going on in their own industry and in the economy at large. For that matter, they need to understand the “weather” that’s affecting their company and their role within that company, since the two could easily diverge.

But I guess what I’m reacting to is the nonstop stream of media coverage that hyperventilates a la “Recession! Depression!! Meltdown!!!” or “Actually, an Obscure Indicator that Doesn’t Affect You Suggests It Might NOT Be a Recession”.

The trends we’re facing now in the economy have been building for a long time, as you rightly point out. NONE of this should come as a surprise. Okay, possible Bear Stearns folks weren’t AS aware as they should have been about the company’s periolous state, but we’re also talking about maybe the worst meltdown ever experienced by a major financial house in this country.

And again, many people will *worry* about this as they worry about rejiggering their personal stock portfolio from day to day, when in fact they would be better served to keep the economic weather and the state of the stock market in their peripheral vision, but to FOCUS on their own work.

Executing well in your own function, in other words, often covers a multitude of failings in macro-conditions.

~

(Photo by iowa_spirit_walker.)

Well, Visa was certainly everywhere investors wanted to be today. The credit-card outfit rode its world-famous name brand — and a strong afternoon rally from financial stocks — to a $17.9 billion IPO, the largest in US market history.

Adding to the fun were strong financial results from powerhouse Goldman Sachs and from Lehman Brothers, which dispelled liquidity concerns to see its shares rise more than 40%. The Fed joined in with a hefty 0.75% rate cut, and even the punch-drunk dollar surged against the yen.

So, jollity all around, yes? Err . . . no. Let’s start with the IPO market picture and move from there:

• As I’ve said before, these days the IPO market isn’t set by one company, especially when that company is a household name like Visa. Google was able to bring forth its monster IPO in the tepid market of 2004 . . . because it was Google. The same applies here.
• The Fed did what it did because its recent efforts to boost liquidity haven’t been enough to stem talk of a recession.
• The results at Goldman and Lehman are certainly nice, but they’re not nice enough to wipe away the fresh memory of the humiliating collapse of Bear Stearns.

So, to recap: great day on Wall Street today . . . future looks bright for Visa (and Goldman and Lehman) . . . but premature to talk about the financial markets as having emerged from the storm yet. I’d say the whole economy might want to keep the hatches battened down, eh?

It was news when the price for a barrel of crude oil first hit $100, but mostly for psychological or symbolic reasons. Indeed, the first $100 bid was a single symbolic bid, not a flurry of genuine, price-signaling bids.

Now, though, the novelty value has worn off. Oil took some weeks to slide back from $100 to below $90, then climb back to the triple-digit mark again. Today it has traded in the $101 - $102 range, which means not only that it has set new record highs, but that traders are operating above $100 for non-symbolic reasons.

As much as we might like to think that markets operate with nothing but cold logic to drive them, the fact is that they respond to human decisions — and humans are often emotional and sometimes irrational.

At this point, a lot of rational actors have decided that a barrel of oil is “really” worth more than $100. With that psycholigical price barrier well and truly breached, it won’t surprise me a bit to see oil run much higher, especially if worldwide financial and geopolitical indicators continue to go the way they have been.

(Image by weirdvis.)

That’s the verdict of Eric Janszen’s provocative cover story in the current Harper’s magazine:

The next bubble:
Priming the markets for tomorrow’s big crash

Online access is limited to Harper’s subscribers, but here are two choice tidbits:

Our economy is in serious trouble. Both the production-consumption sector and the FIRE [finance, insurance, real estate] sector know that a debt-deflation Armageddon is nigh Read more

3 comments

If the economy heads south, how do think it will it affect your organization?  How will it affect the way you manage your business affairs?

It seems to me that the best businesses are managed to thrive in good times and bad — but that’s much easier to say than to do.  If any of my readers can offer their own specific insights into the process, I’ll be grateful to hear them.

(Thanks to reader Dave Livingston for suggesting this topic.)

A quick observation in line with my earlier comments on the nature of the IPO market: It’s worth remembering that there are (at least) two levels of a “market” for merger & acquisition activity:

1. The overall market for M&A. At times this runs sky-high, as it did for tech companies during the boom that ended in 2000, and as it did over the past couple of years for private equity firms doing buyouts. It’s obvious, yet still worth noting, that this broader market is highly sensitive to macroeconomic conditions; witness the current drying-up of liquidity — or just deal-making aggression — among the financial houses.
2. The specific market for a particular asset. Ingersoll-Rand is ponying up quite a chunk of money ($10 billion) for Trane because it believes that adding Trane’s product lines to its own with (a) make it more dominant in the worldwide HVAC industry; (b) insulate it further from the cyclicality of its other businesses; and (c) allow it to operate the Ingersoll-plus-Trane HVAC businesses at a cost savings. The point isn’t how the overall M&A market looks, but how appealing Trane-in-particular is to Ingersoll-Rand-in-particular.

Maybe this is all obvious stuff, but I find that even the obvious bears repeating, especially in light of the business media’s tendency to over-identify trends in the marketplace. Yes, of course there are macro trends, but the presence of them doesn’t necessarily affect the likelihood of a particular deal.