Economic stimulus packages might not work out as planned

Posted on February 8, 2009February 9, 2009 by JeffreyVeffer

With the rush to pass the stimulus packages in various countries, politicians are repeatedly stressing the seriousness of the recession to spur various levels of government into action.
The problem with this is that the more politicians use adjectives like grim and unprecedented and draw comparisons to the great depression the less consumers spend and the worse consumer sentiment gets. This affects how business thinks about investing how consumers shop for goods and ripples up through the economy to prolong and perhaps accelerate the situation.
So in order to push through stimulus packages to fix the economy they may actually be hurting it in the long-run. This is most evident in the consumer sentiment index, which, although marginally higher in January still reflects consumers ongoing fear about the direction of the economy. Consumers now,

” anticipate the deepest and longest recession in the post-World War II era, but consumers do not expect the economy to sink into a 1930s-style depression…”

But in the face of unsettling jobs numbers, consumers are still unsure of the direction of the economy and are looking for direction that there is hope on the horizon. That hope may come in the form of a stimulus package, but we must still keep in mind that comparisons of these current conditions with the Great Depression will not help to spur confidence that government spending will help the situation.

In an analysis of Friday’s jobs report Globe reporter Barrie McKenna cites a University of Michigan professor that notes even though the job losses are large, they more accurately compare with the early 90s recession, not even the recession of the 80s. The reason says Mark Perry is that even though the raw numbers appear unprecedented, in the 1980s there were only about 93 million Americans working in the labor force versus approximately 154 million today. So on a percentage basis there is a distinct difference and a real danger of using raw numbers out of context for other purposes.

What all this comes down to is that as Professor Perry states:

“We’re talking ourselves into a more severe recession than this really is,” he said. “A lot of this is psychological, and that plays into consumer spending.”

But with the pace of job cuts accelerating, market watchers expect that next month’s jobs report will be even worse. One final thing to keep in mind is that these stats tend to be trailing indicators of how the economy was doing. That being said, any commentary on these upcoming numbers has to be framed judiciously so as not to choke off consumers and businesses willingness to spend.

Strategic innovation counters short-term thinking

Posted on January 30, 2009February 9, 2009 by JeffreyVeffer

Many executives find themselves facing difficult decisions these days in light of the challenging economic conditions. Short-term results are often scrutinized closely by the market as a way of determining a company’s financial health and direction. Although this can be a viable way of judging whether corporate strategy is translating into market success, what often happens is that short-term thinking permeates the organization leading to a starvation of resources for longer-term initiatives like new products and services.

One can see this happening at large companies in different sectors as they announce cutbacks in spending on innovation to meet customer needs. As the former CTO of Cisco notes, America is facing an “Innovation Crisis,” and needs to find “new ways of funding fundamental research.”

She cites the fact that Bell Labs announced late last year that it was discontinuing basic science research to “align the research work in the Lab closer to areas that the parent company is focusing on.”

The problem is that with these expense reductions, there is a tendency to pull back customer facing programs in order to conserve cash and “reduce” risk. As in an earlier post, I maintain that this may actually be a riskier strategy over the long term as competitors who continue their innovation program will be in better shape once the economy returns to normal growth.

Arguably, innovation can be seen as an “assembly” of tools, techniques, or assets to meet those deep customer needs. But without the foundation of basic research, it is very difficult to source assets to put into a solution. Of course there are grey areas within both fields, but I believe these days it is becoming increasingly difficult to justify investments in basic research which makes partnerships with universities an interesting way to explore getting access to more fundamental work.

In my opinion, innovation (which I define as meeting stated or unstated customer needs) is different than basic research or invention. While both are important, it is harder to make the case in today’s corporate environment for basic research, which is why I believe that many corporations are reducing their investments in these areas to (hopefully) concentrate more on innovation and getting more value from their existing assets. Keep in mind that the best way to use these assets is understanding the needs and taking a simple (but not dumb) approach to serving them.

In this economic climate, we at Brandsential work towards this goal by using “Value Extraction;” to leverage what’s inside the company to satisfy deep customer needs. And as I’ve said before, now is a perfect time to develop and innovate with these existing assets to make sure the company is well positioned to lead the market once the economic climate improves.