Meritocracy Consulting Blog

Bill George writes that the last ten years (2000-2010) will historically represent a “lost decade” for business (same post, wsj). I’m 27 years old, so between internships, 2 startups and a lot of technology consulting, I’ve been active in the business world for about 10 years. Does that mean all of my efforts have been “lost” as well?  Upon personal introspection I have concluded that my personal efforts have been productive–likewise, there have been some standout large companies in this lost decade. As a whole, unfortunately I agree that this decade has been lost and our economy has dragged its feet…the question we are all asking now is why?

For statistics and a broad stroke view, check out Bill’s article, its concise and a good intro to my posts here which dive into more detail and provide some specific reasons for the lost decade. I’ve broken my ideas into 2 separate posts, perhaps after another 30 years running companies and making billions, I will figure out how to be as succinct as Bill George. The best summary of his article is a regurgitation of the first paragraph where Bill writes,

“Consider the ugly facts:

• At decade’s end, about 25 million Americans – 17.3% of the workforce – are searching for full-time work but cannot find jobs.

• In the past decade, the U.S. lost fully one-third of its manufacturing workforce.
• Information technology jobs – the bright spot of job growth in the 1990s – were down 21%.
• The only growing sectors – education (up 32%), health care (up 30%), and government (up 9%) – are all funded primarily with taxpayer dollars. As the U.S. continues to shift away from the private sector, government deficits mount.

• The stock market began the decade with the S&P 500 index at 1,469 and ended at 1,115 – down 24%. This marked the first decade of declining stock prices, even after the S&P turned in a 24% gain in 2009.
• Real wages declined for the first decade since the Great Depression.”

I generally agree with Bill’s overall assessment that the decade suffered as a result of a lack of leadership, but where did our leaders go wrong? A key assertion of his article is that our economy experienced a net loss in non-taxpayer funded jobs, specifically pointing out that health care and education (both heavily funded by the government) were the only 2 major sectors that had a net increase in U.S. employment…oh yeah, we also saw a growth in government jobs. Other industries that we would have expected growth in–such as IT and communications– employ fewer people today than they did 10 years ago (in the United States). The above statistics are clearly grim, and surprising, but these numbers alone do not confirm for me that the decade was “lost”. Assuming these facts are accurate, I immediately wonder how the net growth in IT, communications and manufacturing related jobs would look if we took a global measurement. I would think (without researching) that the growth in jobs in countries like India, Vietnam, China, Brazil, etc… has more than offset the jobs that were lost in the US. Contrary to many protectionists, I don’t think the decade’s failure was related at all to our failure to protect jobs from going overseas (specifically manufacturing), but rather a failure of business leaders and our government to identify and create (or invest in) new rapidly growing industries.

My primary motivation for writing this article is the fact that Bill did not attribute the lack of value creation over the past decade to some failed philosophies that businesses continue support–vertical integration and a return to the belief that conglomerates can deliver value through diversification and management synergies. The late 1960s and early 1970s are infamous for the erroneous excitement over conglomeration. Not many non-business majors remember this period for the disastrous conglomerates that were formed…but the logic at the time proved to be horrible and it seems like every company except for GE disintegrated and returned to the belief that “focus” was ideal. Through incredible discipline GE has continued to do OK, but that is a post for another time.

Despite business schools teaching (to those who are awake) of the failed logic of conglomeration, in recent years we have had many self serving executives (and bankers) convince us that we were now much smarter and could avoid the issues that occurred “last time”.

We have recently, during the lost decade, seen many failed conglomerates. Ironically, every CEO studied the last time period where conglomerates failed…and most of the companies did not even get nearly as diverse as the prior generation before hitting debilitating competition from more focused companies:

Let’s reflect:

• Banking – Apparently participating in retail banking, investment banking, financial services, insurance, private equity, hedge fund management, venture capital and creating complicated derivatives to tie everything together does not actually reduce the overall volatility or risk of the firm.
• Auto Industry – GM and practically every other car company got involved with financing, while simultaneously growing their workforce by purchasing suppliers and trying to run many brands that have nothing to do with each other. Does it make sense for Rolex to be associated with Casio? Hint: the answer is no. Car companies thought they could successfully manage high end brands alongside low-end counterparts. The lack of brand clarity in the car industry dragged down the high end brands and prevented companies from focusing on their lower end models…causing both brands to suffer. Focused companies like Toyota and BMW did well while the American conglomerates (and Daimsler Chrysler) suffered.
• Media Conglomerates: AOL/Time Warner is often called the worst merger ever. Yahoo, with Terry Semel in charge, thought “media” was critical to being an internet company. Shockingly, being good at the internet was actually the key to being an internet company. Google focused on technology, Yahoo diverted their attention to media…Yahoo struggled.
• True Conglomerates: Tyco, WorldCom, Enron…not surprisingly these companies that grew for the sake of growing (possibly so that management could justify greater compensation) ultimately blew up when the executive’s created accounting fraud…enabled by how complex the companies had become.

So conglomerates do not work…

Being reminded of how the concepts of “corporate diversification” and “conglomeration” fail to create shareholder value seems to now resonate again within management teams. This idea for several years has become more mainstream, but please check out my post about vertical integration since that trend has not really been criticized much at all.

In conclusion, I believe for our economy to grow and for jobs to be created:

1. consumers need to embrace companies that are focused and not trying to over diversify
2. investors and private equity groups should verbally and financially support smaller focused companies
3. venture capitalists and the government should encourage and support smaller and medium sized businesses that are competing through innovation (as opposed to scale)
4. executives and leaders should recognize a lack of focus as the cause of our troubles, and
5. everyone should start actively thinking about and discussing the lack of innovation that is occuring through companies that are placing too much emphasis on vertical integration