“Try to find three pieces of good news, not widely reported, not placed in the proper context or perspective, and once you have found these pieces of good news, share them with as many people as you can”.

OK folks, I have been bombarded with answers to my most recent blog regarding “Social Media and the Value of your Business”. Here is a sampling of the more pertinent responses:

Stephen from Beverly, MA:

Thomas, You pose an interesting question. Certainly, the m/a community will value a business on financial attributes of a company, revenue, balance sheet, EBITDA, etc. And this in many ways forms the basis of a company’s valuation.

But we know that certain attributes will increase the value of a company.  These include IP, strategic significance, management, and customer loyalty.  And surely s ocial marketing can help develop a legion of loyal fans.  Technology changes so fast, that revenue can assume a reverse hockey stick quite fast as paradigms shift, let’s just think of Blockbuster here.  But loyal fans will be stickier, and less reluctant to move to the next best thing.  And social media can help us understand the stickiness of the customer.  A company with a good pulse on their customer is more likely to offer them products and services they desire.

I remember once, the famous author Steven King was worried that his novels sold only because his name was on them. He released a series of books under the pseudonym Richard Bachman. True to his belief, they were not as successful as they would have been had the books been released under his real name.

This shows us that customer loyalty is truly an asset that can translate to company value. The company with millions of followers has committed customers that feel part of the company, and will be less likely to jump ship when a better tablet comes along.  This company is going to get a higher multiple than the less social media savvy competition.

Nancy from Brooklyn, NY:

Yes, it surely makes a difference! Twitter followers and FB fans have become a common measuring stick, especially for media and speaking opportunities, which then lead to more biz. Case in point, my friend, Angela, has two companies and was picked for a reality series on women small biz owners sponsored by Chase or American Express. They told her outright that her solid social media following was one of the reasons they picked her. And, their expectations with regard to her promoting her show appearances to her following were clearly stated in her contract.

Arno from Duesseldorf:

After the dot.com crisis of the New Economy in 2000, venture capitalist, private equity, funds, and corporations are investing again billions of $ into the new web economy. Those services are no longer available on PCs only, but more and more on mobile phones, smart phones and tablet PCs. There is a major move to mobile devices and this trend will open these services to many more people around the world in a very flexible and mobile way. This enables local and/or regional advertising, couponing etc.

The so far anonymous web is changing to a social web. Look at your children from 6 years onwards. They communicate, learn and work in/with these social web platforms. And these children are the decision takers in the years to come!

Branded companies move their advertising budgets more and more from traditional above the line activities like TV and print  to social media in line to avoid increasing spreading losses of their advertising due to too many TV channels, print magazines and newspapers.

Millions of Facebook users are outing themselves as fans of top brands like BMW or Red Bull. This will be used for target group oriented advertising messages. However the trends even in the web are changing: there has started already a move of advertising budgets from search engines to new social media.

“Company A” is on a good way to advertise and communicate in this social network and can consequently reach very easily their target groups in a very efficient way. As a consequence they build up their brand recognition with the new generation of consumers who decide already today or tomorrow.

So the answer to your question for me is quite clear: “Company A” is worth much more than “Company B”.

David from London wrote:

The first thing that strikes me is that company A clearly gains no commercial advantage from it’s social media activities at least not at present. It hasn’t developed them into a sales channel and therefore reduced the cost of sale. The other possible commercial benefit would be that if it is able to talk directly to it’s consumers through the social media channel it could reduce the coat of marketing through conventional channels. It’s clearly not doing that either or we would see improved operating margins.
Which sort of leads me to the conclusion that company A has wondered down the social media path guided by the bearded ones who have no idea how to tailor social media for commercial benefits and have been sucked into the banality of it all.

But in answer to your question, providing the friends and followers are relevant to the business, ie they are mostly customers, I would pay more for company A than B. Not much but a little, purely because it has a channel that could be developed as a commercial proposition by selling directly to the 1m fb friends and reducing their conventional marketing budget. But as the channel is not developed and there is no sure-fired recipe for success doing this the valuation difference would be tiny, 1 or 2%. The reward for getting it to work could be quite substantial.

Irwin from Chicago had this to say about the question:

In response to your provocative question, there can legitimately be two correct answers. Certainly, the value of Company may be argued to be higher (based upon the perceptions of the buyer) provided that all of the Facebook and Twitter followers like the company and its product (s). In consulting with enterprises to establish a favorable social media presence with cross functional teams, I have seen instances where companies run promotions requiring one to “friend” that company’s Facebook page but once the promotion is over those turn out to be “fair-weather friends.”

In the absence of a formal well planned social media policy, Company A may very well shoot itself in the foot. In that scenario, I would prefer to be Company B with a blank slate and the opportunity to provide a valuable social media presence to improve enterprise value.

David from Hauppauge, NY:

Just like you used social media to reach out to your readers and solicit feedback, Company A will be able to monetize their investment in social media over time. I would suggest that it is somewhat of an intangible at the moment you are measuring, but creates the potential for better growth and branding.

Brad from Concord, NH, added:

In my opinion the company with the strong Facebook and Twitter presence has greater value than the company without that presence. Customers select companies to friend and follow on Twitter. A large following indicates interest in the company and its products or services. A large following must lead to bottom line results.

As a side note, to me it seems unlikely that the only difference between company A and company B would be their Facebook and Twitter following. With such a following company A would soon outperform company B in all respects.

Bob emailed this response from Stowe, VT:

I’m rather interested in the sort of thing.  No direct experience with Social Media but my experience during the nascence of electronic communication (ARPA, DARPA and evolving to Email and ultimately the Internet) may be instructive.  Basically what we found at Digital was that when we could target our audiences it was better and faster than WOM (word of mouth) and had a higher quantity of eyeballs than any broadcast or print media.  I am reminded of one axiom:  ”There is no such thing as bad publicity”.  – Zsa Zsa Gabor and one operational reality:  “It is difficult to accurately quantify the direct cost/value of advertising.  Most corporations lack the understanding and skill to adequately determine the cost-benefit of broad based communication.

Howard from Boston wrote:

Agree! The effective use of social media is vital to a company in this day and age. I emphasis EFFECTIVE, because overuse and babble will turn off customers. Further, companies should constantly review their Internet sites to make certain that they are simple to use and provide information thoughtfully and thoroughly. (To see the opposite, simply view the corporate/investor web pages of most international banks.)

Gary from Portland, ME, added:

If one of the companies has achieved this growth and success without working the social media channels, the case might be made — “what’s the value of all the social media hype”.  However, a case can also be made that moving forward into the future, the social-media-intensive company will have a far larger exposure and might use that exposure to pull ahead of the company that has not made that investment in social media contacts.  The extent to which the media-intensive firm might pull ahead – and thus be more valuable at this point in time – might be a function of the firms’ products.  If the products are public-consumer-oriented, the social media exposure might prove to be much more valuable than would be the case in a situation of business-to-business products where exposure and hype in the consumer marketplace is less important and valuable.

Brian from Cleveland, OH:

A company with one million fans is worth much more than the identical company with no fans. But how much more depends on:

• what can be done to leverage the asset (untapped potential)
• what is presently being done to leverage the asset  (already impacting present profitability)
• the ability and degree to which one can leverage the asset into commercialized, profitable revenue streams

Janet from Columbus, OH:

Although Company A & B have equal profits, customers and revenues today, they will not in the future. Company A will quickly outpace Company B as their market awareness increases and they begin to be perceived as a much larger company. If they leverage social media correctly, they will be perceived as industry experts.

And Satish from Bangalore:

Assuming both companies sell FMCGs, as a consumer, I would value company A more, since the FB and Twitter exposure allows consumers to share product experiences.  If these were banks, I would treat both companies as equals. If these companies that I would outsource work to, I would treat them as equals. If these businesses were hospitals, I would value Company A more. And so on.

And last but not least, here is Jaume from Barcelona:

I assume that A and B are consumer businesses and in this case the value of A should be higher because they have a potential to be more known and to increase their customer base and sales per customer so that profits in the future should be higher. I assume that the friends in Facebook and the followers in Twitter is a rather recent thing that has not had an impact on the P & L account yet. However, being more in the public eye has also its risks and company A should devote some resources to manage this to avoid the pitfalls and, at the same time, find a way to translate this large exposure into profits.

In summary, folks, this was a great exchange. I hope you enjoyed it too! In closing, my own sense is that Social Media together with Cloud Computing are two converging forces that will present enormous challenges to the status quo everywhere. Those who embrace those new technologies and embed them into their business models will find opportunities galore. Although there is no consensus among business valuation experts on this topic, my own take on it is that Social Media as an Intangible Asset are going to be a major issue in the valuation of companies going forward. It may take another year or so, but it is a matter of time.

Thomas Schinkel

By

Thomas Schinkel

June 2011

Buy-side or sell-side, in the M&A world, much of the energy is focused on “getting the deal done.” How much is the business worth? What valuation methods are used? The lawyers will fight fiercely with one another over issues of reps and warranties. But as soon as the dealmakers have cleared the scene to make room for the folks charged with the task of integrating the acquired company into a larger whole, the real challenge begins. Successful post-merger integration is the key to generating sustainable added value for the acquiring company.

This is such a truism, and yet, over 65 percent of all acquisitions, including cross-border deals, fail to live up to their expectations.  Why is this, and how can you increase your odds for success if you are involved in an acquisition?

Post-acquisition integration is a catchphrase for a very complex issue that affects different companies in different markets in different ways. Too often, integration is limited to managing the teams of the two companies that are coming together, trying to find common ground and determining overlap. One of the most critical issues that gets overlooked is the new combined team’s connection to a rapidly changing market.

Most of my clients are privately held firms that have grown to a size where internationalization becomes a big issue. Some are driven to internationalization by their customers, big-box retailers and mass merchandisers. In my experience, sometimes such firms make acquisitions as a way of coping with changing markets, but then when the deal is done, they focus all their efforts on internal processes and team issues, without regard for the larger picture, namely the changing requirements of global customers.  It takes a long time for the teams in the two companies to understand each other; while they’re trying to come to grips with the new situation, their competitors are walking away with the business.

I try to get my clients to focus on cultural issues (relating both to geography and internal company culture). Most importantly, I also try to have my clients map out the restructuring costs they may need to incur to make the acquisition successful. Only when such costs are added to the purchase price will it become clear what the payback of an acquisition will be.

I have found that each case of post-acquisition integration is different. Integration into a clearly defined business model that has proven acceptance in one culture is one thing. Engaging in a cross-border acquisition and then addressing post-acquisition integration issues in that case is very different.

The key challenges are strategic and cultural. Many markets are moving targets today and post-acquisition integration needs to be done quickly to allow the organization to stay focused on changing market conditions. All in all, I opt to err on the side of caution and try to map out worst-case scenarios before an acquisition deal is signed.

In the cross-border environment, I believe that more companies are becoming aware of the unique post-acquisition needs, not only on the acquiring company’s side but also on the side of the acquired company.

Mapping out the talents and skills available in the acquired company and then cultivating relationships in a manner that lets all players feel they are making a valuable contribution is as important as, if not more so than, all the financial analysis that is customarily invested in an M&A project. Suppose that during the pre-acquisition evaluation process, it becomes apparent that the firm to be acquired has an IT systems infrastructure superior to what the acquirer has. This valuable additional asset needs to be handled with extreme care so the acquiring company integrates this new system to its advantage without allowing other processes to push aside the benefits of the newly acquired knowledge.

Or suppose you are a manufacturer whose customers demand you go global with them. You need to be keenly aware of where the international markets are moving. Not infrequently, it is towards lower costs, lower margins, fewer SKUs, and consolidation among vendors and resellers. In such an environment, it behooves the acquiring company to move with the tide and not against it.

Overall, post-acquisition integration remains a matter of managing uncertainty and providing clarity early on about the way forward. If that means job realignment, or acknowledging redundancies, address these issues early on and take action, based on the needs of the market.  I have found that traditional incentive programs for senior executives are inherently inadequate to deal with post-acquisition integration issues. More often than not, these incentives stand in the way of the creative use of talent brought in via an acquisition.

In this article I have touched very briefly on a few key aspects of what is really a very complex issue. In closing, allow me to leave you with some questions to ponder:

o  What is your experience with post-acquisition integration issues?

o  If you are contemplating an acquisition, do you feel that you have a 360-degree view of        the issues?

o  Are there cost categories that have been underestimated?

o  Do you have a sense that the cultural issues have been taken into
consideration in a meaningful way?

o  Is everyone on both sides of the acquisition focused on the market
going forward?

If these issues regarding post-acquisition integration affect you in any way, or if you have any comments or questions about it, especially if there is a cross-border dimension to your acquisition strategy, feel free to call me for a conversation and orientation!

Thomas Schinkel

Here are fourteen suggestions that can help you meet the challenge.

By

Thomas Schinkel

International Business Adviser

May 2011

At some point in time all business owners and entrepreneurs have to address the issue of selling their company. To a third party this sounds like a relatively mundane subject but for owners who have invested all or most of their adult life in their companies it is a highly charged and emotional issue.

This issue discusses Fourteen Tips and Suggestions for owners and entrepreneurs who find themselves in the position of contemplating the sale of their company. With these suggestions and tips they can follow a deliberate course of action to help them maximize the value of their life’s work. Getting the company ready for a buyer frequently turns out to be more of a challenge than they ever anticipated. There are three aspects to this:

• The requirements for selling a company are very different from selling the products and services that the very same companies offer. Many owners have trouble understanding these differences.
• The demographic environment for buying and selling companies is determined by the fact that the baby-boomer generation is approaching retirement age over the next 5 – 10 years, and by definition, this means in many market segments there are more sellers than buyers.
• Buyers are more demanding than ever and the discipline of elaborate due diligence process has trickled down from the very large enterprises to medium- and smaller companies as well.

Given this environment, it behooves many business owners to plan ahead and take steps that put their companies in a favorable light towards potential buyers. So here are fourteen suggestions that can help sellers maximize the enterprise value of what many of them has taken a lifetime to build:

• Sell your company when its outlook is strong. The best time to sell your company is when its prospects are good. A buyer will pay more for a company that is well positioned for future earnings growth. Perception is reality. Plan ahead for the sale. Timing is of the essence. Keep an eye on market dynamics. If you expect your industry to go through a wave of consolidation, timing your sale for the upswing of such a cycle may help you improve your “net-yield” by a significant amount.
• Define what you are selling. If you are selling a portion of the company, do you have credible financials that separate the division from the main company? If there are doubts, or you don’t know, invest in getting the information so that at all times there is clarity and transparency within your own organization but also towards potential buyers.
• At various intervals in the life cycle, companies may engage in window-dressing of some form. Family-owned enterprises often have costs that would not be duplicated by a potential buyer. Now is a good time to address these issues and correct them so that you can present a realistic picture to a buyer without expecting them to have blind faith in the earnings potential as you are presenting it.
• Develop and maintain a strong management team. Most buyers want to know that there will be an ongoing management team able to successfully run the business after a sale. Consider putting incentives in place to make sure that the management team remains intact beyond a sale process. Include the accounting- and finance function, even if in the past this function has been under-represented (which it often is).
• Continue to build the company for the long run. Avoid inflating short-term earnings at the expense of long-term growth. Buyers are sophisticated and will discover any earnings management during due diligence. Getting a realistic fix on the long-term prospects of your company is critical to any buyer.
• Seek multiple and competitive bids for your company. Sellers will reap the benefits of a competitive bidding process from both a financial and non-financial standpoint. In a competitive environment buyers are more likely to pay higher prices and agree to more favorable legal terms. A competitive process also gives you the opportunity to research and select the best buyer from a “fit” perspective. In today’s global environment, owners of practically every company with revenues in the range of $20-$100 million that wish to sell, should consider soliciting offers from domestic and international buyers. My own experience is that this can significantly enhance the quality and value of the offers received.
• Communicate problem issues early in the process. Communicating potentially negative issues to a buyer early in the sale process builds credibility and allows you to avoid having a deal imploding on you at the eleventh hour. When it comes to valuing the company, keep it simple. In most transactions, the value points are:

1. 1. Management team,
   2. Market knowledge,
   3. Customer base,
   4. Revenue growth,
   5. Gross margin,
   6. EBIT,
   7. Working capital, and
   8. Machinery and equipment.

• If your presentation to a buyer is substantially at variance with what he or she will discover during due diligence, you not only jeopardize your deal, you will end up spending a lot of time and money for nothing.
• Maintain momentum. From initial marketing to deal completion, maintaining deal momentum is important. Make sure the due diligence process is well-organized and expeditious, that your management’s presentations are well-rehearsed and thorough, and that any data on the business operation are accurate, accessible and organized. Also, establish a strict timeline for the transaction. Even before you contact any buyers, get yourself familiar with the due diligence process and prepare for the questions that will be asked. Buyers look for a credible paper trail. Are your manufacturing safety and other processes up to snuff? Have you documented it?
• Exploit the power of “marketing” your company. Be prepared to communicate the strategic vision for the company and the opportunities that the buyer will have in growing and building the business. Get to know the buyer and amplify potential synergies with the buyer’s operations, not only operationally but strategically. A well-organized process can make the difference between success and failure.
• Buyers increasingly look to some sort of an earn-out formula to structure the terms of the deal. Familiarize yourself with the pros and cons of earn-outs, so that you are prepared and can move forward in an expeditious manner that balances your interests with those of the buyer.
• Clearly define your reasons for selling. The most credible reason for selling any company is that the owner is reaching retirement age. Another is market dynamics, which can create useful opportunities for selling at any time of the company’s life cycle. If you are thinking about retirement, don’t wait until you are 75!
• Probably the most important item on this list, except for the one about soliciting international buyers (point 6), is to determine exactly what drives the value of your company from a buyer’s perspective. What activities represent High Value, which ones represent Low Value? In my practice as a business advisor I have often found that companies provide two and sometimes three different business models under one roof. There are historical reasons for it and the owner usually does not see the distinction between these different businesses that clearly. The point here is that one of the two businesses may be worth more than the sum total and separating the two can sometimes be extremely beneficial to the seller in terms of value creation in the market.
• If you don’t have experience with selling companies, trying it out on your own at this crucial moment is probably not a good idea. Get an experienced M&A specialist on board early on in the process. Such an advisor will assist you in evaluating all of your strategic alternatives and in determining whether selling is actually the best decision. In addition, if brought into the process early, an experienced M&A advisor will help you position your company and its financial performance in the best possible light, without compromising the integrity of the representations to be made), keep you apprised of market and industry conditions, and gain a thorough historical perspective of your business so that your company can be best represented during the marketing process. Such an advisor will contribute to the success of a transaction by:
• • structuring an organized and competitive process;
  • knowing who the qualified buyers are or providing the skill-sets to find them;
  • understanding key legal and accounting issues;
  • bringing skilled negotiation techniques to the table;
  • help you evaluate different options vis-à-vis structuring the deal, and
  • coaching you on becoming an educated seller so that you get the best results for you and for all your stakeholders.

You can bring such a person on board using various different instruments of engagement. One is to add him or her to your team of board members/advisers. Another is to have an outside specialist work with you directly and let him or her coach you on all aspects of this extremely important process. Interview and screen members or prospective members on their experience with the issues you face; do they actually have relevant experience on the subject?

Think of it as a Three-Hurdle Marathon

by

Thomas Schinkel

February 2011

Sooner or later all business owners and entrepreneurs must address the issue of selling their company. To a neutral third party, this sounds like a relatively mundane subject, but for owners who have invested all or most of their adult lives in their companies, it is a highly charged and emotional issue.

In my own experience, owners’ thinking about the process is poorly developed. In the absence of an overall, clearly defined game plan, they have a tendency to make ad-hoc decisions and improvise as they go along. Quite often, this turns out to be expensive and disappointing.

To provide some clarity about the process, a better way to think about ownership transition issues is to think of the sales process as a “three-hurdle marathon.” Each hurdle requires different skill sets. Properly executed, each hurdle logically dovetails into the next one.

The first hurdle is getting the company ready for a sale. This requires steps and decisions that sometimes go against the grain of habits an owner has cultivated over many years. For example, not infrequently, investment in streamlining business processes is lagging behind. Bookkeeping and accounting practices are less than transparent. Fixing these points to make a company’s situation more transparent to a buyer is a very good investment that can pay off handsomely when it’s time to sell.

The second hurdle is the actual selling process itself. This again requires careful planning and assembling a team of experts that may very well be different from the ones the owner has surrounded himself or herself to this point. For example, in today’s international and global M&A marketplace, it can be greatly beneficial to a seller if the selling process includes exposure to international buyers. Better yet, a discrete, private international auction is increasingly considered the way forward for any company in the midmarket for M&A. However, this requires expertise that is typically not readily available from within the seller’s existing network of advisors such as attorneys and accountants.

The third hurdle is for the owner to decide what to do after the liquidity moment has passed: How to invest the money and what to do with the rest of his or her life. Many entrepreneurs are not “retiring types” and tend to look for new business opportunities as soon as the ink is dry on the purchase and sale agreement. Others become passive investors or angel investors. Wealth management expertise comes in handy to make sure that the nest egg is safe and sound for the future and future generations. The complex process of transitioning out of an established business requires careful consideration of three different processes.

In summary, the process of preparing a company for a sale requires different skill sets from the one that follows, namely the actual sale of the company. Once this is accomplished, a new phase with different challenges emerges, and here too different skill sets can greatly help the owner in his or her quest for security and new opportunities in the market.

A Reality Check on Contemporary  Globalization

By

Thomas Schinkel

January  2011

Over the last thirty years, and especially the last ten, it seems as though the whole world has been obsessed by a single driving force, to build one large global village with standardized rules that would apply everywhere and all the time for everyone. Well, folks, that hasn’t quite happened, and however close we have gotten to achieving that state, things are going to change really fast.

The crisis of 2007-2010 has revealed serious dents, if not ever-widening cracks in this vision. While things in some way are improving, especially in the realm of local solutions, the global problems are far from resolved and chances are they never will be. Why? Because the idea of a monolithic, standardized global village never was realistic anyway.

The financial and economic crisis that remains with us in so many ways is merely a broad manifestation of the fact that power structures around the world are being rearranged – at breakneck speed – and the contours of what is coming are already in view. It seems to me that the new shape of globalization will resemble a multi-polar structure where the powers that be cooperate and compete with each other on the basis of enlightened self-interest, and not on the basis of singular coercion around the strongest player’s agenda.

A multi-polar world? For example six global villages instead of one? With all due respect to Thomas Friedman, are you telling me now that the world is not flat after all? Wow, I am all for it! Throughout my thirty years of traveling around the world, I always liked the diversity of human nature, the different cultures that had populated our planet, the excitement of meeting people who lived their lives in so many different ways.

The re-emergence of a multi-polar world has important ramifications for all aspects of international business, ultimately reverberating in adapting business strategies around value chains, channel partner development, finance, mergers and acquisitions, and human resources.

In America, the single most important shift in thinking will be understanding the need to turn away from an economic model that has seen the financial services industry as the singular driver of the economy and the middle class as the world’s consumer of last resort. In hindsight, while this model on the surface of it offered certain benefits, it is now apparent that in more than one way, this model was flawed to the core.

Knowing what we have learned over the last three years, the de-financialization of the American business model is unavoidable, even though many pundits have a hard time recognizing, let alone acknowledging, the implications. In the realm of public policy, there are implications for health care funding and delivery, energy, mobility, industrial and employment policy, and for fiscal and monetary policy.

Throughout the transformation to a new economic model, we will need to become a more self-reliant bunch, more in sync with our traditional American character than we have been during the last thirty years. The adjustment process can be painful and will require intense effort and leadership at all levels of society.

Brace yourself for a turbulent ride on the way, but in the end we’ll be okay. My best wishes for a happy and healthy 2011 to all my readers. Thank you for your feedback, comments and criticisms. The Internet, what a great to place!

Yours truly,

Thomas Schinkel

By

Thomas Schinkel

November 19, 2010

We are living in turbulent times. In fact, we are witnessing a political earthquake that ranks right up there with events such as the collapse of the Soviet Union, the reintegration of the two Germanys, and the collapse of the Bretton Woods Agreement that had served the world from 1945 to 1970 and had resulted in a prolonged period of prosperity for many nations. (In 1971, Richard Nixon disconnected the fixed parity that existed between the value of the U.S. dollar and a certain quantity of gold. During the period of Bretton Woods One, the price of an ounce of gold was US $35.)

Today’s earthquake promises to be more severe than these past events, as it is economic in nature and global in scope. It relates to what is known as the “Washington Consensus”. What is that? During the early stage of the Reagan administration, a series of new mantras and belief systems about the organization of the global economy entered the collective thought processes of economists and politicians in the U.S. and Britain. Both unleashed a series of changes that reverberated throughout the world for the next thirty years. To make a long story short, these mantras and belief systems (propped up by highly dubious arguments of a theoretical nature) included a belief in privatization, liberalization and deregulation. Privatization applied to government-sponsored and owned enterprises. Liberalization applied to the free flow of capital and goods (not people), and deregulation applied to the dismantling of numerous rules and regulations that the proponents of these new belief systems believed to be strangling many Western economies. Vocal proponents of the new mantras included President Reagan and Prime Minister Margaret Thatcher.

After a slow start, the mantras began to take hold of larger and larger groups in academia, which in turn spread the gospel to the world at large. Businesses began to take advantage and after the collapse of the Soviet Union – an event the proponents of these belief systems claimed was directly attributable to their efforts -  there was no stopping the avalanche of freedom. Some scholars  even went so far as to argue that history had come to its logical conclusion and that a new and lasting equilibrium had arrived.

A signature moment in the march to liberty was the signing of the North American Free Trade Agreement (NAFTA), much heralded as the launching pad for a new age of prosperity among the U.S., Canada and Mexico. As more free trade agreements were entered into, it became clear that below the surface something was amiss. Right after the signing of NAFTA, Mexico was thrown into a severe crisis that wiped out the green shoots of prosperity that had seemed to be taking hold of their economy during the early 1990s. I was there when the crisis hit, and it was an ugly scene.

Later in the decade, crises erupted in Asia followed by Argentina, and then the bursting of the dot com bubble which hit closer to home. Whenever these crises hit a country, a standard recipe was rolled out that reflected the Washington Consensus. The recipe was to privatize government companies, open the market to imports, and reduce government spending.

There were plenty of critics, but I won’t review all the trials and tribulations between the forces in favor of and against the Washington Consensus. What’s clear is that the Crisis of 2008 (which originated in the U.S.) removed the underpinnings of any global consensus on world economics. What was lost was the faith that the mantras would actually be effective. More importantly, many observers inside and outside America could not help but notice that the financial crisis was laced with the F-word, fraud. Fraud before, during and after the crisis. Two lonely professors from Kansas University,  who had massive experience in the handling of previous crises, screamed at the top of their lungs about the systemic fraud that is being perpetuated by the financial services industry, yes, the highest echelons of it.

Perverse as it may be, what comes on the heels of this witches’ brew of issues is the Quantitative Easing embarked upon by the Federal Reserve. If the tipping point in the unraveling of the Washington Consensus was reached on September 15, 2008 when Paulson asked Congress for a blank check in the amount of $700 billion, the avalanche happened during the later part of 2010, culminating in the G20 meeting in Seoul. The Chinese are deathly afraid of QE2, fearing a firestorm enveloping their financial system that could trigger a wave of deflation a la Japan of the 1990s. Brazil has taken a beating with sky-high exchange rates that make their exports uncompetitive. They have taken steps to manage speculative capital inflows. Official protests coming out of Germany and the European Union focus on the imbalances within the American economy itself.

Folks everywhere are frustrated, uncertainty is rampant, and sober analysis is in short supply. The Asians want to go it alone, the Obama administration is wooing the largest democracy in the world to join it in the formation of what can best be described as a “Maginot Line of Economic Prosperity”. The Scandinavians remain quiet,  as always going their own, often  well-reasoned way.  Sixty years of a modicum of consensus in the world around themes of economic prosperity has come to an end.

The contours of what is next are already coming into view. Here are three aspects of what seems to be around the bend:

1. The upper echelons of “Global governance,” organizations such as the World Trade Organization and the World Bank, are probably rewriting their business plans as we speak, trying to incorporate the mind shift that just has taken place. If they do, there is a chance they will maintain some level of relevance when the world turns next.

2. In terms of international trade negotiations, expect the Doha round to be another polite manifestation of “agreeing to disagree”.

3. The rest of us, especially here in America, should expect “Import Inflation”. And frankly, that may not be such a bad thing. One could argue that this is exactly what the doctor ordered. If imports are getting more expensive, opportunities will arise for domestic production, which means job creation and adding more value within the dollar-zone.

4. Members of the business community, especially those who are heavily invested in global outsourcing and overseas sourcing, can expect challenges to their business models in various degrees. Some will have to retool the core of what has driven their success for so many years. Others can get by with tweaking one or more aspects of their mode of operations. Others, especially those who anticipated the turmoil, will have a splendid opportunity to reap the benefit of their foresight.

In this context, those of you who have read my blogs before will not be surprised to hear me say that for some there may be  salvation in looking for local solutions with local resources. Globalization may have run its course, the pendulum will swing back. It is a great time for entrepreneurial, disruptive innovation and the development of new business ideas. The more things change, the more they stay the same.

Thomas Schinkel

are a prelude to more fundamental changes to come

Part One

By

Thomas Schinkel

January 25, 2010

That there are stresses and strains on American society is clear for anyone to see. These stresses and strains are the result of changes that include the country’s demographic composition, but more importantly, fundamental changes in the way value has been created during the last decade and a half.

As these changes are now making their impact felt, many thinking people struggle with the question of what will happen to American capitalism. My own take on it is driven by a simple distinction that I find helpful in trying to understand what is going on. That distinction is between “Culture” and “Structure.” For example, the American business culture has always been and continues to be informed by a spirit of innovation and entrepreneurship, and a willingness to take a chance.

The structure of our present model of capitalism is another story. There is no doubt in my mind that a large part of today’s societal frictions is the result of the fact that several important industries have morphed into what can be labeled as “Oligopolies”. An oligopoly is a market system dominated by three or four major players and in which everyone else operates on the periphery. Today, we find this condition in such sectors as, financial services, automotive (the domestic portion, anyway), the health insurance industry and pharmaceuticals. One of the more salient characteristics of an oligopoly is that the leading participants try to avoid competing on price in as many ways possible.

At the same time, you will find that large corporations, including those operating under conditions of oligopoly, are not exactly stellar creators of jobs. To the contrary, it is a well-established fact that job creation occurs mostly at the bottom of the pyramid, where the millions of smaller and medium-sized companies reside. Those players operate under conditions of “Free Enterprise”, where many players compete vigorously on price and all other ingredients of the competitive landscape. Free enterprise of course, is merely a different shade of grey within the entire spectrum of capitalism’s organizing principles.

Culture over Structure

So here’s my take on the tug of war taking place within American capitalism as we begin the second decade of the 21^st century. Ultimately, I think “Culture” will win out over “Structure. It will take a while, but the oligopolies will either be broken up, severely restrained or forced to modify their behavior in some other way. If some of the brands at the pinnacle of the Corporate pyramid must disappear, so be it. But the culture that represents the heart and soul of American capitalism – independence, entrepreneurship and a spirit of innovation – will prevail.

I see this playing out already in numerous small ways among friends, colleagues and clients. It will take a few years to get our bearings straight, as we move away from the delusional mantra of America being the “consumer of last resort”.

Homeless in America

Speaking of independents, the Massachusetts electorate’s rebellious and successful attempt to put a Republican candidate in what many thought was Kennedy’s seat in the Senate lays bare an interesting phenomenon and that is that half the State’s population appears to be homeless. Not physically, but homeless in the sense that they think of themselves as Independents, not as Republicans or Democrats. The red-blue divide means nothing to them. And the political duopoly that the Democrats and Republicans have become leaves them homeless and powerless to make their voices hears. This phenomenon of “rebellious independents” is not limited to Massachusetts. It exists throughout the country. If this group of independents continues to grow, and my take on the situation is that it will, there is even a chance that within five years we will officially have a third political party, fully registered and participating with seats somewhere in between both sides of the aisle.

From Caterpillar to Butterfly

There’s no question that this struggle will cause and is already causing hardship while the transformation is taking place. Allow me to liken this transformation that is taking place in the realm of economic, social and cultural dimensions to a unique one observed in nature, the process through which a caterpillar changes into a butterfly.

The changes that will need to come about, either by default or by design (the latter being the preferred method to be sure), will encompass an overhaul of American society in the most profound way. These changes will come about, in some cases by borrowing from the European and Asian models of capitalism,  but mostly by arriving at our own conclusions.

Specifically, as the voice of the independents gains strength, over time we may witness real reforms being made in such areas as re-regulation of the financial industry, fiscal policy, energy and international trade.

Stimulus Plan Phase II

And the next Stimulus Plan, if and when it comes, will look very different from the one passed in 2009. Above all, it will need to include a gameplan for “new value creation”, a gameplan that gets us away from the delusion that the financialization of the business sector was an effective way to create wealth among the population at large.

All along,  the top bankers had wanted us to believe that their booming industry was driven by innovation.

But listen to what Paul volcker, former Chairman of the Federal Reserve has to say on the very subject at a recent conference in London:

“The only innovation that has taken place

over the last twenty years in the

financial services industry is the Cash Machine!

Paul Volcker.

Wow! Needless to say, for business leaders in all walks of life, monitoring and anticipating the transformation of our economy and society is extremely important, because the impact on the business environment will be profound In my next article in this series, I’ll discuss how in America we can kill three birds with one stone by embracing a method of taxation that has found its way into all major economies of the world, except ours. As always, thank you for your interest in my writings and regardless of whether you agree or disagree, feel free to share your thoughts by e-mailing me at thomas.schinkel@gmail.com.

Thomas Schinkel

Business Success May Depend on a Subtle Shift in Mindset

by

Thomas Schinkel

December 2009

What can we expect in 2010? Pondering what the immediate future will bring is a popular pastime, especially at year’s end. There are plenty of prognosticators out there who will tell you with the utmost certainty that one group of trends or another will prevail. Economic growth, unemployment, housing starts, the condition of real estate markets, the stock market — the targets are too numerous to begin to list. It serves no practical purpose to parrot any of those predictions here.

Does 2010 have a malaise in store for us or will it be the beginning of a Renaissance for America? My own sense is that there are so may unresolved issues that it is too early to tell. In other words, not much of a forecast!

But I do want to draw attention to something more subtle, less tangible and definitely not measurable by the sort of mainstream metric that economists love. It has to do with a subtle shift in thinking about business and strategy, the traditional domain of the Chief Executive Officer. How to structure the organization, how to allocate capital, innovate in house or acquire knowledge from the outside, etc. – in the traditional paradigm the CEO is in charge of planning for the company’s growth, especially long-term. This mindset is captured in the following drawing:

But the crisis of 2008/2009 has shaken up many conventions and traditions, and today

especially going forward into the next couple of years, another mindset altogether is required. This new mindset has to do with coping with uncertainty of a new magnitude. The crisis has exposed many vulnerabilities in the global economy and, while a collapse of the entire global infrastructure has been avoided, unfortunately many of the unpredictables are still out there.

In view of this persistent condition, I have a different prediction to make: The crisis of 2008/2009 will have an overhang into 2010 in that it will have triggered in the minds of more senior business executives an urge to refocus their attention on something different from what they have been accustomed to during the last twenty years.

A Paradigm Shift for Business Leadership

Post-crisis management preoccupations at many a corporation will have shifted from the traditional realm of planning for growth to preparing for unpredictable events, as depicted in the following:

Many a business model has been affected by the crisis in ways that would have been unimaginable even a few years ago, and not always in a positive manner. To the contrary, the crisis has exposed weaknesses in even the largest and seemingly invincible corporate enterprises.

Since many of the factors that provided the underpinning for the crisis are still there, the timing of this paradigm shift is perfect. For example, during the next few years, it is not unreasonable to think through scenarios of inflation and deflation, combined with obsolescence and cluster risk.

Vulnerable Value Chains Present the Greatest Challenge

In my view, the greatest challenge facing many corporations is the issue of trend reversals in the value chain. Most value chains have become global, and the crisis of 2008/2009 has proven that these value chains are vulnerable to “black swan” disruptions. Preparing for and anticipating these disruptions is a sensible exercise – just as sensible as installing hurricane clamps in your house if you live in Hurricane Alley. In this context, some companies are better prepared than others. The French author and publicist Jean Jacques Servant Schreiber noted in 1967 that the American model of competition distinguished itself not because of its access to technology but more because of its manner of organization, combining resources and talent in new ways that made it so competitive and disruptive.

Today, forty years later, the world has changed many times over, and globalization has transformed the American economy into something unrecognizable the 1967 model. Many of the industries Schreiber identified as powerful soon entered a steady trajectory of decline, including the giants of the automotive industry, such as General Motors.

Prepare for the Unpredictable

But many countries — and especially specific companies — have taken a lesson from Schreiber’s observations, and today there are hundreds of companies spread all over the globe that distinguish themselves not because of their technology but because of the way they organize themselves, how they handle information, how they learn (from mistakes), how they share knowledge, where they focus their energies and why.

What seems to be a lost art at the national level has taken hold within some of the companies that will make history during the next five years. It has nothing to do with size; it has to do with how they prepare themselves for unpredictable events. Like hurricanes, these events will come, with the timing and intensity remaining unpredictable. The organizations and companies that are prepared will reap the benefits of extraordinary new opportunities that will provide the groundwork for renewed prosperity, distributed unevenly as ever around the globe.

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