By Michael Kleeman
(Hint- Don’t ask the usual people)
It has worked for years.
Since the 1950s, with relatively few disruptions, the US economy has benefited from a period of relative stability and overall growth. This has enabled business leaders of our largest firms to follow one primary model, get bigger and use scale to maximize economic advantage. This has evolved over time to a few principles:
Maximize “value extraction” from the system you are involved with. Simply put, take what you can irrespective of the damage it does to others in the system;
Remove any and all ‘unnecessary’ costs such as redundancies in system elements, unnecessary inventories, work in progress, etc.;
Drive for economies of scale to help achieve the above optimization, assuming that long logistics and supply chains will remain economic and reliable;
Reduce the cost of inputs to the point where consumers will no longer accept the lower quality. Sometimes this means less quantity in the same sized packaging or lower grade materials for products that are intentionally obsolescent.
This has been a successful model for some players and managed to hyper-optimize for near-term profitability, satisfying investors often at the cost of employees and customers. If only one player in one part of the system did it they would have a sustainable position since the rest of the system they operate in would assume the costs of complexity, redundancy and resilience, allowing the one player to continue to operate even in adverse conditions. The problems come when most or all of the players in a system over optimize, then there is no redundancy, no resilience.
But not of late.
Of late we see how this approach fails. Too few firms making critical supplies, long logistics chains, lack of flexible manufacturing and major stockouts. Smaller and local firms which have been squeezed by massive retail and on-line competitors failing by the thousands with few reserves to fall back on. Or in agriculture, massive consolidation in processing and distribution and optimization leads to inflexibility in productization, packaging and distribution so for over two months we still have dairy farmers, of late in a difficult financial situation, forced near to failure because some traditional markets have closed off. But the same number of people still need to eat and many cannot afford to do so, but the dairy industry cannot meet the need and no alternative uses have been developed. In fact, in agriculture the only real innovation in COVID-time is occurring at very local levels. And in that reality, and the failure of the traditional players, we have the seed of a solution.
There is a different and better way.
The financial bailouts of 2008/9 and the COVID-19 era have been principally focused on larger firms and those that are publicly listed. Protect those that are too big to fail and protect the stock indexes. But if the underlying economy fails, these bigger firms will not thrive. And the underlying regional and local economies have been put under stress by the dominant and historically successful model.
This raises a logical question, where do you turn for the answers to how do we recover from and thrive after the impacts of COVID-19? Do we turn to the leaders that drove and benefited from the system that sacrificed diversity, resilience and robustness for short-term profits or seek elsewhere for the answers? I would posit that asking the leaders of financial services firms, major retailers, digital firms that arbitraged out diversity and “maximized valued extraction” is unlikely to create a sustainable future. Their world view and model of the economic world is framed by foundation elements that if still existing today are very different. These leaders oversee firms that are not creative or adaptive, but effective at one general model described above.
The tendency of successful people and organizations is to prosecute the model that brought success to its extreme, not adapt and change it, usually until it is too late. The impacts of the COVID-19 crisis are extreme, and require a radically new way of examining the challenges and certainly new ways of solving them. We need innovators who will radically re-frame the problem, re-construct the fragile systems into more robust ones and be willing to sacrifice some near term profits for long-term sustainability. We need people close to the issues and the problems, not insulated from them, like the local farmers who are addressing food supply and distribution. And we need to make this approach the new norm, because what we are experiencing today is not the peak of the impacts from COVID-19, and this event is only one of many shocks including future pandemics and climate change that our culture will have to face.
We cannot find the future looking in the rear view mirror.