Government bail-outs prevented a widespread banking collapse in 2008 but could not save developed economies from tipping into a deep recession, plunging stock markets into turmoil as a consequence. In some mature economies, notably those with a high dependence on financial services such as the US and UK, the downturn has been the worst suffered in over 70 years. And the ugly metamorphosis from liquidity crisis into economic crisis into government funding crisis will cast a long shadow for many years over issues perceived as peripheral to the central problem. 

Given present preoccupations, it would be understandable if commentators — economic, financial and corporate — limited their efforts to illuminate the preceding period to identifying the causes of the ensuing melt-down. But for corporate commentators, there are other insights to be gleaned from this interlude, notably regarding the limited impact the ‘growth revolution’ — spawned in the late 1990s and a focus for many a management guru — had both on financial performance during that period and on judgments about future growth prospects. In terms of the latter, investors changed from believing organic growth was an easy consequence of the internet revolution to believing it was the province of very few — the majority remaining reliant on squeezing further rounds of efficiency savings gains from a productivity revolution entering its third decade.

Research by the Corporate Executive Board (CEB) into the financial performance of the Fortune 100 group of companies over a 50-year period highlights how important productivity gains have become to driving earnings growth. For the first part of the period, income or profit growth lagged revenue growth; but on the back of the productivity gains made possible by Thatcherism and Reaganomics, income growth exceeded revenue growth for the first time in the late 1980s. This reversal of the previous trend has become the new norm with wave after wave of cost-saving opportunities breaking across the corporate landscape, typically as a result of advances in information technology enabling process automation and organisational dispersion.

Income growth continued to exceed revenue growth into the early 1990s, after which the two tracked each other until the late 1990s when the rate of income growth surged ahead again. Fears about the sustainability of productivity-led income growth have been around for a number of years, leading institutions such as the CEB, business schools and strategy consultancies to focus research effort on resolving the enigma of organic growth for large companies. Such research has proved popular (as evidenced by a number of best-selling books) since it purported to provide a solution to a well-recognised management problem. Since the turn of the millennium, organic growth was consistently cited in yearly surveys of CEOs as their most pressing challenge until the recession and liquidity crisis re-focused attention on survival rather than growth.

The judgment of investors on these growth efforts has not been glowing, as shown by an unexpected dichotomy in the period from the turn of the millennium to the onset of the recession. The spread of high bandwidth internet access and globalisation made this an extremely buoyant period in economic terms — global GDP growing by over 75 per cent from its 1999 level in the years to 2008 (before flattening off in 2009). But despite this positive backdrop, stock market returns approximated more closely those of the economically-disastrous 1970s than the more economically-comparable 1980s and 1990s. 

On 30 May 2007, the S&P500 closed at 1530.23, beating its previous all time closing high of 1527.46 set on 24 March 2000, over seven years before. Similarly the DAX, which comprises the 30 largest quoted companies in Germany, closed higher than its peak of 7 March 2000 for the first time on 20 June 2007. Such rescaling of previous peaks was not achieved by the major British and French indices, the FTSE100 and CAC40, which only managed to come within three per cent and 11 per cent of their previous highs during 2007, not surpass them.

The new high for the S&P500 was marked by much comment in the financial press, but it went relatively unnoticed in the business pages, the implicit assumption being that the seven-year hiatus was due to an inflated starting point (coming at the height of dot.com mania) than business fallibility.

Yet by the standards of recent history, seven years is long time for an old high to stand. In the bull market of the 1980s and 1990s, equities became overvalued on a number of occasions, most notably in 1987. And in the crash of October of that year, the S&P500 declined by 30 per cent, but recovered those losses within two years. Similarly declines of 20 per cent in 1990 and 1998 were made back within 12 months. The experience with the major European indices was pretty similar. (The exception to this, of course, is Japan where the closest parallel to its financial crisis of the 1990s and persistent deflation is the Great Depression following the 1929 Wall Street crash, from which the Dow Jones Industrial Index took 25 years to recover. It was with an eye to the economic and financial consequences in both the US in the 1930s and Japan in the 1990s that made western governments desperate to avert a full-scale banking collapse in 2008.) So a gap of such magnitude merits exploration and more explanation than simply blaming the starting point.

If we go back further we can find a hiatus of similar magnitude. It took 10 years for the Dow Jones Industrial Average to return to the 1000 level that it briefly topped towards the end of 1972. And in the UK, the FTSE All-Share fell by some 70 per cent from its peak in May 1972 and only recovered those levels in August 1978, some six years later.

Superficially there are some economic and political parallels between the mid-to-late 1970s and the first years of the new millennium, notably an unpopular war and sky-rocketing oil prices. But these similarities are more coincidental than correlated. The last couple of years of the Vietnam War accompanied the start of the 1970s bear market whereas the stock market malaise was already well established before the war with Iraq was pursued. And even if the magnitude of the oil price rise is similar — a fivefold increase in the inflation adjusted average annual crude oil price between 1971 and 1980 versus a fourfold increase between 1998 and 2007 — the causes were very different. In the 1970s OPEC applied a tourniquet to the supply of oil whereas in the decade to 2007 the rise has been driven by global economic growth and surging demand, particularly due to the industrialisation of highly populous countries such as China and India.

More significantly the fundamental economic situations of the two periods were very different. The 1970s was the decade of economic disputes and stagflation — stagnant economic growth and high inflation (something which briefly threatened in the early stages of the credit crunch before a halving of the oil price and similar declines in other commodities turned concerns about inflation into fears about the more painful consequences of deflation).

The UK was the poster-child for the ills of developed countries in the 1970s. For the seven years following Edward Heath’s dash for growth in 1973, the UK economy averaged growth of a paltry 1.0 per cent per annum, inflation of 16 per cent and over 12,000 days lost to industrial disputes each year. The seven-year period from 2000 showed a very different picture — annual economic growth averaging 2.7 per cent per annum, annual inflation of only 2.6 per cent per annum and less than 700 days lost yearly to industrial disputes on average. The differences are less marked in the US. However, inflation in 2000-06 still averaged less than a third of what it was in 1974-1980, and days lost in industrial disputes less than a quarter. 

The early 2000s were not without their own ills. The ambition and effective execution of 9/11 raised the spectre that terrorism could damage economic stability and therefore corporate earnings. The initial panic — arising from a dramatic increase in perceptions of risk with future earnings being discounted at a higher rate and sharp share price falls — resulted in sharp falls in share prices.

Over time this has been replaced by measured risk analysis: the likely frequency of such events recurring multiplied by their potential impact on corporate earnings. The vigour with which the ‘war on terrorism’ has been pursued over the subsequent period has produced a less pessimistic assessment of the risk of repetition. There has been a cost to governments in the form of pursuing wars in Iraq and Afghanistan, but the drag of 9/11 on economic growth was relatively brief, reducing output by an estimated 0.5 per cent in 2001 with the economy returning to growth in the last quarter of that year. As a result, the impact of 9/11 on both earnings and price-earnings multiples was relatively short-lived.

Stock markets beginning to recover from the shock of 9/11 were then hit by the whirlwind of two major corporate scandals, both involving fraudulent accounting — Enron in November 2001, with WorldCom in June of the following year. These struck at the heart of a basic stock market pre-supposition — that reported financial performance reflects real financial performance — thereby undermining confidence in the denominator against which share price multiples can be applied for valuation purposes. These were not the first companies to be caught out. In 2000 two software companies, Unify Corporation and MicroStrategy, reported accounting irregularities and restated sales and earnings having been overly premature in revenue recognition. But the size of Enron and WorldCom and the complicity of their auditors created a fear that all reported earnings should be mistrusted, with shares marked down as a consequence.

But scandals of this type are typically lagging (rather than leading) indicators of corporate downturns. The underlying driver of fraudulent accounting in these cases was the need to demonstrate sustainable, organic growth of revenue and profit to sustain share price valuations and facilitate further issues of equity and debt. Typically the need for creative accounting only arises once difficulties have already hit — the predicated growth is not being achieved. And with Wall Street analysts re-scrutinising the companies they followed, auditors tightening up their rules and authorities introducing tougher regulation and no further miscreants coming to light, the perceived risk of repetition is much lower. The principal economic legacy of these scandals is increased compliance costs due to Sarbanes-Oxley, a heavy burden for some of NASDAQ’s smaller quoted companies, but not a significant drag on earnings for most in the S&P500. 

In pure economic terms, better parallels for 2000-07 are the equivalent periods in the 1980s and 1990s. In all three cases, the decade started with economic difficulties. In the early 1980s there was recession brought on by the monetary tightening of the Reagan administration. In 1991 there was stagnation in the US and decline in the UK, again brought on by high interest rates in the preceding two years (a response to the over-loosening of monetary policy following the stock market crash of 1987). And in 2001-2 there was a sharp slow-down due to the bursting of the dot.com bubble. Of all three, the early 2000s saw the least pain in economic terms — growth slowed rather than stopped or reversed.

The parallel continues with corporate earnings trends — earnings per share of the S&P500 (based on bottom-up weighted aggregation of its constituent companies) showing declines of seven per cent and 15 per cent in 1990 and 1991, compared with a one-off but sharper decline in 2001 of 31 per cent. Any boom contains the seeds of its own destruction. High share price valuations create a low cost of equity capital which encourages companies to raise funds and invest in new plant and equipment. The result is excess capacity leading to fierce competition resulting in a sharp decline in earnings. So even though the overall economic situation was better in 2001 than 1990-91, the preceding boom meant the subsequent decline in earnings was greater.

When looked at on a compound basis, EPS growth from the beginning of 1990 through to the end of 1997 for the S&P500 was eight per cent per annum, whereas over the same period from 2000 it was six per cent per annum. Lower but certainly not sufficiently so to explain the vastly different stock market returns — 13 per cent per annum for the eight years through to the end of 1997 versus zero per cent for the same time frame to the end of 2007.

For the 1990s as a whole, the return on the S&P500 index was 15 per cent per annum. In the UK over the same period, the total return of the FTSE All Share index was also 15 per cent per annum, a decline on the returns of the 1980s which were 24 per cent per annum on a compounded basis.

All of which begs the question, why did stock market performance over 2000-07 (ie, prior to the collapse wreaked by the credit boom and bust) approximate that of the less economically analogous 1970s while not even coming close to that of the 1980s and 1990s with which the parallels are far stronger?

The answer looks simple — the 1990s ended with the dot.com boom and a stock market bubble. This both inflated returns for that decade and created a high base from which returns in the 2000s would struggle to move into positive territory. A simple examination of average stock market price-earnings (P/E) ratios provides some evidence to support this theory.  For the S&P500 the P/E ratio doubled from 15 at the end March 1995 to 30 at the end March 2000. 
The S&P500’s P/E ratio also doubled in the five years to end September 1987, just prior to Black Monday, from which stock markets recovered in just a couple of years. But more important than the absolute increase is the degree of over-valuation at the end point. At the end of September 1987, the P/E ratio of the S&P500 was just over 20, having been under nine five years before — a starting point of undervaluation, the P/E ratio being half what it was 10 years before and less than two-thirds of its average for the preceding 20 years.  Also an increase is more justifiable given the decline in inflation over that period. Inflation rates and stock market P/E ratios are inversely correlated — the lower the rate of inflation, the lower the discount rate which should be applied to future earnings, so the higher the multiple of future and current earnings share prices will be.

So there should be no doubt that the internet bubble led to a severe overvaluation of share prices. But to attribute all of the seven-year hiatus to an inflated starting point, just leaving the analysis at the aggregate level, misses a couple of key factors. In particular, the underlying cause for the near-halving of the P/E ratio for the S&P 500 from its peak of around 30 to around 18 in mid-2007 when the 2000 high was briefly surpassed. 

First, the most egregious examples of over-inflated valuations were those attributed to start-ups and funded by venture capitalists. In terms of companies quoted on stock exchanges, only the technology, media and telecommunications sectors of the quoted market shared this excessive exuberance. Technology stocks rose from comprising less than 10 per cent of the valuation of the S&P500 for the first five years on the 1990s to over 25 per cent of the index by the end of the decade, while their share of earnings was roughly half that. And old economy sectors certainly lagged in comparison.

Second, accepting that even old economy companies had their valuations inflated, why was that
the case? Isolating the underlying cause requires understanding the context which encouraged such irrational exuberance.

When looked at from this angle, one answer presents itself. The internet appeared to provide the answer to the big question that companies were asking themselves: after 15 or so years of reaping the benefits of cost-cutting, how do we generate new revenue streams to maintain our growth in profits?

Excitement among investors about how the internet would enable this through the development of new business models was obviously excessive and misplaced. But this enthusiasm reflected the scale of the problem that the internet appeared to solve — the need to replace productivity-led earnings growth with organic, revenue-led growth. The internet was the deus ex machina for sustained corporate growth.

Except, of course, it wasn’t. And neither were the subsequent initiatives. As mentioned above, earnings growth in the 2000s pre-credit crunch period was six per cent per annum versus eight per cent in the 1990s. In the light of decelerating earnings growth — and not the acceleration that was hoped for — the near halving in the P/E ratio becomes understandable. But it raises the question, why did the growth revolution fail to materialise?

By the turn of the millennium, for almost two decades businesses had enjoyed the low hanging fruits of the supply-side economic revolution — notably reduced regulation enabling labour costs to be cut and industries to consolidate both nationally and internationally. The bandwagon had started rolling in the early to mid-1980s but momentum really picked up in the 1990s, creating exception opportunities for profit growth. As Gary Hamel, with characteristic élan, put it, “One hundred years from now people will look back at the last decade, especially the last half of the decade, as an economic aberration. It was time when a variety of forces conspired together positively to create a buoyant economic climate.”

Notable among the forces was significant expenditure on technology and IT enabling in Hamel’s words “an unprecedented attack on inefficiency. Over the last decade we have seen re-engineering, restructuring, downsizing, enterprise resource management and customer relationship management. All focused on how do you take working capital out of your business, how do you take time out of your processes, how do you operate call centres with fewer people. They were a product of global competition and the Thatcher Revolution”. Driving this was a generation of management heroes who were “dealmakers and efficiency addicts” the result of which was an “orgy of mergers and acquisitions”. Hamel concludes:  “There’s a lot of data that says that companies have reached the point of diminishing returns in their efficiency programmes… Retrenchment doesn’t buy you growth; it doesn’t buy you a future, at best it buys you time.”

This vivid description of the growth challenge facing businesses was manifest in the new millennium zeitgeist — no surprise as he was one of its leading proponents, Leading the Revolution being one of the most iconic books of that particular era. It sought to provide a roadmap for how old economy whales could re-invent themselves as new economy sharks — Enron being the prime example — and indeed needed to, or else they would themselves be devoured. The underlying message of most books of that period was that growth within the reach of any company if it embraced new economy thinking and new ways of working.

After a diet of consolidation and cost-cutting, with the consensus view that the productivity lemon had pretty much been squeezed dry, suddenly there was a feast of opportunities for businesses to grow courtesy of the new economy. The prospect of revenue-led earnings growth — perceived as more sustainable, therefore better quality and rated more highly — encouraged share price valuations to spiral upwards. And it was the pressure to justify these valuations that led the likes of Enron and WorldCom to switch to fraudulent accounting practices once it was clear that the internet would not lead businesses to the sunlit uplands of effortless organic growth, merely extend the fertile plain of productivity gains that had been tilled for many years already.

The replacement of productivity-led profits growth by revenue-led growth has been something that business school professors, strategy consultants and management publications have focused on extensively over the last 10 years. Books and articles have abounded.

One article in the July/August 2004 Harvard Business Review (a special double edition issue focused on top-line growth) by Pankaj Ghemawat quantified this surge in interest by tracking the number of new books published that were focused specifically on growth. This doubled from 200 in 1994 to nearly 400 in 1998, then remained in the 300-400 range. Over the same period, the total number of new business titles showed significantly lower growth.

Ghemawat also notes how the proposed solution to the ‘growth crisis’ (as those with a tendency to hyperbole described it at the time) changed with a watershed appearing around 2000.

“Earlier books, presumably written during the internet bubble, tended to take the availability and attractiveness of growth opportunities for granted: they simply mentioned network economies or winner-take-all effects in passing before getting on with their primary tasks of discussing which opportunities to pursue and how.

“Later books, written against a less exuberant backdrop, spend more time making the case for growth strategies. They argue that managers must pay more attention to business growth right now for one of two reasons: either because of the paths to profitable new growth are less obvious than in the boom years or because cost-cutting has run its course, making growth the best option.”

In terms of corporate activity, this change was manifest in the rise and fall of corporate venturing as the favoured solution for growth-seeking companies over the period. The logic of corporate venturing runs something as follows. The only way to generate significant new growth is through the development of new businesses. If the new business cannibalises an existing one, those with a vested interest in the existing business will seek to strangle it before it succeeds. As a result, new businesses cannot be started from within existing ones and need the special support of a central team with the specialist skills required for identifying opportunities and nurturing these new ventures through their early development. Once they are strong enough, they can be transferred into an existing business or, ideally, spun off in a lucrative IPO.

The problem is that it’s a bit like launching some prototype speed boats from a super tanker with the intention that they will tow the mother ship along and accelerate its progress — generally it doesn’t work. A study of corporate venture units in large companies found that, in the 1970s and 1980s, 44 per cent of internally generated start-ups and 50 per cent of joint-ventures were divested or closed in the first six years, not much better than the 60 per cent failure rate of small business start-ups over the same period. The study concluded: “Many [corporate venturing] units were launched with gusto in the second half of the 1990s to mimic the processes and methods of the venture capital industry. Corporate financing and third-party venture funds were available for all promising projects; in other words, normal rules of corporate risk aversion were suspended. Yet only a handful of the more than 100 such units in our survey developed any new business... Corporate venturing units do have their uses, but they don’t solve the problems of mature companies.”

The result was that many of the newly created venturing units or innovation teams were quietly closed down — the limited number of successes not material enough to impact the performance of the overall business. As another article put it: “Interest in the new ventures tend to be cyclical. Brief surges of enthusiasm, triggered by abundant resources and the need to diversify, are followed by sharp declines. The life spans of both internal venture units and corporate venture capital funds, therefore tend to be short — on average, only four to five years.”

Even if the corporate venturing cycle has turned down, judging by the huge number of hits it generates on the HBR Online, innovation remains as popular as ever, particularly the idea of breakthrough innovation. Yet it remains prone to many of the same challenges that limit the impact of innovation units. To quote Michael Treacy, co-author of The Discipline of Market Leaders: “Like swinging for the grand slam in baseball or betting on the trifecta in horse racing, going for broke with innovation is glamourous. Breakthrough innovations, whether the next blockbuster product or a next-generation business model, create a buzz in the boardroom while lesser forms of innovation go unnoticed. Yet a body of evidence in recent years makes a strong case that breakthrough innovation should be the growth strategy of last resort... First, don’t forget the point of innovation is growth. Since all innovation incurs risk, managers should ask, ‘can I increase revenues without innovation?’ The answer is usually, yes. Simply retaining existing customers and improving the targeting and coverage of new ones can yield significant revenue growth, especially in inefficient markets, where innovation isn’t required to keep customers.”

The point Treacy is making is that the time to launch big innovations is not when they’re necessary for your business, but when they are essential to your market place. The overriding problem with innovation is that it is a means to growth, not an end in itself. Yet because it is fun and exciting, people fall in love with the process and lose site of the purpose to the detriment of the desired outcome.

Despite this focus on innovation and growth over the last 10 years; despite the increase in business schools, business school professors and MBA graduates; and despite the growth in management consultants and ex-consultants in corporate roles, the organic growth conundrum remains unresolved. Most growth initiatives continue to fail, as can be seen how stubbornly organic growth remained the top priority for senior management. At the end of 2007 ‘sustained and steady top line growth’ remained the biggest concern and top priority for 2008 for North American CEOs according to the Conference Board Survey, as it had been in 2004 — in both surveys, regarded as more of a challenge than growing profits. This category did not exist in the 2001 survey, but the top management challenge — Customer Loyalty/Retention — was similarly revenue-related and ranked a bigger challenge than cutting costs. 

Fortunately new sources of productivity gains have appeared — outsourcing and offshoring replacing re-engineering and rationalisation — the predictions of pessimists about the limits for productivity enhancements having not proved true so far. And while CEOs may fret about achieving organic growth, they are not going to be sentimental about it — last year’s failed growth initiative becomes this year’s cost reduction opportunity. And like their predecessors in the 1990s, concluded that growth would have to come from expanding via acquisitions and slicing costs out of the combined organisation. The result was record levels of mergers and acquisition activity in from 2005 through to the
first half of 2007 until the credit crunch sucked all the confidence out of the market.

‘So what?’ you might ask.

Technological advances and globalisation have provided businesses with a set of cost-cutting opportunities when even efficiency-addicts like Jack Welch believed that the productivity lemon had been squeezed dry. Who is to say that continuing advances will not yield further opportunities? Maybe organic growth at any significant rate is not possible for large companies, what is wrong with using mergers and acquisitions as the primary engines of growth?
 
It is unlikely we have come to the end of how technological advances and geo-political trends will create opportunities for businesses to reduce their costs of manufacturing products and serving customers. Yet fears about the sustainability of productivity-led profits growth were again raised by corporate profits in 2006 accounting for a higher share of US GDP than at any time since 1950. As The Economist warned, “Perhaps globalisation has shifted the balance of power firmly in favour of the corporate sector and away from labour. But workers have votes and may demand the balance be shifted back, either through taxes or trade barriers.” In all probability, further drivers of productivity gains will be marginal and not generate more than single digit percentage earnings growth. As Jeff Immelt put it, when outlining the rationale behind the development of GE’s growth toolkit, “After I came in as CEO, I looked at the world post 9/11 and realised that over the next 10 to 20 years, there was not going to be much tailwind.”

As to whether large companies can generate organic growth of any significant rate, of course it would take an economic miracle (or much higher inflation) for all companies in the Fortune 100 to grow revenue at 10 per cent annually through internally generated means. But not many CEOs of Fortune 100 companies will be prepared to stand up in front of analysts and sketch out a future that will deliver only five per cent earnings per share growth per annum, not least for fear of losing their job. Even if there will always be out-performers and under-performers, we need to broaden the pool of those achieving significant growth beyond the isolated examples that crop up in case studies in a more effective way than the current default approach; namely attempting to codify the success of these companies in case studies for others to copy, thereby encouraging imitation rather than invention (the inspiration and originality that leads to genuine innovation) and perpetuating risk aversion and followership when courage blended with experimentation are necessary to leap-frog current leaders. (Necessary, but not sufficient — luck is the other ingredient required. Even if fortune does not always favour the brave — assuming luck to be randomly distributed — that impression may have been created by the brave making more from any breaks that come their way. Ideally we would be able to measure ‘return on luck’, my hypothesis being that it would be maximised with calculated risk-taking.)

What about the earnings boost that acquisitions can provide? The problem with this argument is that study after study has found that corporate acquirers generally pay too much, destroying rather than enhancing value for their own shareholders. Ultimately many of the human biases that afflict organic growth initiatives — most notably over-estimation and over-confidence — are writ even larger in acquisitions. Industry consolidation has also reduced the supply of potential acquisitions and for those that exist there is increased competition, notably from private equity purchasers. When faced with such competition, the risk of the winner’s curse increases — whoever wins the auction has overpaid. 

Once economies start to recover and growth again becomes the focus for strategic intent, we should not forget to ask the uncomfortable question about whether prevailing wisdoms served companies well prior to the bursting of the credit bubble. It would be understandable if once released from the shackles of a sluggish economy, the desire to take action prevails over any inclinations towards reflection. Any failure to grow revenue profitably is a failure of strategy and, to a lesser degree, marketing. If the objective is to make a step change in growth versus what was achieved previously, wouldn’t we be advised — at the minimum — to examine, challenge and be prepared to throw out some of the most dearly held assumptions of strategy and marketing? Also question whether the approach to knowledge development in these disciplines — and management research in general — embeds error, distortion and bias?

A starting point for such deliberation is investigating whether prevailing approaches have been driven by historical factors and whether those conditions still prevail. It is my suggestion that the 1980s and 1990s saw the coincidence of three factors which generated surging profitability, profits and returns for shareholders — the supply-side economics revolution, the explosion in personal computing and the primacy of analysis in western intellectual thought. As a result of its role in this perfect storm, strategy has come to be seen as an analytical discipline. If strategy was purely about opportunity identification, then analysis would be more than sufficient — and indeed it has been for much of the last 25 years. But once strategy becomes about opportunity creation and revenue growth — the biggest challenge facing large businesses — analysis is necessary but not sufficient, with any failure to recognise this creating a millstone around the corporate neck. 

The second pre-supposition requiring investigation is that the purpose of business strategy is to beat the competition. Getting one over the competition boosts testosterone-fuelled egos, but correlating psychological appeal with economic benefit risks any victories being Pyrrhic. The subtle difference between an outcome and an objective is lost. If beating competition is seen as an objective, the risk of behavioural distortion increases relative to if it is seen as an outcome of achieving other objectives, notably serving customers in a superior way. As John Kay points out in his book Obliquity, sometimes our goals are best achieved indirectly.

Equally appealing in psychological terms is the allure of the quick win and the idea that strategy is about big decisions. In part it is, of course. But the track record on mergers and acquisitions does not provide much support for how well prevailing approaches deal with the uncertainty inherent in strategic decision-making. Also sustained growth is not just about senior managers getting the big decisions right, it also about getting the little decisions right — the choices made 10 times every day by hundreds of middle managers or front-line stuff that add up to thousands of decisions and millions in revenue. If strategy is to play a role in guiding these choices — providing a frame for decision-making, thereby ensuring that it can be delegated to the person with the most relevant, specific information — a different definition and manifestation is required to an analysis-driven preoccupation with big decision-making.

In the same way we need to re-appraise some of our fundamental assumptions about marketing. These were shaped by an the environment of the last 50 years of the 20th century — a period when supply constraints prevailed and competition was predominantly limited to national boundaries. It was a case of build it and they will come, so long as you tell them about it. In his book, The New Law of Supply and Demand, Rick Kash describes it thus: “With few exceptions, and with only a cursory glance in the direction of the customer, businesses could sell virtually all they produced… Given their limited choices, consumers were frequently willing to pay whatever their desired goods cost... Of course, there was competition within mass markets, resulting in lowered prices, but production efficiencies made it possible to drop prices and remain profitable. Moreover, lower prices attracted more customers.”

Perhaps this is no surprise as the word ‘marketing’ — derived from the idea of a traditional market, transformed into a verb and then nominalised back to a noun — implies supplier power. Businesses just need to display their products, set a competitive price and they will find customers.

But the success of supply-side economics and the rise of the internet fundamentally changed that. As Kash goes on, “In the early 1990s, the tectonic plates underpinning the world economy shifted. The supply economy was dead, killed by the producers themselves.” The combination of technological advance, productivity gains, availability of capital and globalisation generated over-supply. Reverse engineering, white label manufacturing, online purchase aggregation, purchasing consortia, the possibility of buying from anywhere at anytime has shifted power from suppliers to buyers. Suppliers now suffer from excess capacity, increased competition and competitive convergence; buyers benefit from reduced search costs, greater product and price transparency and wider choice of what to buy and where to
buy it from.
 
The question is whether marketing has adjusted to the new reality or remained stuck in an egocentric way of thinking where the solution to any decline in market share is shouting louder. Ultimately, if there is a problem with both marketing and strategy, there must also a problem with their foundations — management research. Here again some of the basic pre-suppositions are worthy of challenge. At the root of most management science is the pre-supposition that decisions are made rationally, despite increasing evidence to the contrary. Such an assumption makes the creation of models and frameworks easy, but the effectiveness and value
of their implementation questionable.

Equally studying successful companies continues to be perceived as the most valuable way to expand management knowledge. But increased behavioural understanding also leads us to question how scientific such studies are: how sample selection introduces bias; how the complexity of business systems correlates many variables with success, enabling pet theories fuelled by confirmation bias to flourish; and how easily causality be misattributed. Equally it leads us to question, even if there is validity in the findings, the value in the prescriptions offered. How transferrable are they? What hidden costs lie in their implementation?

Finally, such questions lead inevitably to those about the value of business school education. The MBA remains the favoured choice for many wannabe entrepreneurs, high rollers, consultants and investment bankers. It is the default choice for anyone seeking advanced management education because its perceived value is high. What creates that value has over the past couple of years come under increasing scrutiny from those within the much expanded boundaries of business education. These accept that most, if not all, of the value gained by participants in such programmes stems from the selection rather than education process. Yet all have stopped short of the ‘Innovation 101’ conclusion: that any industry where there is a mismatch between what elements contribute most to costs (salaries of professors, opportunity cost of time spent studying) and what contributes value (how difficult it is to gain entry to the programme) is at risk of suffering disruptive innovation.