Fatuzzo Books Blog

It affects each of us. It’s both the bane of our existence and the resource that provides for our fast-paced lifestyle. It makes some of us rich, while leaving others of us cash poor. It fuels our economy and determines the destiny of many businesses. It’s oil. And its price is volatile and heavily impacted by external forces beyond our control, as recent events demonstrate.

Beginning with the chaos in Cairo and continuing with the violent protests in Libya and much of the Middle East, oil prices have been on a dramatic upswing since early February. Industry experts have predicted that, as a result, gas prices could reach more than $5 a gallon by the summer months. Just by the middle of March gas prices around the United States were about 90 cents higher than a year ago, according to AAA of Southern California.

But predictions and prices are unsteady, to say the least. Oil prices dropped slightly after the U.N. resolution to use force to stop Moammar Gadhafi’s violent attacks on rebels, as reported in the March 18^th edition of the Atlanta Business Journal.

And other external forces impact oil prices. As Japan and the international community cope with the impact of the recent and horrific 9.0 earthquake and the tsunami it caused, the diminished demand for oil in the Pacific Rim caused a slight but temporary further drop in prices. But now, once again, oil and consequently gas prices are on the rise.

What could all of this mean for consumers and business owners and our economy’s fragile recovery? No one is quite sure. Balancing natural disasters with the political fallout across Northern Africa and the Middle East has made for a cloudy crystal ball. It remains to be seen how high or low oil prices will go in the coming months. But one thing is for sure. Many different types of external forces can cause global waves of business disruption. And these “business tsunamis” are potentially as destructive as their counterparts in nature.

So business leaders beware. Business Survival in the sea of economic chaos remains a challenge, whether or not the recession is over.

The Recession: Is it over yet? It’s the question many people have been eagerly (and desperately) waiting to have answered since the bottom fell out of the housing market sending the U.S. economy into a tailspin and shaking the national spirit. In the past three years, each small glimmer of hope has been quickly dashed by a jump in the national unemployment rate or plummeting housing prices. But it seems that recently, there has been some good news. Well, sort of.

Last fall, The National Bureau of Economic Research issued a statement announcing the end of the recession. The NBER has long been considered one of the strongest voices on matters such as widespread financial crises. According to AOL’s Daily Finance report in September of 2010, the NBER’s Business Cycle Dating Committee said it “determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II.”

Well it’s great that economists have data showing that our recession ended over a year ago. But what does everyone else think? Is the economy really is recovering?

There are several indicators that the U.S. recovery has indeed started and will continue. According to articles by Rick Newman in U.S. News & World Report (December 15, 2010 and December 28, 2010) there are lots of positives: 80 percent of U.S. corporations had higher-than-expected earnings in 2010; the S&P 500 index rose by about 13 percent in 2010 and that came after a 23 percent gain in 2009; the private sector added 1.2 million jobs in 2010; and U.S. exports are increasing which are helping to prop up jobs and revenue.

And there has been even more good news recently. As reported by Alex Kinsbury in the March 11, 2011 U.S. News Weekly: “The latest data from the Bureau of Labor Statistics show that the country’s unemployment rate has fallen below 9 percent for the first time since April 2009.”

But not everyone is optimistic. Even Kinsbury goes on to remind us that: “There are currently some 14 million unemployed and more than 11 million who either are underemployed or have ceased their search for gainful employment.” And those critical of calling the financial crisis over say there still could be a “double-dip” recession looming on the horizon.

In a Dec. 1 2010 piece in Bloomberg Businessweek, Bill Varner reported on the United Nations analysis of the global economy. This report called the U.S. recovery fragile and suggested that without more Federal stimulus money geared to job creation, the U.S. economy could still fall victim to a growing unemployment rate and that, coupled with possible recessions in Europe and Japan, could stall an already weak recovery.

So what really determines whether or not people believe that the recession is over? The unemployment rate still is expected to hover around 9 percent for at least the next year, and housing prices are expected to continue to fall in most major U.S. cities for the next 12 months, according to David Streitfeld in the January 25 edition of The New York Times. So, while economists may consider the recession to be finished, unemployment and the housing market may be better indicators of how the average American answers the question: Is it over?

But regardless of whether the recession is officially over, it appears that consumers have adopted significant changes in their spending habits. One clear example of this was seen in the recent holiday shopping season when shoppers were more likely to make purchases with cash, rather than credit.

“Cash is the route I’m taking this year, from past experiences with credit cards and being in debt and trying to pay it off for so many years,” said Liz Gonzalez, a community-college employee in Signal Hill, Calif., in a December 9, 2010 report in The New York Times.  Gonzalez seems to be part of a growing norm, rather than an exception.

And what about the astronomical rise in gas prices at the pump due to the dramatic chain of events in the Arab world? How will consumers react to this unexpected burden? And just as important, how will businesses that are already struggling for stability cope? In the March 3, 2011 issue of the Economist it is stated explicitly that the price of oil is more of a threat to the world economy than investors seem to think.

As summarized in the article by Newman, “Every quarter without another collapse in the financial market, puts the U.S. economy further down the road toward recovery, and every month without a crisis means that Americans pay off a little more debt, companies get a little more efficient, and the recovery gathers a little more steam.”

So now we have a building global crisis revolving around oil.  And if that isn’t enough, there is the earthquake and tsunami disaster in Japan which clearly will have global economic impact. So is it over, or will our fragile recovery be stalled? In any case, business survival, stability, and growth will continue to be a challenge.

What do you drive? An SUV? A luxury sedan? Maybe a Smartcar?

The advent of the automobile in the 20^th century provides a good example of when a disruptive invention is a fundamental building block but by itself is not enough to create a breakthrough business. It took the combination of a number of innovations to create the automobile industry that changed the world. What actually happened?

First, the gasoline-powered engine (a truly disruptive technology) was invented in Europe. Then Karl Benz invented and patented (1886) an automobile powered by this technology. He continued improving on his initial concept and eventually formed a company that sold his “motorwagens”. By the end of the 19^th century, Benz was the largest automobile company in the world, having produced over 500 vehicles. However the market for these vehicles (and other similar vehicles sold by smaller companies) was small since they were expensive, and since the supply was limited due to their one-at-a-time production. Not anything world-changing yet.

However, the Ford Motor Company had a vision for how to combine the gasoline-powered engine with the then new innovation of “mass production” to rapidly produce automobiles that were inexpensive.  The additional  Ford innovations – automobiles made up of more common parts and assembly-line production. Ford designed a car and built a factory based on these concepts. And in 1908, the Ford factory produced the Model T Ford – a car much quicker and cheaper to build than any other, which made it the world’s first “affordable” car. Yes, Ford used disruptive technology (someone else’s), but it was the combination of manufacturing-based innovations that quickly led to the birth of the modern automobile industry, the death of the “horse and buggy” era, and the rise to industry leadership of the Ford Motor Company, at least for a number of years.

Automobiles are just one example of how disruptive innovations and/or disruptive changes in the business environment can have a dramatic impact that reaches far beyond one company or one industry. We call disruptions such as these “Business Tsunamis.” Just like tsunamis in the ocean, Business Tsunamis are powerful waves that bring irreversible change. Whatever their causes, these giant disruptive waves can alter the business world as you know it. They can create new companies and industries, provide dramatic growth for existing companies, or lead to the demise of a company, a business segment, or an entire industry.

So why is understanding the concept of Business Tsunamis important? It’s all about managing change. Business Tsunamis are waves of corporate destruction for those who are caught unaware. But they also are waves of opportunity – for those who can successfully “ride” them through the uncharted waters of today’s chaotic world.

The next time you sip your Starbucks… think about how many business opportunities came with the mega-success of Starbucks. They didn’t require disruptive technology, but they did incorporate disruptive innovations of many kinds.

OK. So sometimes good today just isn’t good enough for a changed tomorrow.  For example, once, a sleek sailing ship called the “Cutty Sark” was the ruler of the seas.  But her dominance lasted only a short time. What happened?

The Cutty Sark was a three-masted clipper ship with the most advanced design of the times (1869). She was built to prove that sailing ships were superior in speed and reliability to the newly developed steam-powered ships. And indeed, the Cutty Sark did out-perform all steam ships of that time, at least for a while. But unfortunately for the Cutty Sark, the new technology continued to advance, leaving the Cutty Sark utterly outclassed in the wake of high-powered steam ships. Change was bad for the Cutty Sark. But the steam engine opened up a whole new world of opportunities for others – others who had a vision for the potential of this new technology.

But it’s not just about technology. Think about the opportunities “simple” changes can bring the next time you order a Big Mac and fries. The first McDonald’s wasn’t anything special. It was a drive-in restaurant opened during World War II (1940) by two brothers, Maurice and Richard McDonald. Typical of the time, people drove to this restaurant but stayed in their cars to order and eat food delivered to them by “carhops.” The brothers were successful with their drive-in but wanted more and were willing to change.

And they were successful, very successful with simple but game-changing innovations: assembly-line food preparation using unskilled workers instead of short-order cooks, a limited menu with items that could be prepared ahead of time, disposable “dinnerware” for serving food, and self-service. These concepts, put together, revolutionized how Americans… and later the world… thought about food. This change was definitely not bad for many of the businesses that followed – at least for a while.

But change keeps happening. Today, the business world has changed irreversibly as a result of the recession.  Yes that brings challenges, but it also presents opportunities for those leaders who have positioned their businesses to take advantage of the emerging environment. More about today’s changing business environment and the implications of those changes – a topic for another day.