Conditional Mastery™ – Getting a grip on the Business Cycle

Mastering the business situation isn’t just critical for positioning the business ideally and strategizing moving forward, but also for assessing the risks the business is exposed to. The business conditions can be understood from several angles, one of which is the relative position in the so-called business cycle.

About a decade ago, I learned for the first time about longwave business cycles. It had struck me that several incidents seem to repeat themselves, not so much in a seasonal pattern, but over a relatively long period. My accountant, Steef Stolp, suggested investigating a person by the name of Kondratieff.

Fortunately, my accountant pointed me in the right direction. The Kondratieff cycles, or K-waves as they are known, show a repetitive pattern of on-average 53 years. Commissioned by Stalin, Nikolai Kondratieff compared economic growth between socialism and capitalism. To determine growth over time in capitalism, Nikolai investigated the price fluctuations of commodities and several other indicators. He found a remarkable recurring pattern, a business cycle of about 53 years, that he believed was exemplary for capitalism.

According to Kondratieff, each cycle had two periods of growth and two of decline. Even though Stalin was convinced that capitalism was at a dead end, Kondratieff found that these business cycles, despite an unavoidable destructive character, proved that capitalism was sustainable and created more economic growth than socialism could. A few years after publishing his findings in his book The Major Economic Cycles in 1925, Kondratieff was arrested and sentenced to 8 years in prison. In 1938, he was subjected to a second trial, convicted, and executed the same day.

The following image shows some of the economic data that Kondratieff used to construct his longwave theory. Amongst others, he used the S&P500 Index, US Producer Price Index (PPI), CRB Commodity Index, Homestake Mining Company (Gold price, longest-listed stock at the NYSE), and US Debt-to-GDP (debt cycle).

In 2002, Carlota Perez, in her book Technological Revolutions and Financial Capital, assigned significant technological advancements to each of these K-waves. Thereby confirming the theory of creative destruction by the renowned economist Joseph Schumpeter as well as supporting his argument that technology is the key driver of economic growth. Schumpeter argued that technological progress allows for the more efficient production of more and better goods and services, leading to more prosperity. Schumpeter also coined the term K-wave out of respect for Kondratieff’s work.

Keynote Preparation

While preparing a keynote presentation for Social Media Week 2014 in Rotterdam, I pondered the question: Could business dynamics change simultaneously with the dynamics of these long economic waves?

At the beginning of my career, I had read the book In Search of Excellence (1982) by McKinsey’s consultants Peters and Waterman. For some reason, I had stopped reading after three-quarters of the book. I decided to pick where I left it almost 30 years ago and found support for my hypothesis.

Peters and Waterman exposed that so-called ‘excellent’ organizations were much better than their peers at unlearning habits and reassessing the corporate purpose while allowing people to test a product-market combination early. And they were minimizing cost and risk by creating a prototype to test their assumptions before upscaling the operation. According to the authors, Proctor & Gamble, among others, was particularly successful because it even allowed teams to disrupt the company’s existing products.

In fact, the learnings I took from the book matched most, if not all of the characteristics of the so-called LEAN startups. However, Steve Blank’s book ‘The Four Steps to the Epiphany: Successful Strategies for Products that Win’ was published more than 20 years after ‘In Search of Excellence’, while Eric Ries’s book ‘The LEAN Startup’ launched as late as 2011, almost 30 years after McKinsey’s bestseller. Since most of the Silicon Valley startups had founders and employees that came from these deemed-excellent companies, it should come at no surprise that they adopted the incumbents’ highly cost-effective and low-risk market-entry strategy.

Have we changed?

I became more and more intrigued by the idea that business dynamics change depending on the relative position in the business cycle.

During my keynote, I asked the question: Technology has changed, but have we?

During much of the past 10.000 years, I argued, we’ve evolved as farmers. People relied on seasonal preparations and were laden with rituals and superstition, hoping not to disturb the next season’s yield. Following Einstein’s argument ─ that it is insane to expect different results by doing the same thing repeatedly ─ it was more than reasonable for farmers to develop habits.

In contrast, in our short industrial age, the one that disrupts its product cycle before someone else does would be the wiser. However, given how we’ve evolved, what is the likelihood of a change occurring? Research shows us that resistance to change is the norm, given John Kotter’s assertion that 70% of corporate transformations fail. We will only change if we believe it will improve our lives.

Keynote Presentation

After further deliberation, I presented the following slide at Social Media Week in Rotterdam, broadcasted internationally:

The way businesses commonly adapt to the longwave business cycle, I argued, could best be described by four driver systems:

• Market-driven, implying that the market will decide which new technologies to favor, forcing brands to follow their lead.
• Service-driven implies that service will determine which brand will favor the other after the new technologies have settled.
• Resource-driven, following the tipping point, the battle for market share will drive companies to reduce costs and increase productivity to maintain profitability.
• Product-driven, implying that companies will try to extend products for as long as possible until there is no more profit margin.

Even though one could argue each of these drivers, I still believe that it is a pretty good representation of reality.

During the presentation, I added a few characteristics of the growth (bull) and decline (bear) stages of the business cycle:

The four value positions can also be described as product innovation, service innovation, product/service optimization, and product/service dismantling. These four stages match the typical pattern of the product lifecycle, i.e., Introduction, Growth, Maturity, and Decline.

Top (Peak) versus Bottom (Trough)

Recently, I came to understand that the differences in dynamics between the top of the wave and that of the bottom are particularly relevant today, given the fact that we’re approaching the bottom of the fifth K-wave.  I wrote an entire blog about it, called Ascending from Decline. I invite you to read it, so you can learn more about how to adapt to the turmoil we’re in today.

Conditional Mastery™

Ultimately, the assumption that business dynamics will (need to) adapt to the business cycle seems valid. Mastering growth during each phase of the business cycle is a part of what I refer to as Conditional Mastery™.

As such, when a business cycle reaches its end, indicating that most of the technologies that emerged at the beginning of the revolution come to an end, executives need to consider the early demise of some of all its products and look for new opportunities for growth to secure its future.

Although the image above may suggest that Mastering Conditional Growth™ is entirely related to longwave business cycles, it is not. Conditional Growth is related to every event, condition, circumstance, or lifecycle a company is involved in or exposed to, including the Venture Lifecycle, Product Lifecycle, Customer Lifecycle, and Growth Lifecycle.

Additionally, a PESTLE analysis, STEEPLE analysis, Porter’s Five Forces,  5C analysis, VRIO analysis, SWOT analysis, or SOSTAC framework will help determine the potential, as well as the gaps and constraints, of Conditional Growth™.

Understanding how to grow your business demands a thorough understanding of the position in each of these cycles, which, amongst others, requires a breadth of perspective. Without a broad understanding, a firm is more likely to develop unfavorable products or markets, create the wrong customers, keep an unrealistic vision, pick an unfeasible strategy, get ambushed by more astute competitors, and allocate valuable resources to undesired initiatives, attract unsuitable talent, and so on.

Read on: Mastering Conditional Growth – The Rise and Fall of Empires – The Four Archetypes of the Business Cycle