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Business models and the financial crisis

Abstract: Every day the financial crisis is the number one item in the news. Most messages are either “we are affected as well” or “we need support”. Almost none of current news articles describe the way to overcome within realistic scenarios. The national economies as well as the industries change their business models boundaries only marginal. This approach doesn’t suit to the type and size of the impact by the financial crisis. In parallel we “already knew” that our world is limited and we stress already sustainability in considerable dimensions. The recovery needs other business models and scenarios.

Let’s recap last weeks messages:

  • Quote: nobody was able to predict this financial crisis
  • Quote: nobody was able to estimate impacts upfront
  • Reaction: suddenly governmental funds have to protect banking business and local economy
  • Copy: other industries (e.g. automotive) are affected as well; they asked for financial support
  • Escape: expected market extensions to manage growth via export doesn’t function as these markets stopped as well
  • Surprise: China reduces car-driving within its largest cities

First we have to ask ourselves why we ask for a governmental industry or an industrial government. Although most governments have an impressive number of industrials in their “close” neighborhood, it isn’t the prime task of any government to do business via financial protection behaviors pro industry business. This type and size of subsidizing can’t be managed by any community in the western world, even less in the emerging countries.

Automotive is an important industry for several western economies. Based on the private investment levels it’s more than evident, that people in the main street reflect about the necessity to buy just now. So the decrease in automotive turnover is pure logical. Private investments cover also other items then cars only. So if a government should fund/protect automotive, we need to protect construction, machinery, etc. as well?

Some of the automotive industries expect to increase their markets into the emerging countries to compensate the reduced demand from matured markets. But why should the financial crisis not affect those countries, business and population (Most probably in other formats)? Such strategy change I read a couple of weeks ago regarding an investment bank focusing now more on retail business. This might be a successful business change for one bank (or two), but our population is limited (in the countries as well as on the world). So it’s not a global recovery strategy.

After the US election there was this statement about the “combat the financial crisis will be our prime task”. Yes understandable, but “how” is the main question. The US economy is 60% built on consumption. To increase consumption seems to be a bit strange (should people eat more, buy a 4th PC, go for an additional holiday, and exchange their sofa or curtains). We all know that consumption in this economical size (to balance current crisis) isn’t typical addressed to the financial safe people.

The actual news of the stock exchange aren’t a surprise as well. Based on the old metrics of EPS, financial stakeholder, growth, profit, competition, these institutions rank the listed companies and express their expectations about the economical future. We all know, that the artificial money, associated with the .com- phase and subprime, isn’t available anymore (and wasn’t available before, but that doesn’t care anybody).

This year’s Olympics showed the sizes of growth control. The emerging countries can’t fulfill in all demands of sustainable economies and we should protect them to become a victim of their own (unrealistic/unbalanced) expectations.

The request for more GRC is natural, but if rules are perceived as “too restrictive” the human intelligence is typically to search for “escapes”, driven by the slogan “allowed is all what isn’t forbidden”. The question, why people search for escapes, depends most probably on conflicts between targets and capabilities.

Let’s imagine, we can change the business model of global, regional, local economy and their interactions with government, society, and culture. Capabilities (in the sense of ability to execute), service demand (in the sense of “can you help me” instead of “you need this”), respect (in the sense of “diversity is a real fortune on this planet” ) could put growth, performance, profit, competition on the layers of responsibility, where education, knowledge availability, and expertise sharing, are the drivers for a sustainable capitalism.

In the Sustainability and CSR: SAP TechEd 2008 recordings (assembly) we discussed “Corporate Social Responsibility and Sustainability”, their relationship, the dimensions of “social” and “responsibility”.  In the course of that discussion we received a question about “sustainable capitalism”, which despite time, couldn’t be discussed. Current business models are built on the constraint of finance. This dimension indicated now a strong restrictive impact to alternative scenarios. A change in constraints might open attractive greenfields for society and business.

Kind regards Paul

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  • Paul,

    you are completly right. New business models are emerging but the news are focussing on the bad news. Let´s just pick up your example automotive: A huge automotive company recently started a project to distribute around 200 cars around a German city which people can rent after a first registration. This means a complete change for their business model from my point of view. Therefore it is also a challenge for the BPX community to support our customers on their way.

    Best regards,

  • The current crisis has revealed the interdependence of the financial institutions. In particular, the amplification of risk by the marketing of securitized obligations has resulted in transferring risk from the originators to the holders of the securities.
    This is similar to increasing the coupling in a software system. We attempt to partition software functionality to reduce coupling, so we should seek changes in the economic models that reduce interdependence in order to limit propagations of risk across the economy.
    • Hi David,

      your analogue to software componentization is the „break-up of the value chain“. This feature increase transparency and generates the opportunity to get best-in-class delivery on each part of the value chain.

      The mitigation of risk implemented by the hedging functionality was a nice appetizer to increase financial profit on short terms. But the risk wasn’t classified. On top, hedging led to a virtual business size, which was more than 30 times the real. “Some fluctuations in real” generates hugh waves in virtual, but then virtual became suddenly real.

      So new business models require not only the standardization, industrialization, and componentization, but also increase of transparency and adaptation to current society needs. This all from a global/local and an industry/market consideration.

      Thanks for your comment, kind regards Paul