Everyone wants to know what the economy will do and how to deal with it. OC-based business author and professional speaker, Sanford Kahn, in some respects sees a return to a feudal age of business...as he explains in his article, "The New Feudal Society: How To Prosper In the Coming Age of Poverty and Privilege."
By Sanford Kahn
There is an old saying that goes something like this—what goes around comes around. This saying is plausible, but not entirely correct. What goes around does come around, but in a different shape and form. To more fully appreciate this new “feudal society”we will be entering, we must first examine where we have been and the consequences flowing from that time and place.
The period from about l995 to 2000 was a very unique interval in our economic/business history. The economic events that occurred in this time period happen at most twice in a century. This period of time is called a founders economy, and the years l995 to 2000 comprised the first stage of this founders economy. It is a time of fundamental and rapid technological and economic transformation of society. The transformation is permanent, and it seems to defy the laws of economic gravity. The last such period occurred in the l920’s. This resulted from the confluence of the rapid electrification of the U.S. along with the mass introduction of the automobile.
The first stage of a founders economy ends in a bubble and it does pop. When it does, the second stage is called the “blood in the streets” phase. We are in that phase now and it will dictate our new social and economic environment.
The term “blood in the streets” does not necessarily imply actual corporal fighting. Instead the term means an intense period of business competition. This second stage can easily last 15 to 20 years. It continues until the weak business enterprises are filtered out. The difference now, compared to the previous founders economy, is that not only do you have intense business competition within our national borders but also internationally. The Internet, along with inexpensive communication and transportation costs, has helped to transform the international marketplace. In this second phase, how companies compete and price their goods and services will give rise to the new business serfs and lords—the new feudal society.
From the end of World War II till the late l990’s companies more often than not used the cost-driven model to price their product or service. In this model a company added up all their costs to produce a product or service and then tacked-on a competitive profit margin. This, then, determined the price at which to sell their product or service. For the majority of times it worked.
It is in this second stage of intense business competition that the traditional cost driven model breaks down. Competition is intense because dramatic worldwide increases in productivity have led to too many goods chasing too little demand. Companies now have very little pricing power.
Companies now have to use a price driven model of pricing. This model answers the question: what price will cause my firm’s product or service to clear the market. In other words, what price will give me a competitive advantage. It is usually a lower price than the cost driven price, but with that comes less competition.
Once you determine the price of your product or service with the price driven model, you do everything in your power to slash all costs. This includes labor, medical, inventory, material, and any other expense than can be cut. No cost is sacred. In this second phase you have to reduce all expenses to stay competitive.
It is this second phase of the founders economy that will give rise to the new business “lords” and “serfs”. The new lords will be those business people who can quickly discern, adapt to, and exploit the unpredictable movements in the turbulent flow of life. The new lords will be those business people that have as their target the goal of growing the free cash flow of their business. This cash flow represents the means— the wherewithal— for those shrewd business people to take advantage of opportunities and events that present themselves. By so growing the free cash flow of a business not only do you increase its value, but also you provide it with the means to maintain its market share and possibly increase it. On the other hand, the new serfs are those businesses that are mired in debt and illiquidity. If they stay this way, they will travel down the road to extinction.
I direct major emphasis on building free cash flow primarily because you could be the smartest business manager alive, but without the free cash flow (the financial means); it will be difficult to capitalize on opportunities in this second phase. Having an ample free cash flow allows you the opportunity to take business risks and survive the possibility of failure. It also allows you to hire the talent necessary to grow your business and expand your market share.
In the old feudal society (circa 1200 AD), everything was rather constant. If you were born a serf, that is where you stayed. If you were born a lord, that is where you belonged. In the new feudal society nothing is constant. Through luck, change of management focus, and acquisitions it is very possible that business serfs can become lords. Conversely, if business lords should lose their focus and become complacent in this extremely competitive phase, they could stumble down the path toward serfdom.
Lastly, one must keep in mind that the novel conditions with which businesses now have to deal to remain viable entities in the coming decades will have a seismic impact on the social order and the expectations prevailing among the individuals who make it up. The future belongs to those individuals (lords) that have the intellectual acumen to anticipate and the wherewithal and flexibility to take advantage of developing opportunities. The serfs are maladroit and floundering in debt. It will be difficult for them to seize opportunities.
The second phase of the founders economy will be more turbulent than that which preceded it. But, therein lie the opportunities for those who can and wish to be lords. Out of turbulence comes the potential for growth.
To paraphrase Mel Brooks—- it is good to be a business lord.
ABOUT THE AUTHOR Sanford Kahn is a Business Author and Professional Speaker. For more information on programs please contact him at www.businesstrendspeaker.biz/contact-me His latest book is The Thirteen Great Economic/Business Myths That Dominate Our lives.The book is available on most popular book web sites (amazon.com). This article was originally published at: http://www.businesstrendspeaker.biz/new-feudal-society