Entrepreneurship and Innovation During Austerity

Surviving Beyond the Great Recession

I. Chaston

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137324436
• Topic: Commerce
• Subtopic: Stratégie commerciale

Uses research and real world case materials to examine how market performance can be sustained, even during a period of austerity, by the implementation of innovation-based growth opportunities and the exploitation of technology.

1

The New Austerity

The golden age

Although the Industrial Revolution accelerated wealth generation in Western nations, only following the Great Depression and World War II did the quality of life for the majority of the people begin to show any real improvement (Marr, 2012). The first beneficiaries after World War II were citizens of the USA, which had become the world’s wealthiest nation. As this country shifted from a war to a peacetime economy, jobs were plentiful and incomes began to rise. Europeans were less fortunate. Another 10 years would pass before their economies, assisted by America’s Marshall Plan, began to recover from the devastation wrought by years of war. However even before their economies began to grow, most countries had introduced a more equitable welfare state offering free or subsidised healthcare and education. Furthermore the adoption of Keynesian economics, involving the use of public sector spending to promote economic growth, had a major impact on reducing unemployment.

During the 1950s and 1960s most Western economies enjoyed a golden age of high employment and rising incomes. This provided the basis for the creation of the world’s first experience of mass consumption, in which the average citizen in Western nations enjoyed the benefits of being able to afford goods such as convenience foods, domestic electrical appliances and package holidays. Firms that benefited from the advent of mass consumption included Proctor & Gamble, Nestlé, Unilever, Coca Cola and General Foods.

The first cracks

One of the factors influencing per capita spending power in the 1950s and 1960s was the low price of oil, which provided the feed stocks for plastic goods, petrol for cars, low cost heating and highly affordable energy supplies to support the manufacture and transportation of goods. The low price of oil reflected the fact that the major oil companies had control over huge oil deposits in areas of the world such as the Middle East. Paying third world countries low royalties kept oil costs for Western democracies at only a few cents per barrel. Hence it can be argued that a key factor determining the scale of the post-war consumer boom was a long period of virtually zero energy costs.

Having failed to persuade Western oil companies to accept higher oil prices, Arab countries formed the Organization of the Petroleum Exporting Countries (OPEC) and, in the 1970s, initiated two global oil embargoes. This was the first indication that Western economies should expect an upward trend in energy prices. This trend has continued through to the present day and can be expected to have an ongoing adverse impact on economic growth in the future. By the 1970s Western nations were facing increasing levels of inflation. Although the activities of the OPEC nations provided an excellent scapegoat, the real major problem was that Western politicians had become totally enamoured by Keynesian economics. They had realised that increasing public sector expenditure would create more jobs, which greatly enhanced their prospects for being re-elected. Politicians seemed to ignore John Maynard Keynes’ strong disapproval of long periods of deficit spending on social programmes as a means of stimulating consumption. In his view, deficits in social programme expenditure should only occur during an economic downturn and these deficits should be funded by the accumulation of public sector financial surpluses from taxes raised during periods of economic growth. Keynes was also opposed to policies aimed at varying incomes via tax policy in order to stimulate consumption. In his view, the outcome of such policies would be inflation, which in turn would eventually lead to even higher unemployment. By the 1980s, after several decades of deficit spending, this is exactly what occurred (Brown-Collier and Collier, 1995).

Adding to the problem of rising inflation, major Western firms needed to combat increasing wages in their domestic plants to compete against the new Tiger Nations such as Japan and Taiwan. Some firms relocated their manufacturing operations to countries in Asia with lower labour costs. In addition to exporting jobs, these Western firms also provided potential competitors in these overseas countries with access to their technological expertise. Initially firms in Asia merely acted as satellite suppliers of goods. However, as they gained understanding of Western manufacturing techniques and business strategies Asian companies began to supply own label goods to major retailers in Europe and the USA. From this bridgehead it was a relatively small step for firms such as Honda, Sony, Toyota and Toshiba to start marketing their own branded products in Western markets.

Rising unemployment and inflation caused the unions in some European countries to become extremely militant. This militancy was especially prevalent in the public sector, in part reflecting the fact that strikes by key public sector workers had the capability to achieve disruption on a national scale. A decline in the general public’s support for the unions became apparent in a number of countries as the 1980s progressed. The UK’s Conservative prime minister Margaret Thatcher was elected at the beginning of the 1980s on a platform of using privatisation to reduce the power of the unions across industries still in the public sector, such as coal, steel and utilities (Babcock, Engberg and Glazer, 1997).

By the mid-1980s, inflation and rising unemployment were problems confronting virtually every Western democracy. With any reduction in the size of the public sector deemed as unacceptable by politicians concerned about losing support among the electorate, governments under the auspices of New Public Management (NPM) began to draw upon managerial principles from the private sector in an attempt to make public sector organisations more effective and efficient (Kim and Hong, 2006). In the UK and the USA increasing concerns about the ongoing viability of funding the public sector saw Keynesian economic theory being challenged by neoclassical economists. These theorists expressed concern that the inevitable outcome of prolonged deficit spending would move beyond merely stimulating inflation to actually causing the collapse of economies.

One of the leading opponents of governments continuing to expand the size of public sector deficits through borrowing was the University of Chicago Professor Milton Friedman. Referred to as a ‘monetarist’, Friedman produced a number of academic papers and the hugely successful book entitled Capitalism and Freedom that sought to demonstrate the abuses which can be caused by the misapplication of Keynsian economic theories. His perspective on monetary theory was that, in order to defeat inflation, governments should use Central Banks to establish stable monetary policies. Concurrently the emphasis should be on creating an affordable welfare state by focusing on promoting the wealth-generation activities of capitalism, which could generate the taxes that provided a non-inflationary supply of public sector funds (Jordan et al, 1993).

During the period of popularity for monetarist economics, little mention was made of another, much earlier critic of Keynes, a member of the Austrian School of economics, Friedrich A. von Hayek (Bas, 2011). Keynes’ argued that total aggregate demand determines employment and hence increased spending increases employment and an economic crisis is resolved. This concept has been used by governments for over 100 years to justify policies involving increased public sector spending. Hayek’s criticism was that Keynes’ model ignored the theory of capital, and that government spending to influence demand–employment relationships can only be effective over the short term. Hence the Keynesian philosophy of ‘in the long run, we are all dead’ was seen by Hayek as academic irresponsibility, because such thinking leads to policies which can be extremely harmful to a nation’s economy over the longer term. Furthermore government spending often is targeted at the weakest industries. Hayek felt this created further distortion in the allocation of resources; thereby possibly triggering an economic boom, which inevitably will be followed by an economic bust.

A frequent reason given by other schools of economic thought for rejecting Hayek’s view was that his thesis was not relevant to post-war events, because he was commenting on the applicability to a system of wholesale state planning and the eventual outcome for Keynesian policies being the emergence of an autocratic, dictatorship. In reality this perspective ignored the fact that Hayek was developing his ideas in the 1930s when some European countries were moving towards fascism as a response to the perceived growing threat of communism. By continuing to express such comments, Hayek’s critics were clearly ignoring his subsequent up-dating of ideas and writings, which he produced for many years following the end of World War II.

By the 1990s politicians supported a monetary policy of Central Bankers keeping interest rates low to combat inflation. This policy also provided the benefit of reducing government borrowing costs. Although politicians were aware of the growing problems in servicing growing public sector debt, in Europe concerns about assisting the unemployed, the elderly and socially disadvantaged led to further increases in public sector spending. Total public sector spending in the developed nations increased from 12.6 percent of GDP in 1960 to 17.3 percent in 1995 (Tanzi and Schuknecht, 2000).

A recession in the early 1990s provided an early warning that a slowdown in economic growth across the Western democracies would reduce consumers’ ever increasing ability to enjoy ongoing improvement in their standard of living. An actual decline in consumer wealth was averted by low interest rates in countries such as the UK and the USA, triggering an upward house price spiral. Owner-occupiers perceived the apparently never ending increase in the value of their homes as justification for more borrowing to fund their consumerist lifestyle. Concurrently those wanting to buy their first home were eager to accept loans from the banks willing to lend up to 120 percent of the value of their purchase. The banks’ behaviour merely contributed to further rises in house prices and sustained home owners’ use of this asset to borrow even more money (Whalen, 2008). By the end of the 1990s many consumers in Western democracies felt that their prospects for greater increases in their personal income, through further gains in the value of property, were extremely good. Concurrently increases in public sector expenditure led the unemployed and socially disadvantaged to also enjoy some ongoing improvement in their standard of living.

Elephants in the room

By the late 1980s politicians in those Western democracies where healthcare is provided either free or subsidised by the state were aware that advances in medical technology, when combined with longer life expectancies, meant this area of the public sector was becoming unaffordable. In those countries, such as the USA, where people or their employers pay for healthcare through private insurance but qualify for federally funded Medicare upon retirement, these rising costs were also recognised as being economically unsustainable. Although politicians introduced public sector healthcare reforms, very few of these actions had any real positive impact on service provision efficiency. Hence the total cost of government spending on healthcare continued to rise (Chaston, 2011).

Politicians ignored the need for spending reforms as response to the problems associated with population ageing (Johnson, 2004). Population ageing is the term used to describe the effect of rising average age and older people becoming the dominant group in most populations. There are two main factors; namely increased longevity and declining birth rates. As the number of retired people increases and the number of people of working age decreases, funding of pensions for the elderly becomes increasingly difficult unless those people in work are prepared to accept major tax increases. By the end of the 1990s, observers of population ageing were predicting that many governments would soon be facing potentially massive fiscal crises due to an inability to fund state pensions for elderly people and growing pension deficits associated with pension provision for public sector workers (Jensen et al, 1995). An added factor is that, as people live longer the greater the level of healthcare they require. On average the cost of public pensions and healthcare benefits consumes 12 percent of GDP in developed nation economies. This figure is forecasted to rise to 24 percent of GDP by 2040 (Meeks et al, 1999).

More problems

In the early years of the 21^st century the price of oil began to rise dramatically, mainly fuelled by increasing demand from the Chinese and Indian economies (Rees, 2008). Oil is a non-renewable resource and, as the number of cars on the world’s roads continues to rise, an increasing demand for petrol can only lead to higher oil prices (Moeller, 2008). This trend will trigger an upward climb in the price of other non-renewable energy resources such as coal and gas. Despite the potential offset available from natural gas that is being produced by fracking technology in countries such as the USA, Hartley et al (2008) forecasted that, with demand for hydrocarbon fuels outstripping supply on a global scale, the world will continue to face an upward pressure on all forms of energy for the foreseeable future.

The world is unlikely to run out of oil any time soon, but interaction between supply and demand will result in organisations facing rising costs for carbon-based fuels over the balance of the 21^st century. This will impact other economic activities from the extraction of raw materials and manufacturing of products to production of services and the distribution of goods. Hence organisations, especially those engaged in high energy usage sectors such as the airline industry, will need to accept rising energy costs as a meta-event, which will have a fundamental influence over future strategies.

The other major natural resource problem is that of increasing shortages in the world’s food supplies. The underlying cause is that demand is rising at a rate greater than can be sustained from available supplies (Rosen and Shapouri, 2009). The United Nations have estimated that approximately 40 percent of the world’s nations are either at risk from serious food shortages or are already facing starvation. Continued world population growth is an important factor influencing food shortages, but increasing shortages reflect an interaction between various determinants. One factor is a change in eating habits, with rising per capita incomes causing meat to become a more important component of diets in countries such as India, China and Brazil. This switch in eating habits has led to more of the world’s cereal output being directed towards the less productive agricultural process of feeding crops to cattle, with 7 kg of grain being required to produce 1 ...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures
• Preface
• 1 The New Austerity
• 2 Customer Values
• 3 Revisiting Management Philosophies
• 4 Assessing Futures
• 5 Tomorrow’s Markets
• 6 Tomorrow’s Competences
• 7 Leadership, Vision and Strategy
• 8 Innovation Strategies
• 9 Technology Strategies
• 10 Strategy Implementation
• 11 The Service Sector
• 12 The B2B Sector
• 13 Small Firms
• 14 The Public Sector
• 15 Leaner Futures
• Index