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Wednesday, 17 October 2012

Peak Growth - Causes and Future of Economic Growth

A recent working paper Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds by Robert Gordon at Northwestern University looks at the causes and future of growth in the developed world.

"This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history. 

The analysis links periods of slow and rapid growth to the timing of the three industrial revolutions (IR’s), that is, IR #1 (steam, railroads) from 1750 to 1830; IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and IR #3 (computers, the web, mobile phones) from 1960 to present. 

Many of the original and spin-off inventions of IR #2 could happen only once – urbanization, transportation speed, the freedom of females from the drudgery of carrying tons of water per year, and the role of central heating and air conditioning in achieving a year-round constant temperature.

Even if innovation were to continue into the future at the rate of the two decades before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt. 

A provocative “exercise in subtraction” suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades".

If growth is predicated on industrial revolutions it raises interesting implications for policy.

The paper is worth a look, Pdf is downloadable from the link: Is US Economic Growth Over?

Friday, 8 June 2012

Acquisitions Distracted Hastie Management?

The ABC Inside Business program had two short segments on the collapse of the Hastie Group last weekend. Including a discussion on the large number of acquisitions undertaken by Hastie, and the lack of integration. Video can be found at: http://bit.ly/MgU7Yk

The Inside Business panel makes the point that management was so busy trying to absorb the 20 acquisitions  undertaken since 2005 (resulting in 80 entities, 44 companies, and 27 payrolls), that they weren't keeping an eye on other aspects of running the business.

An alternative view would be that Hastie's approach to acquisition strategy and integration provides an insight into how one of a range of issues in the company was being managed, rather than the cause of management taking their eye off the ball.
Tuesday, 27 March 2012

Small Acquisition Issues

Conversations with colleagues last week have me thinking about the issues managers in large firms face acquiring a small firm. The size of acquisitions received a lot of attention by managers and academics in the 1980’s and 1990’s with a view that the power imbalance between large companies acquiring smaller companies led to failure.

However, in recent times, the acquisition of smaller firms has become increasing popular. Professional services and technology companies have been highly successful in acquiring small innovative firms to access specific technical knowledge or capabilities, while large mining companies have acquired smaller firms possessing an outstanding resource to take it to development.

It’s interesting to consider some of the issues that acquiring firm managers face acquiring a smaller firm, these include:

 • Underestimating the complexity – Managers involved in implementing an acquisition often assume that small size means a simple acquisition. However, small acquisitions require the same core work to be undertaken (e.g. finance, information technology, human resources, etc) as a large acquisition. 

 • Underestimating the risk – A small acquisition might appear quite simple, but with potential risks to the acquiring firm out of all proportion to its size. What are the downside risks?

 • Higher priority activities - Functional managers may neglect a small acquisition, focussing their attention on higher priority activities with greater organisational impact, or greater impact on how their individual or team performance is assessed.

 • Overloading acquired managers – A lack of coordination by functional managers (e.g. information technology marketing, finance, human resources) in the acquiring firm during integration often means that when they do focus attention on integrating the acquired firm activities and data requests are received simultaneously by a small number of core managers or staff in the acquired firm, overloading them.

 • Specific capability – In acquisitions focussed on knowledge or capabilities, rather than a physical resource, the specific knowledge or capability (the reason why the firm was acquired) will be embedded in a small number of key staff. How will the acquirer retain these people and the capability they possess?

 • Cultural issues – People choose to work for a small firm for a wide range of reasons, innovation, lack of hierarchy or silos, etc. Acquisition by a larger firm brings a range of cultural changes as large firm policies, reporting requirements, the need to consult other managers regarding decisions, drop in relative standing, different technology, etc that “weren’t needed last week and aren’t very useful” are imposed. The start of culture clash?

What else have you seen that acquirers of a smaller firm should consider?