Monday, May 25, 2009

Factoring In Deflation: It's Still About The Customer's Needs

We, as a nation, are finally to the point where we have a long list of factors that led us to this depression-like economy. Many tactics have been deployed to stop the decline and hopefully spark some signs of growth. As it stands now, the verdict is still out on how these things will play out in the near future. I've been waiting to hear a little about one possibility, which can be called, The Age of Reality and Accountability.

During one of my last few classes of my MBA program, I introduced the concept of deflation to the professor. It was around October, so it was far from the radar of most business-minded people. However, after some debate and thought, my professor agreed that this could be a possibility. Now, I'm hearing a few analyst begin to make an ever-so-slight mention of this by using words like plateau, lull, and other signals of hope, which is a good thing when as it relates to confidence. But here's another angle on not using the "D" word, it hurts the businesses that are basing their model on things going back to "normal". I've placed the word normal in quotations because normal equates to a consumer who saves less and spends more on credit. This applies to B2B sectors as well. Thus, most businesses aren't adjusting capacity, forcing extreme measures of cost-reductions, or mapping out where their customers of tomorrow will be in the marketplace. Instead, they are waiting for the boom in the economy again. If you've never seen a market downturn like this one before, then what makes you think there actually is a recovery in this thing?

Here's the definition of deflation - a contraction of economic activity resulting in a decline of prices. My theory is based on how capacity and demand estimation is factored in by most companies. Credit is a normal and natural thing, but only if income remains steady, and hopefully increases. The cost of living has steadily increased, while incomes have just been steady (an increase or decrease is in question at this time). If you factor in growing unemployment, you can easily see how consumer buying power has been reduced dramatically. If this is the case, at least two things have definitely changed for businesses - price elasticity and price equilibrium. Thus, there must be a change in capacity, product mix, or other components that make up a business model, which supports an overall business strategy.

I hope this is not the case, but I don't think it's wise to wait for something to happen. The current winners in this economy (McDonalds, Home Depot, and Dollar General) are making the adjustments necessary to MEET THE CUSTOMERS NEEDS. A few analyst are throwing around the inflation scare in the market, but I don't really see how inflation works in this type of economy. Okay, gas goes up to $4 again. It will just mean that the economy will tank even further, and the OPEC gang will realize the error in their greed. But's that's another topic.

Finally, my professor added that deflation included a devaluation in the currency. All I can say is $2 trillion. I told a friend the other day, "Cash is truly king", and I mean that. This economy is all about playing within yourself. If you have the ability to make some moves, make them. Just remember, there's nothing wrong with 10% annual growth. That was the one thing people forgot, which is part of the reason we are where we are today.

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