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The phrase “to big to fail” has been bandied around a lot over the last 12 months; specifically in regard to the (assumed to be unacceptable) cost to society of the failure of large banks and now to large manufacturing businesses such as General Motors and Chrysler.

There is no doubt that the failure of both large banks and manufacturers would cause significant immediate pain to both the local and global economies not just directly but through the knock on effects on confidence (particularly important in banks) and the supply chain in the case of car manufacturers (the usual figure quoted is 6 component manufacturing jobs for each car assembly job). There is also the likely long term damage to the manufacturing skills base (ref the UK in the 1980’s).

Politically this is dynamite as people expect government to help in these situations. The latest approach from GM and Chrysler to the Obama administration is the latest and clearest example of this.  What interests me is what happens next.

If these businesses are “too big to fail” then it seems to me that there are two options for society going forwards to ensure this does not happen again. Either:

1. These businesses need to be broken up into chunks that are small enough so that their failure does not wreck the socio-economic system.  Competition / M&A policy also needs to be tightened up significantly to include a “will this acquisition / merger create a business that is too big to fail?” (note this should not include any assessment of the risk of it failing)
2. If they can’t (or shouldn’t) be broken up then society needs to make sure, as best as possible, that the organisation can’t fail.  This is what has happened in the case of the banks through both implicit and explicit guarantees and significant equity investment.  In return for these guarantees the organisations will, in future, have to be run with “society” as a (possibly the) major stakeholder.  In effect they will have to become like the utility companies where their detailed business plans are vetted by a regulator operating on behalf of society.

What this means for politics is the return of some sort of “planned economy” to the US and the UK in particular (it never really went away in France and Germany).  The major problem with this is that there there are very few politicians that have any experience of industry.

A new socio economic system is emerging, which is neither capitalism as we have known it, or socialism as it was practiced before.  More on this in the next post!

When I meet people face to face one of the things that is commented on a lot is the fact that I take all my notes in Mind Maps.  This is something I started when I joined Vodafone in 1997 and after a week have always taken notes this way.  It has, however, taken the software development community a few years to catch up, but I can now say that, in my opinion, they have now provided some exceptionally useful software.

I have recently upgraded to MindManger 8 (I first used v3) and it provides a genuinely new way to present information, mindmaps as dynamic PDF’s or flash.  Previously, if I wanted to send a client a mindmap I had to send the full detail, which as a 1 page PDF was difficult to read and the links and notes were not visible.  This is now fixed, please click on the image to see an example (MS Explorer users may get a “active content” warning).

I met the author of the New Business Road Test, John Mullins, when we were both presenting at a strategy conference in 2006,  He had just launched the book and it has genuinely changed my approach to assessing business opportunities.

I created the mindmap above over a year ago as a summary for a contact and have wanted to put it on the website since, but I could not present an appropriate level of detail without losing the messages.  The key question is can readers of this post get useful information out of the map?

We would like to wish everyone a very Merry Christmas and a Happy New Year.  As usual, we are not sending cards as we feel uncomfortable with the environmental impact but have made a donation to the RNLI instead.

We hope that next year is productive for you.  We usually wish everyone “prosperity” however this sounded a little hollow, given the economic climate!

Robert Peston the BBC’s business editor has picked on on some of the themes (e.g. mutualisation) I have.  In his blog entry today, one of the telling passages is this

They (bankers) didn’t want to see themselves as the infrastructure of the economy, that couldn’t and shouldn’t attempt to push up their profits at an accelerating rate. Somehow it was a bit too humiliating to be no more than the pipework for the real generators of wealth, companies with genuinely new services, real products and real technology.

So bankers created and exploited new “financial technology” that enriched themselves (for a while, at least) and was supposedly benefiting all of us by providing unlimited quantities of credit at astonishingly cheap rates.

At last it is being recognised that “real wealth creation” is about commercialising new intellectual property and not financial engineering.  In my view, this is what capitalism should be about and where the real rewards should be found.  Most large mature businesses that don’t generate genuinely new ideas (rather than just process improvement) are really utilities and need to recognise that they have to satisfy the needs a broader stakeholder community.

The winners from this recession are likely to be mutuals like John Lewis, Co-op Financial Services and, in the recycling services sector, Valpak.  Shareholder owned businesses that want to compete will have to behave much more like mutuals and balance the needs of customers, shareholders, staff, management and broader society.

Stakeholder analysis and management is the now the critical skill for senior managers!

I have been tempted to comment on the grisly road crash that is the financial markets for a number of weeks, but each time, just as I have got my thoughts together something else has happened.  In many ways this just highlights that it is too early to draw firm conclusions.

I would just like to highlight a prescient post of mine on this website, two years ago to the day!!

In “Stakeholder Capitalism and the Mutualisation of PLCs” I commented on a number of trends which taken together meant that raw capitalism, where the only measure that mattered was profit, was in the process of evolving into stakeholder capitalism, where other stakeholder demands (e.g. no child labour, reduced emissions, fairtrade) are almost as important.

In the post I only mentioned the financial services industry in the context of de-mutualisation, however recent events, particularly the re-capitalisation of the banks, re-enforces my view.  When push came to shove it was decided (correctly in my view) that allowing any large bank to fail was not an option as our economic system would collapse with potentially apocalyptic results.

My key point, both two years ago and now is that capitalism in its “raw” form is probably finished.  It is not profit, per see, that is important, it is more how and why that profit is generated that is critical.

The broader sustainability agenda plays in here as well.  From my discussions with contacts, it is clear to some global companies that they can no longer rely on being able to grab hold of the resources to be able to continue to grow.  This poses some fundamental challenges both for companies and for the global economy, specifically that the issue hat we can see that the global economy cannot expand infinitely and we can start to see the limits!

John Maynard Keynes is seen as the key economist in these times because of his work analysing and dealing with the 1929 crash and subsequent depression.  However John Nash in the Times highlights another aspect of Keynes work. This is an essay where he imagined a world where we had moved beyond crass materialism…

“I see us free to return to some of the most sure and certain principles of religion and traditional virtue – that avarice is a vice, that the exaction of usury is a misdemeanour and the love of money is detestable…We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well.”

I have a couple of Keynes’ books on the shelf already.  Might be time to find a copy of this essay as well!