Management Perspectives

Business cycles have occurred since the creation of central banks in the late 17th century.
The short explanation is that central bankers have the power to create credit, which then spreads throughout the real economy as new money in the form of loans, usually via the commercial banks setting into motion an unsustainable boom. An economic adjustment then unfolds as the monetary and credit inflation is halted to end the widespread speculation and/or the public’s demand to end the price spiral.

Entrepreneurs to the rescue
So how do entrepreneurs—who have been performing magnificently by providing goods and services to consumers’ desire in spite of the Federal Reserve’s destabilising policies for the past hundred plus years—continue to meet the needs of the people?

Entrepreneurship is, in its essence, focused on the generation of new value, producing betterment, growth, and improvement.
While customer preferences and the nature of competitive offerings may change, and conditions such as pricing and contracts may vary, entrepreneurs work towards continuous enhancement of markets.

Their efforts are thwarted by governments, which cannot leave markets alone to function smoothly, and especially by central banks, which aim overtly at manipulating markets through artificial credit creation. Entrepreneurs who are acutely conscious of this problem, since they understand business cycle theory developed by economists of the Austrian School, must nevertheless adapt to the boom-bust cycles.

The most important part of the market is the creation of customer value, especially in the form of innovation. When entrepreneurs can operate in the light of value generation, there is room for profitable operations. Thus, so long as we have central banking, entrepreneurs will experience boom-bust cycles.

Entrepreneurs must adapt and monitor boom/ bust signals
The first tool of adaptiveness is the recognition that the private and the public economies— government spending and central bank intervention in the credit markets—are different and separate. Entrepreneurs can further protect their businesses with anticipatory timing of the boom-bust cycle. There are signals that help.
The first signal is the inverted yield curve, when short term interest rates rise above long term rates. This is unnatural, implying that there is greater uncertainty in the short term than the long term. It can only happen when markets are fearful of the short-term consequences of government policies and interventions, even though they are confident of entrepreneurially induced growth and improvement in the long run.

The beginning of a recession can be anticipated roughly one year from the inversion of the yield curve. Of course, other factors can intervene, such as the government’s shutting down of businesses over the COVID-19 pandemic.
Nevertheless, entrepreneurs can monitor the yield curve signal at https://fred.stlouisfed.org/series/ T10Y3M.*

The national unemployment rate is another signal for entrepreneurs to monitor. This rate declines during the boom and starts declining as the recession is ending or a few months afterwards. There are variations in the pattern by industry which can be monitored such as manufacturing, durable consumer goods, finance and insurance, and construction.

More signals, such as home builder stock prices, to monitor boom-bust timing also provide excellent lead time for the onset of the next downturn.

Strengthening value effectiveness and value security beats managing for efficiency.
The economics profession has been guilty of misguiding entrepreneurs with its focus on efficiency, ie, managing for fewer inputs per unit of output, and eliminating waste. It can cause fragility, impede value generation, and slow down innovation and responsiveness to change.
One example is the management of supply chains. Managing them for maximum efficiency can also make them insecure, if, for example, there are no ready supplier replacements when one slips up. We are experiencing the impacts of supply chain fragility right now in the US. It is for reasons extraneous to regular business operations, but the effects serve to highlight the need to keep supply chains secure under attack from government interventions. Entrepreneurial businesses that develop the strongest possible upstream supplier relationships and cultivate a richly connected value network may be able to perform better when boom-bust hits the supply chain.

Entrepreneurs fight the Fed on inflation
The Federal Reserve insists on maintaining its 2 per cent inflation target, which is economically destructive in many ways (see ‘Why the Fed’s 2 Percent Inflation Standard Is So Bad’ by Ryan McMaken: Mises.org/E4B_142_Article).

Entrepreneurs pursue deflation, always aiming to deliver better quality at lower prices. Why? Because it is what customers want, and entrepreneurs are in business to serve customer needs. Entrepreneurs bring abundance.

Entrepreneurs make their workforce a strong resource
The purveyors of so-called efficient management traditionally see the workforce as a cost and urge entrepreneurs to cut costs by firing people in economic downturns. Entrepreneurs focus on effectiveness instead and see their workforce as a resource and a source of ideas and initiatives for improvement and adaptation in all environments.
A motivated frontline workforce is closest to customers and can bring back information, ideas, and new initiatives to make the business more responsive to customer needs and more capable of delivering desired customer experiences. This is the case whatever the state of the Fedmanipulated economic cycle.

Growth entrepreneurs think expansively at all times
Entrepreneurs create new value for customers, and they do not call a halt to their pursuit of value just because of the macro-economic data that is being reported in the mainstream media.
They understand that customer preferences, or the order of those preferences, may well change in a boom or a bust time, and they maintain their vigilance in monitoring and responding to these changes. These are the signals to which they respond, not the economic headlines.
Entrepreneurs look for the opportunity to introduce new goods and services at all times, and not just at the ‘right’ moments in the economic cycle. They are always looking for new ways to deliver more value. Perhaps, in a downturn, there is a greater call for service and repairs on existing equipment than for buying new equipment. Entrepreneurs can adjust and recombine their assets to provide more repair work and thus make up for lost sales revenue. Entrepreneurs should keep ample cash on hand or available for those times when funds can be used to expand. One potential use is the acquisition of assets from other businesses in a downturn, when business operators who are less savvy run out of cash and offer assets for sale at distressed prices.

Warren Buffett, CEO of Berkshire Hathaway, who has witnessed numerous economic cycles during his 56-year tenure at the helm, has socked away $149 billion of cash. Is it because he is waiting ‘to pick up the pieces’ during the next downturn? Maybe you too should also follow the actions of the Oracle of Omaha and raise cash for the inevitable downturn.

Moreover, there may also be the opportunity to expand geographically into new regions. There is always growth somewhere despite the boom/ bust cycle.

The answer to the boom-bust cycle is value agility
A major tactic for entrepreneurs during the business cycle is value agility. This term indicates the speed of responsiveness that successful entrepreneurs exhibit in response to customer feedback. I apply the same term in my boom/ bust book by defining it as ‘a process where entrepreneurs... adapt and adjust to continue to meet consumers’ perceptions of value your business delivers’ (page 111).

In short, do entrepreneurs stick it out when the economy is in a slump or wave the white flag and close the doors? Mastering value agility means never being faced with that agonising decision.