Darwinian Gale

By now, I’m sure you’ve seen that Fortune magazine just named Steve Jobs “CEO of the Decade.”  It’s a well-deserved honor.  As Fortune noted, Jobs led revolutions during this decade in three major areas – music, movies and mobile communications.  Not to mention, of course, his revival of the Apple computer business.  iMac, iTunes, iPod, iPhone.  We now live in an i-world.  Jobs returned to the helm of the business he co-founded in 1997 and the first thing he did was reinvent the Macintosh with the introduction of the all-in-one iMac.  But that was nothing compared to what he did in 2001.

Now, it’s worth reminding ourselves how 2001 looked to us at the time.  Memories are short.  Economist Mark Zandi, co-founder of Moody’s Economy.com, has written of this time in his new book, Financial Shock (updated edition, 2009).  Let me quote him here at length, just to take us back (p. 74):

“The [dot-com] bubble began to burst only days after stock prices hit their peak, in the weeks just after the turn of the decade.  By the end of 2000, investors were completely panicked.  The value of the NASDAQ was slashed in half.  Other, broader measures of stock prices held up better, at least for a while, but more than $2 trillion in housrhold stock wealth eventually disappeared.  The economic fallout was substantial.  By Christmas 2000, consumer confidence was plunging, hiring had come to a standstill, and businesses were cutting back on investment spending, even for new high-tech equipment.  The economy was heading fast into the 2001 recession.”

Federal Reserve of San Francisco Economic Letter, June 20, 2003

It was in this environment that then-Federal Reserve Chairman Alan Greenspan decided to lower interest rates.  He did so repeatedly over the next three years, until rates hit a 45-year low in 2003.  (Rates are even lower now, of course.)  Greenspan was particularly worried about deflation.  His strategy was to deliberately stimulate a housing boom (not a bubble, just a boom) as a way of reinvigorating the economy.  This became even more of an urgent priority after 9/11 and, soon thereafter, the start of the wars in Afghanistan and Iraq.  The struggling economy needed help, and it certainly did not seem like a good time to invest in innovation…except to Steve Jobs.

In 2001, during the worst part of this brittle, deteriorating economy, Jobs led Apple in the introduction of iTunes (January), the Mac OS X operating system (March), the first Apple retail store (May) and the first iPod (November).  In other words, in the depths of recession, Jobs was looking ahead.  He sought to connect with a recovery consumer mindset not the recessionary consumer mindset.  He spoke to people’s hopes, dreams and aspirations, not to their anxieties, worries and concerns.  He delivered value not a discount.  He offered something for people to put at the top of their priority list, something for people to want so much that they would economize on other things, something that would win dollars that might otherwise have been spent in other categories.

In other words, Steve Jobs staked out a rallying point and refused to surrender his brand to the prevaling winds of the moment.  And in the process, added his weight to the broader effort needed to turn the economy around – Greenspan gave people money; Jobs gave them something to spend it on.

Obviously, the Great Recession of 2008/2009 has been far more severe than the 8-month downturn of 2001.  (As ex-Federal Reserve governor Frederic Mishkin pointed out in an op-ed in Monday’s Financial Times, bubbles driven by credit booms are worse when they burst.  Such was the housing bubble, but not the dot-com bubble.)  But the severity of the downturn is not an excuse to abandon value-creation and investment in innovation.  The past cannot be undone, but the future will be created in whatever manner we make it.  Like Jobs in 2001, it’s up to us to decide what consumers will find in the marketplace, as well as what sentiments we want to elicit from consumers based on what we communicate as our response to this downturn.

Discounting does not power the economy.  This is certainly not to say that we can ignore affordability.  The U.S. and other developed markets are facing smaller economies over the near-term.  But being affordable is not an excuse for pushing cheap over innovative, or for eschewing innovation in favor of denaturing brands.

Innovation powers the economy.  Innovation is what will power the economy past this recession.  We were reminded of this in 2001 in another way, too.  That’s the year that Paul Gompers and Josh Lerner of the Harvard Business School published their bestseller, The Money of Invention (2001), a book about the essential economic role played by innovation and thus the venture capital that funds it.  In conjunction with the publication of his new book, Boulevard of Broken Dreams (2009), Josh Lerner was interviewed recently by The Wall Street Journal about the importance of innovation, especially in a downturn.

The need for innovation is one of several things discussed in A Darwinian Gale.  But the broader message of our white paper is about not giving up on the marketplace.  The recessionary consumer mindset is giving way to a recovery consumer mindset.  Consumers want to buy again.  We have to make it affordable.  But within the budget available, we have to do more than make it cheap.  We have to deliver a compelling total-value proposition.  Doing so requires a detailed understanding of what now defines value for consumers.  That’s what A Darwinian Gale is all about.  [J. Walker Smith]