The Natural Selection of a Market Recession

by Chris Kenton on October 1, 2008

Wave
A couple of weeks ago I wrote about the financial crisis and its likely implications for the business of marketing. Beyond the direct comments on my blog, I got a lot of bemused and even dismissive comments by email. At the time, the Web2.0 conference was in full swing in New York, and most of the chatter was around exciting new technologies, not so much about the stock market. What a difference a couple of weeks makes. We’ve had some collossal bank failures–WaMu and Wachovia–a major battle over a $700B Wall Street bailout, and the single largest one-day drop of the stock market, more than 9%. That’s just the surface stuff–not getting into interbank lending rates, Fed liquidity, foreign capital flight, etc. This week I’ve heard direct news of the ripples hitting my own industry with discrete layoffs starting in the advertising and digital media space.

All of this, of course, is only symptomatic. The really troubling news hits much closer to home. As many of you know, I’m running SocialRep, a startup in the social media monitoring space, and I depend on sales, credit and investor funding to keep the business accelerating down the runway. In the past 2 weeks, one of my major prospects, a company in the financial sector, went belly up rather suddenly–eating up weeks of energy, investment and travel to close a deal. Many of my other prospects are visibly slowing their spending–holding back on any outlay of cash until they can see where things are headed. The limit on one of my credit accounts was cut back, leaving me a lot less breathing room. On the VC front, the impact is also evident–even though VCs have funds, they’re slowing down and being more careful in their investments, waiting to see who has what it takes to survive a downturn. Yesterday, as if to emphasize that this is rapidly spreading to mainstreet, McDonald’s announced that financing from Bank of America for franchisees to improve their restaurants had been capped by BofA in the wake of market events.

These are all serious signs of a market slowdown that goes way beyond Wall Street–right to my own front door. When banks stop lending and credit dries up, it’s like running out of gas. But despite the growing stream of dire press accounts of what’s happening in the market, I still don’t see any sign that the vast majority of people realize how serious this crisis has become. But relatively speaking, it’s still early in the cycle.

I didn’t write this post to spread doom and gloom, although I am convinced that we’re in for a proverbial Correction of epic proportions. The point is, this is all part of the cycle. It’s the nature of systems–part of the very process of organizational advancement and evolution–and many of the most important transformations of social and economic systems can only happen through disruption. The larger the disruption, the greater the capacity for fundamental change. Everywhere you look where we try to control and minimize the natural cycle of systemic disruption, we wind up only delaying–and often increasing the magnitude–of the eventual, inevitable disruption.

The SunThink of forest fires. We spent decades trying to control and minimize forest fires–Smoky the Bear!–only to discover that we were inadvertently causing a massive buildup of dead underbrush and fuel, making the eventual, inevitable forest fire far more powerful and destructive than the smaller fires that used to happen more frequently.

We’ve done something similar in our economy. We’ve leveraged our assets through credit to unnaturally extend and sustain a supposedly endless cycle of prosperity. We used equity and credit to go beyond our paychecks to buy lots and lots of stuff, and the economy grew unnaturally–like some genetically engineered 1000-pound pumpkin. But we leveraged ourselves out over thin air–housing prices. And when we finally reached the headwinds that pushed prices down, the whole thing began to unwind. If you don’t have any more equity and credit to buy lots of stuff, the economy slows down. But it’s worse than that, because now you have to divert your paycheck from buying even the important stuff to pay down the credit bill, so the economy stalls even more. That we’re seriously floating major legislation to try and prop up the underlying housing prices and credit is not surprising, but it’s not comforting. The bill is necessary to prevent markets from seizing up entirely, but many of the provisions are laughable. It’s as if we’re saying, uh oh, bigger fires? Let’s clone an army of Smoky the Bears, and stop fires once and for all. The whole premise is simply not credible. The decline, the disruption, however painful it may be, however we may be able to attenuate some of its worst effects, is a natural part of the system. Not only can we not avoid it. We literally can’t grow without it.

Once you understand that reality, get past the denial, you have a clearer view to what it takes to survive and even thrive in transformational chaos. Speaking dispassionately, the role of disruption is to challenge the system and eliminate weaknesses–to burn out the deadwood and disease. Once that happens–assuming the system wasn’t so diseased that it collapses entirely–there’s an opportunity for reorganization and redevelopment, an advancement to a higher order of organization.

From an American perspective, we have seen this cycle play out in marketing for well over a century. Some of the cycles of disruption and reorder have been dramatic, some more subtle. We’ve seen marketing evolve through cycles that defined marketing by distribution, merchandizing, personal selling, mass markets, mass media, branding, database marketing, internet marketing and most recently social media, just to name some of the most obvious transformations. Some of those cycles were driven most by innovation–radio, TV, computers, networks–others were driven most by disruption–two world wars, the Great Depression, regional wars and countless smaller recessions.

I watched this cycle play out directly during the Dotcom boom and bust when I was president of an agency in San Francisco, and I’m anticipating that we’ll watch it all play out again, but this time on a larger scale, with greater disruption, and with greater impact on the reorganization of marketing as we rebuild. The cycle is predictable, but it’s not orchestrated. It happens through a process of natural selection, driven primarily by short term business objectives. So here’s my 2-cent prediction on the mechanics of this correction. I’ll leave the higher level analysis for a future post.

The first obvious indicators of the cycle accelerating will be layoffs. But companies are already starting to feel the liquidity squeeze, and their first response will be to hold off on any new expenses. This will ripple out and return as a drop in orders and an increase in selling cycles, making the liquidity crunch tighter. After cutting programs, the more aggressive companies will start layoffs. Layoffs ultimately will disproportionately affect marketing, as companies focus more intensely on short-term sales efforts. At this point, we’ll see a large number of senior marketing executives and managers retired–they’re expensive and their contribution is more strategic than the short-term, closing-deals imperative. Marketing will be redefined functionally as sales support and lead generation, and marketing directors will take over the day-to-day reins. Most companies will retreat into this relentlessly sales-driven mode until the bleeding stops and markets stabilize.

Emerging Beauty
At this point, the natural selection shifts from who and what gets cut to who and what gets selected for new growth. Companies still have to compete, and they’ll look for ways to gain a market advantage. The focus early on will be all on demand generation. Marketing directors who have grown up with technologies will explore emerging tools that improve lead generation and campaign performance. Vendors and startups who weren’t overly leveraged before the drop will aggressively innovate new technologies to feed the hunger for cheap and efficient lead generation. But all of this will happen against the backdrop of a new, accepted foundation of social media technology. All of the Web 2.0 hype will have long since burned away, and the useful stuff–the components that help companies connect more effectively with customers to provide the products they want and need without all the bloat of inneficient product development and promotion.

This, ulitmately, is the evolution imperative that will be at the heart of recovery. An evolved paradigm of media–no longer a fight between broadcast and social–but an integration at the foundational level based on what allows successful businesses to advance. It won’t happen by design. It won’t happen by chance. It’s the natural direction of the system, and the massive disruption caused by the financial meltdown is only the catalyst.

I’ll write more in the coming days about why I’m so convinced social media is going to be woven into the fabric of the new marketing infrastructure. Suffice to say that it’s not “true belief” on my part. I’ve written and spoken about this in the past, that the media paradigm we’ve known all our lives and accepted as the norm is in fact a bubble that is bursting. The historical status quo has always been word-of-mouth. Technology simply evolved in a way that disrupted the status quo and put control in the hands of a few, primarily because of the expense of technology-based communication. But technology is now commodity. Communication has returned to a higher level of democratization. And now we’re seeing the media bubble burst, right at the same time we’re seeing a more acute economic bubble burst along with it.

{ 6 comments… read them below or add one }

John Sheridan October 1, 2008 at 1:50 pm

“The larger the disruption, the greater the capacity for fundamental change.”

I love that sentence. I think that is the effect of the current climate that we can anticipate.

Living in Canada, as close allies & partners of the U.S. we are inevitably affected by the U.S. economy. Our financial system is structured quite differently (for better or worse), but we are so close in many ways, that U.S. waves do rock our boat.

An interesting effect of the current crisis is the reaction of those feeling the ripples further away. I lived in the UK for a decade, and still keep a finger on their pulse. It’s curious to me, how the British are pinning their future position on the U.S. bailout. Germany went further and called it a “pre-condition” to stability. I don’t think that’s fair, nor entirely accurate. Europe has their own environment which significantly contributes to their own financial conditions. As do Asia, Asia-Pac, Latin American, etc.

The end of your post has me in entire agreement – “Communication has returned to a higher level of democratization. And now we’re seeing the media bubble burst, right at the same time we’re seeing a more acute economic bubble burst along with it.”

First, the media and financial bubbles are different, as you point out. In terms of marketing, I think the financial climate will actually help bolster the importance of online efforts, as organizations look to ensure that whatever they spend money on, is measurable in one way or another. So, SocialRep is a good business to be in – keep the faith (^:=

Second, the financial crisis is very personal and immediate to billions of people. It is touching more people instantly, than any war, for example. Social media will increase in importance as a tool for those demanding that ‘fundamental change’. We will soon see a start to the era of Norm Chomsky 2.0.

Chris Kenton October 1, 2008 at 2:15 pm

John–Thanks for commenting. Sounds like you’ve traveled many of the same trails. Jonathan Knowles, who commented on the last post on this topic is also a British transplant based in Canada, and New York.

I agree with you about the rising importance of social media. We’re grinding through a period of innovation that looks a lot like the late 90s. Things will start to settle down in terms of the basic tools, and we’ll start building new networks on top them. FriendFeed is a great example, watching how that leveraged the popularity of Twitter, but added more conversational depth to the experience. It’s going to be a fascinating few years ahead.

Pleased to make your acquaintance.

John Sheridan October 1, 2008 at 3:48 pm

It’s interesting you mention F-Feed, because I see a rationalization of the endless stream of tools boiling down to three core areas of importance: those that help you listen, help you speak, and help you gauge the state of the communication. It must progress to technology at a human conversation level; including virtual eye-contact and body language.

“It’s too hard to keep up , and becomes non-productive” as one of the UXnet Board of Advisers said in a con-call earlier this week. Ideas like F-feed, Ping.fm, etc are going in the right direction, I think.

Technology needs to be smart enough to do the work understanding the ever-expanding conversations, but still make it increasingly easier for us humans to participate.

{Nice to virtually meet you, too. But, I’m a Canadian who used to live overseas. The beer is colder here (^:= And as per our conv offline, keep havin’ fun!}

Allan October 10, 2008 at 3:32 pm

Very well written, if overly long, post about the current economic environment. Your mention of forest fires got me thinking if indeed the bailout package is an attempt to put out a forest fire that we ought to let burn so that the ground can be more fertile for future trees.

Chris Kenton October 10, 2008 at 3:39 pm

Allan! I’m wounded. Overly long? But I put in pictures and drop caps and stuff to break up the flow! :)

Thanks for posting. I wonder about the bailout as well. But using another metaphor, if you’re too aggressive with the chemo, you wind up killing the patient. It all just goes to show how little we actually know about managing our economy.

Alex Salkever November 12, 2008 at 2:52 pm

An incestuous comment here. I agree with most of what you are saying. I am unclear on what the exact role of marketing executives will be after this brushfire. They will exist. But with Current.tv cutting the advertising agencies out of the loop, as an example, and other forms of marketing now taking more organic shapes that bubble up rather than pour down from the top, I think it will take a fundamental shift in awareness that marketing is no longer about push but more about empowerment and enabling advocates and the public to shape your marketing message with light interference. Advertising will become much more like content.

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