Forbes America's Most Promising Companies: June 2009 Archives

This week's topic for Forbes America's Most Promising Companies comes from Brett Nelson, Entrepreneurs Editor at Forbes.com:

A vast increase in productivity, care of staggeringly swift advances in computing technology, drove the U.S. economy to new heights in the last 20 years. Where might the next surge in productivity come from to propel us out of the economic rut we are in now? Which companies or universities are at the cutting edge?

This is an intriguing question, indeed.  Let's take a look at some possible candidates.

I know -- it has got to be something green.  Surely with all the hoopla going surrounding green energy, it must hold great economic promise for our economy.  Let's see what Jonathan Fahey discovered in an article at Forbes.com about one printer named Brian Driscoll from Connecticut who got some government help to put in a windmill:

A windmill doesn't make economic sense, even though this poor entrepreneur is gouged 19 cents per kilowatt-hour from his utility. A 121-foot, 100-kilowatt turbine from Northern Power runs $500,000, installed. The air at Driscoll's site on Long Island Sound is so still that the average output would come to only 18% of peak output, meaning that the juice would be worth $30,000 a year. It's hard to cover the interest on a $500,000 loan with a $30,000 annual payback. "If I had to borrow that kind of money for my business, it would be for printing equipment," says Driscoll.

Good thing Driscoll got most of the cost of the windmill paid for through federal and state grants. 

Well, I guess the next big thing won't come from anything that has to do with being green.  If green products were the answer to our energy problem, we would have seen them breaking through due to market demands.  Instead, the only success that we can anticipate from green companies is their ability to secure federal and state money from rent-seeking behavior like Mr. Driscoll's.

OK, health care must be the next big thing that will pull us out of this economic morass.  After all, the Obama administration is planning to spend $1 trillion just as a down payment on "fixing" healthcare. 

But wait a minute -- I don't see entrepreneurs lining up to dig into that pot of money.  Nope.  It is the likes of General Electric and others positioning themselves for some serious rent-seeking in the health care arena.  And don't forget that the goal in healthcare reform is to cut costs and ultimately ration care.  No economic leadership likely to be found in healthcare.

I know.  It must be transportation.  Darn!  I forgot about the new General Motors that is starting to look a lot like the old East German Trabant.

I guess the place not to look for the next big economic thing is with any of the rent-seeking companies in those industries lining up at the public trough.

The thing about economic breakthroughs is that we rarely see them coming, and they never come to us thanks to government policy makers picking the next economic "winner."

What is beginning to scare me is that we are doing everything wrong if we want to see our economy recover due to the good works of entrepreneurs: 

• We are increasing taxes.  Higher taxes kill people's motivation to take risk and launch ventures.  The evidence is overwhelming on this.  And not only are we increasing the marginal rates on income taxes, but we are coming closer to enacting Cap and Trade, which will add an even greater deterent to entrepreneurial activity.  The current 70,000 page federal tax code will probably soon look like the good old days in the not too distant future.
  
• We are increasing regulation.  Those in Washington who believe that capitalism has failed, or at least badly flawed, are eagerly adding new regulations that impact every aspect of commerce.  Bad news for entrepreneurs -- increased regulation also inhibits entrepreneurs.
• Property rights are eroding.  It is clear that we have evolved from our founding as an economy of private property protected by limited government to a system that views private property as something that the government bestows to us by its good graces.  Alas, not a good recipe for entrepreneurial fervor in an economy as business owners need to know that the property they hold and the wealth they create is actually theirs to keep.
  

Sadly, it may be that Mr. Nelson has asked us the wrong questions this week. 

Instead of "Where might the next surge in productivity come from..." , I think the question should have been "Will there actually be a surge in productivity any time soon?"  

And rather than "Which companies or universities are at the cutting edge?", maybe we should be asking "Will there be any companies or universities that will be able to lead us to a new cutting edge?"

I am participating in a multi-blogger forum through Forbes magazine as part of their America's Most Promising Companies project. They will be throwing out a topic each week to several bloggers to write about.

This week's topic from Brett Nelson, Entrepreneurs Editor at Forbes.com:

There's a lot of confusion about whether we are in a deflationary or an inflationary environment. What sorts of pricing strategies should small business owners consider right now?

I have consistently been on the side of those who are worried that inflation is inevitable.  Although the recession has dampened inflationary pressures, I still believe this is only a temporary reprive.

The problem for small business during inflationary times is that they are less able to adjust prices as quickly to adjust to inflationary pressures.  There is never a smooth and orderly increase in prices for every business in the economy and small businesses often suffer the most.

If you have big suppliers and/or customers they can tie your hands.  Your costs go up, but you are unable to pass along these costs with higher prices.

What I worry about even more is that we may see inflation take hold long before the recession is over.  This makes keeping prices up to stay ahead of increasing costs even more difficult as demand will still be fairly weak for some time.

So what can a small business do in terms of pricing strategies to try and weather this impending inflationary storm?

The recession has made entrepreneurs leary of doing anything but cut prices to keep their businesses afloat during the recession.  While that may still be the best course over the short-run, pay very close attention to pricing from your suppliers, decreases in unemployment, increasing interest rates, and pricing moves from the big boys in your industry.  These are the elements of your inflationary dashboard.

When inflation heats up even a little, be aggressive with frequent small price increases rather than waiting and trying to catch up at some point with one big jump. Don't let yourself get behind, as small businesses can almost never play catch-up with their prices.

This can be tough to implement for some businesses, particulary if you publically list your prices.  For example, it can get very costly to print up new menus each month for a restaurant owner who wants to follow this strategy.

But customers are less likely to pay attention to price increases if they are small, so it is essential to find creative ways to communicate your pricing to allow for you to implement this strategy during inflationary times.  For a resaurant it may require using menu inserts that can inexpensively be replaced.  This was actually very commonly used in restaurants during the 1970s and 1980s when we had high inflation.

I know the question of the week is pricing, but I can't let this discussion go without a brief reminder that the income statement is also made up of costs.  Adjusting to inflation also requires careful attention to expenses, as cutting costs can at least somewhat help ease the pressure to increase prices. 

Continue the prudent management of expenses that helped you survive the recession:

- Keep overhead low.

- Build cash reserves to buffer short term price increases that precede your ability to get higher prices from your customers.

- Watch your margins carefully. Worry about growing profits, not sales.

- Don't lock into long-term contracts that have narrow margins with large customers.

- Pay down variable interest loans ASAP, especially now that interest rates are temporarily realtively low. As soon as inflation heats up, interest rates will continue to rise.