Jeff Immelt, the CEO of General Electric has coined a term “the reset economy.” The term is meant to imply that “this economic recession is more than a simple business cycle correction, but is a permanent, fundamental change to how markets will operate and be influenced moving forward.... It’s an emotional, social, economic reset,” which will lead to greater government involvement in the economy and business affairs.

"I believe we are going through more than a cycle. The global economy, and capitalism, will be ‘reset’ in several important ways. The interaction between government and business will change forever. In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner […] I think this environment presents an opportunity of a lifetime. We get a chance to reset the core of GE and focus on what we do best."

In essence the term suggests that companies should be using the recession to reposition their businesses for recovery. Business leaders are starting to use this term to describe the current environment and the road ahead. The core idea is that once we rebound from this economic downturn, the worst in 70 years, it will not be business as usual. We could emerge into a world where:

• The core growth rate is lower as cheap credit disappears and consumer spending does not fully rebound to pre-recession rates;
• The costs of regulation are significantly higher;
• The cost of capital is higher and the ability to apply financial leverage is greatly reduced;
• Global trade and offshore manufacturing shrinks, as attitudes become more nationalistic and defensive.

Many companies project long term demand using a historical growth line. When a recession occurs, they reduce growth rates, project how long they think the recession will last, and then reapply the historical growth curve on the other side of the recession. However, the business environment might be far different moving forward than it has been historically, not just during the recession, but potentially for a decade or more following it. What does the Reset Economy mean for Shippers and Carriers?

Shipper Strategies for a Reset Economy

• The starting point is to determine what to produce and at what price point. This demands a fundamental reassessment of a company’s customer requirements, core competencies, cost structures and its source of competitive differentiation.

• Each company must make a careful determination of which business segments or customers have been lost permanently, which ones have been lost temporarily, which ones will remain at post recession levels and grow at a slower rate than the past and which new business segments will emerge.

In the August 19 issue of the Toronto Globe & Mail there is an article about a San Diego based 4 star luxury hotel that has fundamentally changed its business model to address the new realities. As an example, they now offer a $19 (U.S.) hotel room that comes with no bed, toilet paper, towels, air-conditioning or “honour bar” and a single light in the bathroom for safety. The next level up adds in a bed (without sheets), for $39 a night. For a bed plus toiletries and toilet paper, the rate is $59 a night. Clearly this is “out of the box” thinking targeting the many families that are on tight budgets, are fearful of losing their jobs or have lost jobs but are trying to take some “R and R’ time with their families. The point is that many companies will have to change their paradigms to bring their business model in line with the realities of 2009 and beyond.

• Closely aligned with this is a careful assessment of where the demand will come from and where the sources of supply can come from. Demand may not bounce all the way back after the recession ends. While economic forecasts have not always been that accurate, it may be valuable for companies to conduct some market research or secure economic forecasting data about future demand levels.

• Demographic and category market share data may also useful, not just whether the whole category or market will shrink or grow, but whether that specific shipper is gaining or losing market share in particular market segments. If demand bounces back, while that shipper’s market share is down, the company might not realize that. A company can potentially recover lost market share with the right pricing and marketing strategies.

• Supply chain strategic planning and risk management will become more important than ever as companies seek to adopt “lean” approaches. Network optimization and inventory analysis tools will play a strong role in helping the supply chain organization perform the necessary analysis and drive out excess costs and inefficiencies. Many companies will need to work with consulting organizations to do this type of analysis.

• Organizations with Integrated Business Planning processes – i.e., rolling quarterly budgets that are connected to monthly Sales and Operations Planning processes – will be better equipped to accommodate a changing macro environment.

• The focus on cost savings and value should be a boon for shippers that invest in best in class RFP, E-sourcing and spend analysis tools to drive all excess costs out of their supply chains.

• As demand increases, the tight capacity will place upward pressure on freight rates. This will make the task of optimizing the value of each company’s freight expenditures that much more important.

Carrier Strategies for a Reset Economy

• The core problem for asset based carriers will be matching capacity to projected demand over a strategic planning time horizon.

• Each trucking company must make an assessment of which markets (e.g. cross border versus domestic, national versus regional) and services (e.g. LTL, "heavy" LTL, truckload, expedited) have growth potential, where their fleet can operate in a profitable manner, which markets should they abandon or reduce their commitment to and how quickly should they be bringing back capacity.

• Just as a hotel is offering $19 hotel room for the sleeping bag crowd, truckers need to be talking to their clients and discerning the trends in their market. This could open up opportunities for low cost operators that can provide various levels of basic transportation services at affordable prices.

• It also suggests that carriers should be part of the solution by employing analytical tools to help their clients identify alternate modes of transport, pool points, continuous move and round trip opportunities, possibly in combination with other clients. This is the added value that shippers will be looking for to keep their costs low.

• With tepid demand expected for the next several years, it suggests that carriers must plan for a slow uphill climb with innovation, thoughtful planning and attention to detail more than ever before.

• As the pendulum turns, albeit slowly, carriers need to regain pricing discipline, to better utilize freight costing tools, and look for opportunities where they can migrate freight rates to more profit sustaining levels.

• Despite the less than stellar results in the trucking industry, one can expect an upswing in mergers and acquisitions as companies seek to restore critical mass.

Some companies will emerge from the recession stronger than ever. Crises create opportunities: to overcome cultural resistance; to slash structural costs that are out of line; and to build supply chain agility and flexibility. They incent companies that create the ability to compete in a far wider range of economic scenarios and market configurations. General Electric, Siemens, Wal-Mart and Proctor & Gamble are among the leading edge companies that are “resetting” their companies for the “new economy.” Paul Laudicina, chairman of A.T. Kearney stated it this way in the current issue of Business Week, “The most important thing any company could or should be doing now to prepare for the post-recession environment is to look at all of the fundamentals and re-examine what changes in the theory of business might mean for their core competencies, for their ability to meet the new customer demand.”