“The Economy, MBEs and Economic Recovery”

Fred McKinney, president and CEO of the Greater New England Minority Supplier Development Council

It comes as no breaking news that the U.S. and global economies have been depressed for the past 20 months. But the good news is that Real Gross Domestic Product (GDP) was up 3.5 percent in the third Quarter of 2009, the first increase in GDP since the middle of 2007.

Nonetheless, the economic stagnation has caused severe unemployment and the restriction of capital resources. The grim reality is, in order for the unemployment rate to decline, real GDP has to grow. Since the second quarter of 2007, unemployment rates have increased from 4.6 percent to 10.2 percent. Now, eight million Americans are out of work.  

Consumer confidence has suffered and business conditions have worsened because of reduced sales, increased inventories, falling prices and falling profits. The cumulative impact of this downward pressure has created the worst economic conditions since the deep 1974-75 recession, and because of the collapse of banks and other financial institutions, the economy was perilously close to shutting down in a way reminiscent of the Great Depression.  

It is clear that the economic recession of 2008-2009 was the result of excesses of greed, credit, and hubris. Greed is the ultimate equal opportunity human flaw. It was seen in the behavior of homeowners who sought fortune by “flipping” houses as if they were kids trading baseball cards. It was seen in the practices of mortgage brokers who generated incredible incomes “helping” homeowners refinance their homes or buy new homes that their incomes and wealth could clearly not support.  

Consumers also engaged in credit card financed spending that complemented the mortgage financed housing excesses. And the credit card companies expected to cash in by collecting a usurious 20 plus percentage rate of interest.    

Minority Business Enterprises (MBEs) participated in the economic upswing in ways that forever will change the concept of what is a MBE. Nonetheless, MBEs were often the first to suffer the decline in economic activity and were the hardest hit.  Over the past twenty months, almost 15 percent of our MBEs in the Greater New England Minority Supplier Development Council have either gone out of business or have decided that business conditions are so bad that they did not renew their certifications. Almost 40 percent of our MBEs reported in a recent survey that they expected their 2008 sales to be lower than in 2009.  

MBEs that are in relatively good fiscal shape should consider a merger or acquisition. This is often the fastest way that any business can gain scale. These difficult times are a good period for business expansion because most firms that have survived have been forced to look internally at their allocation of all resources and have made tough decisions regarding people and technology.   Businesses can emerge from this economic downswing more efficient, more competitive and more focused for future success.  

It is time for minority entrepreneurs to start acting like business leaders instead of lemmings marching toward the precipice. MBEs need to consider several management assessments, including: external markets, internal organization structure, financial capability, strategic acquisitions, and marketing and public relations.

External Market Assessment

The economic recession has changed some markets permanently. Business is just going to be conducted differently now and in the future. A prominent example of this is in financial services. Mortgage brokers and lenders who once ruled the roost have had their wings clipped. Companies in other industries have also gotten much more vigilant over all aspects of their profit and loss statements. Competitors in what were once separate industries are now competing for the same customers. A perfect example of this is telecommunications, computers and entertainment. The cell phone is competing with computers. Computers are competing with flat screen TVs. Telecommunication companies are competing with cable companies. Every MBE needs to look at how these changes have impacted their businesses and their industries, if they want to have any chance of success in the future.

Internal Assessment

Once the external analysis has been conducted, it is time to take a sober and objective look within the enterprise. Success and growth hide the weaknesses that a bad market reveals. If you have built a business to fight the last war, you might not be successful in the next one. It is the job of the CEO to make sure that the proper structure is in place.  

 Financial Capability Assessment

MBEs will need capital to accomplish their growth plans, and a lot of it. There are many sources of capital such as equity, various forms of debt or internal resources. The problem for most businesses, large and small, is that internal resources are rarely enough to feed the beast. External sources of capital in the form of new equity investors or debt are required in order for MBEs to thrive in the coming economy. Banks are good sources for loans, provided there is sufficient collateral and cash flow. So MBEs and others need to look at the world of alternative finance. However, this wealth will never find you if you do not have a sound business plan.

Strategic Acquisition Plan

MBEs need to spend at least as much time identifying potential acquisitions as they do identifying new customers. If you decide to pursue an acquisition, the science of valuations, integration and managing change come into play. MBEs that want to become relevant in their industry will have to grow through acquisition. There are simply too few examples of significantly sized MBEs who have grown organically.

A Strategic Marketing and PR Plan

Can a small business build a really successful brand?  I believe that the answer to this question is a qualified yes. There is no question that an MBE with $5 million in sales is not going to approach the market recognition of icons like McDonalds or other global companies. But MBEs with much smaller budgets can creatively stick out above the other smaller companies in their industry and in some cases grow to become national players.

The market is open to brilliant ideas that can be executed superbly. Now is the time for MBEs to explore their marketing and PR activities.

The Future

Economists are known to be the bearers of bad news. If economic history is reliable, we know that this recession is longer and deeper than most post WW II recessions. Like any expansion, this recession will end soon, if for no other reason than it will simply run out of steam. Consumers and businesses will wake up and realize that the sky is no longer falling and it is time to borrow reasonably, spend wisely and employ more people.   

Fred McKinney, president and CEO of the Greater New England Minority Supplier Development Council, as excerpted from Dec. 4 speech to Chicago Minority Supplier Development Council.