Market corrections always teach lessons. This correction is teaching a lesson that may come as a surprise to those looking for a return to “normal” growth. There is nothing “normal” about this recovery, so the key is to understand its abnormality. It is safe to say that today, abnormal is the new normal. Winners will see this, seize upon it, and will most assuredly claim new ground as they do. They will also have embraced a new way of thinking that provides advantage. Let’s call the over-arching lesson of this correction the “finite-rule.” In this first post on the theme of the finite-rule, we’ll offer a simple definition. Next week, we’ll use the business of clean water as an example of a market adjusting to the reality of the finite-rule.

 

To start, let’s explore what the finite-rule isn’t, using its logical antonym, the “infinite-rule.” The infinite-rule often underlies what Greenspan coined irrational exuberance; the belief that growth in something is either perpetual, or that it won’t come to an end for the foreseeable future. Every bubble assumes that a market won’t be held back by limits to key ingredients like talent, credit, liquidity or energy because market forces will take care of those shortages. Additionally, many infinite-rule believers think they hold a unique insight needed to time a market peak, enjoying growth during the up-cycle and avoiding the pain of a down cycle.

And the infinite-rule self-perpetuates. During a bubble few will call it what it is, and when one bubble runs its course, the majority of its players look for another to grab on to, and hope they’re smart enough to exit (the next time) before everyone else catches on, whether they won or lost the last time.

Of course, if you had borrowed to speculatively build neighborhoods full of high-end housing units far from employment centers just before credit markets tightened, infinite-rule thinking would’ve failed you. And if you had done it expecting that credit couldn’t tighten, then today’s market would feel completely foreign. False assumptions about never-ending market potential and conditions never changing are cornerstones in the infinite-rule world. Corrections, arguably, are the market’s mechanism for bringing us back to reality.

So what is the finite-rule and how does it work for businesses that understand it?

To start, the finite-rule is as much about understanding the core limits of a market as it is about understanding a market’s inherent potential. For example, to build a diaper factory to serve a region where the population is making fewer babies hardly makes sense. It would make more sense to shutter the excess capacity, or move to a more favorable location. But finite-rule thinking is deeper and more nuanced than simply quantifying the top or the tapering of a demand curve. It’s not about timing exit. Indeed, finite-rule thinking is the understanding that there is value to be earned both in periods of growth and in periods of decline, and that a company must be able to successfully play on either end of the curve, often in the same, smart way. Moreover, it is about knowing that the growth side of the curve is as much influenced by fundamental finite truths as the contraction side of the curve.

Finite-rules see value in small, and in making things smaller all of the time, and even (and especially) when large seems like a logical approach. In this way, finite-rules takes lessons from LEAN thinking, in which bottlenecks are always the focus of process improvement.

For example: it is widely published that there is a shortage of licensed nurses in the United States, along with an increasing need for the kind of health care work that nurses typically provide. Infinite-rule thinking suggests that we had better train many more nurses, and fast. This approach overemphasizes the expectation of longer life, plays into our underlying fear of death, and ignores the reality that nurses care primarily for people who are older than them. It ignores that fact that demand for nursing as we know it will eventually plateau and then decrease with a US population that is replenishing with young people who may rush to nursing, but won’t require as many nurses themselves. Since nurses are usually younger than their patients, and if we simply attack the problem by training more nurses per capita, then eventually we will be left with more nurses than patients. The LEAN-influenced finite-rule approach attacks the problem in a fundamentally different way. Instead of trying to balance supply to demand (and when demand stalls attempt to create more of it artificially) finite-rules deconstruct the processes of the market and remake them in smarter forms. Finite-Rules look at the actual work done by the nurse to determine how it can be focused, or parsed into smaller but more effective bits. Finite-rule thinking always starts with process design. It lowers the bar in terms of energy required to accomplish valued work, by concentrating expertise, eliminating redundancy, avoiding excesses and dispensing with the non-value added. Finite-rules emphasize that technology is always a lever - a tool to make work more effective - so technical innovation is paramount.

But finite-rule thinking isn’t just about “doing more with less.” It is as much about not doing things that are not necessary to do and never creating and spilling off waste in the first place. Finite-rules always reveal that certain resources are in limited supply. Instead of simply using them when they are cheap to use, finite-rule value comes from deferring or even avoiding use altogether, to reduce eventual resource pressure.

The business of clean water provides insights into this idea. Next week, we will post the second in the finite-rule series: how the clean water market is transformed by finite-rule thinking.