Karl Moore: This is Karl Moore of the Desautels Faculty of Management at McGill University, talking management for The Globe and Mail. Today, I am delighted to have Michael Porter, who is a professor at Harvard University and just one of the biggest names in strategy around the world, to join us. So, good afternoon Michael, and let me just start by offering my congratulations on your honorary doctorate from the Desautels School here at McGill University.
Michael Porter: I was very delighted to get the invitation and it's been a great day.
KM: We're in the midst of the worst recession in our lifetime, Mike. We look at that and say, “What does this mean from a viewpoint of strategy?”
MP: Well, I think we got into this recession in a very curious way, and that is that we had a failure in one – what you would normally think is a relatively small – part of our economy, which is basically residential mortgages. So because of a whole lot of failures that are coming out, and we all understand, and partly due to some failure in finance theory and thinking, we ended up with this catastrophic problem in mortgages, which is so big and affected the creditworthiness of banks and financial institutions to such a degree that it then spread in concentric circles. Now it has infected credit cards, because people couldn't pay their credit cards and they were behind on their mortgage, and then it affected the housing sector and other sectors.
The real economy was actually pretty healthy going into this but it really got poisoned by this and it exposed something much deeper, which is the unsustainable nature of the way the world economy was growing. So we had this bizarre situation where, I wish I had the chart I could show you, the U.S. was bumping along at consumption as a percentage of [gross domestic product] at 62-63 per cent, and it had been gone that way for 30 years and then all of a sudden, starting in the mid-nineties, it shot up to about 72-73 per cent. Clearly that was a credit-fuelled consumption boom in the U.S. Credit was free and people were just borrowing and spending, the economy pretty much boomed, and a lot of the growth was really passed to China, Taiwan, and these other countries that became more and more dependent on exports to the U.S., and their local economies and their local consumption was actually going down as a percentage of their GDP!
So, if it were just the mortgage problem and we could just restructure the mortgages and sort that through, then that would happen relatively quickly; in fact it's already gone quite far. But unfortunately we have to realign the intergalactic planetary forces in the world economy, and the U.S. can't pull everybody else along. China has to readjust to not being totally dependent on exports to the U.S., and all of that has proven to be complicated and difficult. I believe as of today, which is late May of 2009, that we are actually growing the economy in the U.S. again. It may be a false peak, it may be just an inventory-restocking kind of thing, but we are definitely growing and I think that's undistinguished; I have lots of access to companies and information.
