"The rich get richer and the poor get poorer." This crusty old saying, unfortunately, describes economic trends that are dominating the United States. Some economists call it the "hourglass economy"--there are growing numbers of people at the high and low ends of the income spectrum, and fewer and fewer in the middle.

Though hiring a former Apple executive to be a telecommuting CEO was certainly a bonehead move for J.C. Penney, the hourglass economy is the real reason the company is struggling to stay alive, according to Rita Gunther McGrath, associate professor at Columbia Business School, and author of the new book The End of Competitive Advantage. Failure to understand how the economy was changing harmed the retail chain, which traditionally has targeted those shrinking mid-level earners, she says. The hourglass economy can take down your company, too, if you're not careful. That's why McGrath recommends three key tactics.

1. Pick your target market carefully

"Look at the market in two dimensions," McGrath says. "Are you going after large volumes and a bigger footprint at the low-income end, or will you be a niche player with bigger margins and probably slower growth at the upper end? It's going to be much harder if you try to land in the middle."

A company targeting low-income customers needs to be aware of the dynamics that can govern their daily lives, McGrath notes. For instance, many people at the low-income end of the scale live paycheck-to-paycheck, which means that they're only able to make large purchases early in the cycle, right after they've been paid. At the end of the cycle, they can only afford necessities. If you're a retailer, it's smart to stock your shelves in accordance with your customers' pay cycles.

On the other hand, McGrath says, "If you want to reach people who have more discretionary spending power, be aware that they don't want to buy the same things as all the other people with discretionary spending power." Small companies have a natural advantage in this arena, she adds, in that a customer who buys one of your products is unlikely to find that everyone he or she knows has one too.

"If you're targeting there, think very hard about the emotional component of what you're selling, and how does it set the buyer apart and make that person unique?" she recommends.

2. Don't ignore early signs of trouble.

If you own a small business and have been running it for a while, and you're starting to see a downward trend, take that very seriously, McGrath advises. "Don't make the mistake of assuming you're seeing a cyclical trend. You hear people say that sales are down but they'll be better next year. It may well be a permanent structural shift, and entrepreneurs often wait too long to ask those questions."

3. Stay flexible

In this economy, your best shot at safety is to be able to change your organization on a dime, McGrath says. "In this hourglass economy, be careful about fixed costs, or fixed commitments to a given business model. Leverage your partners' resources if you can, rather than building things for yourself."

This piece of advice comes with a helping of irony, since it was exactly this phenomenon that created the hourglass economy in the first place, according to McGrath. Companies seeking to stay nimble in uncertain economic conditions have sought to restrict the size of their full-time staff, relying on outsourcing and temporary or hourly workers. Those without highly marketable skills are left without any guarantee of continued employment, or even of full-time hours from their current employer. "For people who don't have valuable skills, 'I can replace you with three people tomorrow,' is not an empty threat," McGrath says. She notes that in retail, 15 years ago 70 percent of employees were permanent and 30 percent were temporary. Today, those proportions are reversed.

Whatever you do, keep in mind that the hourglass economy isn't going anywhere. "It's a continuing and growing phenomenon," McGrath says. "We're seeing a shift in power toward owners of capital and away from owners of labor. And so many institutions would all have to change at once to reverse this trend."

Published on: Jun 7, 2013
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