In case you haven’t heard, Lebron James, the best basketball player in the world, is leaving South Beach behind and will play for his hometown team again, the Cleveland Cavaliers, this upcoming NBA season.
From a basketball perspective, James instantly turns one of the worst teams in the league into one of the best, as the Cavs now have a legitimate shot at the NBA title. But, bigger than that, Bloomberg reports that the signing of James (a $21-million-a-year cost to the Cavs) is worth $215 million to the city of Cleveland.
“He’s a walking, talking economy,” Nick Kostis, owner of a downtown Cleveland restaurant, told Bloomberg. After all, having a celebrity like James playing downtown will bring in more interest and more people, which will have a ripple effect that will benefit all the businesses in the area.
And while all that is good, the comeback of James highlights a fundamental flaw in Cleveland similar to what happened to the Netherlands in the early 1960s. And, really, there’s a business lesson there on exactly what Cleveland shouldn’t do.
The Dutch Disease
In 1959, a large natural gas field was discovered in the Groningen Providence of the Netherlands, which became the largest natural gas field in Europe. Needless to say, the Netherlands’ economy boomed because of it, a large number of Dutch people got jobs in the natural gas sector and wages across the country grew.
And therein lay the problem. The natural gas discovery resulted in not just an increase in wages in that Dutch industry, but all Dutch industries. What happened was manufacturing costs increased because of those wage increases to the point that Dutch manufactured exports could no longer compete on the international market.
Ultimately, the end result was an economy dependent on one aspect, natural gas. And that sector is now on shaky ground, quite literally, as the dramatic increase in earthquakes in the Groningen Providence has been linked to the pumping out of all the natural gas in that area.
In January of this year, the Dutch government agreed to pay out 1.2 billion euros to the families affected by the earthquakes and to reduce the amount of natural gas it pumps out of the field in Groningen. Obviously, those actions will have serious effects on the Dutch economy.
Tying It Back To Cleveland
The Netherlands and Cleveland both suffer from the same symptom: too much dependence on a singular resource (or, in this case, person). Historically, the Cavs have proved to be a lousy franchise without James, so once he retires or leaves the basketball team – and the economy – is set to fall again, if nothing changes.
Here’s the good part: James probably has at least six more years of great basketball in him. In those six years, he’ll likely bring in a huge amount of interest and money to Cleveland.
The city needs to figure out a way to turn that interest into longtime growth. Perhaps they can use the extra money to fix the city up, incentivize businesses to build there and create a place that’s not completely dependent on a basketball player.
Bottom line, the next six years are huge for Cleveland, a city that’s been downtrodden for some time. If they invest this new-found revenue stream wisely, they can turn around the city.
Otherwise, all it will be is a nice six years.
The Business Lesson
The larger point here is that any business can’t think that one person or one resource or one model will just keep pumping out cash, year after year. Instead, a successful company needs to see that money as capital to invest into discovering the next business model that’s going to put their current one out-of-business.
A perfect example of this is Dominion, a Virginia-based energy company. Dominion, like most energy companies, makes its money off long-standing energy forms like nuclear and natural gas. However, the company has also invested substantial sums into developing emerging forms of energy, like wind and solar.
Companies need to approach hiring the same way as well. Hiring someone like James is great, as he’ll provide a huge amount of money. But that money needs to be seen as no more than capital to invest into hiring the next James, or otherwise the company – or, in this case, Cleveland – is setting itself up to fall.
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