25 Feb 09 Recession: Looking for stress points

In my last posting Davos 2009, Recession and Business Strategy: Quo Vadis? I included some straightforward questions to start the process of “stress testing” your business strategy.  In this posting I would like to explore the issue of “Stress” from a different perspective, which has a distinctly human element.

Unfortunately all the dials (or most of them) are pointing to a period of prolonged economic recession.  And we cannot be sure, with any degree certainty, what the post recession world will look like. As I explain in my recession scenarios,we could face four completely different worlds.

This means, probably for the first time in our lives, that we will have to live through a period of extended business and strategic ambiguity.  Some observers tell us that we are entering a depression that could last for up to 10 years.

We know too little, from both strategy and human perspectives, of what the challenges are for living and managing in a such a period of extended ambiguity.  Together with my colleagues, I am interested in exploring further the strategic and psychological implications both of this economic downturn and the prospect of a long period of “strategic ambiguity”.

I would therefore be grateful if you could spare a few minutes to complete the following survey.  It can be completed anonymously and only the aggregated findings will be published.  The results will help us to gain a deeper understanding of the challenges that we face. To participate, please click on the button below.

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Tags: business strategy, economic downturn, economic recession, human perspectives, survey

22 Dec 08 Recession Survival: Industry Contagion, Structural Change and Business Strategy

Structural Change

My last two entries introduced the challenge of structural change. I have drawn attention to the fact that recessions don’t just mean a period of economic contraction, they also bring the prospect of economic restructuring. And economic restructuring has fundamental implications for business strategy.

I used financial services in the UK as my example. To recap, in the late 1970s manufacturing employed over 25% of the workforce. This figure is now around 10% (and reports are that it will now take a further hammering). Fortunately, financial services came to the rescue in the 1980s and created jobs that swelled this sector to take eventually 21% of the workforce – up from 10% in the late 1970s.

That was good then.

But having an economy dominated by financial services could be bad now.

I have already pointed in earlier posts to at least two reasons why financial services won’t bounce back. One of these is regulation. It is clear from the action plan that emerged from November’s inaugural G20 summit that the blame for the current recession is being laid squarely at the feet of the financial services sectors of the world’s advanced economies. The G20 action plan focuses upon establishing a global regulatory framework that will prevent another financial services led implosion. And that regulation may restrict innovation and therefore future sector growth prospects.

But this leads us to another problem. And it’s particularly a UK problem.

I have been considering for about two years now the long-term viability of services led economies. My theory is that as manufacturing drifted towards the emerged and emerging economies so eventually would services. Indeed, there is the argument that entry barriers to services would fall as the educational capability of the newly emerged economies increased. Certainly, there is evidence that the newly emerged economies, and China in particular, will focus upon developing its own service sector capabilities to swell indigenous employment. In so doing it is reasonable for it to acquire, through acquisition, the intellectual knowledge held in the advanced economies. And as we have learnt through financial services offshoring, employees do not necessarily have to be located within the countries where the service is delivered.  These factors could dampen the resurgence, from an employment perspective, of financial services in the UK and other advanced economies.

Now, there is a related message from others calling for first order macroeconomic adjustment in the UK[1]. Broadly, the view is that financial services based economies are just too volatile. Essentially, to ensure stability the advanced economies should go back to the past and focus on re-establishing manufacturing, retail and healthcare sectors. Interestingly, some quarters[2] are calling upon President-elect Obama to move resources out of financial services into the “real” sectors of technology and manufacturing.

Industrial Contagion

Whether of not we see this type of economic restructuring depends upon a number of factors, one of the most important of which I will refer to as industrial contagion. By industrial contagion I mean the appearance of the corporate liquidity domino effect – the need for nationally funded corporate bail outs spreading from banking and financial services into other industry sectors.

And there is of course one sector already on the brink -automobile manufacturers and their component suppliers. If the support announced and mooted over the three days 19 21 December fails to stop the big US auto manufacturers collapsing (or only ensures a slow lingering death) then the whole question of the industrial structure of advanced economies will come under the main spotlight. For collapse of the big auto manufacturers in the US will bring almost unprecedented levels of human suffering in the US and beyond.

Over 3m unemployed and unemployment in some US states being pushed up by nearly 9%[3].

This is the type of event that can, and probably will, redefine both industry structures and the role of private enterprise in society.

So industry contagion is a leading indicator of structural change in advanced economies and, regrettably, the appearance of and “L” shaped, and not as hoped for a short-lived “V” shaped downturn.

Business Strategy

What has this to do with business strategy?

Everything probably.

It means that if we do enter an “L” shaped recession when we come out of it chances are that your target customers – whether consumer or business – will look and behave completely differently.

This could also herald an era where the balance of power starts to shift away from the boardroom towards governments, regulators and of course the new shareholder, the public.

It may also bring to end the view that businesses should be driven just to maximise shareholder value. It seems likely that contribution to a broader social agenda will sit alongside profit generation in organisations future balanced scorecards.

Therefore, we should now be using industry contagion not just to judge the shape of the downturn but more importantly how capitalism could change.

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Information Sources

[1] S. Johnson, P. Boone, and J. Kwak, “Get Ready for an L-Shaped Slump,”

Peterson Institute: Real Time Economic Issues Watch, Dec. 2008;

http://www.petersoninstitute.org/realtime/?p=330.

[2] P. Boone, S. Johnson, and J. Kwak, “Op-ed: An Economic Strategy for Mr.

Obama,” Peterson Institute, Nov. 2008;

http://www.petersoninstitute.org/publications/opeds/oped.cfm?ResearchID=1046.

[3] R. Scott, “Automaker bankruptcies would cost up to 3.3 million U.S. jobs,”

Economic Policy Institute, Dec. 2008;

http://www.epi.org/content.cfm/webfeatures_snapshots_20081217.

Tags: business strategy, economic contraction, economic restructuring, g20 summit, recession, strategy

27 Mar 08 Countering Over-Optimism: A role for the Balanced Scorecard?

Gavin Cassar’s (Assistant Professor of Accounting at Wharton) latest research is interesting and may confirm a trend that many of us suspected was lurking behind the scenes. The problem is that when preparing business plans, managers tend to be overly optimistic. There may be an inbuilt tendency for us all to be just that little bit too optimistic when looking into the future. How many business plans have you seen painting a picture of pain today, jam tomorrow?

Interestingly, Cassar points to some evidence that the tools used in the budgetting process may actually exacerbate this problem. I have noticed that when ideas are expressed in numbers – financially – there seems to be a hypnotic trance that takes over. Because the plan is expressed in a financial format, the creators seem to believe in it.

To overcome this problem and improve forecasting accuracy, Cassar suggests:

1. Don’t just rely on a budgetting system. A good internal progress reporting system is also needed. Used together, these tools can improve forecasting and planning accuracy.
2. Go back and look at past experience. Reflecting on the actual past experience of generating revenue may be sobering. I find it helpful to contrast managers’ revenue projections with a robust forecasting model – such as time series decomposition – using actual historic data without any management intervention. The results can help us get back to reality.
3. Do ensure that external trends are properly factored into any agreed projections. Do the right research. Get external opinions. Don’t just sit in a darkened room to prepare the plan.

So there is a role for the Balanced Scorecard here.

Firstly, as tool that can illustrate the potential enormity of tasks that are needed to generate revenue growth if a proper correlation exists between the financial objectives and the remaining people, process and customer dimensions. Which really brings me back to a key point missing in many Scorecards – and that is validation of the linkage between Balanced Scorecard measures and actual desired performance. Scorecards only work if you are sure of the linkage between actions and end outcomes – financial performance. Secondly, the Balanced Scorecard makes an excellent performance tracking tool that Carras observes must be used hand in hand with budgetting and forecasting tools.

Tags: Balanced Scorecard, Business Planning, forecasting, forecasting accuracy

28 Feb 08 The Dangers of Stretch Targets

Reading Stefan Stern’s article “The art of stretching employees” (Financial Times February 25th 2008) reminded me of some of the problems associated with the popular management by “stretch” philosophy. You know what I mean – asking employees to do the seemingly impossible for example achieve 60% growth after a year of 30% growth.

There’s more to leadership than asking employees to do the near impossible – there’s an order to things and a couple of pitfalls to avoid.

A Certain Order to Things
I spent a fair amount of time reviewing more recent research when compiling my last Executive Briefing on the Balanced Scorecard – and I came across an interesting piece of academic research on stretch targets. The basic conclusion of the the research is that there should be a certain order to things when considering using stretch targets. The central message is “think about the skills, experience and knowledge that your employees need to take on that near impossible stretch target and set a target to achieve those competences before you hit them with the stretch objective.”

Quite commonsense really. So make sure that your scorecard can measure new competency acquisition as well as stretch.

A Couple of Pitfalls
Whilst writing this entry on a rather grey Thursday afternoon, two other potential pitfalls spring to mind. These are:

(a) Capacity. What if your people are successful and pull in that 60% growth. How are going to handle it? Is your business planning (and financial modelling) process good enough to link growth with that most precious of all resource – people – I mean here the capacity to handle all those new customers?

(b) Exhaustion. In my Executive Briefing Success: Your Biggest Problem? I warn against corporate exhaustion “here growth and acquisitions stimulate internal reorganization and restructuring. Such structural changes bring with them risks of loss of control and even loss of identity. The enlarged business starts to wonder what its core activities really are.” So just be careful – years of stretch may lead to tiredness, confusion and failure – if you don’t keep an eye out for the symptoms.

It’s great to be ambitious and leaders must build ambition – but they need to build capacity as well – there is after all a certain order to things.

Tags: Balanced Scorecard, business failure, stretch targets