Talking about strategy » financial crisis

Don’t surrender to uncertainty!

Kim Warren — Thu, 11 Jun 2009 11:08:43 +0000

I hope senior management do not get persuaded to divert their attention to studying ‘complexity’ in the hope of understanding recent economic turmoil. “‘Power curves’: What natural and economic disasters have in common” argues that “parallels between financial crises and natural disasters–such as earthquakes or forest fires–suggest that the economy, just like complex natural systems, is inherently unstable and prone to occasional huge failures that are very hard or impossible to foresee. Proponents of this school of thinking are bringing new ideas grounded in complexity theory to economic forecasting, strategic planning, and risk management.” This contributes little to the quest for skilled strategic management.

Whilst random fluctuations add complexity to how exactly events unfold, many of the phenomena discussed in this article feature simple underlying mechanisms that are well understood and do not need abstract or complex math.

The sub-prime lending collapse was inevitable, and its timing increasingly clear as conditions worsened. The 2001/02 dotcom crash was indicated as new-firm startups were gradually overtaken by failures – both of which were observable – with IT/telecom suppliers, consultancies and others relentlessly adding capacity while ignoring this data. The same has happened this time round in many sectors – e.g. ship construction, commercial property, credit-card lending.

Many such events feature thresholds being crossed in the organization’s own market environment – making it a basic discipline of competent strategic management to track these mechanisms, rather than looking for abstract and non-actionable answers in complexity.

Please go to this article and challenge its value for helping senior managers steer organizations’ strategy and performance! – there’s a comment facility. … unless of course you know of a real business that made real decisions with real impact on its sustained performance byusing complexity science that could not have been done easier, quicker cheaper another way?

How firms are coping

Kim Warren — Sat, 21 Mar 2009 08:58:09 +0000

Mixed news from a recent S+B survey of execs. 75% say they do not need extra financial support – as I suspected – though that may change of course. More worrying is that most seem not to be taking the correct actions, given their specific situations.

The article by Shumeet Banerji CEO of Booz & Co and Neil McArthur MD of Booz Europe helpfully groups firms into 4 categories – strong, stable, struggling and failing. You would expect stable companies to be strengthening their position by seeking complementary acquisitions, and the weaker groups to be conserving cash, for example, but neither group is by and large pursuing these or other appropriate actions.

The survey also confirms another finding I expected – that most firms expect to emerge stronger from the downturn [especially in developing economies]. ‘Most’ may be disappointed, but many firms should do so and be working towards making it happen.

Boom times create all kinds of difficult industry conditions – competitors charging into ‘strategic’ initiatives that make no sense, new entrants taking on markets they have no hope of succeeding in, everyone expanding too fast and creating over-capacity. It’s when things get tough that all these challenges pile up and get too much for weaker firms – and that’s when strong firms can sort out the mess. So, for example, we should be seeing more acquisitions and faster rationalisation than seems to be the case. No surprise either that developing economy firms are more optimistic – in addition to their lower basic cost base, their recent arrival means many have been able to grow a ‘clean’ business model, while established firms in old economies were adding on bits and pieces and complicating their businesses. I know which position I would rather be starting from today!

A calmer view of the crisis

Kim Warren — Mon, 20 Oct 2008 07:03:03 +0000

To look past the panic see Taking a Calmer View in strategy+business, which explains how financial institutions that move beyond short-term solutions and focus on restructuring, tightening risk, and working together with regulators might emerge from the crisis with business management strategies for sustainable growth.

Ethics vs. competence

Kim Warren — Sat, 18 Oct 2008 10:25:54 +0000

I took the trouble to post a query on one of the Academy of Mgmt discussion lists, asking what colleagues felt we had failed to do to allow professionals to graduate with the basic strategic incompetence [as well as financial] to bring about the current global crisis. Replies so far seem to focus almost entirely on the issue of ethics – not at all on what those people actually learned or didn’t whilst in our tender care. Whilst the ethics issues are important and challenging, we don’t know how much this contributed to the problem vs. simple incompetence … which is both clearer and more tractable. It seems unlikely that everyone involved in bringing about this crisis knew exactly what they were doing and nevertheless pursued it dishonestly.

As educators, we can’t reasonably be held responsible for immoral behaviour by our graduates, since we clearly don’t condone it!, Society at large might, though, reasonably want to know why we didn’t make sure they got the basic professional skills needed to not mess up on this huge scale.

So .. what should they have understood, why did the education we gave them fail, and what are we going to do differently to ensure the next generation don’t perpetrate the same foolishness?