By Paul Plotczyk
The title of this article is taken from a conversation with a client organization responsible for training men and women to protect us -- the citizens of the United States -- here and abroad. We thought it was a great metaphor for the chaos that erupted in many companies following the Crash of ‘08.
Although the lessons outlined here are focused on organizations, they are all sourced from a piece which focused on personal finances that appeared in the September 2009 issue of Money Magazine “5 Lessons from the Crash” by Penelope Wang, (http://money.cnn.com/magazines/moneymag/).
The hopes of Ms. Wang's article and this one are that the “5 Lessons” will help strengthen finances going forward as well as help limit the damage of the next crisis.
FIVE LESSONS FROM THE CRASH OF '08
Lesson 1: Asset Allocation/Diversification still works -- just don't expect a guarantee.
From a personal perspective, many people may have concluded that asset allocation as a way of managing risk is a bust. However the Money Magazine article suggests that “the real problem with asset allocation isn't that it no longer works, but that people expect that it will always work.” Meaning that even the most sophisticated diversification plan can't guarantee you won't lose money in a tanking market.
From an organizational perspective, many leaders are having similar doubts about the effectiveness of diversification as a way of minimizing risk. Here the problem is not with diversification but how diversification is handled.
Diversification works well if the organization is clear about the impact it will have on the organization's finite resources, and ensures there is more than a tangential connection to their current business.
Diversification Don'ts
1. A home furnishings company diversified into the office furniture business -- a venture that had some small signs of life a few years ago. But even in a better economic climate than today's, it was clear the shift was causing significant stretch and stress to the competencies of their current employees - who were very experienced with selling furniture to residential customers, not businesspeople. Plus, their systems – procurement, logistics, storage and delivery - were tuned to very different set of customer expectations.
2. Similarly, we had a government client primarily focused on law enforcement, have counter-intelligence added to their long-standing mission. This change caused considerable budgetary problems – and has created significant challenges to the men and women who are now expected to split their skills and competencies between two very different domains. Some skills are easily transferred, others … not so much.
Sometimes You Should Stick with the Knitting
Taking on new roles and tasks adds a personal burden to the people expected to perform, regardless of their dedication and commitment. It also causes shifts in the practices and processes of the enterprise. Sometimes there are not enough people - or enough knowledgeable or skilled people – to get the job done.
In a time of tension about the strength and future health of an enterprise, an organization's decision to stay with the core business it knows might be a wise choice.
Lesson 2: The world is riskier -- and will stay that way.
We all know that risk is here to stay and that the market may remain jittery for several years. This may mean more corporate earning disappointments - for a variety of reasons too numerous to outline here - but certainly some coming from weary investors who are quite likely to react very quickly to any bad news. More reasons for organizations to stick to what they are good at.
"Slow and steady wins the race" is an old dictum that it may be time to revisit. We are not suggesting to halt all expansion, or for an enterprise to retreat into its shell.
We are suggesting a good strong assessment methodology when considering any move into a new market or product.
This may, in fact, be an ideal time to make a move. It is definitely the time to brush up on some tried-and-true planning techniques: Scenario Planning, Systemic Modeling, and Competitive Destruction.
Shell Oil has been using the technique of Scenario Planning for over a decade (Shell.com). Their most recent business result from using this planning technique takes them into the year 2050. (Remember when 1999 seemed far off in the future?)
It is important to acknowledge that a detailed planning process can feel laborious and tedious. As a result of rigorous planning, sometimes organizations wind up undoing previously established long-term plans. Some organizations may even experience losses while taking the time to become fully engaged in planning. However, if sustaining smaller losses keep you from an unsustainable loss it is well worth the cost.
Here's a quote from market guru Warren Buffett to keep in mind: "The stock market has a very efficient way of transferring wealth from the impatient to the patient."
Lesson 3: Real diversification is harder to achieve than it looks.
This lesson has to do with the inter-connectedness of markets, mission and money! Many individuals attempted to diversify, only to find that their portfolios held stakes in risky and/or unwanted assets. A suggestion in the “Money” article regarding how to avoid too much exposure to one industry or asset is to, "...drill down in your portfolio to see what you actually own."
The corollary in the corporate world was that many organizations didn't recognize the inter-connectedness of seemingly unrelated businesses. Why did the auto industry crisis nearly derail a durable goods company? Because one of their major suppliers of parts and products was heavily tied to the auto industry. As the auto industry melted down, quality and availability of products caused serious problems -- delivery and cash flow problems -- in the all-too-unpleasantly-surprised company!
Dodging the Domino Effect
A US-based global manufacturing company used our "Competitive Destruction" exercise in a strategic planning session and discovered that their reliance on one major supplier in a critical metals market left them with high vulnerability in both pricing and supply.
With good cash reserves, one obvious option was an acquisition. As a result of a "stick to your knitting" assessment, the decision was made to acknowledge the high degree of dependence and suggest a partnership arrangement – including favorable pricing, payment and delivery.
Despite much skepticism amongst a few key executives, a series of conversations was initiated with the supplier. The result was a supplier who was very willing and interested in securing a viable, reliable business relationship, and even offered very favorable and unexpected payment terms that brought some predictability to the cash flow of both organizations.
The real lesson here may be a reminder to get to know your customers and suppliers - to know their business like you would any partner. Your futures are intertwined. And you never know what is possible until you do it.
Lesson 4: Recognizing a bubble is hard. Hedging against one is harder.
"To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong," said then-Federal Reserve chairman Alan Greenspan in 1999. He certainly knows first-hand how hard that is -- given he failed to detect two of history's frothiest markets -- in tech stocks and in housing.
The point in Lesson 4 for individuals is also a truism for any enterprise: the one sure hedge is a healthy dose of cash. We couldn't have said it better. But we did take it one step further in our article, Top 10 Ways to Create a Big Bold Fast Response, where we suggested, "Cash is still King. Liquidity: it is the lifeblood of every organization in a severe downturn. Collect it. Hoard it. Sell unnecessary or unusable assets at fire sale prices. Offer more discounts to customers who pay early. Be creative. Don't wait for a bank or Washington to bail you out."
Lesson 5: You can't time the market, but you can time yourself.
"While you can always find a few savvy folks who have managed to outguess the market the vast majority of us fail miserably at market timing." Warren Buffett.
The lesson here is that the circumstances and focus of each individual and each business are unique and sometimes vastly different. Circumstances tend to dictate action.
This does not mean individuals should abandon asset allocation or that organizations should abandon planning. It simply recognizes that the best antidote to volatility and uncertainty is defining your path and staying true to your goals.
One of the primary values of Scenario Planning is the process for thinking through in great detail, specific scenarios and identifying the “cues and clues” that precede the unfolding of those scenarios. Knowing and attending to the development of the "cues and clues" can help an organization successfully navigate through good times and bad.
Conclusion
While the recession as been declared "over" in some circles, most of our clients are cautiously optimistic at best. No one doubts that there will be many bumps along the way to a full recovery. Our hope is that through the process of "lessons learned," we can minimize the chaos in the event of more economic gunfire.
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