During difficult times, a structural breakdown in the economy is an opportunity in disguise. To survive – and ultimately to prosper – companies must learn to exploit that opportunity. There is nothing better to filter thoughts than a crisis. Therefore, you must always have a strategy during different times and unusual fluctuations. Of course, this doesn't mean most of what people call strategy – mission statements, bold goals or three- to five-year budget plans. What we want to talk about here is a real strategy.
For many managers, this phrase has just become a household word. Meanwhile, this business jargon once transformed marketing into a marketing strategy, data processing into an IT strategy, corporate acquisitions into a growth strategy, and with cost cutting we have low price strategy. Equating strategy with success, boldness or ambition will always create further chaos. Many people are still labeling anything related to the CEO's signature as strategic – a definition based on the decision maker's salary, not the decision itself.
And through strategy – which means a response linked to a challenge – one understands that a real strategy is not a document or a prediction but rather a comprehensive approach based on diagnosis of a challenge. Therefore, the most important element of strategy is a strict view of the implementing forces, not the plan.
What is happening?
The events of the past year have been startling but not extraordinary. According to the general trend up to now, land bubbles, easy credit and high interest rates often create a dangerous combination. Real estate debt sparked America's first depression in 1819. A mortgage bomb was hidden directly after the depression of 1873 to 1877: innovative forms of mortgage lending. Mortgage lending in Europe and the United States created an unsustainable housing price bomb, and the four-year global stagnation led to housing market collapse and unemployment. credit tightening alongside it. Another round of credit tightening, which was triggered by the failure of publicly traded railroad bills, led to the Long Depression of 1893 to 1897. The “lost decade” Japan's 1995 to 2004 period occurred as a previous period of high interest rates and wildly inflated land values led to financial bankruptcy.
Leverage is at the core of such stories. Archimedes once said: "Give me a lever long enough and a solid fulcrum, and I will lift the whole earth." However, the scientist did not add that it would take a lever as long as many light years to move the Earth even by the width of a molecule, and if the Earth were to move, the reaction force would from the lever will also knock him up the fastest and thrown far away. The current crisis is also a reaction from leverage in two places: households and financial services. And without leverage, economic collapse would be a disappointment, while mortgages would no longer go into foreclosure and companies would no longer go bankrupt. It is the leverage that eases the pain in the waves that were amplified before.
Almost everyone knows how these dynamics worked. American household debt began to increase in the early 1980s, and its growth accelerated in 2001. Leverage among Wall Street's five largest stockbrokers—the traders ( Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley) suddenly rose sharply after 2004 when the US Securities and Exchange Commission exempted these firms from the debt-to-capital ratio limit (leverage ratio). – leverage ratio) 12 for a long time down to 1 and allows self-adjustment. From 1990 to 2007, the entire financial services sector expanded 2.5 times faster than total GDP, and from 1947 to 1996, its profits increased by an average of 0.75% of GDP to 2 ,5% in 2007. Then, the decline in home prices led to an unprecedented increase in the pace of foreclosures and a decline in the value of mortgage-backed securities. This downturn quickly destroyed highly leveraged financial firms—firms whose failures spread losses and uncertainty throughout the financial system. US consumers continued to invest at high levels throughout the first half of 2008 but by the third quarter had reduced annual interest rates by 3.1%. The economic recession – a deep-seated one – has actually appeared.
The breakdown is structured
Discerning the meaning of these events is actually more difficult than recounting them in detail. Perhaps it is because we are focusing on the structural break with the past – which, in econometric parlance, is where the significance of time-series data emerges when trends and patterns emerge. Association patterns fall into constant diversity change.
A period of crisis for a company is often a sign that the company's business model has become extinct - meaning that the basic structure of that industry has changed dramatically and dramatically. So the old ways of doing business are no longer possible. In the 1990s, for example, IBM's basic tiering model of choice and edge at the top of an integrated mainframe line began to fail. The demand for computers increased, but IBM's way of providing them decreased. Similarly, newspapers in times of crisis are now the reader and advertising grabbers of the Internet era. Demand for information and analysis is growing, while traditional publishing media are finding it harder to monetize that demand.
And the same principle applies to the economy as a whole. In most recessions of the past 40 years, demand has kept pace with capacity and growth has returned to the 10 to 18 month mark. This crisis shows a clear difference because it is difficult to envision a potential resurgence of financial services or a radical turnaround in the housing sector. In addition to these two “hot” areas, trends in commodity prices, oil imports, national trade balances, the state of education as well as large-scale power promises also seem to be happening. cannot withstand this crisis. In particular, the idea that the United States can grow by borrowing money from China to finance housing consumption that has just started seems unreasonable because everyone knows that the dollar America will be different in the future. And when the business model of a part or the entire economy changes in this direction, we can say that there is a structural breakdown.
Such a breakdown often means times are difficult and correction is neither easy nor quick. Difficult and changing conditions will sink some organizations – but others will prosper by understanding how to exploit the fact that old patterns have disappeared and have been replaced by new ones. just started to appear. The first important decisive condition is to try to survive in a really tough economy despite any economic collapse (see “Guide to surviving in difficult times” section above). end of article), and the second is the benefit from these emerging patterns. A structural disruption is the best time to be a great strategist for the moment of shifting old sources of weak competitive advantage to emerging new sources. Only then can the newcomers overtake the seemingly well-established players.
In some industry sectors, the most recent structural disruption occurred in the 1980s, following the development of microprocessors which led to computers becoming cheaper to use, both desktop and personal computers, and giving rise to new types of software industries. Those innovations are what led to the Internet and e-commerce. And more importantly for strategists, that disruption has profoundly and rapidly changed the nature of competitive advantage. For example, in 1985, a large telecommunications equipment company could afford to serve at least two of the three major continents—North America, Europe, and Asia—with the combined skills of thousands of development engineers, construction engineers and workers. But by 1995, mainframes had become the primary source of advantage. Cisco systems without origination have dominated this entire industry segment by deploying from the ground up about 100,000 lightweight signaling paths with code written by a small team of talented people. It was that structural disruption that adopted Silicon Valley's small team culture to keep up with Japan's advantages in emerging industries and serious, large-scale workforce management. This. This shift in the logic of advantage has transformed the wealth of nations.
Structural disruptions represent the obsolescence of many existing behavioral patterns, but nevertheless point the way forward for some companies and sometimes even entire economies. international. For example, the Long Depression from 1893 to 1897 marked the end of the railroad boom and the beginning of the shift to an economy based on sophisticated consumer products. Milton Hershey built his chocolate brand and distribution advantages early on during those difficult times. General Electric became a product of the same period, because of the structural disruption that marked the rise of the electricity-based economy.
Although the 1930s were difficult times for America as a whole, not every industry or business was in decline. Although the economy has changed dramatically from capital goods to consumer goods, some industries – such as steel, rubber, coal, glass, railways and construction – have had to endured heavy losses, but consumer brands like Kellogg have made great strides. Camping tourism and roadside hotels have opened up along highways. Airline passenger traffic has grown strongly. Entertainment embraced the growing radio and film industries and their audiences throughout Hollywood's Golden Age.
Likewise, during the decade from 1996 to 2005, overall consumer spending remained relatively flat in Japan even though the economy was still in a whirlwind of new things. For example, this country has more than 200 brands of non-carbonated drinks or each small convenience store of the Seven-Eleven Japan system serves more than 50 customers at any time of the day. But around 70% those brands disappear every year and are replaced by completely new ones.
The wrong remedy for a structural breakdown during difficult times is to try harder at the same old pattern. Disruptions and hard times are sure indicators that an old pattern has been pushed beyond its limits and is destroying value. One such example of a template is the consideration of financial incentives. Decades of careful research show that there is no evidence that anything but luck explains why some fund managers do better than others. However, fund managers or even pension funds that are said to perform better have huge salaries and bonuses. Incentives are good in principle, but did Bear Stearns have risk management versed in returns to reap the massive $4.4 billion bonus it distributed in 2006? ? If you pay employees enough to generate any future payments beyond salary, don't be surprised when they take big long-term risks for short-term wins. And in almost any pattern, exaggeration produces negative returns.
Many aspects of such structural changes will depend on the government's policy response. Today, nuclear energy, infrastructure remodeling, and housing materials are all on the list of possible drivers of the economy. In studying such business opportunities, it is important to recognize that competition for government funds is fierce. For example, during the New Olympics under President Franklin Roosevelt, the federal government greatly expanded its performance record. Since people needed something better than handwritten or typed documents, people turned to IBM's novel card stamping system. And in the growth of the airline industry, Boeing lost its airline business as a result of the Air Mail Act of 1934, but also built solid advantages through good implementation of important military contracts.
Another pattern that can create negative or significantly reduced profits is complexity that hinders business and management systems. The financial services industry is little more than a poster boy for the costs of this type of complexity. Calls to regulate such complex systems are misleading – and regulators cannot fully understand the problem unless the creators explain it thoroughly. In this case, the best regulators are those who prohibit such specific types of behavior.
Complexity is also reflected in the increase in email volume. Philip Su, a Windows Vista software engineering manager, reports that the intensity of coordination under this project created “a phenomenon where process begets further process, eventually becoming a spontaneous explosion.” force.” We have all just experienced the influence of this apparently unpredictable cheap media. But unfortunately, lowering the price of sending messages causes a sudden increase in the number of messages. An email to a group of colleagues sparked immediate responses, the pool of participants expanded, and responses proliferated like neutrons in the critical mass of a pluton. The messages become requests to do, change, or review some thing. All of that comes at a high cost. In the 1980s, when the use of computers became an indispensable part of management's personal belongings, the percentage of pre-tax costs was calculated according to selling, general and administrative expenses. Selling, General, and Administrative costs (SG&A) began to increase rapidly.
This increased administrative incentive partly reflects the growing importance of knowledge-based workers as well as the outsourcing of manual labor. This also reflects a huge reliance on truly complex systems consisting of discrete components whose performance is virtually impossible to evaluate. Despite IT, marketing, and HR promises that their programs generate strong returns on investment, companies are still betting on a holistic approach to their business. with business activities and not with any component at all. And that risk is that in times of trouble, this system becomes a problem.
Consider the analogy. When oil was abundant and cheap, we created a large infrastructure that worked well as long as oil remained abundant and cheap. And when oil becomes expensive, we hope to have another infrastructure. Similarly, when economic opportunities abound, we invest in management infrastructure from which we reap great returns. As the scope of opportunities becomes rarer, we must change our management infrastructure. Such a system requires companies to spend at least $300,000 a year on salaries, benefits, employee support, and the systems that enable an employee to undergo training. basic ability to do your job that might be unbearable in a less than adequate world.
Do things differently
It is difficult to organize infrastructure when everything is still good and demand is increasing. From 1993 to 1995, while director of INSEAD's Corporate Recovery Initiative, Richard P. Rumelt researched and worked with companies trying to become more competitive. He found that, just as business activity increased in 1996, the profits of these companies were reduced, as if by a sudden shift, from restructuring to growth.
Indeed, since those years, most companies have grown. So they also invest money in increasingly complex structures to address the diversity of products, geographies, and employee and government needs. But now, in difficult times, scale and diversity will be cut even though costs will not automatically be cut. The costs of managing scale and diversity used to be molded into IT infrastructure systems, resource systems, and processes for designing and marketing new products.
So, during structural disruptions in difficult times, cutting costs is not enough. Things must be done differently and on two levels: reducing the complexity of corporate structures and transforming business models. At the corporate level, the first commandment is to be simple and simpler. Therefore, companies must become more departmental and divisional, eliminating commitments to coordinated work, rethinking boards of directors and other mechanisms connected to businesses, products or activities. geographical area. The purpose of these reductions is to provide unified focus and support for services that do not require business units to coordinate their time and effort in carrying out their operations. Splitting larger units into smaller ones to obtain government cross-subsidies as well as break political blockades. You might think that coordination costs would increase if you fragment your business, but you have to do so to see what you need to organize properly.
Then, start revamping the individual businesses. There is a large, useful body of knowledge about how to do that, and it's not something that can be repeated over and over again. In general, the first task is to understand how a business existed, competed, and made money in the past. Don't rely on PowerPoint charts and graphs. If your business is too complex to understand thoroughly, break it down into digestible parts. Once you have achieved that important understanding, you can begin the work of reshaping. There is no magic formula, just reforming a business always requires a deep visualization and understanding of it.
In normal times of difficulty, the traditional measures are to cut fixed costs, scale and diversity. But in difficult times brought about by structural disruptions, you have to rethink how you manage. Companies that survive and continue to prosper overcome the cost issue and grasp the detailed structure of management work. Some new emerging issues that need top consideration are:
- How much extra work is done by way of pricing and incentive systems that push managers hard to get busy and do better than others?
- What streams of information can you leave out? Information that does not inform value-creating decisions is a wasteful pastime.
- What decisions and adjustments can you standardize as policy rather than lose money on meetings and communications?
- How can you work with customers, suppliers and governments to simplify their processes to the point where you can simplify yours?
Recessions are neither good for the economy nor for ethical development. But since we are forced into a period of dizzying change, it is best for us to start the reform process before it is too late.
Guidance exists in difficult times
- If you can't survive the tough times, it's best to sell out soon. Once you are in financial trouble, you will not have any bargaining power over any transaction.
- During difficult times, limit your expansion ambitions as much as possible. As these times improve, reclaim that range if it's still valuable.
- Any steady source of good profits – any competitive advantage – attracts attention first, causing uproar and government cross-subsidies in good times. So you can survive with this kind of waste in those times, but in tough times you cannot and are forced to give it up.
- If there is a silver lining to difficult times, it is the pressure to cut costs and find new possibilities. Cutbacks and changes increase people's resentment in good times but not in bad times.
- Use difficult times to stay focused and strengthen your competitive advantage. If you are still confused about this concept, difficult times will help you understand it clearly. Competitive advantage has two branches that both grow from the same root. That is, you have a competitive advantage when you can help your business earn better profits than other businesses and when, the cash costs of doing business are low enough for you to survive in the long term. difficult times.
- Take advantage of difficult times to buy assets from distressed competitors at a negotiated price. The best assets are competitive advantages weighed down foolishly by debt and impatience.
- During difficult times, many suppliers are willing to renegotiate terms. So don't hesitate.
- In tough times, buyers will always want better terms. So they can pay for fast, authentic payments.
- Focus on your employees and the community you sustain through difficult times. Good relationships with those you have retained or helped will be rewarded many times over when good times return.
