Posted by Adam Gordon on Jul 22, 2010 in all, decision-making, economy & finance, management, risk management, scenario planning
Preliminary results of the European banking stress test are to be published by the Committee of European Banking Supervisors tomorrow (July 23.) Although the exact nature of the tests have remained under wraps — not without controversy — the essence is clear. Regulators are simulating various forms of adverse financial conditions (GNP performances, interest rates, currency values and flows, and other money metrics) to see if important banks have the resources to withstand these conditions.
Controversy has resulted from lack of transparency in the tests, leading to speculation that they are designed to have most banks “pass” in order to boost confidence — as clear an example of mixing up judgment and advocacy as one is likely to get.
The key measure for determining which of the 91 banks fail the test — and need to raise capital — is whether their Tier 1 capital ratio would fall below 6% under the “loss assumptions” imposed by the test. This is the same level that was required in the stress tests of U.S. banks in its similar May 2010 test.
Model worlds
Anyhow, what is particularly interesting to this author is that the concept “scenario planning” has not been used through the bank test process, but these tests are fundamentally future scenarios, this is what scenarios are all about: creating model future worlds that express the evolution of important uncertainties towards somewhere at the limits (but not beyond) of plausibility, with the specific intent to use these worlds to stress test current decisions as to what a company is and does — from its business model to its resource base to product line to marketing, and so on.
If the organization’s key decisions would hold up (produce profitability or however success is defined) in different, alternative tests, this tells managers theirs are probably good decisions for the future. If they would flop in any test, this points to what needs to be urgently addressed. In this way an organization explores and becomes robust to its unknowable and unpredictable future.
Notably, it is precisely the stress-test purpose of scenarios that stops this foresight technique becoming (as it does all-too-often in the wrong hands) a “wishing well” for better times. When scenarios cease to be direct stress tests of present decisions, they become floaty indeed.
Full scenarios
Having said all this, the difference between the US and European banking stress tests and full scenario work is the bank tests are considering only economic factors, only adverse (risk) conditions, and only “known unknowns.” Full scenarios would include the full range of important drivers of change — and potential surprises — outside of economics or finance in their construction. In operating as stress tests, they would look at threats to the status quo as the bank tests do, but also provide a testbed for exploring opportunities in change.
read morePosted by Adam Gordon on Jun 7, 2010 in all, decision-making, Future Savvy, management, strategic foresight
I’m always looking for ways to explain the role of quality foresight in everyday management, so I liked this little animated gif from managewell.com.
Imagine driving down a country road when a street dog starts chasing your car. The dog attacks the car, but by the time it gets close, the car has moved ahead, so the dog changes direction and attacks the new coordinates. This goes on as the dog adapts, but it never quite catches up, and once it is following behind it is obviously too slow to catch up. Had it thought ahead and run straight it would have had its day with the tires.
The resulting curve looks something like this:
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In mathematics, this is known as the ‘curve of pursuit. The dog is attacking the problem as it sees it right now, but by the time it reaches it, the problem has moved on a few steps. A ‘problem-solving’ approach like this is going to prolong the time it takes to get to key decisions, and give the initiative to competitors. The better approach in managing moving situations — and all situations are moving — is to anticipate and tackle tomorrow’s position today.
Obviously the devil is in the quality of the anticipation, but for that there is Future Savvy and other key resources that exist for determining quality in foresight work. Industry foresight can never be done perfectly, but it can be done well enough to avoid the “dog chase” future-management style that characterizes much of industry leadership.
read morePosted by Adam Gordon on Apr 22, 2010 in all, decision-making, leadership, management, strategic foresight
The strategy world has mourned the sudden passing of C.K. Prahalad, Professor of Business Administration at the Ross School, University of Michigan, this week.
Front page 'Competing for the Future' Hamel & Prahalad, HBR 1994
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As many have commented, Prahalad made great strides in getting business to see the potential in emerging markets and ‘poor’ consumers, in The Fortune at the Bottom of the Pyramid and allied work.
In our rush for the new and latest, early work often gets buried. So I would like, as my take on the passing of Prahalad, to go back to his fundamental testimony to the role of and need for foresight in management, which is to be found in his co-authored piece (with Gary Hamel) ‘Competing for the Future,’ Harvard Business Review, 1994, which became a very famous book of the same name. Sixteen years on and now in the wake of the credit crunch, this piece remains as relevant as it ever was:
“Ask yourself: Do senior managers in my company have a clear and shared understanding of how the industry may be different ten years from now? Is my company’ point of view about the future unique among competitors?
“On average managers devote less than 3% of their time building a corporate perspective on the future.
“The painful upheavals in so many companies in recent years reflect the failure of one-time industry leaders to keep up with the accelerating pace of industry change… Those companies were run by managers, not leaders, by maintenance engineers, not architects.
“If the future is not occupying senior managers, what is? Restructuring and reegineering. While both are legitimate and important tasks, they have more to do with shoring up today’s business than with building tomorrow’s industries. Any company that is a bystander on the road to the future will watch its structure, values, and skills become progressively less attuned to industry realities.
(therefore) “Most layoffs at large US companies have been the fault of managers who fell asleep at the wheel and missed the turnoff for the future.
“If senior executives don’t have reasonably detailed answers to the ‘future’ questions, and if the answers they have are not significantly different of the ‘today’ answers, there is little chance that their companies will remain market leaders.
“The Quest for Foresight: Why do we talk of foresight rather than vision? Vision connotes a dream or an apparition, and there is more to industry foresight than a blinding flash of insight. Industry foresight is based on deep insights into trends in technology, demographics, regulations, and lifestyles, which can be harnessed to rewrite industry rules and create new competitive space.”
Footnote: this from the FT: The last time CK spoke to the FT he was buzzing with intellectual energy. “Really, in all my career I have been interested in ‘next practices’, and not merely ‘best practices’,” he said.
read morePosted by Adam Gordon on Apr 6, 2010 in all, horizon scanning, management, managing uncertainty, strategic foresight
As of writing, Blockbuster clings to business life, with $1 billion in debt, unprofitable stores and continued losses, and it looks inevitable that it will file for bankruptcy protection. In Q4 ’09 the company posted a loss of $434.9m on revenue of $1.08bn. The stock price has fallen is $0.26 per share, down from lofty levels of over $15 in the early part of the decade. That’s a lot of shareholder value down the drain. *
Reading analysis by John Tamny in Forbes, I lighted on the following paragraph — as perfect an encapsulation of why looking to the future in timely and in a high-quality way is essential, and how quality horizon scanning is integral to it:
“As often happens as companies grow, Blockbuster concentrated on perfecting its existing service while beating competitors offering the same instead of looking into ways that outsiders might destroy its business model altogether… For Blockbuster, the “disrupter” in question was Netflix. Indeed, popular as the Blockbuster brand was, getting to the video store in order to take advantage of its services was a hassle for customers–as was returning videos on time to avoid paying late fees. The rise of Netflix from well outside the traditional retail space meant these problems were solved in one fell swoop.” (my italics)
Change that matters, that is, relatively sudden and acutely disruptive to incumbent business-model success, always comes from outside an industry. Britannica wasn’t beaten by another encyclopedia. Eastman Kodak was beaten by digital photo startups, not by Fuji. And so on, and so on, through industry failure, whether it leads merely to value hemorrhage or all the way to Chapter 11.
Looking vs seeing
Sure there are companies that lose because they are simply outcompeted, that is, are less capable than the competition in doing the same thing. Hertz is currently in this category. But when a clear market leader, with brand and capital and customers galore comes totally unstuck, it is always new technology and/or new business model coming from the outside that has done it. In these cases, as with Blockbuster, companies fall to industry entrants that change ways of doing things, solving pain or trade-offs that buyers suffer, or otherwise provide consumers with more value.
These are always, theoretically, innovations incumbents could have done themselves if they were ready to think ahead (and brave enough, when required, to cannabalize existing products that stood in the way of important future steps) and therein lies a conundrum about looking at new, external competitors. It’s seldom that the incumbent can’t see the intruder, that is, is not looking. Often they are looking intensively. It is that they don’t see the absolute disruption in the new until it is too late. It is a problem of perception. This is why industry horizon scanning is a little about the easy task of looking, and a lot about the much harder job of seeing. And why putting one’s corporate head down and making an existing product or service ‘more perfect’ is part of not seeing.
* Interestingly, the Blockbuster demise was called exactly right in November 2007 by Don Reisinger on CNET.
read morePosted by Adam Gordon on Feb 25, 2010 in all, decision-making, economy & finance, lifestyles & values, management, strategic foresight
Charlie Munger, Vice-Chairman of Berkshire Hathaway Corporation, the diversified investment firm chaired by Warren Buffett, has a piece titled: ‘Basically, it’s Over‘ in Slate this week.
Charles Munger
First, let me say, what I like about investors (and managers and entrepreneurs) with long-term track records of success, is it means — it must mean, by definition — they have a high quality view of the future. Not only a high-quality view, but a high quality view that renews itself. There is no doubt that Berkshire Hathaway has consistently over time had a better view of the future than most expert forecasters, policy pundits, and futurists. The record is clear.
Anyway, Munger this week offers a parable about Basicland, a C18 Pacific island colonized by Europeans where: “Property rights were greatly respected and strongly enforced. The banking system was simple… Almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property… Speculation in Basicland’s security and commodity markets was always rigorously discouraged and remained small…
“(But) as their affluence and leisure time grew, Basicland’s citizens more and more whiled away their time in the excitement of casino gambling… Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called “financial derivatives.”
And so it goes on, telling the history of America and the route to the Credit Crunch, and potential for new misery going forward, via this parable. He uses the parable as parables have always been used, to say something in ‘make-believe-land’ that cannot be said (or will not be heard) in reality. The folly of Basicland’s citizens and government is much easier to acknowledge than our own. Scenarios of the future are similar in function, similarly allowing mental and institutional ‘permission’ to think the unthinkable and ‘say the unsayable.
The worst investor in America
Munger wouldn’t be the first to say: “Change yer ways or ye be doomed.” Isaiah and many before and since have said that. Nor would he be the first old white guy to espouse traditional ways of doing things. We factor that in. But he does look to basics and basics are important in having a high-quality view of the future. They signal the limits of the excess and reversion-to-the-mean imperatives.
I remember in the 1990s, when I was living in Washington DC, and Warren Buffet was “the worst investor in America” for missing out on the dot.com boom and Nasdaq bonanza. He just stuck to his guns saying, time after time, ‘there are no fundamentals behind these valuations (aka, this is just a casino) and fundamentals will prevail, which of course they did.
Now the brains at Berkshire Hathaway are saying that forums where risk, debt, currencies, etc., are up for speculation are ‘casinos,’ and their players therefore gamblers (rather than, as they would have it, ‘investors), and that they produce little fundamental value and fundamentals will prevail.
read morePosted by Adam Gordon on Feb 12, 2010 in all, economy & finance, failed predictions, management, strategic foresight
Two running business stories with foresight importance this week, both I realize brought to me by smartbrief.com (Smartbrief on Leadership) which I find a very credible news aggregation service. The first is a WSJ piece ‘How Lean Manufacturing Can Backfire.’
Toyota President Akio Toyoda, Feb 11, 2010. Pic: AP
Lean manufacturing creates efficiencies and shaves production costs by creating just-in-time — no inventory — systems, using common parts and designs across product lines, and generally squeezing materials, processes, and (inevitably) quality controls. This may or may not include pressing suppliers to lower prices, and therefore squeeze their own materials, processes, and quality controls. ‘Lean’ has been very much a core process and operations mantra for about two decades. To misquote a favorite saying, manufacturing companies have been adamant: ‘one can never be too rich or too lean.’
But now Toyota has had a slew of embarrassing recalls — the 2010 Highlander; 2008 – 2010 Sequoia SUVs; and 2009 – 2010 RAV4′s due to gas pedal problems. It has just recalled 437,000 Prius and other hybrid vehicles worldwide to fix brake problems. In 2009 it recalled Corolla, Camry, Vios and Yaris sedans due to faulty electric window-control systems.
The point of the WSJ piece is to implicate lean manufacturing in this. (It’s unclear whether it’s too much lean or too little quality control, but they are clearly connected.) Now, lean as an idea is not going to go away. Nobody is suddenly going to advocate ‘bloat manufacturing,’ but looking at the damage in reputation and bottom line that Toyota has soaked up, the company and others like it will obviously looking across their lines and saying to themselves ‘a bit of redundancy (fat, if you like) in the system will be cheaper than this.’ Thus the pendulum swings back from lean extreme to somewhere a bit more durable. A happy medium.
Maharaj Mac
In the other story, the Times reports how McDonalds is seeing benefits from localization of it’s menu, for example, offering the McItaly in Italy, the (non-beef) Maharaja Mac in India, the McLobster in Canada and the Ebi Filit-O (shrimp burger) in Japan. The pendulum effect here is that McDo became the mega-corporation it is based on global standardization and a ‘one-menu’ mantra from Cleveland to Taipei. It wasn’t just one menu, but each item had to be produced from the same stock, and in the same way. McDo fries were identical everywhere, that was the guarantee (and they were always called ‘fries’ no matter what locals called them.)
It is now become common cause among the global food companies (notably Starbucks and KFC) to work local options into their offering. One may think this is merely ‘think global, act local.’ The point is, it is an about-turn indeed from the ‘think American, act global’ that went before. What works best is in fact a happy medium.
What does this have to do with better future-thinking? Expect a recall sooner or later on forecasts that don’t see change resolving itself around a happy medium.
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