Monday, May 15, 2023

Relying on outdated tools or conditions

 In uncertain times, where do you turn for insight and answers?  Most often, it seems, we turn to what we know and trust.  Older tools and models that have proven themselves over time.  In the uncertainty we face today (this post was written in May 2023), many business leaders are facing uncertainty about what strategies to implement, what plans to make.  Inflation is still running high, there is a significant amount of political uncertainty in the US, a war in Ukraine and rising tensions between the US and China.  

Supply chains that once seemed so efficient now seem easily disrupted.  Costs, for people and equipment are rising.  When we face all of these uncertainties, what tools or methods help companies understand the current state and plan for the future state?  What do managers turn to for answers?

There are several answers, and none of them are perfect.  Many managers and executives will look to the past, to see if there are lessons learned from previous, similar episodes in history.  Others will look to their education and the frameworks and tools they learned in college or graduate school, to help them understand the markets and their shifting demands.  Still others will look forward, to try to understand what the future may bring, and how to prepare for an emerging future that is unfolding.

I've written previously about VUCA - Volatility, Uncertainty, Complexity and Ambiguity - and how the military and government will use a VUCA model to begin to decipher what they are facing.  Today, there are several factors that business face from within the VUCA framework:

  • Volatility - in the US, there is volatility in the market, especially with what has traditionally been a relative rock of stability - the banking industry.  As SVB and now First Republic go under, a cornerstone of the US economy now seems more uncertain, more volatile, and that causes concern not just for businesses, but for households as well.
  • Uncertainty - in an economy with high inflation (well, high compared to what we've experienced for the last 30 years), there is a lot of uncertainty about what the Fed will do, what results its actions will create, and what the near future will look like from a growth or recession point of view.  No one has great certainty now, unlike just a few years ago when interest rates were approaching zero and the market was growing.
  • Complexity - many businesses are unraveling or rethinking systems, processes and supply chains that have been implemented in the last 20 years.  China, once a low-cost production location, has become more expensive and a competitor, both on a business level and on a national level as well.  
  • Ambiguity - This is the one factor that I think is less worrisome.  I don't think our challenges are ambiguous.  We may lack the correct models or frameworks or experience to decipher them, but that makes them complex, not ambiguous.
With all of this said, let's go back to the three ways managers often try to interpret their setting and the risks associated with each.

Looking to the past

The last time we had high inflation in the US was during the late 1970s and early 1980s.  While our recent inflation was challenging, it was nothing compared to the inflation of that era.  It makes sense to review what managers and executives did in that time, but that insight comes loaded with a lot of freight and uncertainty.  The 1980s were an inflection point in the US, a shift from the more liberal 1970s to the Reagan economy in the 1980s, where tax rates fell and spending on military and technology increased.  Also, the 1980s were the beginning of the end of the Cold War, where the US was increasing spending and the USSR was going bankrupt trying to keep up.  There were two "poles" in the world at that time.  China was a low-cost producer of inexpensive goods, and Mexico was just beginning to take advantage of NAFTA.  

What the Fed did at that time is what the Fed is doing now, raising rates to slow inflation, which led to a recession.  In some regards, history will repeat itself now.  But, as Mark Twain said, history doesn't repeat itself, but it does rhyme.  Meaning we can learn from the past, but we should not expect the present situation to repeat itself exactly.  

Understanding the present and especially looking forward to the future based on how governments and businesses reacted in the 1980s does not take into account the tremendous changes that have happened since then - the establishment of the EU, the advancement of the internet, the rise of China and the diminishing Russian economy and threat.  We should use the past as an example, but lift only those learnings that are still relevant to today's environment.  Relying too heavily on lesson from the past, when the past conditions were so different from today's, introduces ideas and concepts that may not be relevant or useful.  

Relying too heavily on lessons from the past can lead to mistakes, what the military calls preparing for the last war, and failing to understand that the next war will be different.

Looking to your frameworks

Many executives in charge of businesses today were in graduate school in the 1990s and 2000s.  This meant they learned at the feet of Michael Porter and others and were educated on the concepts that were prevalent at the time.  As a reminder, Jack Welch was held up as an avatar of great business competence during and immediately after this period, only to see GE break into several parts when it was realized that most of GE's profit came from financial engineering.  Tool like Porter's Five Forces and newer models like the Business Model Canvas can provide frameworks for analyzing situations, but this analysis requires deeper thinking and more complex synthesis in a time when inflation is higher and VUCA factors are more extreme than when we were in graduate school.  Note that I used a tool in the introduction - VUCA - and provided some basic analysis.

Again, nothing wrong with applying the frameworks we learned, as long as we apply them in the right way and take away lessons that align with the world we live in, and do the deeper analysis that is required.

Looking to the future

My bias is always to look back to the past, to leverage my tools, but also to try to understand what is going to happen next.  Understanding the future, what is likely to unfold, and to move proactively to address emerging needs and challenges is both profitable and risky.  Risky because the company needs to place bets on what future will unfold and what new opportunities or threats could emerge.  Profitable because getting these bets right, investing and moving into new opportunities or spaces before competition means higher revenue and margins.

The problem with looking to the future is that so few people understand how to do this work well, and too often we simply forecast the existing conditions into the future - what I like to call straight line future.  We'd like to assure ourselves that we can understand the future, and in the absence of good research and thinking, the best way to forecast the future is to determine it will be more of the same.

Which tools to use?

So, in one instance (looking to the past) we have rock solid evidence of how decisions played out, but the circumstances today are likely different.  In the instance of the frameworks learned in college, those too may be relevant for a specific timeframe and competitive state that may or may not exist.  When considering the future, the most necessary and relevant information is to understand future conditions, but we have the least experience and least amount of trust in that data.

Which suggests that most companies ought to get much better at understanding trends and scenarios, interpreting market conditions and future actions, and analyzing competitor actions.  If relying on the past is dangerous due to shifting conditions, and relying on frameworks could be situational, then understanding the future playing conditions is probably the best approach.

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posted by Jeffrey Phillips at 6:35 AM


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