By Matthias Chang
Friday, 26 June 2009 07:57
This article is an edited and summarized version of my seminar paper, Common Sense Planning For Booms And Busts© which I first presented soon after the 1997 financial crisis and which I has since developed further.
The target audience for this article is the hands-on managers and policy makers who are presently confronted with the challenges of overcoming the present painful global financial tsunami.
I have deliberately omitted voluminous data and complex graphs so as to enable my readers to grasp the essence of my analysis.
You will not find this approach in leading international business schools and or management seminars / forums by leading management gurus. We say this because we have brainstormed with executives and consultants from impeccable academic and business backgrounds over the last twenty-five years, and what we found most often missing in our discussions is the application of the tool of common sense in addressing and resolving complex issues.
We have heard often enough the refrain, Come on, it cannot be that simple, there must be a catch. Another common frustration is, we have spent hundreds of man hours on this and we have covered all the angles, and we can’t see how you can get us out of this mess.
We offer no magic bullets and or have we asserted that we have all the answers. But what we do assert is that a proper mindset, one based on common sense is often more effective than complicated theories and equations. I believe that the present crisis has taught us that rocket scientists and Nobel Laureates are not infallible. In fact by ignoring common sense, they have contributed substantially to the present financial debacle!
Often than not, when taking a simple, street wise approach our critics would never cease to caution and remind us that if what we say is right, surely the leading scholars of Harvard and other leading international business schools would have considered it and if applicable, used it.
Take the present crisis, how is it that all the leading international banks and fortune 500 companies were caught with their pants down? The IMF, the World Bank and central banks all over the world were surprised by the scope and depth of the crisis and still groping in the dark for answers and solutions.
At this juncture, we would like all of you to take a break and read as many annual reports of leading companies from all sectors of your economy as well as the multi-nationals for financial years 2005 to 2007. Read also the reports of central banks, the IMF and the World Bank.
Without exceptions, the Chairman’s message to shareholders of these companies has been positive, forecasting continued growth and surging profits for years to come. The good times are here to stay. Financial engineering has assured us that the sky is the limit in wealth creation.
Treasury officials and central bankers were echoing the sentiments in unison, and when the crisis was all too apparent, experts in Asia and elsewhere (especially central bankers) were chanting the mantra, Asia has de-coupled, and will not be affected by the crisis that first exploded in the US.
The rest, as they say, is history.
But those of us who used common sense took pre-emptive measures as far back as early 2006 and parked our hard earned income in safe havens.
A LESSON IN WISDOM
There was a wise businessman who always liquidated his major investments at a certain period and would be severely criticized by brokers, investment bankers and smart graduates from business schools and the much touted advisers from leading international management firms for cashing out too early and missing the big hits. I was with him in the 80s and in the 90s when this tongue lashing was meted out and we would just silently soak up all the verbiage and gratefully thank them for their unsolicited guidance.
What arrogance, when this businessman was a multi-billionaire and none of the so-called experts were near the ranks of multi-millionaires.
This is what he taught me:
1) Don’t be greedy.
2) Be content with the pre-determined profit targets that you have set.
3) Count your blessings
4) Have no regrets if you could have earned more.
5) Nature have seasons, profit-making is also seasonal.
6) Embark on a business when you are ready and not before.
7) Prepare for adversity, for the winter.
Let me assure you that you won’t be taught the above 7 principles in world renowned business schools. Neither will policy makers apply this common sense and wisdom in managing their economies.
The wise businessman also taught me that these principles apply equally when formulating national blueprints such as five-year plans.
MOTHER NATURE AND BUSINESS CYCLES
Mother nature has taught us for centuries that there is a time to plant, a time to grow, a time to harvest, a time to prepare the ground and a time to rest. And there are the four seasons; each assigned a specific role in the overall scheme of things.
Is the business cycle any different?
In every seminar that I had the opportunity to participate either as the leader or as a delegate, I have never ceased to ask the attendees whether they believe in cycles, specifically business cycles and the response has always been unanimous – it is fundamental.
Yet, my colleagues and I seem always to be in the minority when we examine business plans and or national blueprints for development and growth. We do not find any correlation between the plans presented and the relevant business cycle and or the specific period of the business cycle.
The booms and busts, euphoria and despair, alternating as certain as the sun rises in the morning and sets in the evening.
In our daily lives, we prepare for sunrise, to go to work and earn a decent living and after a day’s work, prepare to retire and the well deserved rest.
How strange that we do not apply this nature’s principle in business.
SURVIVING BUSINESS CYCLES
To illustrate the above principles, we have for the purposes of this article taken a business cycle of ten years. [1]
In our strategies, we have always acknowledged that different skills and mindset are required for:
A) a downturn, and
B) an upswing
Thus in our training modules, we have emphasized the development and establishment of the following management teams:
A) The Fire Brigade / Trauma Team
B) The Recovery Team / Money Makers
Let me now explain our common sense approach to planning.
Diagram 1 – Planning For Business Cycles
At Point A which is the bottom of the preceding business cycle, our Recovery / Money-making team would have in the 3-4 years of the downturn been preparing itself for the upswing. Our Fire-Brigade / Trauma Team have retreated to enjoy their well deserved rest.
Most plans, no matter simple or complicated has a duration – from inception to implementation and the realization of profit / loss. Likewise, any economic policy of a government has a similar cycle. And for the purpose of this article and illustration, this duration ranges from three to five years.
Thus our strategy is to ensure that our business plan or policy achieves full realization at Point A-1 with possible spillover to Point B-1. But, not beyond Point B-1.
This is because it is inconceivable for anyone to pinpoint accurately to the year or month the exact peak of any business cycle. In the result, invariably at Point B-1, we are already prepared for any adverse situation.
We have consolidated our growth and its benefits and harnessed our reserves for any eventuality, specifically a downturn – be it a major or a minor disruption (cycles within cycles).
At this juncture, we would like to stress that nothing is more crucial than the need to recognize and have in place teams with the relevant skills and mindsets that at a moment’s notice can be deployed and or re-deployed as circumstances dictate.
At Point B-1, the entire management would be in a pre-emptive mode for a down turn and the tools and probable answers and solutions are on the table. While we may not be able to anticipate all the outcomes, specifically a “black swan event”, nevertheless, the mindset is such that demoralization would not set in and be an issue and that no major restructuring in terms of organization or human resource are required to meet the challenge.
From Point B-1 to Point C, our Fire-Brigade / Trauma team is better prepared than any team that may exist in our competitors’ organization. Typically, we would be at the minimum, nine months ahead of anyone and have a better chance of surviving any crisis.
The finance resources are in place to meet the challenge as we would have unwound our positions and reduced and or minimized exposures.
The right team is already looking out for fires to put out, and is assured that there is a back up team to rebuild when the fires are put out.
Anyone who disputes that there is a necessity for such a team - well trained and with specific skill sets even in times of growth and exuberance is a buffoon.
My simple rebuttal to any criticism is this: If you disagree, why do we have a fire-brigade in every burrough, district, county etc. More lives would have been lost in September 11, 2001 had there been no fire-brigades to help those trapped in buildings.
A trauma team at the emergency ward have different skills and mindset and are better prepared for such eventualities than your physicians in the general ward. Period!
It must also be pointed out that at Point B-1 to Point C, the Recovery / Money-making team is not idle. This team is running parallel with the Fire-Brigade team as they are now deployed to re-train for new opportunities and acquire new skills. The two teams are running parallel but not interfering with each other. They have a common objective – ride out the crisis and recover before anyone else!
They have different mindsets and skills.
They have to assess the extent of the devastation to the organization, the industry, the market and related markets, the national economy as well as the global economy. They are already primed to re-tool and to anticipate future needs.
At Point C, the Recovery / Money-making Team would be in the same position and mindset as they were at the previous Point A ten years ago.
The cycle repeats itself when we reach Point C-1.
FUNDAMENTAL PRINCIPLE
Given the above explanation and illustration (for simplicity sake), it is incumbent that every organization must have in place at all times the aforesaid two teams.
We do not subscribe to the use of the blunt tool of retrenchment when crisis sets in because its application reveals and exemplifies a management team that is devoid of any common sense and competency notwithstanding sterling performance during the boom period. For if a manager cannot deliver profits during a boom period, why is he/she still hanging around?
While we take cognizance that frequent turn-over of human resource is inevitable, the very existence of the infrastructure for the two teams ensure that at any one point in time, the teams are able to renew and rejuvenate to meet their specific challenges.
Absent such an organizational structure, the members of the usual management team are often depleted during the crisis, because they may have been terminated, retrenched and or resigned and often blamed for the inevitable losses during the downturn. The surviving members would be exhausted when bottom is reached and would of necessity take a longer time to recover. Some may not even recover, for want of a recovery team!
Neither do we want a situation, as in the case of the American banking giants, where the culprits who caused the devastation are retained. They were neither fit to be in the Fire-Brigade Team or the Recovery Team.
PLANNING FOR FIVE YEARS OR TEN YEARS
We take the view that an organization should always plan for a ten year cycle. By this I mean, to plan for the major cycle as appropriate for the particular industry or market etc. But within the major cycle, there must be in place plans for any erratic short cycles which may prolong or shorten the major cycle.
Planning for the major cycle is the overall strategy, while planning for the minor cycles are the tactics that we need to use to ensure we survive and prosper during the major cycle.
We hope you will appreciate why at the beginning of this article, we requested that you take a break and read as many annual reports of leading corporations in your industry and five-year plans of countries.
Should we be surprised when a corporation which plans for a major acquisition or an investment and then maximizes its leverage at the peak of a cycle files for bankruptcy when a crisis sets in?
Have you ever come across a government official in the treasury or a central bank that plans for the inevitable downturn?
They have not, because they are mindless and cowardly and they just echo what the politicians want them to say.
What we have instead, is the deliberate creation of one bubble to replace the previous bubble that has burst, thereby ensuring that the next crisis will be more devastating.
So long as the global financial system is grounded on central banks, fractional reserve banking and the insidious shadow money-lending system, there will always be cycles of booms and busts.
This is the sad state of affairs of all governments. They take their citizens for fools, as if they are not mature enough to appreciate the consequences of a downturn and therefore must be fed with sound-bites so as to sustain the “feel good factor”.
Election or re-election to public office is paramount and nothing must derail this objective, even to the extent of lying.
Right now, the Malaysian government is in the process of formulating the 10th Malaysian Plan, another five-year plan to continue the policies of the 9th Malaysian Plan which was for the period 2006 to 2010. I shudder to think that Malaysia may be planning out of the context of the “business cycle” and not even from a ten-year perspective.
The previous five-year plans have served Malaysia well, but we must recognize that the first quarter of the 21st century will be turbulent years and anyone who thinks that the present global crisis will end and recover by 2010 need to re-examine the nature of this crisis.
It is a systemic crisis and it will be prolong. Different skills and mindsets are required to address these challenges.
We must plan beyond blindly adopting the Stimulus mantra!
It behoves all responsible management to use common sense when planning.
We wish our readers every success in their plans for the future.
Endnotes
1. To avoid any misunderstanding, we readily concede that cycles can be of different durations and there are cycles within cycles, but this will not affect the thrust of the thesis that we should plan in anticipation of cycles. The critical issue is: do we have in place the relevant skills and mindsets for different periods of any one cycle to maximize profits and outcomes and minimize losses and disruptions? In Malaysia, we personally experienced three major cycles of ten years duration, cycles ending in 1987, 1997 and 2007.
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