Managing Through a Downturn

Managing Through a Downturn is definitely the toughest task a manager/leader has to undertake. Of course, when the economy is buoyant, we are also faced with challenges such as keeping the best talent from rivals, managing multiple deadlines, etc. However, with a limited budget coupled with gloomy outlook, the task is definitely much tougher. The title of this book which is part of Harvard Business Review's series on management caught my eye and I was hoping that it would give me some insights on managing in such tough situation. This is the first book from Harvard Business Review which I have ever read and the book consists of seven articles from authors from diverse background ranging from Professors, Consultants and also CEOs. So, it should be worth our time right?

Some useful insigths from the book are summarised below:

1) "More than education, more than experience, more than training, a person's level of resilience will determine who succeeds and who fails" (The book starts on resilience which is an important characteristic if a company were to survive through a downturn. A downturn will present opportunities to resilient companies as it will weed out other weaker competitors and when the economy recovers, it is the resilient companies that stand to benefit)

2) Three fundamental characteristics seem to set resilient people and companies apart from others. One or two of these qualities make it possible to bounce back from hardship, but true resilience requires all three.

a) The first characteristic is the capacity to accept and face down reality. In looking hard at reality, we prepare ourselves to act in ways that allow us to endure and survive hardships: We train ourselves how to survive before we ever have to do so.

b) Second, resilient people and organizations possess an ability to find meaning in some aspects of life. And values are just as important as meaning; value systems at resilient companies change very little over the long haul and are used as scaffolding in times of trouble.

c) The third building block of resilience is the ability to improvise. Within an arena of personal capabilities or company rules, the ability to solve problems without the usual or obvious tools is a great strength.

3) ...... resilient people have very sober and down-to-earth views of those parts of reality that matter for survival.

4) The fact is, when we truly stare down reality, we prepare ourselves to act in ways that allow us to endure and survive extraordinary hardship. We train ourselves how to survive before the fact. (The ability to stare down reality is in some ways related to managing expectations. I believe a company should know the harsh reality of competition and that it is a jungle out there. You have to be the best or otherwise, competition will eats you up. At the end of the day, it is all about supply and demand. Again, it is a balancing act. Too much of doomsday scenario will sap morale. One way for a company is to set certain criteria for reward. For example, minimum percentage of bonus based on a target of how much profit a company made for the year and also how much staff contributed to that profit. That way, staff would know what to expect and also what is expected of them in order to get that desired bonus. If we leave it to staff imagination, it may overshoot or undershoot catastrophically. For Malaysians, the closest example that I can think of is our public university admission. People are frustrated because it seems that even the brightest student can't earn a place in our university for his choice of studies. If the selection criteria is transparent, the frustration can be managed as the students' expectations can be managed and for all we know, it may be simply there are better students out there and all these conspiracy theories are only our own imagination. Hahaha! Similarly, maybe there are conspiracies by the management to squeeze staff dry or maybe it is only our imagination. Hahaha!)

5) ..... resilient people devise constructs about their suffering to create some sort of meaning for themselves and others.

6) Since finding meaning in one's environment is such an important aspect of resilience, it should come as no surprise that the most successful organizations and people possess strong value systems.

7) Values, positive or negative, are actually more important for organizational resilience than having resilient people on the payroll.

8) The third building block of resilience is the ability to make do with whatever is at hand.

9) ..... rules  and regulations that make some companies appear less creative may actually make them more resilient in times of real turbulence.

10) Resilient people and companies face reality with staunchness, make meaning of hardship instead of crying out in despair, and improvise solutions from thin air. Others do not.

11) (On smart executives): they prepare for the worst while focusing their companies on what they do best.

12) Failing to plan for the worst is a much bigger mistake than upsetting the troops in the short term, because once an industry is in the middle of a downturn, it is almost impossible for companies to come up with inventive solutions (Good point right? Just spare some time during good times to plan for not-so-good time which every company will have to go through inevitably)

13) Successful downturn managers avoid diversification and concentrate as many resources as possible on playing to win on their main field of competition (It needs clarity of mind for a manager to know his own strength and not be confused by other distractions. Studying history, all empires eventually fall because of either the rulers or their successors have become too comfortable on their own success or their ego has become too inflated that they think that they can conquer the whole world)

14) Far better to plan ahead and stay focused on what you know you can do, not on what you hope to do better than established players in other markets.

15) Costs do have to be carefully managed, but the key is consistency. A company shouldn't act one way in good times and another way in bad times. Otherwise, employees, suppliers, and other business partners will lose confidence in the company, and morale, cooperation, and productivity will all decline.

16) Companies such as Southwest Airlines, Harley-Davidson, and FedEx have no-layoff policies. As a result, their employees dig in during tough times rather than shop for new jobs. (I feel this is the right approach. Companies expect committed employees, so companies should be committed to their employees as well. Besides, anybody who has ever gone through the painful experience of being laid off or withnessed their colleagues being laid off knew how demoralising that can be. Again, there is a caveat. You also do not want to create a too comfortable environment like public service and ends up with a lot of dead woods).

17) Companies that successfully navigate huge waves tend to look bad news in the eye and institutionalize an approach to detecting storms. Rather than hedge their bets through diversification, they place a big bet on their core businesses and spend to gain market share. They manage costs relentlessly during good times and bad. They maintain a long-term view and strive to earn the loyalty of employees, suppliers, and customers. Coming out of the downturn, they maintain momentum in their businesses to stay ahead of the competition they've already surpassed.

18) (On root causes of growth stalling): Nearly half of all root causes fall into one of four categories: premium-position captivity, innovation management breakdown, premature core abandonment, and talent bench shortfall.

19) Premium-position captivity: the inability of a firm to respond effectively to new, low-cost competitive challenges or to a significant shift in customer valuation of product features (A company needs to constantly review its work processes and whether it has grown to be inefficient and not only resorts to restructuring when there are serious problems).

20) Innovation management breakdown: some chronic problem in managing the internal business processes for updating existing products and services and creating new ones.

21) Talent bench shortfall: a lack of leaders and staff with skills and capabilities required for strategy execution.

22) Internal skill gaps are often self-inflicted wounds, the unintended consequence of promote-from-within policies that have been too strictly applied. Such policies, often most fervent in organizations with strong cultures, can accelerate growth in the heady early days of executing a successful business model. But when the external environment presents novel challenges, or competition intensifies, these policies may be a severe drag on progress.

23) Few companies formally monitor the balance in the executive team between company lifers and newer hires who offer fresh perspectives and approaches.

24) And management development programs all too often focus on replicating the skill sets of the current leadership, rather than on developing the novel skills and perspectives that tomorrow's leaders will need to overcome evolving challenges.

25) ..... analysis of company growth rates and senior leaders' backgrounds suggests that the sweet spot for external talent is somewhere between 10% and 30% of senior management (This is a good target for company CEOs. In addition, CEOs and also EMPLOYEES should remember points 21 to 25. CEOs have important responsibility of communicating this point to employees so that existing employees are not over-zealous in protecting their beloved company. Future leaders from within the company should have enough confidence to accept outsiders who brings value to their organization. Management should also inculcate a culture where it is easier for an outsiders who brings quality to fit in to the organization rather than being isolated and eventually forced to leave).

26) Organizational pathologies - secrecy, blame, isolation, avoidance, passivity, and feelings of helplessness - arise during a difficult time for the company and reinforce one another in such a way that the company enters a kind of death spiral. Reversing that downward trend requires deliberate efforts by the CEO to address each of the pathologies.

27) ...... the first task of turnaround leaders is to open channels of communication - starting at the top.

28) Turnaround leaders must move people toward respect; when colleagues respect one another's abilities, they are more likely to collaborate in shaping a better future.

29) To pull a company out of a death spiral, the CEO needs to encourage people to take initiative and feel that they can make a difference - which is hard to achieve when an organization is in slash-and-burn mode. (In my opinion, this is one of the most challenging task of a CEO. Well, CEOs are highly paid to do the difficult task anyway. My point is that the CEO must be convincing and sincere and it is even more important that the employees believe him/her. It is very difficult to gauge the actual response as most of the time employees may just nod in agreement but actually doesn't buy the idea. For me, in an ideal world, the CEO should be in the front line fighting with his soldiers and earn their trust and respect - just like in war movies).

30) ...... strategy goes nowhere unless it begins with the customer.

31) Leadership economics is a hallmark of almost every great strategy; when we see a situation in which the rich get richer, this is the phenomenon at work. (This statement means that in whatever a company (or an individual) does, the aim should always be towards No. 1. Whether as the No. 1 firm in your industry, the top gangster, etc. - to be No. 1 is the ultimate aim as the rewards will be disproportionately higher between the No. 1 and the rest).

32) Three archetypes of leadership:

a) Entrepreneurs are often ahead of their time, not necessarily bound by the context in which they live. They frequently overcome seemingly insurmountable obstacles and challenges to persevere in finding or launching something new.

b) Managers are skilled at reading and exploiting the context of their times. Through a deep understanding of the landscape in which they operate, they shape and grow businesses.

c) Leaders confront change and identify latent potential in businesses that others consider stagnant, mature, declining, or moribund. Where some see failure and demise, this breed of executive sees kernels of possibility and hope.

(Does your company have each of the above leaders?)

33) Eric Schmidt: A company can survive losing a lot of people, but if it loses its smart people, it's done for. (Do you know who is the smart people in your company?)

34) Eric Schmidt (on keeping employees): ..... you need some kind of early warning system so that you always have a chance to get to people before they're out the door.

35) To win the hearts and minds of your key employees, you have to communicate directly and physically with them.

To be honest, after finishing the book, my initial thought was that this book is only average. But after writing down some of the key insights, I found that I actually did learn something from it. You won't feel like you are ready to take on the world after reading this book but I guess it is probably got to do with the title and not the quality of the articles. This serves as a good lesson to me. I should train myself to be exposed to less encouraging subjects and get wider perspective. For example, you will notice books on people's success are usually more popular. While, it is good to stay positive but we must avoid getting the wrong true picture of achieving success, i.e. IT NEEDS A LOT OF HARD WORK!

Napoleon by Max Gallo

Lessons and strategies from military exploits provide the best reference for us to translate into daily management and strategies in our business and work. In military, great leaders are able to motivate people to fight for a cause (and the causes are not necessary clear or just) and when compared to our day-to-day work, our challenges would appear like child's play. For one, our failures would not involve massive loss of lives (including our own) or if you are lucky, ends up being a POW. As such, I would recommend reading military books and the lessons from such books would be invaluable in our quest to be a good leader. This is why classical military texts such as Sun Tzu's Art of War or Clausewitz's On War are part of management and strategy courses being taught in good universities.

One of my favourite military strategists of all time is Napoleon and of course, many of us knew about his exploits and achievements in modern warfare and strategies. In my opinion, Napoleon's victories are unmatched and perhaps will never be matched. His achievements are even more amazing given the fact that he often out-maneuvered his adversaries who are usually superior in numbers. For those who are interested in the exploits of Napoleon, I would recommend the novel by Max Gallo as a starting point. Please take note however, that the book by Max Gallo is a combination of history and fiction. Because of Max Gallo's brilliant imagination, the quartet of books is highly readable and therefore, is a good start before we read more serious and "dry" military books.

The series are divided into four books as follows:
a) The Song of Departure
b) The Sun of Austerlitz
c) The Emperor of Kings
d) The Immortal of St Helena

There are many lessons which we can learn from Napoleon's amazing achievements and his subsequent downfall:

1) In war, as in politics, one must fight one's adversaries by uncovering their intentions, letting them reveal themselves as one feigns weakness or ignorance, and then strike at the desired moment.

2) One must always, when one cannot crush an enemy completely, leave him the possibility of fleeing and saving face, so that instead of being compelled to fight to the death, he agrees to negotiate. (This message is standard in all military texts and good leaders should remember this. Very often, our ego gets in the way and we ended up fighting long wars which drains our energies and resources. For me, I always remind myself on the "real" objective of doing something. In fact, Napoleon's own downfall is due to his protracted campaign against the Russians (so are the Germans) which ultimately results in his defeat at Waterloo).

Reading about Napoleon's campaigns, one will learn the importance of surrounding yourself with good leaders (or managers). Napoleon's army is famous throughout Europe because he picks good leaders such as Lannes, Ney, etc. Napoleon's strategies also involve quick movement of his military units and often surprises his enemies from the back and again, it is important in our day-to-day management to make quick and decisive decisions.

For this series of books, I will limit the list of useful lessons but rather, will encourage those interested in Napoleon to "enjoy" reading his spectacular rise and subsequent painful downfall. To compensate for the reduced content in this post, I will include some useful military quotes for your reading pleasure:

1) Leadership is the art of getting someone to do something you want done because he wants to do it - Dwight D. Eisenhower.

2) There are only four types of officer. First, there are the lazy, stupid ones. Leave them alone, they do no harm......Second, there are the hard working intelligent ones. They make excellent staff officers, ensuring that every detail is properly considered. Third, there are the hard working, stupid ones. These people are a menace and must be fired at once. They create irrelevant work for everybody. Finally, there are the intelligent lazy ones. They are suited for the highest office. (Personal opinion: Careful on interpretation and don't ends up filling your company with lazy people.)
- General Von Manstein on the German Officer Corps

In summary, reading military books is great for budding leaders but for me, it is important that we get the right lessons. When I was younger, I refused to read books which teach us to achieve our objectives at all costs or where the ugly side of human being are emphasised for fear that I would turn into a person with all the material riches in the world but with no real friends or families. For that I leave you with a quote which I extracted from Sun Tzu's The Art of War which was translated by Lionel Giles and with a new foreword by John Minford:

"Emerge from the mud untainted; understand cunning but do not use it" - A Ming-dynasty writer.

From Asian to Global Financial Crisis: An Asian Regulator's View of Unfettered Finance in the 1990s and 2000s

When I choose a particular book to read, I usually make sure the Author really knows his subject. For example, I try to pick books written by Warren Buffet himself rather than someone who is interpreting his thoughts. Similarly, the last few books which I have posted are something like autobiography. Therefore, when I was interested to read about the Asian financial crisis and how it relates to the crisis of 2007/2008, I was hoping to read the experience of someone in the eye of the storm rather than some academics or critics who may not understand the uniqueness of Asians. I believe we are always biased by our upbringing, education background, families, friends, etc. As such, I was very happy when Andrew Sheng decided to write about the Asian financial crisis. Andrew Sheng is the ideal candidate to write about it given his experience in Hong Kong, China and Malaysia and the book will be handy as a source of reference and also to remind us not to keep repeating history itself.

Some of the key points which I gathered from the book are briefly summarised below:

1) Ultimate test of economic success is not natural resource endowment or geography, but the quality of governance (The turmoil experienced in some of the richest natural resource countries such as the middle east highlights this point. In fact, there is a term for such a situation, the resource curse).

2) The stronger the yen, the more Japan would transfer production to its cheaper neighbours and lend or invest in the region to prevent further yen appreciation. The more liquidity and investment inflows, the more the Asian economies boomed, because they were on a 'soft peg' to the U.S. dollar. On the other hand, the reverse situation would occur if the yen were to depreciate.

3) The Japanese asset bubbles were identical to other asset bubbles in the sense that they were essentially inflated by credit. (This is an important lesson. Bottomline is, whenever, there is easy money, there will be bubbles. In layman's term, if we start hearing mega projects or billion dollar seems like spare change, it means that there is easy money everywhere. You think it is easy to finance billion dollar projects if there is no easy money?)

4) ........potential volatility due to sudden swings in the reversal of the carry trade would remain one of the key vulnerabilities of the Asian global supply chain.

5) ......beam in our eyes, seeing what we choose to see or what we are trained to see, and we may ignore the most important details. (One of our major weaknesses. I would recommend mixing with people of different background and perspective in order to reduce the effect of "beam in our eyes").

6) 'Never let monkeys look after bananas'

7) The other problem with modern education and technical training is that we have created silos of specialists, each arguing with each other from their own specialization and narrow points of view.

8) The Asian crises followed the topography of a Minsky-Kindleberger model of financial crisis that goes through roughly five stages - displacement, monetary expansion, overtrading, revulsion and discredit.

9) The irony is that at or near the top of the boom, irrational exuberance and greed are such that hardly anyone questions Ponzi financing behaviour when it emerges.

10) ......loose monetary policies, excessive global liquidity and low interest rates create bubble conditions. (I have highlighted in a few previous postings that I believe Malaysia is currently experiencing a property bubble. We certainly have the ingredients where banks are aggressively marketing housing loans coupled with low interest rates two years ago. But now, we are seeing a steady rise of interest rates and the next stage will see the euphoria slowing down before a painful plunge. Well, that is my opinion)

11) The Thai explanation of the crisis may be centred on two broad areas - excessive private sector debt and mistaken policy decisions, the former somewhat encouraged by the latter.

12) In a financial panic the central bank must lend freely at penalty interest rates against good collateral. But the central bank cannot exercise the role of lending freely during a currency attack, particularly in trying to defend a fixed exchange rate. In a situation of open capital flows, the only defence of a fixed exchange rate is through higher interest rates. However, if the corporate sector is already overleveraged and the banking system fragile, then raising interest rates is in fact no defence. Higher interst rates would only worsen the financial position of the corporate sector and the banking system, leading also to bank runs.

13) .......central bank cannot defend both a currency attack and a bank panic at the same time.

14) Clean politics is wise politics.

15) To avert a crisis, monetary policy must strike a correct balance between these three elements [exchange rate regime, domestic interest rates and the control of capital flows into and out of a country]. (Easier said than done. One of the biggest obstacles for regulators is the interference of politics. As we know, once politics interfere, whether it is in public governance, education or finance, the results are usually disastrous).

16) Pride comes before a fall.

17) For nations to grow stably, their industrial base must be supported by a sophisticated financial system with good risk management and strong governance.

18) Amongst investors familiar with Asian markets, two important indicators point to irrational exuberance. The first is the amah (domestic maid) syndrome. When amahs get into the market, that is the time to get out.

19) The second systemic indicator is when businessmen begin to neglect their businesses and begin to punt heavily in the market.

20) Tan Sri Noordin: "During a crisis, don't deal with all problems. Deal only with the top three".

21) Walter Bagehot's dictum states that in a banking crisis the central bank must lend freely against good collateral.

22) China's rapid growth in the last 25 years is a demographic endowment, with a large increase in the working age population. (Can this last forever? Refers to China's working age population chart below).

23) If their (China) nominal exchange rate remains unchanged, then there will be a danger of asset bubbles forming in the stock and real estate markets.

24) .........from historical experience that all crises are inevitable - it is a matter of when and how serious. (My personal opinion is that an asset bubble crisis would hit Asian countries soon starting from China).

25) A fundamental problem with the world of financial derivatives is that neither regulators nor market participants have a good handle on how much true leverage exists in the system and consequently how much capital is necessary. The embedded leverage in many derivative products magnified the impact on market volatility.

26) Keynes: 'A conventional valuation which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really make much difference to the prospective yield; since there will be no strong roots of conviction to hold it steady'.

27) Minsky's Financial Instability Hypothesis holds that over a run of good times the financial structure evolves from being robust to being fragile.

28) The fallacy of composition, by which market participants erroneously assume that what they believe is true based on partial information is true for the market as a whole, was prevalent in both the Asian and current crises. Market participants acted on partial information, and their collective herd behaviour created market overshooting or undershooting.

29) Military strategists appreciate that ground conditions are continually changing and that strategic resources cannot be stretched too thinly. For best effect, they must be concentrated and used against a chosen sector with the greatest effect. They remember all too clearly that it is most dangerous when all is quiet on the Western Front. Likewise, financial regulators have to learn to recognize that dangerously low-risk spreads and low volatilities, coupled with fast-rising markets, are usually precursors to crisis.

30) A routine execution of current processes without examining outcomes is likely to lead to process for process' sake.

31) ......no financial structure is strong unless the real economy is strong.

32) .......crisis is ultimately political in nature.

33) Ultimately, all financial crises are crisis of governance.

In summary, this book is a good source of reference for an overview of the Asian Financial Crisis and how it relates to the 2007/2008 global financial crisis. Andrew Sheng's in-depth knowledge of Asian financial system has enabled him to analyse each countries' weaknesses from South Korea to Malaysia.

Here, to support my opinion that Malaysia and China is on the verge of another crisis which will be triggered by collapse of the property sector, I would like to offer my two-cents worth of opinion. First, I would like to draw the readers' attention to the first figure below:

From the figure above which was sourced from the National Property Information Centre (NAPIC), it shows that the total value of property transactions in Malaysia reached a record of RM107.44 billion in 2010. From the chart above, doesn't it look like it is due for a correction sometimes in 2012?

The next figure is on the working-age population (ages between 15 and 64) as a percentage of total population which was shown by Andrew Sheng in his book. What I find interesting is the good correlation between Japan's stock market reaching its peak on Dec. 1989 and the subsequent property collapse with the decline of Japan's working-age population. Based on UN's projections, will we see similar problems with China soon? Looks like 2012 may be an important year but I certainly hope it is not apocalypse. How about Malaysia? Looks like 2020 is a very important year for Malaysia after all.

Have a good weekend and for those celebrating Duanwu festival, enjoy your dumplings!