Hello, everyone! This is Monday Morning 8 a.m., a weekly newsletter where we distill the insights from all of the distractions, articles, and emails that you receive in your inbox every day. In this week’s newsletter, we’re going to focus on one overarching theme, risk, and you’ll see that theme running through all of the big stories this week.
You can also listen to our podcast series if you search “Strategy Skills”—which this newsletter is based on—in any podcast app.
Not All Risk Is Equal
Financial Times did a fantastic piece looking at why COVID-19 had much less of an impact on Africa than many had expected. The expectation had always been that the more developed economies—within Europe, the United States, Canada, and within Asia, for example—should have performed better than less developed countries that don’t have as much disposable income and resources to combat the virus.
There are a few theories on why Africa wasn’t as hard hit by the virus. One theory is that because populations in some parts of the world have less access to health protection, they have developed a built-in immunity. This is just a theory—it might be right or wrong.
The article raises a deeper question, though, and this is the insight: Everyone is talking about requiring or developing a pandemic plan. But what is the pandemic plan? How do you measure the risk generated by a pandemic? How do you measure the impact of the plan? How do you measure the fact that at any point in the future, a pandemic could roll through any country in the world and wreak havoc?
If you have a consulting background, you know the focus is on the risk of implementation. But if you speak to financial people, they’ll talk about WACC—the weighted average cost of capital—and the fact that they can move the discount rate up or down to cater for risk. There are many problems with WACC, and I suggest you Google it to see why using it as a discount rate to cater for and measure all risks is inappropriate. WACC works best when looking at a discrete project with predictable risks. If you’re examining whether you should make a decision to invest in a country that may be hit by a pandemic, WACC is not going to help you with that.
So, how do you develop a pandemic plan? Here’s what you have to think about:
You won’t be able to come up with a general catch-all pandemic plan that will perfectly address every single pandemic that could ever occur at your offices around the world, and here’s why. The world right now is obsessed with COVID-19, but the way you respond to that virus is very different from the way you would respond to another pandemic. You need to have two things to respond well.
First, you need to have is what Jamie Dimon would call a “fortress balance sheet,” which means having enough cash on hand to see yourself through a crisis. But the second thing you need to understand is that beyond that step, there’s not a lot you can do. Because each pandemic is going to be different. So you need a tailored plan.
For FC Insiders who have access to our advanced knowledge management system, you can log in and look at a detailed study we did to understand how to respond to a pandemic.
What you’ll see in this analysis—which you can edit and use for your own planning—is that you have to be able to break down the entire activity chain, from the time someone gets infected, to the treatment process, to what would happen to them afterwards. The treatment process, costs incurred, infrastructure, necessary resources, how employees will be able to work—all of these will be different because each pandemic is different.
Every pandemic needs to be mapped out in a certain way, such as the treatment path and the benefits case. Employees must be well enough so that they can work, and to work as productively as before. But you have to understand the costs associated with providing treatment, keeping productivity up, reducing absenteeism, changing your infrastructure, and changing your system to support your employees. That is how you respond to a pandemic. If you have one pandemic strategy, it’s going to be so generic that it won’t really help you when any and all pandemics roll through.
Nikkei Asia did a very good piece about Mitsubishi effectively canceling their plans to build a commercial passenger jet, which was a major initiative of the Japanese government. They had the capability in the ‘70s to build an aerospace sector, but once they shut it down, they were never able to build that critical mass of skills, even though they’d brought in engineers from other countries like Canada. It was so hard to get the Canadians to work with the Japanese that the so-called benefits of bringing foreign expertise never materialized.
There’s another good piece about the new CEO of GAP trying to bring a different focus to their stores because, as she says, the so-called GAP empire has become muddied in its focus. There’s a risk: whether or not GAP focuses on the wrong thing.
There’s a story about how Facebook is moving into gaming, and an article on how the Chinese are spending a fortune on building the capability to fabricate their own semiconductor chips, so that any potential disruptions to their supply chain will not be a significant problem.
All of those articles exemplify strategic risk, which is a risk you take when you make a bet on a market.
That is why when you read about Jeff Bezos, Elon Musk, and so on, the media says they took a bet on Cloud, for example—and it is a bet. It’s called a bet because there was no certainty when they started. In fact, many people said they shouldn’t do it.
Strategic risk means: How do you invest in your business, while planning to cannibalize your current skill, product, or service to build something that’s going to displace what you’re currently doing? You could call it diversification or cannibalization—it could be a combination of both where you’re not necessarily cannibalizing your current business, but you’re adding new sources of revenue. That’s diversification. Other times, the business you diversify into is going to cannibalize your current business. You don’t want to be distracted management moving into new areas, but you often have to do it. This is what automotive companies are experiencing today when they realize it’s too late for them to go into electric vehicles.
We’ve mapped out the thought process and steps that an executive team should have to develop a flexible strategy that focuses on what’s important today, but also on what will provide the upside if something new comes along. If you’re an FC Insider with access to our Advanced Knowledge Management System, you can log in, edit those slides, and use them to run your own executive workshop. That’s an important decision companies have to be making today, and it can be done—there’s a technique for it. When I was a partner serving companies, I didn’t develop the technique, but I built off of things other partners had been doing in the oil and gas sector, and we built it for our sectors. Today, you see tech partners doing the same thing and building off the work we did. So, that’s strategic risk.
The Risk of Defense Versus the Risk of Offense
When we talk about risk, we tend to think all implementation has the same risk—it doesn’t. The Financial Times has a great piece about how Amazon is trying to take on the established players in the Indian market. Amazon has a pretty good foothold, but, of course, India is one of two markets with over a billion people, and as the only of the two truly open market to foreigners, it’s an important market.
There’s another story from Nikkei Asia about how China’s Ant Group is about to go public. It’s going to be the world’s largest financial services firm—maybe not by market cap today but pretty soon.
The Financial Times has another piece about how Microsoft earnings have gone through the roof. And that’s largely driven by the bet taken on Cloud services, which you can read about in this piece from The Wall Street Journal.
When you’re defending a position, the risk you usually take is that you pull back resources from everything else—like things you should be doing for the future—just to defend your position. The danger is that you spend so long defending your position that you don’t have the resources to invest into the future. And sometimes you defend something that’s going to be cannibalized anyway. Again, we’ve seen that in the automotive sector when a lot of car companies defended their positions so carefully during the 2008 financial crisis that they never really invested in electric—they pulled back their resources.
When you go on the offensive, the danger is that you leave your core exposed to an attack, or you use the core for cash to invest in your offense, and then you never actually defend the core.
The skills and risks you have to manage are very different depending on whether you are under the threat of an attack, or if you are the one attacking. When companies talk about the risk of market moves, you must ask yourself: Am I attacking, or am I defending? The moves you will make are going to be different depending on your answer, and a large part of that is the ability to fund yourself.
If you’re an FC Insider who has access to our Advanced Knowledge Management System, we have a number of proposals and studies where you can see how we’ve helped companies understand how their cash flows are going to change, measure that impact, prepare the slides and the communication for how they would bring that to the investment community, and then how to manage that message. That’s an important skill companies need to have today, whether you’re defending a position because you’re running out of cash, or you’re on the attack because someone’s been weakened.
Financial Times has a piece about European nations that are NATO members thinking about how much more money they need to spend to insulate themselves from other countries that pose a risk to them. Now, the thing about business is that geopolitical risk is usually given the least amount of attention in planning. But it’s probably the biggest risk because bad things happen geopolitically—whether it’s flooding, assets are nationalized, there’s an invasion—all of these things happen.
When I was a partner many years ago, I worked with a mobile phone company. One of the biggest questions they asked was how to raise money in an extremely hostile part of the world where it’s very difficult to prove to the banks that the assets they’ve collateralized, or put up against the loan, can actually be seized by the bank to be resold. You can read a version of that letter where we simulate that discussion. FC Insiders who have access to our Advanced Knowledge Management System can use that letter to see how to write to senior executives, but also how to have these very technical discussions in a simple, direct way.
We’ve also put together a study where you can see how we methodically analyze the investment in a theoretical, unstable country for an investment company—like pension funds, and so on—who want to buy into this company. You can edit the slides, make whatever changes you want, and use the methodology as needed.
Risk of Counsel
Every time we do the Monday Morning 8 a.m podcast and email with all the links., I always go back and look at the big stories. I reference the Financial Times, The Wall Street Journal, and Nikkei Asia because I read those publications, and I think the quality of reporting is very important—but they also cover important parts of the world. Nikkei Asia is focused on the Asia-Pacific and Australia. Financial Times is global but tends to be very European, and The Wall Street Journal tends to be very focused on the United States and the G7 countries. But the final risk I want to talk about is the risk of counsel.
Yes, your friends will influence you. But they are mostly sending you things through social media—Facebook, Twitter, email, etc. If you’re reading a lot of the Financial Times, The Wall Street Journal, or The Washington Post, you need to read extensively the writings of that editor. That is the person who’s determining what you’re reading in their newspaper. If you know the angle they’re taking, you know how to assess, accept, or discard some of the views.
Every single newspaper has an agenda. That’s a fact. If you think there’s a newspaper out there that’s perfectly objective, they are only objective relative to their view of the world. But everyone’s going to report the facts relative to what they think is important. And, of course, sometimes they will choose not to report a story if it doesn’t fit into their worldview. Obviously, there are many interesting things happening around the world, but newspapers have limited space. Whether or not you agree with the fact that newspapers have an agenda, you can agree with the fact that they have limited space. And they are picking things that are relevant to their audience—they are not going to publish stories that are not relevant to their audience because if they do that, they will lose their audience.
The job of every reporter—and you can see it in their writing—is to always use a certain format. They will use anecdotes to humanize a story, so you feel sympathy. They almost always start a story by telling you about someone who’s going through some experience they are reporting, then they will give you the data to support the elements mentioned in that anecdote. But they’ll only frame it in a way that’s useful and important to their readers.
Here’s a simple example: If I like to knit, and I’m reading a knitting newspaper, and the paper starts talking about fishing, I’m going to be turned off because I’m not interested in fishing. This concept of newspapers only reporting what’s interesting to their readers is not that alien—it’s 100 percent true.
Ask yourself: What is the leaning of this newspaper? What is the leaning of this editor? That will often tell you more about the story than the story itself. Also, when a story is published is actually very important. If newspapers want to kill a story, they publish it around five o’clock on a Friday evening because things die from the weekend news cycle. The date of a story also matters. Sometimes a newspaper will break a story close to when it can influence an event. What is the position of the story? Does it appear buried right in the back? Or is it given prominence—if it should have prominence? Why is the story covered in the first place? What is the overall message in that story, relative to the overall position of that newspaper?
For example, if it’s a conservative newspaper and they post a liberal viewpoint, that’s nice. But has the overall position of the newspaper changed, or are they publishing a liberal viewpoint just to say, “Hey, we’re actually open to all views”? What if a newspaper that follows the principles of free markets starts introducing a columnist to talk about how to regulate markets? Does that mean that they’re now open to all ideas? What is the reporter’s agenda? You have to look at all angles—why is an angle being explored? You should also ask why a newspaper might be ignoring a story. These questions will help you to discern the angle and agenda behind the news you read every day.
Educational Sci-Fi Novel on Productivity Strategy: Mavis
We’ve released a new educational novel called Mavis. Mavis reads as a dystopian sci-fi thriller about a productivity paradox. But, ultimately, it is a novel about productivity strategy.
If you want to understand productivity, you should read Mavis, which is now available on Amazon. We also released The Strategy Journal, which guides readers, step-by-step, to understand the problem, develop a structure, develop hypotheses, design the tests for the hypotheses, track daily and weekly tasks, plan the message for your team and manager, manage the project, guide you through critical update meetings, calculate the benefits case to convince your colleagues and start the pilot implementation of your recommendations.
Both books are available on Amazon! If you end up reading Mavis, loving it, and supporting it with the review on Goodreads (and Amazon reviews are, of course, very much appreciated), email a link to [email protected] by the end of November (extended due to requests) and we will include you when we send out a gift to our most loyal readers (in December), which is one-month access to the accompanying course. If you end up reading The Strategy Journal, loving it, and supporting it with the review on Goodreads (and Amazon reviews are, of course, very much appreciated), email a link to [email protected] as well by the end of November (extended due to requests), and we will include you when we send out a gift to our most loyal readers (in December), which is one-month access to a different accompanying course.
New Release: Advanced Knowledge Management System
And the other big update that’s coming up is we are launching an advanced full-knowledge management system, which is going to have editable PowerPoint documents, including editable proposals (which can be downloaded as PDF) available as an add-on service to selected FC Insiders. But it’s much more than that. As many of you know, the ability to see a complete study, use it as a blueprint for the work you are doing is often a difference between not only whether you’re a successful consultant, but whether you’re successful in industry. Same with proposals.
It’s one thing to want to meet a client about strategy.
It’s another thing to know how to sell it and to see a blueprint.
So let’s see how this new Monday Morning 8 a.m. format goes. Every week we will look at 3-4 themes, or one theme and 3-4 subthemes. What are the big stories and what are the big implications. Let us know if you like or dislike the style.
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Have a great week,
Kris & the rest of FIRMSconsulting team
P.S. Interested in sponsoring Monday Morning 8 a.m.? Email [email protected] and let us know.
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