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The Biggest Threat to Your Business
I think we can all agree we are living in pretty
interesting times. Just 3 months ago a barrel of oil
was trading at over $147. Today it is trading at
around $72, a 51% drop. Five months ago the
Dow Jones Industrial Average (DJIA) was over
11,000. Today it is around 8200, a 25% drop.
While watching last night’s final Presidential
debate one thing became quite clear. Both
candidates were strongly warning that failure to
enact their economic plan (only achievable by
electing them) would result in a Depression in the
US worse than that experienced during the
1930’s. What do all of these events have in
common? They are the result of the use of (or the
attempt to use in the case of the candidates)
emotion and reactive crowd behavior to make
important decisions rather than objectivity and
experience. Ask yourself, did the events of the
last 3 months really warrant the price of oil to rise
and fall by 50%? Ask yourself, do you really
believe that the market value of some of the
largest and long-term successful companies in
the US is worth 25% less than just five months
ago? Do you really believe that either of these
Presidential candidates will be able to enact
anything close to their respective tax cutting
economic plans given the current national debt?
What does all this have to do with managing your
business during these difficult economic times?
Plenty.
What is lacking in the above examples is the
ability of leaders and managers to maintain
objectivity and focus when it seems like their
market, or the world is either spinning out of
control or worse, entering a “new era”. Let’s
examine the components of these abilities and
look at some examples.
The Energy Crisis – Part I and II
Some of you may remember the previous oil
crises in 1973 and 1979. In both cases there were
widespread panic and calls for energy
conservation and achievement of energy
independence from foreign oil. At the time the big
three US auto makers embarked on a reactive
emergency product development program to
produce smaller, more fuel efficient cars. The
problem was because these were reactive and
panic driven development programs, the
development costs were very high and the quality
of the vehicles was poor. Anyone remember the
Ford Pinto or the Chevy Vega? Meanwhile,
despite the “oil crises”, the Japanese auto
manufacturers kept focusing on their core
strategy which had always been producing
smaller, more fuel efficient cars. Oil prices
subsequently plummeted in both cases and the
US auto makers reacted by shifting over to
developing and manufacturing minivans and
ultimately gargantuan SUV’s like the Hummer.
Meanwhile, the Japanese maintained their
primary focus on the smaller, fuel efficient auto
market. Now, in 2008 we enter the Energy Crisis
– Part III and the US auto makers are again
reacting and launching crash programs to
develop fuel efficient cars, including electrics and
hybrids. And as happened previously, the price of
oil is now plummeting. If the price of gasoline
drops below $2.50 per gallon what will the US
auto makers do next? The results of the above
leadership decisions:
• The US auto makers have:
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The Biggest Threat To Your Business

2. • Suffered major quality issues due to multiple
reactive shifts in their product development
strategies.
• Seen large erosion of their gross margin in part
due to inefficiencies of continually changing
product development strategies, market focus,
and ongoing quality issues.
• Weak balance sheets due to overall operational
inefficiency and poor return on capital investment.
• Loss of global market share.
The Dot Com Bust
I am sure you all remember the late 1990’s and
early 2000’s when companies with no revenues
and no profits had market capitalizations of
hundreds of millions or even billions of dollars.
We were told that we had entered a “new era’ of
business model where the valuation of a business
was no longer measured as a multiple of
revenues or earnings. I happened to be running a
semiconductor equipment company at the time.
The semiconductor industry had always been
notoriously cyclical and capital intensive. The
biggest trade show for the semiconductor industry
was held annually in San Francisco in July. When
I sat down at the keynote speech at the beginning
of the show in July 2000 the title of the
presentation was “Nothing But Blue Skies”. The
well known industry analyst went on to state that
the industry was in its highest growth phase in
history and there was no end in sight. He further
stated that the industry had entered a “new era”
where there would no more cyclicality as in the
past due to the emerging economies of the Far
East and the huge drive of the Internet. By that
October, the DJIA had dropped by 25% and
semiconductor industry had entered the worst
downturn in its history. The industry has never
recovered to this day.
Lessons Learned
The purpose of the above examples is not to
criticize the US auto industry or use the benefit of
hindsight to display my genius. Rather the
purpose is the encourage you to exploit and
utilize the power of objectivity and experience as
a strategic competitive advantage in times of
extreme stress. Some takeaways to keep in mind:
• Always keep updated on macro trends occurring
in the world in addition to your local industry
trends. Think about how these trends may affect
your market and your business before they
actually do. Sometimes the answer is that they
won’t! Don’t react to a perceived threat. Validate
it.
• Most events and trends are not really new. Use
your life experience and historical perspective to
look for repeating trends. Your awareness and
knowledge of the previous oil crises in 1973 and
1979 could have provided you with valuable
insight into how this latest crisis might turn out
(i.e. rapid price spike followed by rapid drop).
• Take a step back. Force yourself to look at the
big picture. Seek objective advice. Ask yourself: is
this a real long term sustainable change in
process or a short term reaction to a triggering
event that may reverse?
• Stay the course. Only change long term strategy
or direction if there is a compelling reason to do
so. Don’t chase trends based on temporary
triggering events. You can implement short term
low cost strategies to manage these.
• Beware of extremes. When you start hearing or
reading about “new eras”, “new business
models”, or extreme predictions (the next Great
depression) or movement in prices or supply don’t
just react. When every expert is predicting the
most optimistic or pessimistic scenario it is
usually an indicator of an inflection point (i.e.
Nothing But Blue Skies). Look for historical
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The Biggest Threat To Your Business

3. precedence and some sort of secondary
validation before launching expensive and risky
new initiatives in response to these.
• Most things don’t change quickly and stayed
changed. There is no question that over the next
decade there will be increased use of alternative
energy as a buffer against rising oil prices.
However, people will not rush out and start buying
hybrid or electric cars, solar panels, and wind
turbines en mass over the next year or two.
These technologies have been around for
decades and continue to improve but it will
probably take another decade before they are
utilized by the mass market. The same is
probably true in your market. Plan accordingly.
• Trust your gut. You know more than you think.
Read and watch the news reports but don’t let
them overwrite your own experience and
objectivity.
There is an old saying that “adversity breeds
opportunity”. Volatile economic and market
conditions will almost certainly result in the
emergence of new high growth and profitable
companies. However, this is often the result of
what the leading companies failed to do as much
as the genius of the emerging companies. So be
careful, the biggest threat to your business could
be you.
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All rights reserved. Reproduction without
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October 2008
The Biggest Threat To Your Business