Check your assumptions

(Read the following quote in Forbes, October 5, 1998, written by Peter Drucker) "As we advance deeper into the knowledge economy, the basic assumptions underlying much of what is taught and practiced in the name of management are hopelessly out of date... most of our assumptions about business, technology and organization are at least 50 years old.  They have outlived their time... Get the assumptions wrong and everything that follows from them is wrong."

Last week, former Reserve Board Chairman Alan Greenspan admitted to Congress that his assumptions about financial services and the products being offered, including credit default swaps (CDS), were wrong (read article here).  As a result, what he thought would happen in the financial markets - from interest rates to equity prices to currency values - turned out to be wrong.  Unfortunately, this helped create the opportunity for runaway leverage and the banking meltdown which has affected world trade since early September.  When leaders operate with wrong assumptions, the price paid by everyone can be pretty hefty.

The reality is that pretty much all leaders work with assumptions about business that are very country specific.  The impact of global knowledge transfer - of worldwide information at a moment's notice - of labor arbitrate happening in hours - and the immediacy of financing and financial reactions - is still not well understood by leaders trained in an earlier era.  Thus leaders under-recognized the speed with which manufacturing jobs could move around the world - as well as the speed with which IT services could move to lower cost markets.  Even though the current Federal Reserve Chairman (Dr. Bernanke) is a student of America's Great Depression, what he doesn't understand is that Depession happened in an isolated way to the USA.  Today, globalization means that problems with U.S. banks becomes a problem globally.  For all his studies of history - things in financial services have fundamentally shifted.  His assumptions are, well, often wrong.

In November there will be an economic summit.  Some are referring to it as the next "Bretton Woods" - a reference to the meeting in New York which determined how foreign currency exchange rates would be set and how banks would interact between countries (read about the summit here).  Yet, there are others who say no changes are needed.  But let's get real.  Of course we need to rethink how our country-based banking system works in a world where insurance companies and hedge funds often move faster and have more ability to affect markets than traditional banks.  In the 1800s banks in the USA issued their own currency - and then states issued their own currency.  Eventually this disappeared to federal currency.  So, do we now need a global currency?  With the change to the Euro in Eurpope the need for individual country currencies took a step toward unnecessary.  Should that trend continue?  You see, it's easy to think about the world using old assumptions - like a U.S. dollar as independent of other countries - but does it make sense in a world where products and services are supplied globally and governments (such as India and China notably) now manipulate their currencies to maintain price advantages?

On Friday evening a "guru" on ABC's Nightline was talking about the wild swings on the New York Stock Exchange and the NASDAQ.  He commented "the only way to get hurt on a roller coaster is to get off.  So hold onto your equities and keep buying."  Give me a break.  A roller coaster is a closed system.  Even though it goes up and down, you know where it will end and the result.  WE DON'T KNOW THAT ABOUT EQUITIES TODAY.  Many, many companies we've known for decades could disappear (GM, Ford, Chrysler are prime examples).  Just like Lehman Brothers disappeared, and AIG practically so.  If you were an investor in common or preferred equities of Freddie Mac or Fannie Mae, your "roller coaster ride" did not have a happy ending - and you would obviously have been a whole lot smarter to have jumped off.  You may get bruised, but that would have been better than the disaster that loomed.

It is critically important to check assumptions.  This is not easy.  We don't think about assumptions, they just are part of how we operate.  That's why now, more than ever, it is incredibly important to do scenario planning which will challenge assumptions by opening our eyes to what really might happen.  Because you can never assume tomorrow will be like yesterday - not in business.  To survive you have to constantly be planning for a future that can be very, very different.  Doing more of what you always did will not produce the same results in a shifting world.  Planning for future shifts is one of the most important things managers can do.

Comments

[Nancy Munro]

I think your analysis of forcing us to even consider global currency should be somewhat of a wake up call --- I'm sure many of us didn't realize the evolution that the US currency has gone through the econiic world as we know it was very different prior to the industrial revolution. It also makes sense that financial ripple effect is a global problem. So how do we know what to expect -- as you say we don't. Scenario planning is a great process but my suspeicians are that not everyone is skilled at doing this nor is management necessarily up for putting into action any plans as a result of the outcome from this exercise. Maybe you can provide us with some steps on how to do this and some of the guidelines for acting on the results of this process.