The Good, the Bad, and the Potentially Ugly

The sheriff rode into town the other day to speak to a combined meeting of my three TEC groups.  The sheriff, in the persona of economist Brian Beaulieu, didn’t need no “stinking badges.”  His credentials in terms of forecast accuracy and suggested actions in anticipation of turns in the business cycle preceded him across TEC nation.  He began predicting, for example, the recession of 2008…as far back as 2003. 

Here is what he had to say this time. 

The Good.  There are two to four more quarters of positive growth left in the current recovery in the United States.  The Federal Reserve’s QE3 policy will continue to stimulate the economy.  Employment will continue to rise.  The consumer will carry the day once again.  Retail sales will be good for Christmas 2012.  Ho-ho-ho. 

There will be a recession in 2014.  Not a bad one.  And liquidity will not be an issue.  Interest rates will remain low…because Dr. Bernanke said they would.  The bond market will continue to absorb inflationary pressures.  The mother of all price bubbles, however, is festering in the bond market. 

The private sector is doing quite well, thank you.  Beaulieu asked for a show of hands and found almost every TEC member company in the room was making money.  More than half were experiencing record profits.  Most companies are lean and well positioned to survive the downturn in 2014 in reasonably good shape. 

2015, 2016 and 2017 will be good years for the U.S. economy.  Unemployment will continue to be high, however.  Structural unemployment has increased to 6% from 4%.  The Fed’s unemployment target has increased to 7% to 7.5%.   

To Brian Beaulieu, a self-proclaimed, non-normative economist, it didn’t matter who is elected president in November.  The president of the United States has little control over the economy in the first 12 to 18 months of his presidency.  Beaulieu didn’t buy into the argument that businesses were holding off on making profitable investments pending the outcome of an election. 

The Bad.  There will be a serious downturn in the economy in 2018.  According to Beaulieu, there is a 90% probability of a precipitous stock market decline beginning in 2017. 

We will begin to experience systemic inflation over the long term.  Inflation will pay off the nation’s debt.  And QE3 is currently creating global inflation.   

Austerity measures, i.e. decreasing the rate of increase in government spending, will slow the growth in GDP and reign in the economic recovery of 2015, 2016 and 2017.  Austerity hurts. 

While there is no “fiscal cliff” lurking out there in 2013, there will be a slow erosion of GDP growth.  Part of the erosion might be attributed to the expiration of the Bush tax cuts and the potential implementation of sequester-related spending cuts.  Federal spending is projected to rise by $1.7 trillion without sequester cuts between 2013 and 2021. Federal spending increases $1.6 trillion even with these automatic cuts over the same time frame.  Big deal.  Taxes are going to go up either way…through rate increases or deduction limitations.    

The dollar will continue to be the world reserve currency.  Labor costs are projected to increase 15.5% over the next five years in China.  Relatively low political risk in North America combined with relatively low but rising interest rates make capital investment look positive for the United States, Mexico and Canada. 

The bond market is the problem.  The bond market is the big problem.   

To make matters worse, most TEC members agree that bonds are the least understood financial instrument in their prudently invested portfolios.  Beaulieu cautioned against bond funds that will come under price pressure as interest rates increase.  He cautioned against non-tax backed municipal bonds and high yield (junk) bonds.  He worried about the ill-liquidity of bonds at a time when investors needed access to cash.   

The Potentially Ugly.  According to Beaulieu, there will be a depression that begins between 2025 and 2030.  This depression will last for a decade.  Statistically, The Great Depression lasted from 1929 to 1934; although the recovery did not take hold until 1941.  About a decade. 

Beaulieu did not despair on this projection or any other piece of “the Bad” discussed during his presentation.  He repeatedly made his point that this was America.  The people in the room were Americans first; and then, entrepreneurs.  He urged his audience to do what every other generation of entrepreneurs did in good times or bad.  Make your move.  If your company has been around a while and you are dependent on a tired, old product or stagnant market, start something new.  Figure it out. 

If you don’t have the drive or the years left to retirement, sell your business to someone younger who can figure it out.  To Brian Beaulieu, business cycles are business cycles.  Nothing can stop the entrepreneur…except the entrepreneur. 

Brain Beaulieu’s new book, Make Your Move: Change the Way You Look at Your Business and Increase Your Bottom Line, includes a methodology for determining your internal corporate business cycle and prescriptions for dealing with the inevitable ebbs and flows of business.   

Dennis Ellmaurer is a management consultant who works primarily as a TEC chairman, leading three CEO mastermind groups in southeastern Wisconsin.  He can be reached at 414-271-5780 or dennis@globenational.com.     

Ready, Aim....Follow Through

My fiancée and I recently completed a hand gun training and safety course. Our instructor, Craig Turner, is a police officer. Mr. Turner also teaches other police officers how to shoot hand guns.

Mr. Turner taught us the basics of hand gun safety. Important concepts, such as, the gun is always loaded. Know what is in back of your target. Your finger doesn’t go on the trigger until you are going to shoot. And know, when you pull the trigger, you are going to do some serious damage.

From a technical standpoint, Mr. Turner taught us the concept of “ready, aim, fire and follow through.” In business, we have heard of “ready, aim, fire” or, if you prefer or you’re Ross Perot, “ready, fire, aim.” Even though the trigger had already been pulled and the bullet was in the process of exiting the barrel of the gun, it was follow through that made all the difference in the accuracy of the shot.

The similarities in business are striking. Business leaders spend countless hours on planning. They might bring in a facilitator, hold off-site planning sessions, and come back with something akin to a leather bound business plan….that never gets implemented. Like with hand guns, it is the “follow through” that differentiates companies that get things done from those that simply dither along through another useless planning cycle.

So why is getting things done so difficult in a typical organization. B. Chuck Ames, president of Reliance Electric Company described one of the problems of failed execution this way in the article Basic Management Concepts.

“No one should ever be pressured (or allow themselves to be pressured) into making unrealistic commitments. But once commitments are made, they should always be fulfilled. The good manager knows that most commitments are broken because of a sloppy attitude that always manages to find a rationale for failure. For this reason, good managers insist that all commitments be met. It makes no difference whether the commitment seems trivial, e.g. to return a phone call or pass on certain information by a certain time – or crucial, e.g. to meet a project completion date or achieve planned sales or earnings results. It must be met once it has been made.”

To shoot better or get things done in business, follow through is omnipotent. If you would like a copy of the complete B. Chuck Ames article or Mr. Turner’s phone number, please contact me. I will be sure to follow though on your request.

Are CEOs Idiots?

Kodak’s CEO tells 17,000 employees the only option for the 131 year-old company is to file for Chapter 11 bankruptcy protection. The company had 64,000 employees in 2003. Research In Motion fires its co-CEOs after the maker of BlackBerry loses $30 billion in market cap. Sony, Panasonic and Sharp, the trifecta of the Japanese consumer electronic industry, lost a combined $17 billion in 2011. Are the CEOs of these once great companies total idiots?

Before going too far, let’s add some local flavor to the stew. What the heck happened to the likes of some of these local boys?

- Joseph Schlitz Brewing Company

- Allis-Chalmers Manufacturing Company

- Schuster’s Department Stores

- Strong Funds

- Midwest Express Airlines

- M&I Marshall & Ilsley Bank

- Please insert your favorite corporate debacle here.

Were the CEOs idiots? How did these fabulous business blunders occur? We may never know exactly. But here are a few suggestions.

- Bad Strategy. In the end, what was Midwest Express anyway? A high-end, “best care in the air” corporate travel airline or a no frills, discount alternative to a bus? Customers were confused. Employees were confused. Vendors confused. Shareholders? Confused and left holding the lost luggage.

- Rotten Execution. In an effort to cost cut its way to prosperity, “the beer that made Milwaukee famous” changed the brewing process and started using cheaper ingredients. Not only did the reformulation change the flavor and consistency of the beer, the new Schlitz had a shelf life of about a day and half. Customers noticed. Can you say Budweiser?

- Blame Game. “We were making so much money, we just couldn’t quit.” Those pesky housing bubbles in Arizona and Florida were the problem. What a nice, conservative mid-western company from Milwaukee was doing in high risk, high reward ventures way outside its market area is another question. But for crying out loud, the M&I was a bank!

- Trends…Unforeseen, Denied, Misunderstood and Delusional. Kodak is an easy target here. An electrical engineer at Kodak literally invented digital image capture technology in the mid-1970s. How did the six Kodak CEOs since the ‘70s screw it up so badly?

The four bullet points listed above are certainly not all encompassing. And there is almost always more than one reason for the failure of the CEO to respond appropriately to the challenges of running a business successfully over a long period of time. How to improve the odds? Some suggestions.

- The Reality Check. My guess is the CEOs of some of these failed companies would have been better served with a strong board of directors that knew when and how to challenge the strategic thinking of the CEO. Absent a board, some CEO peer groups, like TEC, are designed to “question the answers” of the CEO. One of my TEC members employs a designated “BS Detector,” from outside the company during the strategic planning process to help the group avoid delusional thinking.

- People. People get things done. Weak management teams don’t. Failure to put the right people in the right jobs is bad. Failure to deal with people problems – fast - is worse. Jim Collins’ bus analogy of the right people in the right seats is well known. It should be pointed out, however, that CEOs need to get the wrong people out of the seats and off the bus before the new folks can get on. CEOs usually have an inner sense about weak people on their teams. They sometimes refuse to see it and deal with it in a timely fashion.

- An Intentional Culture. There is a real nice company down in Racine, Wisconsin that does not allow its people to say stuff like “I didn’t make plan because of (fill in the blank).” Or “I failed to fulfill my commitment due to (some circumstance beyond my control).” Realistic commitments that are made, are kept. No excuses. One TEC member CEO eliminated the words “hope” and “luck” from his company’s corporate lexicon, as well.

- Apply The Trends to Your Business. TEC Resource Specialist Adam Hartung suggests analyzing the mega trends eight years out. He recommends the intentional creation of “white space” disconnected from the business for innovative thinking. Get people outside the box. Then, have them think.

Truth be told, even the CEOs who really mess up aren’t idiots. CEOs are people. They make mistakes. They fail sometimes. Some learn and get better. Some don’t. But as long as we have human beings running corporations, there will be room for improvement.

CEOs and Divorce

I have a couple of divorces going on now. Over the years, it seemed to me that I had a divorce going on with at least one of my members at any given point in time. With three TEC groups and 45 members in total, one might expect some “normal” percentage of member marriages to be headed for the rocks.

I wondered, however, if CEOs were more likely to experience failed marriages. The stress of the job. The time commitment. The travel. The temptations. Might they all add up to a higher percentage of divorce among CEOs?

An informal survey of my colleagues, however, revealed no evidence to support the proposition. It was, by and large, the position of other TEC chairs that CEOs were no more or less likely to have a marriage end in divorce. It also appeared that a fair number of CEOs remained in unhappy marriages. This would be similar, I suspect, to the married population as a whole.

There was, however, one common thread among CEOs of privately held companies whose marriages had failed. It was the almost desperate need on the part of the CEO to “keep the company.”

When it came to splitting assets and negotiating marital property settlements, the desire of the CEO to retain his or her company appeared almost as strong as child custody rights. In many cases, CEOs seemingly ignored the valuation of the company and the recommendations their advisors. In the end, they wanted to keep the company. It was, after all, their baby.

The implications? Good divorce attorneys on both sides probably are well aware of the save-the-company phenomenon. It is certainly healthy for the CEO to recognize this financially irrational desire. With the supercharged emotion of a divorce, rational thinking has been known, sometimes, to take the back seat.

Competent legal advice and strategy can help. Trusted advisors, like the peers in a TEC group, can assist. In the end, however, it is the CEO in the divorce who must come to terms with the reality of a fair marital property settlement and the need to keep the company. The evidence suggests that even in divorce, reality always wins.