The Road Ahead: Nixon-Carter Redux?

November 24th, 2009

We are consulting economists to owners of small businesses.

We got this work doing turnarounds and workouts during the 70’s and 80’s.  From that experience I began to doubt the conventional criticism of small business:  that it was poorly managed and under capitalized.  I knew more than a few smart owners who nonetheless lost large amounts of money.  These owners had sought advice.  It wasn’t bad advice for the time.  The experts had done their homework:  the decision was good.  Only later after the decision fell apart was the owner accused of being a hip-shooter and poor one at that.

The 70’s were the era of Nixon-Carter:  a time defined by those two very smart people.  High inflation, ABM, higher interest rates, energy prices, devalued dollar, export explosion, high unemployment.  Our only certainty was that times would never be good again.

It is easy to say now it wasn’t that way.  But then the prevailing wisdom featured population disaster — Paul Erlich.  Conference of Rome in1974 declared we were running out of everything, the environment was destroyed — all downhill from here.  A decade framed by Vietnam and Iranian hostages.  But Erlich didn’t foresee Norman Borlaug’s short wheat; Rome did not foresee the Reagan-Clinton boom.  The doomsayers were wrong.

You see, sticking to the facts is not the same as seeing what comes next.  Even when we see the present reality accurately, it may be said the pressure of present reality creates an opposite reality.  The best minds in business quickly forget that the future is never reliably a mere extension of the present.

It took me a while to figure out how smart money can be so reliably wrong.  It has taken just as long to find how to fix it.  But by the late 80’s, at the height of the S&L crisis, not only could we avoid disaster, we knew how to profit from its anticipation.

Peter Drucker wrote about the 1997 Asian crisis.  He said it was clearly foreseeable a year in advance, and had warned of its imminence.  A year is enough time to duck and enough time to profit.

Predictions are entertaining.  We don’t do prediction.  We do foresight.  Predictions are entertaining generalizations.  Foresight is the hard work of making sense of risk and opportunity achieved through pragmatism and humility.

So how come we don’t see?  Too busy?  Too many problems?  Dumb?  I don’t believe it.  Greedy?  Too easy to say, who doesn’t want more!  We miss things in part because we view management as the highest function in business.  Therefore, we misunderstand management.

Simply put (as simply as I can get it): managing is gathering, analyzing, and deciding the facts.  This very process is necessary but shortsighted.

Foresight is about the future.  The future has no facts.

Drucker described management as inherently (not necessarily) introverted.  Drucker believed that outside data was the key to foresight.  Managers overwhelmingly relied (and still do, in my experience) on inside data, much of it purely financial.  Drucker urged the big guys to look outside; his advice was mostly ignored.  You and I couldn’t take the advice.  We couldn’t afford the computers in 1970 or the data entry costs, and we didn’t have the tools to interpret what we saw.

Two things happened in the Nixon-Carter era that would change it in time: the Intel 4030 and the internet.  By the turn of the millennium computing was cheap and a world of data was available at ones fingertips.    My son and I finished the third piece — knowing what to look for and how to handle it.

You see the compelling lesson of the 70’s & 80’s, and the source of my obsession, was that most crises that led to the workouts and turnarounds I effected did not have to happen in the first place.  The prevailing expert advice lacked foresight.  Being factually- (not future-) based, it is the advice that tends to prevail.  But of all those involved in a major decision, only the owner has to live with what is NEXT, what is beyond today’s facts.

Is that clear?  You, the owner, bear far and away the greatest cost of being right about the present and absolutely wrong about the future.

This is my experience:  data interpreted by economic theory make us see what is yet out of sight; seeing past today’s facts wins.

Foresight is seen as having no factual support, as lacking management credibility.  And as Larry Bossidy, retired Honeywell CEO, said, facts are the highest form of management.  As it happens, I think he is inadvertently right about facts and management.  I doubt he intended it this way, as he makes management a bit player.

But a bit player it is.  There are no plans without change, and no foresight without purpose:  these are the province of the entrepreneur.