This Will Definitely Leave a Scar
With the market turmoil we have been facing in the aftermarket, it has become especially difficult to answer the boss’ question: ‘What’s our plan… what’s next?’
Even though I have been in this business for hundreds of years (at least that’s how it feels), I confess that not only do I NOT know, I’m not even sure how to attack it. But I think that I can draw a circle around the range of approaches:
“Hurricane Cone” … If you watch TV weather… even the real stuff on the Weather Channel… you find a perfectly reasonable approach to dealing with too many independent variables, interacting too intensely with only estimated directional and fuel components, no known time horizons and no useful historical data… like a tropical storm.
As my partner Bruce Merrifield (even after Harvard Business School and advanced math, probability and statistics) admits, “uncertainty reigns.” The weather scientists have to resort to calculating ‘confidence limits.' These are represented on a map as a cone shape emanating from a single point (NOW) and applying numerous computer models to try to determine the most probable paths, Never a prediction of the five-day course of the storm.
“Bullshit Storm” … If instead, you prefer to spend a lot of money to discern trends, there are tons of researchers/consultants/charlatans who stand in line to take your money. They employ tools ranging from phenomenally complicated algorithms to absolute witchcraft or gut feel. I generally group academic economists in this crew. You don’t get a map or a chart… you are just as likely to get something like this high-level analysis: “Broadly speaking, our view is that the macro narrative will transition from the tailwinds created by the now fully-priced stimulus measures implemented—along with the developing reopening of the global economy—to one focused on headwinds created by a second wave of economic stress, which is amplified by heightened geopolitical and societal disruption risks and a near-term slowing of both monetary and fiscal support.” This sentence is from an actual report! Expensive! Certainly reassuring enough to help you sleep.
Two completely different approaches: one somewhat actionable and the other just to pay someone’s club dues. Knowing and planning are based on admitting there are holes in the info boat and working with or around them. I think we can see four macro trends starting. Recognition and analysis of these threats to each individual company or circumstance may save a lot of management time: Destabilization, Acceleration, Destruction and Timing.
Destabilization—Never before has this country exhibited the current level of lack of trust. Most government units (federal, state, local, foreign countries) are on financial life support, borrowing wildly or running the printing presses to simply print more currency. This can’t end well, and an increasing number of citizens are starting to realize this. The debt tsunami (and its social and commercial consequences) is the greatest future threat we will face.
This uncertainty has surfaced in other relevant organizations. Government, politics (Trump or Biden), corporations, religious faiths… even trust in the absolute truth of the Internet… has been shaken, perhaps irrevocably.
In business, this instability will start a series of truly revolutionary changes: functional organization and channel agreements, longstanding personal relationships and education requirements will whipsaw the 75% or so of the still-employed workforce. No position is a given.
Acceleration—whether technology or social habit, change will happen at unimagined speed. Already, the COVID-based distortions have shortened adaption and adoption cycles by years. Online education went from mostly theory to actual (but not at all universally effective) in a fraction of expected time. No time was allotted for training teachers or students. How about some AP Calculus or conversational German online?
“eCommerce behavior trends have accelerated five years in 75 days,” according to Merrifield. “This speed is dictated by Amazon or the fear of Amazon.” While the use of Zoom, Instacart and other ‘newfangled’ tools has expanded, their technologies are, by the new timeline, quite old: video calls, discussion boards, chat, shared online documents have hardly changed in years.
Their current rate of (untrained) deployment is insane. Last-Mile alone has arrived as a full-grown market. As a share of the total cost of shipping, last-mile delivery costs are substantial — comprising 53% overall. (Nevertheless, how would you like to be the exec at grocery delivery pioneer, Peapod, who abandoned service throughout the Midwest in February?)
Studies find that companies that are thriving focused on five key enterprise innovation decision points: Progress, Adaptation, Timing, Human+machine interface, and Strategy. Imagine trying to give each of these proper attention in traditional planning processes. This may well signal the end of committees and their endless meetings! We can dream.
Working from home was, for many, just a distant dream. M.I.T reported that 50% of those who were employed as office-based before the pandemic were now working remotely. That’s a significant increase. Pre-Covid the figure was about 15 percent. In 2018, a U.S. Census survey found that just 5.3% of Americans worked from home full-time.
Destruction- We used to talk of the need for occasional ‘creative destruction’, the practice of radically revising process, product or market approach. The term was coined by Joseph Schumpeter (1942), who considered it 'the essential fact about capitalism.' Lots of books, consultants and biz school courses hope to give guidance.
A quick Internet survey of available advice yielded no ideas that might be useful in this type of stress. In fact, most references to the term were connected to video games!
Nonetheless, if six months ago, you had said, ‘We’re going to give you a few weeks’ notice, and then you’re going to have your whole work force working from home,’ I would have said: ‘You’re insane. There’s no way it’s possible.’
Destruction is showing a world of unexpected consequences. In some major, high rent cities, the idea of the sprawling office campus is in trouble, as is the automatic assumption that getting a dream job in San Francisco means paying millions of dollars for a three-bedroom ranch! The rush to update antiquated home loan terms is really heating up.
Shrinking real estate costs can’t be ignored. With fewer employees in-house, firms can shed space. Already, the U.S. Patent Office found “real estate savings were immense” — fully $38 million. For the vast majority of businesses, the coronavirus situation is an opportunity to completely rethink who are the really important employees and just how much office space is really needed. There are a lot of businesses that are currently unable to pay their monthly rent. In some cities, only 50% to 70% of commercial tenants paid their rent for the month of May.
I still believe that the aftermarket will lose 35% of all physical locations…retail, service, distribution, dealer and supplier branches. The news stories about ‘not opening again’ have mostly been applied to bars and restaurants… don’t forget small jobbers, welding shops, used vehicle lots or collision centers.
Owners of commercial buildings won’t pay their mortgages, taxes, insurance, maintenance and other ongoing costs. Most commercial buildings have some type of mortgage. This is going to create a huge cash flow problem for the various individuals and entities that own these properties. It requires little imagination to envision the need for a massive, bank-led restructuring in the commercial real estate market as defaults accelerate in big cities and small towns alike.
Timing— The International Monetary Fund recently pronounced “This is a crisis like no other and a recovery will be like no other.” Feel better? This tangle of change can certainly trigger a permanently chaotic ‘current state’ (for our lean thinkers). A few examples:
· Delay in vaccine development and lapsing of government unemployment payments cause dollar printing excess, which in turn will trigger inflation and further social unrest.
· Electric vehicle investments (all sizes) create a ten-year boost in implementation.
· 30% jobless level scrambles educational programs and individual career expectations.
And so it goes (or doesn’t). A simple mechanism that is helping me understand the many possible futures is the double pendulum. A pendulum (a string and a weight) is attached to the bottom of another. [For a great illustration of the double pendulum, click (control) here.]
Slight changes in the initial condition of the pendulum — say it starts swinging from a little higher up, or the weight of the pendulum balls is a little heavier, or one of the pendulum arms is longer than the other — lead to wildly different outcomes that are impossible to predict. Try it. This exercise will clarify the difficulties in predicting both the direction and timing that may unfold. Note: to drive yourself batty, try to get two of these to exactly copy the other.
Thinking about the future of the pandemic, the economy, social conflict or politics means wrestling with incalculable uncertainty, both personally and as an industry. It also means dealing with what’s not likely to happen:
· The virus disappears in the next several months.
· Debt swaps magically reset the world’s banking system, along with personal and small business credit obligations.
· Everybody suddenly embraces the different peoples of the world. (Hell, I’d take the people in just this country!)
Really the only investment to create and ensure maximum survivability is in FLEXIBILITY in every possible decision. It may mean lease vs. buy, out-source vs. in-house, debt vs. equity or offensively expanding vs. defensively contracting. No real rules…Nothing is ‘like it was.’
It won’t ever be.
70th Anniversary of the Korean Conflict June 25, 2020