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Archive for the ‘Risk’ Category

Undervalued - Opportunity or Risk?

Tuesday, June 16th, 2009

Around the world, the term undervalued is gaining strength. There is undervalued equipment, buildings, and land. Buildings can be purchased for less than they cost to build just a few years ago. Businesses are for sale at “fire sale” prices. Today,” undervalued” is beginning to transform many industries.

Opportunity or Risk?

Of course, it depends. It’s somewhat analagous to going to a garage sale. “It’s only a bargain if you can truly need or can use it.” However, here is the fascinating part of the equation. “Undervalued” tends to be a greater opportunity, especially  for small to mid-sized businesses. Companies that are well run and have adequate capitalization can take advantage of destressed assets. But here is the bigger picture to think about, and it falls under the “Without Warning” umbrella.

If a company is able to purchase undervalued assets and put them to work, how does this change the competitive landscape? Can this become a competitive advantage?

China’s Silent Problem

Thursday, June 11th, 2009

If I were a newspaper boy trying to hawk newspapers on a street corner in New York City, my mantra might be, “Extra. Extra. Read All About It. China’s Exports Off  26.4%.” Yes, that was the news yesterday. China’s exports off 26.4% in May, when compared to a year ago. Now many economists and other smart people will place this under the moniker, “It’s the economy stupid” umbrella. And this might be the case. However, I’m convinced that a bigger problem lies over the horizon, and this problem is “Quality.” This is China’s silent problem. A problem they are avoiding, since much of it lies in the Culturism silo.

Let’s go back a decade or so and why companies started their sourcing frenzy from China in the first place. This excerpt is from Paul Midler’s book, Poorly Made In China.

Concerns about business risk weighed heavily in the decision-making process. What importers needed to know before they moved their business to China was whether the economy was safe. One important contributing factor was a changing perception of China as a low-risk environment.

There were still economies in the world where an importer could wire-transfer funds and find that the recipient and the cash had both disappeared. Importers who came to China were reporting to others that this sort of thing did not happen. Factories delivered the goods, and outright fraud was more rare than in other corners of the world.

Compared with other economies, China came to be seen as a sanctuary. Latin America remained a place where kidnappings by professional criminals was common. In other countries, you could at least count on having your luggage stolen. Vietnam, which was just next door to China—and which had even lower labor costs—was one of those markets where such stories of petty theft were commonplace.

 The common perception on the street at the time was that “Made in China” was due to low manufacturing and labor costs. In reality, “Made in China” was a hybrid of sorts. Low manufacturing and labor costs. And, it was a low risk country from which to conduct business. This “low risk” perception enabled small to mid-size companies to suddenly enter the import - export marketplace with relative ease, and of course low risk.

Today, “Made is China” is still regarded as a place where low manufacturing and labor costs exist. It remains a low risk country from which to transact business and send business executives to. However, it is losing its low risk moniker when it comes to quality. And this is the Silent Problem that is beginning to face importers in the eye. And as the Chinese export market has waned, quality issues are increasing and becoming more visible. From my perspective, here’s why they’re becoming more prevalent. Chinese companies that are dependent on exports are finding it increasingly difficult to maintain financial stability as exports have waned. Therefore, they’ve been forced to cut corners where ever possible, leading to persistant quality problems for many importers. This may be viewed as short term thinking, yet is one where much of the Chinese culture lives.

And this is why China has a Silent Problem of immense proportion. And if it continues, it begins to change everything.

 

A New Problem Being Silenced

Saturday, June 6th, 2009

The past year has been tough, especially on the banking industry. However in recent months, their balance sheets have stabilized and once again started to report profits. I’ve been leery about this dramatic turn around, and now I’m concerned. The banking industry may be intentionally silencing a problem, which is simply one type of silent problem. Bloomberg reports in Bank Profits From Accounting Rules Masking Looming Loan Losses. It states:

“With our capital and assets, stressed as they have been, we can go back to focusing all our attention on managing our business and restoring value,” Citigroup Inc. Chief Executive Officer Vikram Pandit said after Geithner’s examinations were completed. The revival may be short-lived. Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are…

Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. “The big banks’ profits were totally bogus,” says Weiss, whose 38-year-old firm rates financial companies. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”  Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston…

The financial collapse in 2008 was preceeded by years of silent problems that went unnoticed. Today however, everyone is looking for them with a vengeance. No one wants to be embarrassed again. However, just because these issues are now visible, it doesn’t mean that government and the banking industry won’t work diligently to make them silent again. Will the analysts allow it to happen, or will they be the vigilent watchdog we need?

What do you think?

Silent Problem Inside China

Tuesday, May 26th, 2009

In my book Without Warning, I refer to ISMs as a place where manysilent problems reside. In this classification, ISMs related to gender, race, generation and culture exist.  The challenge for the ISM category relates to how difficult they can be to dislodge. In effect, they’re engrained inside the organization, the culture, the society. And since they’re engrained, they’re difficult to dislodge.

Recently I was reading “The Economist” and came across the book review “Poorly Made In China” by Paul Midler. It states:

Factories will do anything to please. Prices are famously low and production cycles short. His clients returned from their initial trips to China stunned by how quickly factories became proficient and puzzled by how much could be done so well, so fast, so cheaply. They were right to wonder.

Most of Mr Midler’s work is coping with what he calls “quality fade” as the Chinese factories transform what were, in fact, profitless contracts into lucrative relationships. The production cycle he sees is the opposite of the theoretical model of continuous improvement. After resolving teething problems and making products that match specifications, innovation inside the factory turns to cutting costs, often in ways that range from unsavoury to dangerous. Packaging is cheapened, chemical formulations altered, sanitary standards curtailed, and on and on, in a series of continual product debasements.

The first line of defence against compromised products are the factory’s clients, the importers. The moment they begin suspecting a Chinese manufacturing “partner” and want to discover what might be unfolding is the moment they become particularly eager to find people in China like Mr Midler. That suggests they want information. But, as Mr Midler discovers, they are finicky about what is found. When suspicions turn out to be reality, all too often they become unhappy—miserable about resolving something costly and disruptive, yet terrified about being complicit in peddling a dangerous product. This is particularly true if the problems could go undetected by customers. Better, to some extent, not to know.

It’s the last paragraph that spells out the Silent Problem phenomenon and the “why we avoid” stigma. A place where problems reside unsolved and often times, morphing into a new and higher form. When they’re unleashed, they’re commonly toxic. So if you’ve been following “Made in China” news in recent years, you’re likely not surprised that China has strong cultural underpinnings. After all, its a culture steeped in history dating back thousands of years. Yet I find it surprising that many companies look at the cost side of the ledger, while avoiding the risk side. To avoid a Without Warning event such as lead tainted paint in toys, companies must look at both sides of the equation. Risk & Reward. Unfortunately, many companies are just now beginning to understand the risks.

Although I have yet to read Poorly Made in China, this excerpt adds context to this important subject. And if the quality drift is cultural in scope, changing it will be difficult for companies to a achieve.

A Problem That Is Already Half Solved

Thursday, May 7th, 2009

Southwest has and continues to be a much admired airline and company, despite its recent economic downturn. They have been a leader on so many fronts, especially as relates to moral and empowering employees to do whats right. Yes, Southwest reinvented the airline industry. So I was surprised when I read a Bloomberg article titled, “Southwest Slows Growth as Slump Dents ‘Golden Shield.’” This was my special nugget as relates to Silent Problems.

Southwest’s losses have been due in part to its strategy of locking in fuel prices in advance, as far out as five years. Masterminded by Kelly, the contracts helped ensure profits as prices rose. They became a liability when fuel rates tumbled 65 percent last year after a July 3 record.

In December, Southwest replaced its hedging contracts to minimize future losses. It has since resumed hedging, and now goes out only as far as 24 months.

‘Dangerous Competitor’

One of the neat things about Southwest is that they have problems, but they recognize them,” said Michael Boyd, president of aviation consulting firm Boyd Group in Evergreen, Colorado. “That means the problem is already half solved. That makes them a very dangerous competitor.”

Wow. Words of sage advice. Yes one of the goals of being a leader is to position your organization to become a “Dangerous Competitor.” And one of the best paths to becoming a “dangerous competitor” is to simply solve the problems that your organization interfaces and deals with on a daily basis. Avoid the desire to avoid. Tackle those tough problems up front. And put the problems behind without fear.

In my book, Without Warning, I present why problems are avoided, and why that’s Dangerous. Secondly, I discuss how problems that are avoided rarely fix themselves, but more importantly, how they morph and turn toxic over time. And third, why silent problems tend to be the most dangerous problems of all. Because when they finally surface, they in effect become a Without Warning Event. This is why this book is essential reading to everyone striving to become a dangerous competitor.

Are you up to the challenge and the task?

Mr. Madoff, you’re no Warren Buffet

Saturday, March 14th, 2009

Oftentimes, the best way to understand and appreciate a system is to expose the extremes.  When it comes to the financial community, Madoff and Buffet are on the opposite ends of the spectrum.  Although their ages and prominence up to six months ago were similar, in reality they were opposites.  For instance:

  • Madoff lived in a NYC penthouse, living the lifestyle of a billionaire.  Buffet lives in a small house in a quiet Omaha neighborhood.  He is a billionaire living the lifestyle of the middle class.
  • Madoff’s non-existent trading strategy was constructed around secrecy and lack of transparency.  Buffet’s strategy is based on value investing, where everything is transparent.
  • Madoff preyed on his victims by being highly exclusive.  Buffet’s Berkshire Hathaway was open to the public if you could afford the admittance price of $100,000+ per share.
  • Madoff spent, spent and spent money to support his lifestyle.  Buffet plans to donate most of his wealth to charity, through the Bill and Melinda Gates Foundation.

The constrasts between these two financial icons are Black and White.  And yes, Bernard Madoff was a Black Swan, and Warren Buffet the night in shining armor.  Be careful, who you trust your hard earned money with…

Food Safety at a Crossroads

Friday, February 27th, 2009

Human nature would like us to believe the incident involving Peanut Corporation of America (PCA) was an honest mistake.  It wasn’t.  The salmonella outbreak involved deception, cover-ups, and lies, where numerous warning signs that something wrong existed.  In the book, Without Warning, author Rodney Johnson describes such an event as a silent problem, a problem that is being avoided, neglected, and in this case, intentionally silenced.

 As is common, when a silent problem is present, individuals closest to the problem know a problem exists.  For example, leaky roofs and a multitude of unsanitary conditions were present at PCA.  And several inside the company knew it had shipped product that initially tested positive for salmonella. 

 What’s the solution? 

 This might seem obvious, but we must realize government oversight will never be the only solution.  The first line of defense must lie in creating programs that empower employees to do what’s right.  This is detailed in the book Without Warning where it states that the first tactic must be to make the problem visible.  This could be achieved by creating a 1-800 whistleblower hotline for employees at any FDA regulated food facility to contact.  The second tactic would make the problem memorable.  I’d recommend the FDA create a series of films, posters and a website informing employees what would be considered an unsafe food environment.  The third tactic would provide the FDA direct access to all testing results from approved laboratories, which they do not have today.

 Only when the government empowers its citizens to do what’s right, will stories similar to PCA be avoided.

Failure DENIED

Thursday, February 26th, 2009

It’s almost been a year since Bear Stearns hit their speed bump head on.  With the thoughtful oversight of the Federal Government, it was brokered, and the entity saved.  Then along came AIG, CitiGroup, Fannie Mae, Freddie Mac and others.  The only one allowed to fail was Lehman Brothers, which most believe was a huge mistake.  Today, more and more companies are bellying up to the “too big/too important to fail” trough.

Is this a trend?

One thing we must realize in this unfolding story is the importance of the media and PR.  It shapes  perception, policy and now the economy.  Yes, the economic stimulus is analagous to Willie Sutton’s famous response to the question why he robbed banks.  Sutton’s said, “Because that’s where the money is.”  Today we realize the banks no longer have the long arm on the money supply, its the Federal Governement.”  And if your business or industry is challenged in the current economic environment, you need to navigate your way to where the money is, a.k.a. the Federal Government.  But here is where this big pot gets really dicey.  You need to talk their language.  What is that language? It’s simple.

  1.  Jobs - save them regardless of the price
  2. National Security - energy, defense…
  3. Too big to fail

So as you scour vaious media, you’ll begin to see how companies are positioning for bailout and stimulus funding.  But more importantly, in too many instances the government will play an evolutionary role with some stamped, “Failure DENIED” on the paperwork.

Success, Risk and Failure

Saturday, February 21st, 2009

The economic crisis is cascascading across geographical boundaries, and across organizations and their core competencies.  Right now, a heads down, do not fail attitudue is becoming pervasive.  Is this a silent problem?  Is this prescription worse than the disease?  Will our ability to survive to tomorrow inhibit our ability to survive into the future? 

Unfortunately when it comes to innovation, a direct link between risk, failure and success coexists.  One might even say, a codependency between them is present.  Here is a video from Honda worth watching.  It illustrates that out of the shadows of adversity, success often triumphs in ways we never thought possible.

 

Be the one to see it coming!

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Without Warning - Rondey Johnson

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