No Room For Error

Our school system instilled the mentality that there are no losers and everybody wins just by participating. Well, this system is not sustainable when things get serious. Everybody does not win and if you do not perform, well sooner or later, your lousiness will catch up with you. This is exactly what we are seeing in the marketplace. High profile as well as average executives who had been flying under the radar are being called to the test. In a shrinking market, there will be losers, however how do we weed out the scapegoats in this case?

Some are celebrating the shakeout at GM and Chrysler. People seem to enjoy the government’s heavy hand on AIG and other institutions, but the concern is who will be replacing these? Who is willing to step up and risk their careers in this environment? History teaches us that when a solid regime is toppled (right or wrong), chaos follows. The communist regime in Russia and the Islamic extremism in Iran are good examples. I am not likening our system to these extremes but just removing people from their positions is not a good solution unless you have the replacement ready to go.

Remember how people hailed the toppling of Saddam, but we discovered later that the solution did not end there, that was barely the beginning. Well now, we see people hailing toppling of heads at corporate America, but do we have the right plan to implement the change. This situation reminds me of a discussion I had years ago with a young intern who truly believed that a two-month training would allow him to run a multi-billion dollar company with 14,000 employees. The reality is that it takes more than education, experience or charisma to be in the right job position and toppling people left and right is not a good way to resolve the problem.

Cartoon

With young kids at home, it is inevitable to end up watching (and sometimes enjoying) simple cartoon films. That’s what made me wish consumers would have SpongeBob’s attitude that consists of always being positive, focusing on the task at hand and not worrying about macro-economics.

Another feature that does not stop amazing me is the short-term memory consumers and investors have. It is almost comical just like Dory, that fish in “Finding Nemo” – here we go again, I guess with young kids my TV now is locked on the cartoon channel. Dory suffers from an extremely short-term memory where she forgets things she said or heard 10 seconds ago. Imagine traveling close to the speed of light and watching time on Earth at a rate of 1 year per second. All human beings would be acting exactly like Dory. It seems that every 10 years or so, the market goes through a big adjustment and somebody from space would be astounded by how stupid human beings are. How can you keep falling in the same trap again and again?

There are many explanations to that. Our survival instinct taught us to forget traumatic events after some time, which helps us move forward. We also need to forget some things in order to take additional risk. The downside is that we keep repeating what did not work in the past. And we never seem to learn that a downturn is a recurrent event that we have to use to be ready for better days.

Still on the cartoon subject, South Park ran a great episode about the economic crisis. Check out this short clip:

Click here to view the entire episode

Irrational Panic

Got back to my previous posts, especially the ones prior to March 10 (all links in this post refer to my previous posts). Some friends called me crazy when I suggested the DOW could jump by over 1,000 points in a week. Well, let’s put it this way, three weeks ago, if you were told to invest in the DOW and you will be gaining over 20% on your money in less than 3 weeks, what would have been the answer? Would you have seen the pendulum overshooting? Most people would have refused to believe it. That's the inverse of a Black Swan, or what I am calling a White Swan. That’s exactly what happens in a bubble (in this case the bubble is inverted).



This recent run might not be the comeback, but it is proof again that the market is governed by irrational emotions and that your business needs to profit from this downturn to ensure readiness for the tsunami effect.

Need What You Want?

Our consumerism mentality gives us the illusion that our wants are similar to our needs. A friend of mine who is a consultant asked my opinion about whether he should invest in an exchange server, a salesforce CRM solution and other IT applications. Keep in mind that this is a single person operation. He believed that he “needed” to spend thousands of dollars to ensure he has systems in place to manage and synchronize his different e-mail accounts, calendars, client portfolio and be able to access these from anywhere he wants including his laptop, a public internet browser or his BlackBerry. Once I helped him understand his business requirements, he was able to see that he already had everything he needed at his disposal. Sure it was not perfect, but again an expensive set of solutions is not guaranteed to be perfect either. Basically, his MS exchange account with 1and1 was good enough for his Outlook, gmail and BlackBerry. A free application from Google allowed him to sync his gmail calendar to his Outlook, another free application performed the same function with his BlackBerry. Finally, a free service from Soocial allowed his contacts to be synched between all three platforms. All that at the cost of less than an hour of his time, $6.99 per month for the exchange server, and a $1,000 bill for my advice (I did not charged him but I SHOULD HAVE).

In today’s panic mode and still remembering the internet bubble burst, companies are reluctant to spend more on IT. However, there is not doubt that IT remains key for strategic success. One cheap solution is to perform a holistic identification of business requirements and compare the findings to the functionalities of systems in place. A key question that companies tend to miss is what do you already have and what is necessary versus what is unnecessary. Surprisingly, you might find out that your existing systems already give you needed and necessary information that your management is not able to leverage due to inconsistencies or non-standard interfaces and reporting tools.

If you still believe that you do not have all the needed functionalities, the next step is to evaluate necessary versus “nice-to-have” versus unnecessary requirements. Spending should be focused only on achieving competitive advantage. Your decision should be based on obtaining those necessary functionalities that you do not have today.

Once you know exactly what is needed, the next abyss to avoid is overdesign. You should always seek simple solutions to get the necessary functionalities. The simpler a system is, the more flexible it will be and the less maintenance it would require.

Spoiled Kids"R"Us

Several weeks ago, a national news van parked in front on our office in Downtown Minneapolis in expectation of a snow storm that was to dump 6 to 8 inches. That’s when it struck me: When did snow in Minnesota become national news material! It snows here every other day and every winter temperatures drop below zero. A typical deviance from the mean is normal. Actually, if everything was exactly at the mean, then we should be concerned. People are horrified by an economic downturn which by no means should be considered historic. What is happening to the American culture? We built this country through hard work and hardship, so why are we wimping out on the first sign of trouble? It concerns me that we are moving from self-sufficiency to self-victimization.

Politicians pretend to understand what the “people” are going through by making such comments as “I had a tough childhood because my siblings picked on me”, or “I saw my parents struggle to keep our farm” and “it was always somebody else’s fault, we were just victims”. Listen to yourself. Do you realize how spoiled these comments are? To put it in perspective, as siblings, it was our job to pick on each others, that’s how you train in a micro-society to prepare for the real world. Compare your experience to growing up during the civil war in Lebanon and being picked on by different militia factions. How about seeing your parents struggle to find basic needs for their family while dodging sniper bullets. We had our house destroyed three times and no insurance or government helped us. Every time that happened, we picked ourselves up, moved on and rebuilt.

We hear that we want to change and grow our workforce, as long as somebody else is paying. Some politicians are even suggesting we work less to resolve the unemployment issue. I do not know about you, but last time I checked the 35 hour week that was implemented in France was a miserable failure. And finally, we are asking the government to help innovation and make businesses more nimble. There should be a ban for using the words government, innovation and nimble in the same sentence. It is like asking a 90 year old to pick up contortionism! Since when setting policy, regulations and rules helped innovation?

We are nothing but spoiled kids who cannot handle the slight hardship and who want grownups (the government) to resolve our issues. Just tough it up and move on! If your ancestors who moved to this country thought like you, you would still be under some form of dictatorship or extreme socialism.

Sore Derrière

I picked up road bicycling six years ago and I am by no means a serious biker -- I spend on average about 2 to 4 hours per week on a bike. Last Saturday, I helped a friend choose a bike that fits him and his needs. That’s when I realized that over the past several years, I have advised and accompanied over twenty people to a bike shop to help them decide which bike to buy. This begs the question: Why do these people rely more on the advice of an average biker friend rather than listen to an experienced biker or even do their own research?

It seems people nowadays want real and authentic advice. An expert biker will tend to overestimate their needs and intimidate them into purchasing the lightest and most expensive bike. On the other side, performing their own research is tedious and confusing when biking is not a competency they have. As a side note, I did advice my friend to get padded shorts, so it is not my fault he has a sore derrière.

CNN ran an interesting article yesterday about how blogs have been shaping the travel industry. Apparently, blogs are taken more seriously than the mainstream media. They are authentic and read more like advice and less like a promotion. (refer to CNN’s article)

The same seems to apply to the business word. Many businesses are shying away from big-ticket consulting services that pretend to know the client’s business more than the owners do. Middle-market business owners and managers are reluctant to pay for what they already know (only packaged in a fancy PowerPoint document). Also, experts do not seem to listen to their client needs and end up providing expensive solution that do not fit immediate needs. Just like an expert biker would recommend a $5,000 carbon fiber bike to a novice. On the flip side, businesses find it hard sometimes to fix their own problems either because they usually lack the knowledge or the time to implement. Just like a novice biker would struggle making a decision based on academic research. These businesses did not forget the last time they had a sore-derrière because they listened to their own voice.

The best advice comes from an authentic business advisor, who has experience running businesses (not a fresh MBA graduate) and who is not trying to sell a canned solution. The middle-market today is in desperate need for that kind of affordable and measurable results-driven advice (Refer to F1 Strategy’s website for Business Cases).

Return Policy

This weekend, I learned two important and correlated lessons: Our American culture is to blame for the economic mess (and success), and a 3-year old’s job is to remember whatever you promise them (intently or not).

Let me elaborate on the latter lesson first. During a heavy snowstorm last January, my 3-year son was riding his tricycle in our unfinished basement when he asked me to get him a “real bikey” – you know the one with training wheels. Assuming that kids have a short attention span, I learned to deflect my answers and told him that I will get him one when the snow melts. 3-year olds usually forget what they were doing 10 minutes ago. But sure enough, two months later, we’re outside chalking drawings on the driveway when my son’s already large eyes got even larger that I could swear I saw a big light bulb hover over his head and with a loud squeaky voice he proclaimed: “Daddy, the snow melted, let’s go get a real blue bikey from Target!” Not only he still remembered, but he already formulated a very specific color, shape and location. I pretended to be the tough dad by not responding to his request and by showing him that I was still the boss… and an hour later, we were picking up a new blue bikey from Target. After spending an hour putting it together, that bikey was (according to my son) too small. So we returned it and got him a nice Spiderman bikey, which ended up being too big (I have to agree here, because he could barely peddle and he ended up falling and scratching himself and the bike). So we returned that one too and I will be getting him what he calls a “medium bikey”.

So how is this story related to the first point I am making about blaming our American culture for the economic mess. Well when I was a kid, my dad got us a bike (cool red chopper). It was a teenager’s bike, weighed a ton and I was just eight. I pretended that it was a perfect fit and never told anybody when I crashed from what felt like a three-story bike. Why? Because I knew my dad could not return the bike and I did not want to lose the bike either.

My parents still have that mentality. When they visit from Lebanon, they spend hours making a purchase decision and ensuring it is a great fit to their needs. That’s when I realized how our American culture changed since return policies got easy. In a way, this helped our economy by eliminating wasted time and frustration, but it also created a culture of no commitment. People will keep assuming that their mistakes will be bailed out and that there are no real downsides to breaking a commitment. In the past twenty years, we have learned that it was OK to try things out and if we did not like them, we could just return them, no questions asked. Our culture’s return policy got really easy where we thought we could try a nice car, a large mortgage or even a marriage, with a loose return policy mentality. The neck-deep economic mess we’re in could not be a one-time gig. This will be a recurring event as long as the root-cause remains.

The Prodigal Son

If so far, you have been a hard worker, smart saver, cautious investor, you must be feeling cheated. You must be starting to think that there are no downsides to recklessness, idiocy and gambling. Well, get ready to feel even worse about yourself. If you thought that by not punishing swindlers we could all benefit, what would you say if these same crooks were to be rewarded?

Trump wannabee Borrowers: Some are getting help through the first-time homeowner stimulus. By the way, renters get zippo and if you did not play the real estate market game, you are just paying from your own savings to help others.

Rating Agencies: They stand to make a billion-dollar windfall in the government's latest attempt to heal the credit markets (refer to WSJ article).

Lenders: Many banks and institutions are flooded with loans and competition is scarce. According to the Wall Street Journal, the big banks that dominate the market are eager to boost their profits margins, not give deeper bargains to consumers (refer to another WSJ article).

If you are surprised by this outcome, then maybe you can find comfort in knowing that this is definitely not a new trend but it has been in place for centuries. The bible’s parable of the Prodigal Son is a perfect example. After wasting his share of the inheritance, the prodigal son returns to his father, who greets him with open arms and hardly gives him a chance to express his repentance. Instead, he kills a fatted calf to celebrate his return. The conservative and wiser brother who stayed put all these years does not receive any special treatment and his faithfulness is not rewarded. The father’s response: Son, thou art ever with me, and all that I have is thine. It was meet that we should make merry, and be glad: for this thy brother was dead, and is alive again; and was lost, and is found. – (Luke 15:32, KJV)

So it seems the government is telling us that if it is taking over 2,000 years to know that life is not fair, then "tough luck".

Internet Explorer 8.0

Back in the nineties, I worked for a limited time at Microsoft-France. One of the quotes that stuck in my mind was from the then-CEO at a launch gathering for Internet Explorer 4.0. He jokingly said that no matter how fast new processors are becoming, Microsoft will always find a way to slow them down. Everybody at the time thought Compuserve and AOL would eat Microsoft’s lunch because IE was very clumsy. Today, Microsoft launched Internet Explorer 8.0 and it seems to significantly best its competitors (e.g., Mozilla Firefox, Apple Safari, Google Chrome, Opera).

Regardless whether you believe Microsoft is an evil empire or a great company, one thing we can all agree on, they have been the leader in PC software for a long time. Apple, Linux and other competitors might have better technology, but Microsoft still has the lion share. The reasons behind this success are numerous and include the fact that Microsoft is great at marketing simple-to-use and affordable products. If there is a cheaper, better and faster solution, people would naturally migrate towards that. The argument that MS is using illegal techniques is short-sighted because that strategy is a short-term one. The argument is that Linux is a better and more robust platform, but the question is how come nobody figured out a way to build an empire around it just like Microsoft did? If a product is easy for an engineer to use, that does not mean it appeals to the masses. I would apply the same logic to alternative energy sources. We need an economically viable solution to make the switch a no-brainer (we also need to level the playfield of subsidies).

Today, businesses struggle to find the right solutions and that is because IT services are still run by engineers who believe they can tell the client what they need. The Y2K era is long gone and business should be driving IT, not the other way around.

Tsunami Effect

On the morning of December 26, 2004, 10-year-old Tilly Smith was in Thailand on vacation with her family when they went for a long walk on the beach. Tilly noticed something with the ocean that reminded her of a lesson on tsunamis she'd had at school just a few weeks before. At first, she tried in vain to warn her parents, but when they started walking back to their hotel, the water suddenly surged. They barely made it to the second floor and watched people and property wash away.


What the market experienced in the last 6 days could be just a taste of what might be coming our way. The DOW moved up by 1,000 points or 15% within 5 days. This is proof again that the market is driven by irrational emotions. Something is definitely out of whack when you have companies like Deluxe (DLX) at a P/E Ratio of 3 and trading at below $6 a share, or when you see LifeTime Fitness (LTM) at a P/E Ratio of 5 and trading at below $10 a share.

The perception is that this is an extremely bad economy. The reality is that many businesses are still doing well. I just heard from three different placement firms that this is their best year thus far! Many large businesses have been laying people off just because they can do it in this environment with no repercussions. These same businesses are turning to placement firms to fill-in the gap. Businesses that are doing well are not incented to declare it in public and, in some cases, they are ashamed of acknowledging it. The reasons include reluctance to brag, fear of going against the crowd, or even concerns of bad omen.

Back to my inverted bubble theory, the current market frenzy could reverse very quickly and we could have a Tsunami Effect. Money is being held back and at the first sign of recovery, the market will be flooded by investors which in turn will drive values up faster than expected. The credit crunch was a major rupture at a fault line and resulted in the water receding dramatically, exposing areas that are normally always submerged. This should serve as an advance warning of the approaching tsunami which will rush in faster than it is possible to run. All the signs of a Tsunami are here: Extreme pullback of funds, blue skies in the public safety arena and a decent ocean of money still waiting for the right opportunity to come back.

Tae Kwon Do Beating

Last week, a man tried to quietly rob a Tae Kwon Do studio in suburban Milwaukee.He ended up face to face with the Tae Kwon Do master. You could just imagine what took place. Fast-Forward and the robber is pinned to the floor while the Tae Kwon Do master, still holding the robber by the neck, calmly calls the Police and waits for them to arrive.

Yesterday, the new administration announced its plan to help small businesses by raising the federal guarantee on small-business loans up to 90%. So far, it’s been easy to give money away, but do we have the right controls and systems in place to keep tabs? On one side, the borrower did not change their ways, so this like sending the same robber back to the Tae Kwon Do studio in hopes that he would not get caught again. On the other side, lenders are still driven by profit, so we could be subjecting the robber to the same kind of beating he received on his first attempt.

It is true that small businesses accounted for about 70% of the new jobs created over the past decade, and credit has been drying up for them, but throwing money at the problem does not address fundamental issues. How is this different from what got us in this mess? We just finished blaming lenders for relaxing their underwriting guidelines and giving money to people who could not afford to make payments, on the bet that house prices will keep increasing? Along those same lines, the administration is relaxing the rules and giving money to businesses that might not afford to make payments, on the bet that the economy will get better soon?

Self-Victimization Syndrome

When I was growing up during the civil war in Lebanon, recession meant your neighbor got shot. Depression meant you got shot. When we would hear the economy grinded to a halt, that meant you couldn’t buy bread, milk or gasoline. Credit crunch meant the bank was literally blown up. Devaluation meant the country’s currency was worthless. Put that into perspective when you turn on your TV set to listen to out-of-touch journalists dissecting the state of the US and global economy.

There is no doubt that people are hurting in this economic downturn, and I fully believe that many people genuinely need help. So what is the best way to deal with the current recession? It is all about how we interpret the information. Pessimists focus on events that are out of their control, while optimists target events that are controllable. Internal factors that could be controlled include the search for a job or starting a business. So focusing on numbers and bad news does not help in any way especially when the news is nothing but a look in the rear view mirror.

What concerns me most is the victimization trend that is sprouting in every corner. Once you start believing that you are not in control and everything that is happening to you is not your fault, then you become your own worst enemy. As Americans, we are strong because our culture was built on risk-taking immigrants who depended on themselves and themselves only. Compared to socialist or communist countries, where people learned to lean much more on their government and tend to blame everything on “the man”, Americans usually have the attitude that they control their destiny. Bailout trends might encourage people to play the victim role, thus exacerbating the recovery process.

So the faster we get over it, readjust to the recession and move forward, the better it is to our personal sanity and to our economy in general.

Worthy of note, the Lebanese people learned lessons from the Lebanese civil war and became resilient and risk-averse that the Lebanese financial system barred anyone in the country from investing in mortgage-backed securities, and Lebanon’s banks had one of their best years ever in 2008. (click here for more on the subject)

Lemonade Stand

Einstein stated that as demanded by the relativity principle the observer cannot know whether he is at rest or in absolute motion. Same thing applies to many people in this economy. Knowing that the economy is bad does not shield us from going through a rough time. With all the media frenzy, a person cannot tell how bad the recession is or how to prevent things from happening, so what is the purpose of following the news? And the big issue is that most people in the media are more artists than business people. This conflict does not provide most media outlets with the knowledge to truly analyze the economic situation.

As for people following the news, national averages are deceiving, because no single person is 8% unemployed. How do you then gauge how much employable or unemployable you are? Perception is everything. For an employed person, the employment rate is 100% compared to the unemployed where the rate is 0%.

When did we move to a society of employment? Over 100 years ago, most people were independent contractors and tradesmen. There were few cases of employment such as the clergy and the army, and then there was the forced “employment” or slavery. It was after the great depression, followed by the second war, that people thought job security was linked to employment in Corporate America. What an illusion!!! How would you rate the risk of a business that has a good probability (over 50% in the first three years) where revenues could just stop overnight and where you could lose everything with no warning signs? I bet most people would agree about the high risk such a venture entails. Well isn’t that similar in some ways to employment? What equity can you pass down to your kids through employment?


Now do not get me wrong, our country is still way ahead of socialist ones where everything must be structured by the government for an illusion of “benefit for all concerned”. However, it seems one cannot have a lemonade stand in this country without having the government agencies involved and big corporations trying to figure out ways to own lemonade stands and employ salaried people. The old hierarchical structures of large organizations are remnants of the past. Our education system and government should adjust their framework to encourage independent structures and move in the direction of “free agency”.

Leadership Loss

Ever wondered why the departure of a company founder or leader could be a major setback for a business?

Well, good leaders usually have a deep understanding of the big picture. It also helps if they happen to be charismatic and have the ability to rally people behind a common mission. Most importantly, they understand how to move levers and when to pull the right triggers.

Recently, the image of business leaders has been tarnished by numerous incidents of power abuse, greed and other unethical behaviors. Even in a bad job market, employees are less willing to take on big leadership roles that would expose them to tough decision-making thus risking their careers. The shortage of good leaders could also be traced back to our education system that has been encouraging students to become experts in specific fields. This is creating silos in Corporate America. It is moving resources away from leadership roles and into narrow expertise niches.

Good leaders can see through silos and link them together to get a harmonious organization. When these leaders leave, people continue working in their silos, communication breaks down and the dynamics of finger-pointing thrive. Solutions are not sought until the bottom-line starts suffering, which usually happens late in the game. The following scenario could take place: Communication between silos breaks down and knowledge is no longer shared. A couple of months later, the turnaround time and quality of products or services suffer. Clients start noticing the company’s sloppy work and two months later, they do not place a new order which in turn impacts the company’s bottom-line. The business just lost over six months in the process and it might take another six months to fix the issue?

That is what usually transpires from the departure of a leader. To prevent these issues, your company will need to get the help of internal or external experts to build a cause-effect strategic map with leading key performance metrics to help you be proactive. Notice that I just used bastardized buzzwords such as “Key Performance Metrics” and “Proactive”. Many so-called consultants and IT developers diluted the real meaning of these terms by bringing preconceived solutions to the table. So beware of this pitfall and make sure you recruit the help of true business experts that can approach solutions from a business perspective. Setting up leading indicators is more art than science.

Dual Pareto

Finding the right balance between labor and IT is never an easy task. A company could always improve flexibility by minimizing any potential over-design, postponing non-urgent upgrades and purchases, and creating temporary applications to test new functionalities (where applicable).

As a matter of fact, when trying to create flexibility, most companies tend to over-automate. This creates a complexity that is usually hard to maintain or reconcile, rendering the system obsolete. The big challenge remains to selectively automate, keeping in mind that each added functionality increases maintenance efforts and reduces the ability to upgrade.

To optimize the balance between labor and IT, management should follow a few principles:

• Avoid over-automation (functionality level ROI). Any overdesign will result in extra costs (e.g., development, maintenance) and always lead to sunk costs for the company.


• Ensure “time is on your side”. While developing a system in a limited amount of time, there often are situations where delaying the development of certain functionalities is of value.


• Create temporary simplified plug-ins. Most IT people do not recommend this solution but in reality, business should drive IT and not the other way around. Using such standard programs as MS Access or MS Excel, a company can develop small and flexible PC-based pilots which will be reversed engineered later and transformed into fully integrated modules of the larger system.


• Involve senior management in some of the details. Help from senior management and from external experts is always a must to ensure that the overall strategy is being followed.

There is always a temptation to implement excessive automation which explains the fact that few companies have successfully balanced labor and IT. Selectively use external help when dealing with large projects. External help should not consist of IT consultants but rather people with the business and functional expertise in the areas you are trying to automate.

Culture Eats Strategy For Lunch

No matter how great your strategy is, unless you get the buy-in from your senior management as well as your front-liners, there is no way your strategy is going to be implemented. Culture manifests itself in different shapes. It could be the “contrarians” who reject an outside idea and influence the thinking of their peers. It might be the “bullies” who are usually the loudest persons in the room and who can get people to just agree with them to make them shut up. Or it could be the “lazy” who found their niche in an organization and they would try their best to protect their fiefdom.

So how do you overcome culture barriers? You could always use the short-term fear technique such as “there’s a new sheriff in town, either you’re with me or you’re not.” A long-term solution though is implemented via a combination of leveraging facts and instilling passion.

Leveraging Facts: Most people use anecdotal metrics to defend their stance. This method is hard to break unless you have facts on your side. By doing so, you engage them to help you explain these facts. For example, somebody might say “my sales associates are idiots, they do not understand how to sell our products”. Well, if you bring a survey showing that proper training was never performed and that sales associates are behaving in line with their compensation plan, suddenly you engage people in “fixing” the situation, thus owning the solution which in turn make them more committed to implement a solution.

Instilling Passion: By nature, people hate change. They get comfortable and fight for what they spent time building. On the other hand, many people volunteer their time for their hobbies and passions, and they continuously want to improve on their work. When Carlos Ghosn took over the reins at struggling Nissan, engineers were running the show and were stubbornly comfortable in their approach to market cars. By resuscitating the Z model, which was a source of pride at the company, people got passionate and worked hard on changing and implementing the new concept. This helped create the new successful lines such as the Murano. Today, Nissan is the most profitable and growing car company

So instead of confronting culture, work with it using facts to help people understand that your opinion is not based on your gut feel but on hard numbers. then get them to work on a project they are passionate about. You would be amazed by some of the results that can be achieved by those same people that seemed to be barriers for change.

Fact-Based Predictions

Last summer, at a family wedding, I got into a debate regarding real estate trends in Toronto. I assured my audience that inventories of unsold properties will increase and prices will fall. I received fierce arguments that the market in Toronto was safe from the US economy. This is typical emotional logic usually motivated by an investment people have, so they hope that by staying positive, they would not jinks their investment returns.

Since my Toronto debate, what happened to that market? The Canadian Real Estate Association is validating the slowdown and explaining it through rising unsold inventory, falling new home prices, greater resale competition and reduced credit availability. The average home prices dipped 1% in 2008, a sharp reversal from the 10% annual appreciation from 2002-2007. By January of this year, national average prices were down 11% year-on-year (though by a more modest 5-6% on a regional sales-weighted basis).

Scotia Economics is projecting another 15-20% decline in the volume of resales this year, with a further 10% drop in average prices. In Toronto, the average home price already dropped by 4% from $380K in 2008 to $364K in 2009.

Fact-based predictions are inarguably more sound than gut-feel ones, but human instinct again takes over even though it might not be the right judgment in today’s environment. It feels sometimes as if I am looking at a satellite image and predicting a storm, but it is hard to convince somebody if they look up and all they see is blue sky.

Source: Canadian Real Estate Association (CREA), Scotia Economics calculations.

The Blame Game

What happened to make this credit crunch become a major recession?
Mortgage lending is a simple concept: A borrower needs money to purchase or refinance a house, while an investor is looking for a return on money based on different appetites for risk and reward. In the past, banks, thrifts or government agencies played the conduit role to connect borrower and investors. Then everybody started getting involved, including mortgage brokers, appraisers, mortgage lenders, investment banks, servicers, rating agencies, investors (Wall Street) and even the Federal Reserve.

Everybody was winning when house values virtually increased. Things started falling apart when house prices leveled, interest rates started adjusting at much higher levels and delinquencies skyrocketed. That’s when the blame game began. So who’s to blame? Is it the Trump-wannabes, or is it the greedy Wall Streeters? Everybody contributed to the crunch.

Borrowers: Most borrowers remained honest people looking to purchase or refinance their home, but many were caught in the frenzy of becoming the next Donald Trump and the high demand drove house prices to historical highs. Claiming ignorance, many borrowers hoped the government would bail them out… and in many cases, it did.

Mortgage Brokers: They helped borrowers through a maze of different products and complex terminology, and had access to many lenders with better deals for borrowers. Some used aggressive sales strategies, thus misleading borrowers through teaser rates, adjustable rates and other exotic solutions.

Appraisers: Helped assess the value of a house, but some started doing drive-by appraisals or even stated/online ones while working in tandem with brokers to jack-up home values and get loan funding.

Mortgage Lenders: Provided financial solutions to help people own their homes, but many started relaxing the rules and understating risk to try to fund as many loans as possible, reaching the NINJA levels (No Income, No Assets).

Investment Banks: Provided warehouse line of credit to lenders and securitized loans, but started combining high-risk with low-risk loans under a high-grade investment, which made them vulnerable and their small margins were quickly erased when writing-off bad loans.

Rating Agencies: Rated securities to help investors quickly evaluate risk, but allowed Wall Street to gain too much influence over rating (cozy relationships) and did not understand subprime risk.

Investors: Provided liquidity for Lenders and Investment Banks by purchasing Mortgage Backed Securities to manage their investment risk, but became hooked on the profits and did not question their exposure to subprime, and ended up with huge losses when loans started going bad at a frightening rate.

Federal Reserve: Set interest rates and heavily influenced the amount of lending, but leaned too much on interest rates in a bid to keep the economy afloat, and then tried to wash their hands from the crisis.

So here you have it. EVERYBODY is to blame.

Lead by Example

Government is asking banks to start lending. Some so-called economists are lining up on news shows to throw up solutions. These include letting the banks fail. They also include nationalizing the financial industry. Well how about a win-win hybrid solution? (to use a trendy green term).

Let’s first agree that to fix the economy we need healthy banks that are motivated by Capitalism 101: profits. We cannot let the entire banking industry fail but at the same time we do not want to nationalize which goes against basic principles of capitalism and free-markets. Now that we established this objective, let us understand the root of the problem: Credit is limited because banks are still carrying over a trillion dollars of toxic assets. Hence just hoping that the issue would resolve itself over time will only yield an extremely slow recovery.

We acknowledge the uncertainty lays in the difference between the hold-to-maturity and the mark-to-market values. So what should be done to help free banks from their shackles and allow them to venture again into lending land? What if the government set its own prices to invest in these toxic assets and became a shareholder in the banks? Keep in mind that profitability could be the outcome of a long-term hold, something that only the government seems to be able to afford nowadays.

In simple terms, the best way to save a financially-strapped but sound organization is usually achieved by injecting capital in it and relieving it from bad debt, while taking an equity share and in some cases helping management with the turnaround. This is usually a win-win situation and a far better solution than letting the business fail or acquiring the entire company and replacing the management team (especially if the buyer is not an expert in that field).

Let us hope Democrats and Republicans can work together instead of bickering and sweating the small detail. We cannot afford wasting additional time while the Barbarians are at the gates. The right solution will need to strike a balance and a trade-off between government bureaucracy and capitalistic greed.

Borat in Business

You know that feeling you get when you receive an e-mail containing a recycled joke being revived every time a friend discovers the internet? Some of these jokes have been in circulation for over 20 years, and I thought I blocked them from my e-mails but they are resurfacing on Facebook now (or like this old lady from church calls it: Bookface). That is the same feeling I get when I witness a business woman being perceived as less skilled than a man. I still cannot believe that some people are not over the fact that women in business are as good as men! I am not sure whether this is a generational, cultural or inferiority complex, but some men should start treating women as equals in the business space! For God’s sake, this is 2009!

I am not writing this blog to gain women’s support but as a man who moved to the US ten years ago, I always assumed that this country was ahead of others when it came to women rights. This assumption made me cringe every time I saw a woman not being treated fairly. I guess it still takes me by surprise. I notice it often when I am accompanied by my wife on a business meeting. She is a well educated and smart lady, and she definitely gets the unwanted flattering attention at first (in this case, I cannot blame anybody because she is gorgeous and I am… well… much hairier). However when we start talking business, some men (older ones mostly) suddenly shift all their attention to me and barely listen to what my wife has to say. The worst case came when my wife got referred to a medical specialist for health reasons, the old doctor kept talking to me and almost ignored my wife even though I was merely accompanying her. He was communicating with her through me without making eye contact with her even though she was sitting right by my side!

I do not believe we will ever completely eliminate sexist comments and sometime flirtatious behaviors from the work space (it goes both ways by the way), however it is about time we stopped behaving like Borat and convince ourselves that women are equal to men when it comes to business.

Soft Landing or Hard Takeoff?

Most economists are projecting a slow recovery lasting 3 to 5 years. Even Bernanke last week projected a 2 to 3 years uncertain recovery. To continue with my theory of a White Swan or Inverted Bubble (see previous posts), allow me to dig through comments made during the last real estate bubble.

Do you remember some years ago how the catch phrase “soft landing” suddenly picked up steam? In 2005, Ryan Ratcliff, an economist at the UCLA Anderson Forecast stated that the weakness in the real estate sectors will slow everything down a little bit, but not enough to get an actual recession. NAR's chief economist David Lereah said that the fact that the March 2005 figures were "holding close" to the numbers recorded in the strong rebound a month earlier "is additional evidence that we're experiencing a soft landing. We may see some minor slowing in home sales as interest rates rise, but the market is clearly stabilizing."

By definition, soft landing in the business cycle is the process of an economy shifting from growth to slow-growth to potentially flat, as it approaches but avoids a recession. It is usually caused by government attempts to slow down inflation.

Aren’t we hearing the same tune today, in an inverted sense? Aren’t we surprised how the irrational panic that is taking over the market keeps pushing beyond the breaking limit? Aren’t we taken aback by how intense this downturn is becoming? Well, these are all signs that when the market adjusts, it would not be a “soft landing” or in this case, “soft take-off”, but instead the market is bound to snap back.

The Passion of Business

What is the most important ingredient for business success? Is it a great idea? Great leadership? Great implementation? All these traits are definitely needed but passion for the business makes it a great one.

The reality is that you tend to enjoy most what you are passionate about and what requires you to spend time on. Le petit Prince (the little prince), written by Antoine de Saint Exupéry, is a book supposedly for children. It has sold more copies than “to Kill a Mockingbird”, “Gone with the Wind” and “Goodnight Moon” COMBINED. Le petit Prince lived on his own small planet and cared for a rose that he thought was unique. When he started travelling the world, he came upon a whole row of rosebushes, and was disappointed because he believed his rose was the only one in the whole universe. Suddenly, nothing was great or unique about his rose so he lied down in the grass and wept.

Then he met a fox that explains to the Prince that his rose is unique and special, because she is the one that he loves and is passionate about.

Many businesses fail because employees are not passionate about what they do. In his biography “Shift”, Carlos Ghosn the CEO of Nissan explains how during his first 100 days at the helm of Nissan, one of the things he needed to turnaround the failing brand was to instill passion and he did so by bringing back the “Z” model.

In summary, "it is the time you have spent with your rose that makes your rose so important."