I’ve been posting on strategy in the downturn for a while now, but what makes me really angry is the strategic incompetence that led to this mess [search 'incompetence' for previous posts on this]. But now I’m puzzled – Harvard Business Review, McKinsey Quarterly, Strategy+Business, Economist, etc, etc, are full of advice from strategy experts on how to survive the problem, so I wondered how much they warned folk before that this was likely to happen? .. and how much advice they offered on how to make sure your organization would avoid trouble in the first place?
I don’t have time to do a wide-ranging review of their output during 2004-2007 for all possible warnings and advice – though I cannot recall a single such warning - but I did do a quick scan for anything on the subprime crisis. That after all was a crystal-clear case of an originally reasonable strategic opportunity that numerous competitors managed to mess up big time. It was also very evident in the media, due to the widespread concern about policies towards different customer groups. [There's a great little history of the events up to 2006 at BNET - if that doesn't work in your country, Google A short history of subprime by Brenda White in 'Mortgage Banking'.]
So I had a look …
I find plenty of reports about problems as they arose in particular companies as long ago as mid-2005, but astonishingly I could not find a single article from the top-level management journals describing the strategic crisis that was brewing or what firms in the industry should be doing about it. And this in spite of the fact that regulators were already expressing concern from May 2005. Even when casualties were beginning to pile up during 2006, there were still no considered articles pointing out the nonsense that supposedly sophisticated firms were pursuing.
McKinsey Qtly Aug97 highlighted opportunities in reinventing real-estate transactions, in which subprime lenders stood to do well. In Jun04 they reported “A deterioration in the credit quality of consumer loans, will probably lead to an increased chance of failure among subprime lending institutions as a group“, but did not offer any warning or advice to the banks themselves. In Aug04, it praised “Spanish-language education programs for potential home owners with an array of prime and subprime mortgage products and innovative credit evaluations to increase [loans to] Hispanic borrowers.” adding “… recent immigrants may not take for granted the relative stability of US financial institutions.“ In Jan06 they offered a pessimistic scenario “Overburdened US consumers giving way” in which “… return-on-equity levels in the subprime-mortgage industry could fall to 5 percent, from 20 percent“. But the killer came in Jun07, when an article entitled Surviving—and Prevailing—in the US Subprime-Mortgage Market actually encouraged further commitment to an already collapsing sector – “Despite recent dramatic downturns and the threat of increased regulation, subprime-mortgage opportunities still abound for players that are willing to wait for an upturn and can stomach the attendant risks.“
Perhaps we shouldn’t be too hard on McKinsey, though – at least they offered a view. strategy+business did not mention the sector at all before 2007. HBR seems not to have noticed the sector either, but at least by April 2008 had caught up, recommending that “If you don’t understand, ask questions“ - a touch late, perhaps? There were just 13 occurrences of the term in the Financial Times during 2004-05, none mentioning the strategic risks, and the Economist didn’t touch on it at all until Dec06, by which time the problems were piling up.
Now there are two reasons this makes me so angry. First, it is the primary responsibility of those directing an organization’s strategy [and of the consulting firms they employ] to ensure that its future is secure. Secondly, we have been here before, and not long ago …
During 1999-2000 I was being rubbished by colleagues for asking if the dot-com boom was in danger of busting. One eminent figure told me “You just don’t get it – the way the world works has just changed.” He even claimed that investors no longer put money into equities because they expected that they [or those they would sell stock on to] would ever get a return – they did it because they were in some kind of philanthropic way excited to be supporting a brave new world.
None of the top strategy journals highlighted the danger then either. Nor did the only significant professional body for strategists – the Strategic Management Society. I am told [though cannot confirm] that the Society’s 2001 conference was originally planned for Paris, but was switched late in the day to San Francisco because the West Coast was ‘where it’s all happening’. I didn’t attend that one, but hear that both the attendance and excitement was rather more muted than hoped for, as the dot-com bust destroyed most of those spectacular cases that were to have featured. If the Strategic Management Society can’t look more than a few months ahead, I guess there’s not so much hope for the rest of us.
Lastly, let’s not forget the real victims of this incompetence, both in 2001 and 2008 - not the bankers, consultants or senior executives themselves, but ordinary folk trying to make a living and save for their retirement.
But perhaps I’m wrong, and authoritative sources were indeed warning of the inflating bubble of 2006-07 and giving sound strategic advice on how to avoid it or prepare for it. If so, please do let me and my readers know.Share