Hi Peter … It is the primary responsibility of top management to prepare for challenges that could arise, to look for signs that it might be coming towards them, and take anticipatory action – or at least hold back on action that could get them into trouble. These cases all trace back to the feeding frenzy of irresponsible lending to the sub-prime mortgage sector – i.e. lending money to people many of whom probably couldn’t repay it. Not all the big investment banks messed up so badly on this issue, and didn’t have to make such huge write-offs. So some people were being smart enough. The annoying issue for the rest of us is the much, much wider trouble the less-smart ones have caused.
Cycles like this happen in many sectors – the insurance industry sees them regularly. The UK commercial property sector is just tipping right now into over-supply and falling yields. I was working with a law firm last summer who were throwing every lawyer they could get onto property-related deals and asked them the simple questions “How long will this boom go on, when might conditions come together to cause its reverse, what impact would this have on your business, and what would you do about it?” They found it pretty easy to moderate their hiring plans and turn attention to alternative services that might be in increasing demand as the situation changed.
It doesn’t need especially sophisticated tools to deal with this kind of question, just the ability to ask what the future will look like if changes continue as expected, and at what point the situation will become unsustainable. To get a better handle on the situation, though, dynamic modelling is quite do-able for most reasonable-sized organizations. [BTW .. demographic changes are amongst the easiest to build confident forecasts, and rarely responsible for substantial, unanticipated impacts on firms].
Kim