Strategy and the economy

With worries about world economies falling back again, we could reflect on how we got in this mess, and some questions for Strategy.

Recessions usually start, I hear, in the corporate sector – falls in consumer or public spending then follow those business reversals, rather than the opposite. It can also be shown that an industry can fall into big cycles with no variability at all in underlying demand growth. If this happens in one sector, then both the boom and the bust infect other sectors, making the problem still worse, and a recession ensues. This was a topic at a small conference, featuring iconoclastic economist Paul Ormerod, back in February – here is a rather basic [sorry] recording.

If we are so smart at developing strategy, how come so many companies failed to see that their over-heated markets were no basis for what turned out to be gross over-expansion? If a general recession is the sum of down-turns in many sectors, then this strategic error was nearly universal –in retail, banking, telecoms, transportation, raw materials, real-estate … Strategic incompetence in, say, US subprime lending or Northern Rock is rather clear, but similar if smaller errors must have been happening all over.

So, as a strategy profession, where did we fail? Did we not provide the tools for management to prevent these mistakes? Did we ourselves fail  – or did we indeed warn of the emerging problem but get ignored? Or did some of us actually do pretty well [I think Canadian banks largely avoided the crisis, for example]?

Then, what are we doing now to help strategic recovery of the businesses we support, and hence of the economy? Have we helped design smaller but more powerful business strategies – or are companies stuck with crude cost-cutting instead? Recessions are often a great time for strong companies to pick up weaker rivals or cheap assets, or steal business – which if widely done should speed the recovery – so are we playing our part to make that happen?

Perhaps we need much more of the smart strategy modeling at Boeing?

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