Wednesday, August 30, 2017

Recession Strategies

I stumbled across some notes I took at a lecture about ten years ago, just after the cataclysmic beginnings of the recent reception.  The speaker believed that the primary cause of the crisis was being overly focused on short-term financial results to the detriment of long-term functional success.   In my notes, I have a list of the three strategies he suggested to weather and emerge from the present crisis.

His first strategy, which he believed to be the worst approach, would be to take only short-term actions to alleviate the symptoms of the economic downturn – to wait and hope for external conditions to improve and then, once the economy has recovered, the firm could go back to doing the same thing as it had done before … until the next crisis inevitably occurs.

Second was to rely on government intervention.  He stated that there is a trend in western nations to be more accepting of “big government” and to be passively compliant, and even among the public, otherwise-intelligent people seem to be in favor of the nationalization of certain industries, such as banking.   He described how ambitious government reforms failed to prevent a recurring crisis and the ways in which regulation is seldom the path to meaningful and lasting success.

The third option was to remember the nature and purpose of the firm and its role in society, and to assess its operations in light of that purpose.  Economic efficiency and financial profitability are to be seen as the result of successful operations, but not their drivers.   Best case, they should be considered in a historical context, assessing the effectiveness of the organization’s past activities, and where they are lacking, to be considered as symptoms that require attention and investigation.

Naturally, the last option was his thesis, and he noted that many firms that weathered financial crises simply remained focus on their core business.  Even when the market is down, people need goods and services, and there is still ample disposable income for conveniences and even luxuries.   For a firm to change its nature is implementing a long-term change to address a short-term problem, and the firm ends up shedding the characteristics that made it successful, and ensure its success under adverse conditions.

Ten years later, with the recession dragging on, it’s easier to see which firms are still hiding in the bunker and waiting for the weather to change, which have taken hand-outs from government agencies in exchange for relinquishing at some degree of control, and which have rolled merrily along.   There problem is that even firms that take the speaker’s two “wrong” paths can successfully survive, and that their survival reinforces the notion that the choice they made was right.

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