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In Uncertain Times, Strategy Becomes More Important, Not Less

What is the basis for my worry? It’s the double whammy of the 2017 corporate tax breaks and the increase in federal spending.

I had a discussion the other day with my neighbor.  It was about the validity or lack thereof of global warming. He and I are on opposite sides of the political spectrum but have a good enough relationship to have meaningful discussions on partisan issues. The points I brought up were things like documented increases in temperatures, accelerated melting of glaciers and ice caps, etc. He acknowledged those facts but said they were due to normal variations in climate -- not the result of man’s use of fossil fuels. In the end, his position was that predictions about climate have always been iffy, sometimes on target and sometimes not.

He cited an example to support his position. We live in Washington State, west of Puget Sound. In 2018, there were multiple forest fires, both in our area and across the state. Because of a below-normal winter snowfall in the Cascade and Olympic mountains, this spring our governor issued a “state of emergency” regarding the likely occurrence of another year of excessive wildfires. The actual result was there were few such fires and no real outbreak requiring emergency actions. In fact, our area had one of the most pleasant summers, weather-wise, in recent years with enough—but not too much—rainfall and generally moderate temperatures. My friend went on to say we should live our lives focused on what is in front of us and not worry too much about the forecasts prognosticators put out. At one level it’s really hard to argue with that type of position.

Over the last couple of weeks, Travis Hessman, the editor-in-chief of IndustryWeek, has written two stories that parallel the above discussion. The first essentially supports my friend’s live for the day philosophy, saying we should enjoy the current positive economic environment and not base too much on what economists might say is coming down the road. The second touches on two different strategies regarding how to prepare for the future: one based on planning, the other on reacting. These two articles will be the basis of this week’s recap.

Hessman’s August 12 article, IW U.S. 500: Tariffs Make Their Mark, painted a pretty rosy picture of the 2018 economy. The subtitle of article did a decent job of summarizing what would be discussed in it: “Facing impossibly challenging times—tax cuts minus import taxes, government stimulus minus rising costs—manufacturers found a stability that defied the markets, defied the models and defied every predicted outcome.”

The article featured economists’ predictions about what to expect in 2018 relative to 2017 economic results. The comparison, which shows 2018’s economy greatly outpacing 2017’s, is hard to dispute, and I don’t. The 2018 results are at odds with many predictions that had suggested we would experience a softening of the economy in 2018. So, at least in this case, the prognosticators were wrong.

Does this confirm my neighbor’s philosophy about operating in the present? I don’t think so. At issue is whether the positive economic results of 2018 are a leading indicator of the initial phase of an economic boom, or something less rosy.

Paul Ericksen's columns are part of IndustryWeek's Supply Chain Initiative.

Specifically, I worry that some of the actions that delivered positive results in 2018 might lead to a downturn. The “risk vs. reward” balance of our current tariff policy has been discussed ad infinitum, and I will not go into it here other than to say I support the tariffs but hope that other negotiating strategies are also being applied since—in my experience—if you only have one tool in your tool belt, you are essentially tying your hands.

What, then, is the basis for my worry? It’s the double whammy of the 2017 corporate tax breaks and the increase in spending by the federal government. If you hadn’t noticed, those two factors were the primary cause of 2018’s annual increase in federal debt that set a new record—by far. This, I believe was anticipated by the administration, but they predicted it would be offset or at least dampened by increased economic activitydelivering additional tax revenue due to increased profitability and an increase in the wage rolls due to American corporations relocating operations back to the United States. To date, neither has happened, which leaves us in the situation where we are borrowing increased amounts of money to pay our bills. Another way of putting this is that we are increasing our number of outstanding IOUs.

Increasing spending in an environment of reduced revenue will, over time, produce inflation. Inflation always puts a damper on economic vitality. Some may say that the world today is different and inflation isn’t necessarily the threat it used to be. That may be true. But as I was taught in my college economics class, there has never been a period of extended debt increase that hasn’t led to an economic downturn.  So, unless revenues do start increasing—and spending is reduced—I’m worried about the dollar losing value, which, while it may be a good thing for exports, would not be a good thing for the budgets of working Americans.

Hessman’s second article (August 23), entitled Strategy? What Strategy!?, relates to dealing with economic uncertainty. Normal corporate practice is to align actions with a strategic plan. Consequently, corporations attempt to tie day-to-day activities—including those that deal with unexpected events in the business environment—to an overall strategic plan. In other words, through their strategic plans, corporations define a future result that they are committing to deliver to investors.

Hessman’s article posits that strategic planning may be a thing of the past.  Why?  Because of the assumption that changes in today’s world trade are occurring so fast that any advanced planning corporations might put together will soon become obsolete. And that the better approach is to react to—and hopefully thrive in—the chaos of today’s business.  Hmm.

This kind of thinking is not new. It was first touted by Ph.D.-types in the early to mid- 1990s. To get in on this theory, several consultancies created programs to sell to clients showing them how to adapt to a world when they could expect most planning to be overtaken by current events. As with anything new being touted by respected consulting firms, many companies jumped on this bandwagon. Over time, though, it was shown that following such a tactical strategy led to reduced financial results. Investors became restless, and consequently the theory was short-lived.

Maybe this time it will be different. I imagine consultancies dusting off and trying to sell their old programs where strategic planning took a back seat to tactically dealing with issues.  Maybe I’m too immersed in past practices—I imagine that at least some of my younger colleagues regard me as a bit of a dinosaur—but I don’t see how today’s environment is different than that which existed in the 1990s.  And back then, it became a failed approach to business. Investors rely on profitability projections and results. Reacting in a tactical manner to economic changes will probably not hold up well under analyst scrutiny.

Sure, companies need to react to major changes in the economic world—such as the tariffs on Chinese goods—but unless they do so under the umbrella of a solid strategy, their actions will not deliver optimal results.

And, I might add, when dramatic changes do occur in worldwide trade, this represents a good opportunity for a company to review and revise—if needed—its strategic plan.

For instance, it worries me that corporations that had sourced in China due to that country’s low labor rates are setting themselves up for future inefficiencies by re-sourcing to other low-wage countries like Vietnam; i.e., a strategy of sourcing based on piece-price. As discussed in my August 30 article, a good business case can often be made for sourcing and manufacturing products in countries that represent a corporation’s major market.

Anyway, it is clear that the times “they are a changing,” and that successful corporations will need to adapt to increased variability in the business environment, at least in the short run. The assumptions and processes their actions are based on will go a long way in determining their future success.  So in my mind the best course is to “choose wisely.”

Paul Ericksen is IndustryWeek’s supply chain advisor. He has 38 years of experience in industry, primarily in supply management at two large original equipment manufacturers.

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