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Get As Much Advance Warning As Possible of Trend and Irresistible Force Shifts

Mar 27, 2008
Knowing when the trend or irresistible force shift's cause will be triggered is critical to your success because you need time to prepare. This information is more important, the longer it will take you to adjust.

Having a lot of advance warning is especially important if the required response will be to develop new products or services, or to redirect your organization in some fundamental way. Some irresistible force changes occur slowly, while others are almost instantaneous.

Let's look at an example of a time lag that proved to be confusing to managers in most organizations. By understanding more about this example, you should be better prepared to correctly find the necessary advance warning for your enterprise's irresistible force shifts.

Consider the collapse in many Asian economies beginning in 1997. Many people point to the currency crisis in Thailand as the beginning of the problem.

That event, in turn, was made more likely by a much earlier devaluation in the Chinese currency. If you keep looking backward, you find that the primary cause for this whole string of cause and effect occurred much earlier as overspeculation in Asian economies funneled mountains of borrowed funds into all kinds of dubious investments, such as high priced office buildings that could attract few tenants, unneeded infrastructure that was of little or no use to anyone, and local factories for goods that could not be competitive with imports. This misdirected investment activity had been going on for more than a decade in most Asian economies before the contractions occurred.

Those who watched capital flows in and out of these countries and how new capital was used accurately identified the potential for a crisis years before it occurred. In some cases, these analysts avoided investing in the countries and markets. In other cases, they also warned others to do the same.

A shift in the willingness to keep capital in the countries, both by citizens and foreigners, created the final reckoning of a formal devaluation or a rapid fall in each currency. Quickly, these weaknesses spread to Eastern Europe and South America, as had occurred in the past. Having examined the causal elements that had led to such financial crises in the past would have provided all the clues you needed to have predicted this one.

When word of the collapsing Asian economies reached the United States, almost all public companies soon responded to investor questions about how this event in Asia would affect their business. The answers usually were framed in terms of how much business the company did in those Asian countries with products exported to Asia.

Unless that amount of business was more than 5 percent of total company sales, most executives and financial analysts felt that there would be no material impact on their company. However, a few analysts took a contrary view and predicted that a more important factor than exports to Asia would be increased competition from Asian companies.

This conclusion was based on noting that these companies would now be selling their products at prices 30 percent to 50 percent lower than before to reflect the devaluation of many Asian currencies. These pundits certainly had a point, but they were off on their timing.

When currencies and economies collapse, the financial system usually collapses too. Consequently, any company that had to rely on maintaining old loans or getting new ones was in big trouble.

Since almost every company borrows some money, this meant almost every firm in the countries experiencing a weak currency also had a new problem of liquidity. These Asian companies would be more effective competitors only when they could raise the working capital to be able to produce the goods for export.

For many such companies, it took more than a year before they had sufficient funds to increase exports. Many of these products, in turn, take a long time to transport and reach customers through distribution channels around the world.

So many U.S. companies only saw increased competition from lower-priced imports after a lag of twelve to eighteen months. Then the deluge began.

But many of these U.S. companies wrongly concluded that because they saw no immediate change in competition from imports that none would ever arrive. Again, looking at past financial crises would have revealed this likelihood of delayed competition in advance. In making your analyses, you must be sure to consider the ripple effects of each event.

Another missed ripple factor was that a collapse in Asia caused a collapse in many other countries. These combined economic declines had a direct impact on all other parts of the world through reducing demand for commodities and finished goods of all kinds.

These raw materials were immediately in less demand, and the prices started falling and had not stopped in some cases (with the notable exception of oil, because of renewed effectiveness in production controls) two years later. Such a collapsing price spiral feeds on itself.

Reduced prices for these commodities reduce the incomes of those who produce the commodities, which in turn reduces the demand for everything else these people buy. For many U.S. companies, this chain of events sent a false signal that the Asian problems were a benefit in disguise, because costs immediately dropped for commodities. Only much later did these same U.S. companies see demand soften for their goods and services, including the prices they could charge.

Many commentators see a tempest like the decline in Asian currency values as a localized event, and predict that it will be over in a short period of time. What these people miss is that such a financial collapse creates a series of vicious cycles that feed on each other.

For instance, such a financial crisis usually causes credit availability in local economies to shrink for years. This shrinkage of savings is caused by concerns about the future of the country's currency, its banking system, and those who do business in the country.

Savers usually take their money and run into harder currencies and investments in countries that are doing better. So in looking at your ripple effects, be sure to consider how they can connect into related cycles of change that may be mutually reinforcing.

This movement out of weaker currencies translated into helping fuel an enormous boom in the U.S. and European stock and bond markets through late 1999. This reaction also fooled a lot of people into thinking that even better times were just around the corner.

Literally all the excess liquidity in the world simply headed for just a few places, creating a temporary inflation in the financial assets in those currencies. Subsequent drops in the local economies that first collapsed eventually affect demand for goods and services of the hard currency companies, and those hard currency financial markets eventually collapse also as the stock values exceed what the earnings and cash flow performance the companies can deliver, and then stock prices drop.

You could see this occurring as most U.S. stocks declined in 1999, except for those servicing the Internet boom. In such a circumstance, this cycle can take years to play out.

Impressively, many Asian stock markets began to rally about 18 months later, fueled by a successful export boom based on the lower prices. This in turn began to draw investment capital back into these countries, and reduced liquidity in the hard currency countries.

The big winners in this case were those who shifted their money into North American stocks prior to the devaluations, and those who used hard currency to buy strong exporters in the devaluing currency countries after their devaluations. The lesson of this example is that the irresistible growth enterprises interested in protecting and benefiting themselves in the future will learn to use capital flows and their application as barometers of potential change in a country's currency, investing, economic, and acquisition climate.

This Asian example points out that seeing something dramatic happening, like the Asian problems, does not mean that you are going to assess its impact and the timing of that impact accurately. Most people will overestimate the immediate issues, and underestimate the longer-term ones. Since situations like these can cause some to benefit in the near-term, the casual observer may even decide that something that will ultimately be negative is actually positive, because the negative impacts are delayed.
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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