❯ WHERE’S THE CONTEXT?


Robert_AvilaRobert Avila, Managing Director of Future Crunch, has advised companies on strategy and market environment issues for more than twenty years. FutureCrunch develops mission-critical, data-driven insights and recommendations for businesses in times of discontinuous change. Prior to founding FutureCrunch, Mr. Avila worked at a number of major consulting firms, including Deloitte, PwC and Coopers & Lybrand, where he was the chief economist for the firms’ strategy practice and director of Economics & Policy Analysis. He has also worked as chief economist at The Futures Group doing scenario-based strategy development for Fortune 100 companies and at SAGE Associates doing public policy analysis.


The difference between a business executive and a manager, an entrepreneur and an engineer, an investor and so much of what Wall Street has busied itself with over the last fifteen years is the difference between the unknowable and the known. Despite the construction of fully integrated, globe-straddling ERP, SCM and CRM (Enterprise Resource Planning, Supply Chain Management and Customer Relationship Management) systems, the corporate executives still do not know what is going to happen next. Despite all the vast spending on business intelligence systems, corporate strategists still can only guess at what the next big thing will be. Fortunes have been poured into risk management systems, but as the whole world has learned, risk has not gone away.

Magical Money

For almost a generation, consultants and software engineers have been marketing magical money-making machines. This technological revolution, which has transformed the way businesses are organized, directed and managed, compares in its scope and consequences to the mass production and management revolutions of Ford and Sloan nearly a century earlier, but neither of these revolutions succeeded in automating the money-making process. To do that, one first would need perfect foresight, which is contrary to the nature of existence – a problem set without a solution – a goal impossible to attain.

Vision

The job of the business executive is to set the strategic direction for the organization, to position it for success in the face of future business conditions. Once the strategy has been determined,the responsibility of management is to execute those plans as cost effectively as possible. All of the information systems in management’s hands enabling them to increase operating efficiency and squeeze unnecessary costs out of the value chain, while at the same time attaining all of the business objectives, are laudable and impressive, but of little value if strategic direction set by the executives turns out to be wrong. Business executives who busy themselves with management issues (with the objective of improving quarterly profits) have transformed their enterprise from a vessel with an engine and a rudder into but one more bit of flotsam on the stream of commerce going wherever the current is taking it.


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What Sticks

In this time of rapid technological innovation, it is understandable that the innovative engineer with the latest mix of networked hardware and software might be thought of as an entrepreneur. Indeed many engineers have proven to be tops at entrepreneurship, but the two callings are not identical. The entrepreneurial decision to bring to market something new, different and untested is a bet on an unknown future, requiring skills that are distinctly different from the engineering skills required to design and produce that new thing.

In a time of low capital costs and rapid technological change, when the barriers to producing new things are historically low,the most efficient approach may be to try everything and anything – to just throw it all out there and see what sticks. Such conditions do not eliminate the role of the entrepreneur, but simply increase the number of trials and diminish the marginal return. When failures rise to the point that they totally overwhelm successes – as they did at the end of the dotcom bubble – the importance and the challenge of entrepreneurship returns.

Financial Engineering Distraction

The same technological revolution that has changed corporate management and new product development has just as completely transformed Wall Street in the form of financial engineering. A mixture of elaborate mathematical algorithms and cheap computing power has made possible a vast proliferation of new and complex financial instruments. At the heart of all of them there is one consistent, abstract theoretical concept: someone else is minding the store.

The core idea that underpins all of the new-age financial management is the idea of market efficiency, the theory that at any time, market prices represent the best possible estimate of value. This theory rests on the idea that, if anyone has information that suggests that the price is wrong, he can make money by acting on that knowledge and thereby correct the market price.


This concept is characterized by the tale of the economist and a friend walking down the street. The friend says, “Look! A hundred dollar bill! There, lying on the sidewalk!” The economist calmly responds, “Nonsense; if a hundred dollar bill were on the sidewalk someone else would have picked it up by now,” and walks on.


For the efficient market theory to come close to working, vast numbers of investors must be evaluating businesses, markets and even individual mortgages and making informed judgments about long-term viability and present value that result in placing capital at risk.

Over the last fifteen years, so much money could be made from exploiting all the implications of the new financial engineering technology that apparently no one was looking at the sidewalk, where, in addition to hundred dollar bills, there also has been a great deal of stuff one should avoid stepping in.

Business Judgement:Intuitive or Planned?

The key characteristic that the business executive, the entrepreneur, and the investor have in common is acting on judgments about an unknowable future. Such judgments may be informed or they may be intuitive. The underlying nature of the challenge cannot, however, be managed or engineered out of existence. At times it may be efficient to get by on riding the trend, but, with time, relying on the decisions of strangers will prove insufficient. Ultimately,the unfortunate fact is that despite a mass of technological innovation, business executives, entrepreneurs and investors must commit to action in the face of an unknowable outcome. This requires clear vision of the future and a view of the business within market context. Most importantly, someone must be minding the store.