Strategy, Context and Awareness: Sub-prime Lessons
Earlier we put up a readfest (WRFest 23FEb08(Business Strategy): What the Future May Hold ?) focused on business strategy, including a view of our strategic concept/context chart. Judging from the performance of the Finance Industry as a whole most of the arguments we made were and will continue to be ignored. But as stakeholders (investor, employees, suppliers, customers) we don't think you. Eveventually and ultimately. Now the WSJ has kindly joined us in our finger-wagging prescience with a fascinating story about strategic awareness really matters. Rather then wait to put up a shorter excerpt we're posting a longer one now. There are many lessons and examples cited here. The question for you becomes - as a stakeholder - do you know where your stake is tonight ?
UPDATE: More credit costs seen weighing on banks, brokers Analysts at Goldman Sachs cut estimates for the nation's top banks and brokers Monday and said these major institutions would likely report write-downs of between $1 billion and $12 billion for soured real-estate loans and related exposures. Goldman's estimates of new write-downs ranged from $1.4 billion it expects for Bear Stearns Cosall the way up to a whopping $12 billion projected for Citigroup Inc.
The Coming Leveraged Debt Write-Downs
Subprime Lessons Hit Home for CEOs Executives far from Wall Street are finding lessons in the subprime-loan meltdown. Among the insights: Don't chase a boom without planning for the bust and ensure that incentive systems don't encourage excessive risk.
As mortgage lenders imploded and stock prices swooned last summer, a light bulb went off for Tim Houlne, chief executive of a Texas call-agent provider: "Bubbles always burst." Mr. Houlne's realization attests to how, far from Wall Street, executives in other industries and their advisers are finding management lessons in the subprime-loan meltdown. Among the key insights: Don't chase a boom without planning for the bust. Make sure subordinates feel safe delivering bad news. Ensure that incentive systems don't encourage excessive risk. And don't gloss over complicated details.
"Every five to 10 years, there's a mess of this sort," says Richard Coughlan, a management professor at the University of ichmond. "Leaders would do themselves a great service if they would study the failures of the past and learn from them." By contrast, in the finance industry, many firms continued to pursue subprime-related business long after the first signs of a housing slowdown.
That's a familiar pattern to veterans of the technology boom of the 1990s and the ensuing bust. During the boom, telecom companies rushed to install miles of fiber-optic lines based on predictions of an exponential need for capacity… Instead, he suggests that executives plan new initiatives before the current wave crashes. Toyota Motor Corp. did this well during the 1990s, Mr. Kanazawa says. While Toyota and its peers chased the then-hot sport-utility market, Toyota also developed its hybrid Prius. Its 2000 U.S. launch ran counter to conventional wisdom at the time. But as gasoline prices rose, Toyota's move looked prescient.
Jim Bradford, dean of Vanderbilt University's Owen Graduate School of Management, sees another lesson in the subprime woes: Make sure subordinates feel comfortable delivering bad news -- promptly. It's possible that earlier strong warnings of mounting subprime problems may have helped top bank executives react better. Mr. Bradford speaks from experience. Before entering academia, he was CEO of glassmaker AFG Industries, a unit of Japan's Asahi Glass Co. He tried to foster a candid environment by also praising and promoting people who disagreed with him or who brought him bad news. That candor helped thwart disaster at least once.
Other management experts say the subprime mess underlines dangers of incentive systems' unintended consequences. Many finance-industry participants are rewarded for closing deals, with less regard for the deal's ultimate value. Critics say that encourages everyone from mortgage brokers to investment bankers to disregard long-term risk. Sears auto centers learned this lesson about incentives in the early 1990s, recalls Mr. Coughlan, the University of Richmond professor. State officials alleged that employees recommended unnecessary repairs largely to earn more commission payments. By 1994, Sears had paid $15 million in refunds and other costs to settle charges in 41 states and 19 related class-action suits. It also pledged to change its compensation plan.