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Implications

Driverless Cars and Long Term Implications

Driverless cars are reality today. The street images you look at on Google Maps came from cameras mounted on some of the first examples. It’s a logical presumption that eventually consumers will adopt the technology for mobility.

What does that mean? Is it a short journey, a “hockey stick” adoption pattern, and do the benefits outweigh the difficulties of putting those vehicles on the road? Who will own them? Who will make them? What will be the impacts on auto insurance, manufacturing, purchase, lending, and payment for usage?

The questions are multiple and should be asked if you’re in any number of fields. Government, public safety, financial services, city planning, transportation, city dwellers, auto manufacturing, and geospatial fields come to mind immediately.

The adoption? It will depend on consumer attitudes and those will be shaped by existing perceptions and the safety record of the vehicles. Google is ahead in the development with an enviably low mishap rate but the recent Tesla-related death and a culture of experimentation in the driving industry force – the software sector – means that the road ahead will be bumpy.

Plus there’s the regulatory environment which right now is a patchwork of state laws in the US without a Federal baseline that needs to be established. As typical, government lags by anywhere from 5 to 10 years just as they have with other de novo technology issues like drones, advanced analytics, and cyber-currencies.

But what you can do right now is think through the implications of eventual adoption on your career or industry. After a recent presentation where I outlined the impact of 25% of drivers switching to use of driverless vehicles a state government executive cam
Googledriverlessmall
e up to me and said his department at looked at the same possibility and determined that the existing highway infrastructure is currently overbuilt by about 40%. He said his state is scrambling right now to convert construction assessments to other forms of mass transit. He believed a 25% adoption was highly probable by 2040.

Insurance and financial services already anticipate the impact. Travelers places language in their annual report on the threat to their revenue of autonomous auto adoption. Warren Buffett is quoted as saying, “when you start making the driver safer, that would be a big, big jump, and that will happen some day, and when it happens there will be a lot less auto insurance written."


Photo: By Grendelkhan - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=47467048

A Red Letter Day for Global Trade


Brexit

July 24, 2016 is a day when two events impacting world trade became real – and create
a puzzle of after-effects. The implications of Brexit and the opening of a higher-capacity Panama Canal are going to ripple through a wide range of industries over the coming months and years.

At this writing markets are roiling around the world over Brexit. What’s puzzling is that there seemed to be almost no market adjusting in advance of the vote. What? Didn’t the polls continue to estimate the vote was too close to call? In those instances I always advise clients to be ready for either outcome and to take actions in advance to hedge, protect, and be ready to trigger pre-thought moves.

The EU is a key piece of the global economy. There’s no doubt it is weakened by this action. In economic forecasts recently I’ve been warning of the difficulty that arises when two major economic players are simultaneously at risk of recession. Britain and the EU may simultaneously dip after this action and the difficulties in Brazil, Argentina, Canada, and China could trigger a serious downturn.

The Canal? A longer-term but perhaps even more precarious situation. Panama took the low bid on the reconstruction of their overwhelmingly prime asset. The limitations to “Panamax” sized vessels limited shipping for at least the last 40 years of the century-old infrastructure. The rebuilding of the lock system enables very large container vessels through the “new” Canal.

Problems? Count em. Substandard concrete based on fracture-prone Panamanian rock. Poor design. Reliance on Spanish-built tugs that can only reliably operate in reverse, not forward. Not enough room in the locks for giant ships and the tugs at front and rear of the ships. Insufficient steel reinforcing in several areas of the new locks. And all that along in an El Nino-induced record drought that means that super-vessels don’t have enough water to float between the oceans.

One mistake. One super-ship into a lock wall and it all comes tumbling down. Planned volumes through the Canal like US grain into Asian markets are disrupted. China’s shipments to US East Coast ports. Months if not years of delays. Funding shortfalls that could topple the Panamanian economy.

Fiduciaries, leaders, directors, management? Sharpen up your implication thinking and start the discussions and actions now.

Image - Copyright: nerthuz / 123RF Stock Photo

MERS, SARS, & Preparation

Disease outbreaks are one of the top “wild cards” in my field of forecasting. These are lower-probability but high-impact events. One is unfolding before our eyes. The best current information I’ve seen as I write this is here:

http://www.sciencemag.org/content/348/6240/1183.full (paywall)

I remember SARS well. I was pulled into a multi-day implication-focused discussion back in 2003 as a corporate team overseeing store openings in two major Chinese cities worked through the impact on their business and key decisions moving forward. I still use their situation as a case study in some leadership education sessions I conduct.

MERS CDC
Photo: CDC

MERS is a crossover disease from camels. It is an airborne and surface-contacted virus. It was discovered in 2012 in the secretive kingdom of Saudi Arabia. Until recently it was thought to have a 40% fatality rate.

Just like SARS it features media-friendly images of crowds wearing face-masks on Asian streets, soaring case identification, thousands of people in quarantine, rumors, and the beginnings of panic.
Instead of China the epicenter is South Korea. The WHO is onsite and the information coming from the government is much more forthcoming that what we struggled with back in ’03 with the Chinese.

The “index case” – the first known victim – had tremendously high amounts of virus in his lungs. The most virulent spread has been in the hospital that treated him. A term to remember – “superspreading event” – occurred. An entire floor of St. Mary’s Hospital, open only a couple of months, was contaminated with 30 identified cases stemming from the one patient. One of those who got that initial contamination went on to pass the virus to 36 new cases in another hospital. Frightening.

Now more than 2500 people in South Korea are in quarantine and the government is reporting new cases daily.

What to do?

Watch carefully. Seoul is a major airport location. Seek out information about how the illness progresses. There’s thought that it may be more virulent at different stages. But also keep a level head and take to heart that the virus is now fatal in just 10% of cases.

Begin to
prepare contingency plans if the disease either continues to multiply in South Korea but especially if it’s reported in new countries. Develop the implications on your organization, job, colleagues, community, and especially your family. Investigate which treatments are being used. Preemptively lay in a stock of face masks – which you understand will not protect the wearer but will prevent the wearer from spreading the virus if they’ve been exposed.

We’re not at the state where this outbreak threatens anything but this past year’s failure of the flu virus, the fairly regular reports of virus outbreaks from animal crosses (especially avian flu) should cause you to think that this is something that belongs in your long term thinking and organization’s s.
emergency preparedness.

Strategy, Not Knee-Jerk

Today a lawmaker who was briefed on the Federal Office of Personnel Management breach of employee data leaked that the incident is far worse than originally reported. Not 4 but maybe as many as 14 million records of federal employees, past and present, are in the hands of the bad people. Very disturbing. http://bloom.bg/1Fc8EMx

T
OPM Seal Small
hese record sets are what is known as “fulls” or “fullz” in the hacker lingo. They are full sets of information. Names, addresses, phones, social security numbers, pay, health records, military service records, and – most damaging – security clearances. Think of the opportunities. Think of the damage. Think of the outrage from the victims that their very safety and personal property has been exposed.

Plus it may have come from China.

But what bothers me most is the knee-jerk reaction from the Congressional hawks. They want a response. They want to declare war. They want to go to the alleged perps servers and destroy data. John McCain is almost shouting for a “preemptive strike.”

It’s another example of governmental leaders making quick decisions without thinking through the implications or consequences. Cyberwar is nothing trivial. Not only could it unleash a storm of “weaponized code” – as my clients in the information security world call it – but it may not come only from from a few sources like China or North Korea. The entire hacking community could get involved. That’s a lot of enemies. The implications are chilling.

McCain spoke about the ability to shut down the US power grid from abroad. If the US declares cyberwar we can probably expect exactly that type of action. The hawks will have guaranteed it. Often the government takes action without thinking through the unintended consequences.

Stuxnet, the malware developed to attack Iran’s centrifuges concentrating nuclear material, turned out to be reverse engineered and various versions were dropped back into US systems and weapons systems.

USCYBERCOM_Logo
Let’s not forget that the Snowden incident was a game-changer. One person was able to create an entirely different perception about government collection of data on upstanding citizens. He revealed the capabilities of the NSA and the US Cyber Command. Cybersecurity is an area where one person can create significant damage.

It is never good strategy to reveal your thinking to your enemy. “What’s wrong with you Santino? Never let someone outside of the Family know what you’re thinking.” Is it really a good idea to rattle sabers if you don’t have a prepared strategy to back it up. We can almost guarantee that one does not exist.

The smart way to approach this problem is with a two-pronged effort. One is the ratification of US and worldwide law that provides severe penalties for these actions. That’s what McCain should be backing and initiating with his history of taking brave political initiative. But the other prong should be a robust but clandestine plan to penetrate, invade, creatively disable enemies and deal with as many resulting contingencies as possible.

Trigger and Cascade

Trigger events are those with long term after-effects. We’ve seen one recently in the technology sector. Apple prevailed in its patent infringement suit against Samsung. It’s not the billion-dollar award that’s most significant. It’s the implications of the decision.

It was a complex issue, perhaps too complex for a jury of laypeople to decide. Apple was charging infringement not only on how their devices work but how they look. This includes software features, hardware and high-speed communication ability, as well as something called "trade dress," the overall look and feel of a device.

My work with clients and executive education sessions often involve an “implication cascade” – thinking about the after-effects, results, perhaps consequences of a future event. Here are potential implications from the Apple vs. Samsung decision.

  • There is a new wave of creativity in handheld and tablet technology potentially leapfrogging Apple products.
  • Innovation in the handheld sector is stymied as inventors and small companies fear a suit from one of the big players.
  • Companies increasingly build rings of patent and copyright protection around their offerings, discouraging technology transfer and creating unique, differentiated offerings.
  • Copyright law undergoes a shift toward “trade dress” – the unique look and feel in a range of product areas including automobiles, appliances, furnishings, dress, and consumer products.
  • “Apple Island” – where the “i-market” segment increasingly becomes handcuffed to the technology.
  • Design trends upward as the base of market differentiation.
  • More mergers in the handheld and tablet marketplace as large competitors snap up smaller players with unique features.
  • A market where 3-4 companies (Apple, Google, Microsoft, one unknown) are left standing by the end of the decade.
  • A one-year delay in enforcing an injunction enables Samsung to turn around its product line and introduce new devices late in 2013.
  • Apple’s share price goes over $800.
  • Agreement on the GATT is delayed further by this new emphasis in intellectual property protection, hamstringing WTO talks on trade and subsidies.

A New View of Oil

Several entries in this blog have focused on oil prices. It’s an overarching driver of future factors that range from consumer behavior to geopolitical influences.

Lately I’ve studied oil prices more carefully and drilled into (forgive the inadvertent pun) the data that looks ahead. I’ve been a forecaster of a long-term rise in prices due to supply and demand pressures for a commodity with declining output.

I’m now adjusting my views in line with advice I give clients. A forecast is foresight that takes into account uncertainty and adjusts with time and new information. Time has passed since I began forecasting a rise and new information is available.

Frankly, the Bakken is making me a believer that more oil that will be available over the next two decades than we’d been able to forecast before. There’s been evidence of this in the past but now it’s being put into practice to a greater degree.

For many years I lived and worked throughout California’s Central Valley. The oil-producing fields to the west of Bakersfield were a constant source of amazement to me as someone who minored in geology in college. The estimates of the field and its productivity continued despite the forecasts of depletion. The Kern River Field was supposed to have fallen off in production in the 30’s, 40’s, 50’s and especially the 70’s and 80’s.

Today Kern River still forms a foundation of the strategic national reserves. Chevron began injecting steam underground in the 60’s and today the formation still yields about 80,000 barrels per day. It was a harbinger for what we see today as the unprecedented emergence of “tight oil” – petroleum that is brought to the surface through new technology both in new discovery fields and old fields that were thought to be defunct.

That’s what’s going on in the Bakken which I doubted was a significant or long-lived contributor to oil production. Today we know that it is and while so-called “cheap oil” – where you punch a hole and oil and gas flow to the surface – could be gone the creation of new reserves is going to be with us on an increasing basis.

Oil over $200 a barrel? Less probable if geopolitical events don’t cause problems in the Gulf. But I think the planet may have been blessed with some more time to use fossil fuel reserves while it makes the transition to sustainable sources of energy.

The Drought and Farmer Viewpoints

It’s been almost two decades since I first worked with a bunch of smart farmers who lead their state associations for the corn and soybean commodities. I’ve learned their business, watched them navigate a series of farm legislations, try to wean themselves away from government subsidies, and then prosper as prices came up dramatically over the past five years.

This year I returned to the same gathering for a fresh class of state association leaders. I didn’t know quite what to expect in a severe, brutal drought. I talked with some producers who were not going to harvest much of a crop. A very few lucky farmers located further north in the country or in the relatively moist East are going to do extremely well. But even the unlucky were optimistic as one can only be when you put almost everything in your business on the line every year and throw yourself on the mercy of nature.

If you want to see an example of resilience listen to these men and women as they talk about their ground, the crops, and their plans for the future. Certainly crop insurance plays into the situation. But they firm their jaws, speak frankly about the risks, and when asked about another drought “event” (that’s the term they use) they become gravely contemplative.
“That would take us back to zero,” one farmer told me. Another said, “We could deal with that but we’re probably going to sit back and see how the winter reestablishes our moisture before we even decide to plant next year.” The implications are serious for food supplies, energy prices, global trade.

If the breadbasket of America was to see anything similar to the conditions that have ravaged Texas for almost a decade we might look at food security suddenly becoming a strategic concern. The executive branch might need to step into the farm situation instead of allowing Congress to continue to argue over food stamps for the poor instead of providing a safety net for the people who feed the country.

Technology Trends from the Trenches of Enterprise IT

I’ve moderated and presented the closing keynote at the largest global gathering of information security professionals for the past two years. It gives me insight to what they see as emerging technologies, issues, and dangers.

This is an unusual conference. A task force guided the producers to stage a three day global meeting that departs from the typical talking heads and death by PowerPoint. Incisive interviews, extremely well-moderated panels, and audience interaction are the norm. This year there was an especially intriguing hands-on session co-led by IDEO and Deloitte on how to provide the right space for innovation within organizations.

In 2011 the huge buzzword was “Cloud.” It was so pronounced that by the third day we were joking about avoiding the “c-word.” This year the cloud was taken as a matter of fact, a reality that all executives (CIO’s, CISO’s, VP-level info security types, and consultants) take in stride and provide for in information security tactics. Here are some other salient tech trends from the conference:

  • SAAS – using the cloud, “software as a service” is now reality in many organizations. Google’s penetration with Google Docs into large enterprises or sales departments’ non-IT-aided implementation of SalesForce are both examples.

  • BYOD – lots of acronyms, right? “Bring your own device.” Workers want to use their personal technology-du-jour on the job. That means organizations can’t mandate Berries but have to adjust to iPhones, Droids, and the various tablets as accessing sensitive company information.

  • Big Data – this has been around in various forms, most often in the term “data-mining” for well over a decade. But now there are accessible, pragmatic tools to allow organizations to probe their mountains of data for patterns, opportunities, and profit generation.

Six years ago, on the eve of the Great Recession, a financial services CEO criticized me bitterly for engaging her board in scenarios that forecasted the possibility of individual customer experiences or products. Today large financial institutions can use Hadoop to gather information and do exactly what I posed as a possibility. That exec, incidentally, no longer heads that organization.

Energy Prices: Why Have They Moderated?

It’s seldom that I work with a client not affected in some way by energy prices. Whether it’s the shipping costs of manufacturing, input costs of agriculture, or even the impact of higher transportation expenses on business to consumer organizations this question about the future often plays into strategy and preparation for the future.

Everyone wants to know the future price of a barrel of oil or of a kilowatt of electricity. Like most forecasts the calculation is complex and the range is wide depending on the timeline. OPEC policy, supply, demand, new discoveries, emerging technology, consumption behaviors, geopolitical events can all have a bearing or effect on energy price.

For several years I’ve been tying the price forecasts to global economic performance. This has been especially true as the globe goes through the most dramatic economic cycles since early in the last century. In fact, I’ve been forecasting a semi-permanent rise above a $100/barrel price floor sometime between 2011 and 2015. I still hold to it.

Many will ask what’s driving down short term spot prices in oil. Good question. Typically these short term fluctuations are driven by buildup in supply and the hidden effect of economic downturn and consumer behavior. That’s what’s been going on lately. I believe it also has to do with the discoveries of fairly large but very expensive sources of oil in the Western Hemisphere. Bakken oil (or “tight oil”), Alberta tarsands, and offshore Brazilian potential are all examples.

These “tight” and “dirty” sources have put off the depletion of other sources in the recent past. Eventually, however, the inexpensive oil sources are going to wane further and the price is going up. I believe to a fluctuating, often volatile range from $100 to $150/barrel.

Whether I’m right or wrong about the forecast is less important than preparation. I’m fond of the statement denial is not a strategy. That’s why I’m bemused, surprised, or sometimes frustrated by organizations that find reasons to deny any possibility of what would be painful developments. Those that believe the relatively inexpensive energy we enjoy today is going to be with us for the foreseeable future are in that denial.

The Race for Sustainability

It was obvious 5 years ago that the term replacing “green,” environmentalism, or “save the planet” would be sustainability.

The signs were obvious. In manufacturing, energy, and agriculture the shift had been underway for some time. But the “s-word” was popping up in unanticipated fields like financial services, municipal government, hospitality, and healthcare.

The driver: consumer attitude. When people are asked whether they want a product that’s “green” or “organic” they hesitate. Experience tells them it’s going to be somehow a sacrifice of quality and higher priced to boot. Not a great choice unless you’re in the minority of the market that wants to save the planet at any cost.

But the term “sustainable” refers to the concept of renewable or the ability to be perpetual. A UN commission in 1987 established a definition that holds today,
“meet the needs of the present without compromising the ability of future generations to meet their own needs.” Consumers sign on to that thinking readily. So readily, in fact, that the future is going to be full of battles over the ability to use the term.

A conflict in an active segment of my practice is a good example. Organic food producers would like to claim the sustainable term as their own. An organization called the Leopold Academy applied to the American National Standards Institute a few years ago to establish a standard, a definition, of “sustainable agriculture.” When forming the group that would put forward the criteria they pointedly omitted the largest food producers in the US – production agriculture. You know, the farmers that use chemicals and genetics to be the most productive on the planet and which account for well over 80% of the food production in our country.

The US Department of Agriculture intervened and the Leopold Academy agreed to put 11 production ag representatives on the committee where they were outnumbered 3-1 by organic producers and environmental group representatives. The new participants tried to turn the standards to what’s known as the “triple bottom line” – defining sustainable as not only environmental but based on
economic and human capital issues as well. The short version is people – planet – profit. The discussions continued for some months but last fall the production agriculture reps pulled out of the talks.

Today it may be impossible to establish a standard until two sides of the debate can sit down in more equitable numbers to reach consensus on the definition. It’s a huge issue that could lead to more than standards and labeling. With a political overlay the standards would eventually translate to regulations.

Look for many more debates, discussions, and organizations positioning themselves as “sustainable” in the years ahead. Look for them to use the triple bottom line as the standard. In your own industry or field, no matter the level of environmental sensitivity, look for
sustainability to be a major issue in the future.

The Oil Forecast

For the last three years, ever since it became obvious that the world was slipping into a recession and commodity prices would come down, I’ve forecasted an inevitable return to rising oil prices.

My logic: the recession reduces demand but only temporarily. Recovery from recessions is uneven globally. Some regions recover months, perhaps even years before others. A robust economy in Asia and to a lesser extent in Latin America will create demand that will drive prices up despite a slight fall in use in the U.S. and the EU.

Speculation or unexpected geopolitical events – “triggers” – will create volatility. Speculators will enter the market on supply shortages. No regulating body can keep them away from the opportunity to make money.

My forecast from mid-2008 forward: 75 to 85% confidence that an oil price spike and permanent plateau above $100/barrel will come sometime in the 2011-2014 time frame.

It’s been of interest to clients in, well, almost every field. Because as one CEO said to me on being asked what energy prices affect, “Everything!”

As the economic recovery has forged ahead strongly almost everywhere except the North Atlantic the price of a barrel of oil has risen back through the $50, $70, then $90 levels. Now the unprecedented events in the Middle East have taken Brent futures over $111. West Texas will follow.

Will it stay there? Of course it depends on a complex array of factors. Economic effects, how high the price spikes, volatility, whether the Saudi’s can really make up most of the shortfalls, refining bottlenecks, and more. In the weeks ahead I’ll place more information here on the implications of this important trend.

In the meantime I’m getting a lot of queries from clients who quickly remember my forecasts and are running through their Plan B strategies to react to the development or are confident because they planned for the high probability of this years ago.

The Consumer Christmas 2010

I spent time at the epicenter of American spending over the past few days. The Christmas shopping at Macy’s flagship store in Manhattan was, in a word, tepid.

Don’t get me wrong. The store was busy but large areas were deserted. A store that stays open 24 hours a day is a phenomenon in itself but those wandering the aisles were being attracted to sale racks and less-spendy areas of the store.

It was interesting that many of the fur-bedecked matriarchs leading families very slowly and deliberately through the store’s luxury departments were speaking other languages. A lot of Russian and many Asian languages filled the air as we steered around them.

It’s not surprising. Almost all surveys of consumer behavior in the U.S. show a concentration on reducing debt that is unprecedented. Spenders are coming to grips with the fact that jobs are not multiplying, they’ve got to make do with what they have, and the smartest thing they can do is get out from under credit card and other debt as quickly as possible.

Where was shopping intense in Manhattan? Jack’s Dollar Store located just a few blocks from our hotel. Wall to wall shoppers all the way up to the closing hour.

The most likely scenario for the economy, in my opinion, is a long slow recovery. What I observed falls in line with that. I think a GDP growth near 3% in 2011 will enable the unemployment rate to drop below 9%. Spending will return cautiously. It won’t be for big-ticket items but will begin to bolster support for more indulgent food, some travel, culture, entertainment, and family involvement.

We attended sold-out Broadway shows but there were half-priced tickets available up to curtain time at almost all shows. Movies that you would have to buy tickets for days in advance at prime viewing times were walk-up purchases. Top-rated restaurants were busy but not overwhelmed. On the eve of the Christmas rush I’ve been getting discount and free-shipping (even of the rapid variety) offers on a regular basis.

We’ve moved into an era of moderation and introspection. May we emerge more sober and wiser.

The Wild Card Weeks

Wild Cards are lower probability, high impact events. We’ve not seen a few weeks like the last three for some time. I’m not a believer in the adage of “threes” when it comes to these events but there are lessons and implications for the three we’ve just seen.
A volcano erupts and ash plus extreme caution by air travel regulators paralyzes a system we take for granted. Millions are stranded. Millions, by any currency measure, are lost. Alternative transportation comes into short-term vogue and overloads. Normalcy returns and we forget. But that volcano is still smoking and just because it’s not page 1 news we relax.
An oil platform explodes and lives are lost. Initial concerns about leaks are downplayed by company executives. Days pass and a slick surfaces. There’s action but no results. Now we’re staring into one of the great environmental disasters of our generation.
Initial reports of an over-reliance on a “blowout preventer” will be examined in hearings and investigations for the next 3-4 years. Recriminations from environmentalists take on stronger weight. A decision to open more offshore drilling could not have been worse timed. We realize that we’re totally unprepared for the scale of the problem, contingencies for stopping the gusher of oil on the bottom, and we’re unenlightened or purposefully ignorant about the risks of the technology.
A car bomb fails to detonate in New York’s Times Square. If it had a fireball would have killed dozens, perhaps more. Vehicles nearby would have burned and exploded. The ensuing panic would have injured hundreds. Midtown Manhattan would have emptied as reports of the notifying phone call leaked out. The caller said it was only a diversion for a larger device. Transportation would have slammed to a standstill. Offices remained empty for Monday morning. Absenteeism spiked. Broadway theaters cancelled performances. And the world’s biggest financial center would have stopped for days. The economic after-effect would have climbed into the hundreds of millions for a devices that cost only a few hundred dollars.
When the alleged bomber is arrested within 53 hours we relax. Investigations of the origin, connection to terrorist groups, evaluation of police response will come. There will be criticism of no-fly lists, airport security, even Craigslist. But when the crisis is over our thinking returns to the mundane.
Therein lies the problem. Extraordinary events like these should prompt contingency thinking and action. They should trigger better preparation, encouragement of public involvement, and planning for the next inevitable event. Too often we don’t look at the next event, only the last event.
I’m hoping the wild-cards of the past few weeks result in serious contemplation and preparation for:
  • Disruptions of air travel for substantial periods of time on the part of industry and government.
  • Development of even better alternatives to face-to-face communication to back up or reduce long distance travel.
  • Better technology and layered backup systems for the next generation of deepwater drilling like that necessary for tapping the even deeper oilfields off the coast of Brazil.
  • An acceleration of alternative energy sources and, most importantly, conservation.
  • A renewed recognition that many man-made systems have Faustian consequences that should be contemplated before adoption, not after.
  • Higher levels of vigilance among all peoples in all places for those that would indiscriminately destroy life.
  • Smooth transitions to pre-thought Plans B, C, D, and Z when the worst happens.

The Buffett Letter

I read Warren Buffett’s letter to me as a shareholder this morning. Direct, analytical, balanced as usual. I like this passage a lot:
“Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding. Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy.”
The chairman’s contention that obvious upside growth is no guarantee of success is one that many leaders miss. I see it in industries challenged by bright but unclear futures.
Agriculture is an example. It’s obvious that increasing world population is going to demand food and a growing middle class will increase demand for animal protein in diets.
OK. Barring a major disease outbreak or a comet hit, this is an obvious outcome.
Many in agriculture assume that North America will be the big winner. That the world will beat a path to their production. That other nations, other producers will not be able to keep pace or match their products. Here the Buffett interpretation is missed.
Predictions from Malthus to Paul Ehrlich to recent forecasts of peak oil after-effects have breathlessly proclaimed danger. I watched Lester Brown of the Worldwatch Institute in 1995 do a predictive presentation on
Who Will Feed China. He’d written a book with that title.
The answer to Brown’s question? China itself. While importing substantial quantities of soybeans and vegetable oil it is quite adept at meeting its own food needs and exporting very large quantities of foodstuffs and value-added products to the world.
Where is Buffet’s “host of competitors” battling for supremacy? Everywhere.
I can cite examples of basic crop rotation and sound agronomy’s ability to triple and quadruple the productivity of land in Asia and Africa.
Then there’s wonderful technology
not involving genetic modification but making use of plant genomes to bolster Mendel’s techniques in developing even better crops and nutritious food. Mega-competitors like Brazil, Argentina, and huge multi-national corporations that have bought land in the poorest nations will crank out food, feed, and fiber in the next 3 decades.
Errors in judgment like looking at autos in 1910 or TV sets in 1950 or hand-held converged devices today with rose-colored myopia abound. There’s no argument that strong demand is ahead but there are no clear, dominant, easy winners.
Heck, one of my clients, Motorola, is spinning off its well-known handset business and retrenching to the predictable, profitable platform that has been there for decades: two-way radios and similar technology. Personally I think it’s a solid, overdue strategic move.
Question the too-easy and too-optimistic assumptions. Widen your view. Look ahead. Identify the potential competition before it surprises you. And then adjust your strategy to compete in the good, but challenging times ahead.