Business Performance II - Moving Toward Crisis, Managing By Hubris:
Earnings, Financial Engineering, Non-Performance, and Malfeasance
By Dave Livingston, Managing Principal, Llinlithgow Associates (
Dave is a management consultant primarily focused on improving enterprise performance by coupling strategy with execution thru the design and implementation of workable, integrated management systems.He blogs on this and related issues in Economics, Markets
& Investments and specific industries and companies at
, his BizzXceleration blog.
This collection of blog essays look at business performance in 2008 and focuses on several inter-relatedquestions. First, with the slowmotion slowdown quickly turning into something much more serious, how well werebusiness prepared and preparing for the upcoming storm? Next, two key, critical and highly co-dependentquestions – what should a business be doing? That is what are the strategic and operating principles by which itshould be judged and analyzed? And how, in fact, do you conduct such an analysis? What are the perfomers andnon-performers doing, what are the data sources, how do you collect you own data. Finally, what were companiesdoing instead of what they should have been?The short answers are that a business should be focused on creating value for its customers. That means that itneeds to have a workable, executable strategy where the strategy reflects the realities of the world around it aswell as operational capabilities. It also includes balancing short-term decision-making with long-term developmentand investment requirements. You can imagine if you like a matrix defined by columns of Current and Future androws defined by Strategic and Operational.The essays use numerous case examples to illustrate the approach and test it’s usefulness as well as appealingto great gurus, such as Warren Buffett, as sources of insight and inspiration.The bottomline is anything but good. But the machinery, case studies and principles developed and discussedhere are as applicable today as they were when first published. In fact they underpin a lot of what we see goingon around us every day.Instead of focusing on creating value, on evolving sensible strategies and developing the operational capabilitiesrequired to be effective it seems that many of the problems that showed throughout our 2007 assessments werecontinued into 2008. Business focused on the short-term at the expense of the long-term, didn’t update or refreshstrategies or develop new ones and certainly didn’t focus on developing the operating capacities required. Worsethey largely ignored the warning signs surrounding them and instead focused on short-term stock performanceand the use of financial engineering to boost apparent stock performance. All the long-term damage of thecompany and resulting in poor positioning when the crisis arrived for real.In short the focus was on financial returns not value creation or business performance. It can only becharacterized as a combination of hubris, short-sightedness and self-interest bordering on malfeasance.There are of course many exceptions and we discuss a few. In the process we hope we provide a toolkit thatallows you to evaluate the health of a business and its prospects, whether you’re an employee, business partner,customer or investor. These are approaches, techniques and data sources intended to be used and they havebeen accurate and timely.