When the U.S. financial meltdown struck in 2008, with the seeds laid much earlier, we were asked by our clients and friends, “How deep will it be? How long will it last.” Will it be a short run recession, a deep recession, or even a great depression? Gary Becker, the Nobel Prize economist, when asked the same question in October 2008, said, “Nobody knows. I certainly don’t know.” The message: don’t trust economists who say they know.
The fact is that we are entering a new age, The Age of Turbulence. In his book, The Age of Turbulence, Alan Greenspan describes his diverse experience as the Federal Reserve Chairman and one of the most powerful men in the world. Greenspan had to deal with a great number of economic disturbances and shocks for which the only recourse was to muddle through and pray. He was confronted with major issues facing the United States, such as burgeoning trade deficits and retirement funding, as well as the proper role of government regulation.
The world is more interconnected and interdependent than ever before. Globalization and technology are the two main forces that helped create a new level of interlocking fragility in the world economy. Globalization means that producers in one country are increasingly importing resources from other countries and increasingly exporting their output to other countries. Technology—in the form of computers, the Internet, and mobile phones—enables information to course through the world at lightning speed. News of a breakthrough discovery, a corporate scandal, the death of a major figure, is heard around the world. The good news is lower costs, but the bad news is increased vulnerability. Outsourcing has always had its defenders and its critics. While global interdependence works in everyone’s favor in good times, it rapidly spreads much pain and damage in bad times.
But what is turbulence? We know it when it occurs in nature: it creates havoc in the form of hurricanes, tornados, cyclones, or tsunamis. We experience turbulence in the air from time to time when a pilot asks us to fasten our seatbelts, In all these cases, stability and predictability vanish only to be replaced by being buffeted, bounced, and jabbed by conflicting and relentless forces. And sometimes the turbulence will be so continuous as to plunge the whole economy into a downturn, a recession, or possibly a protracted depression.
Economic turbulence creates the same impact on us as turbulence in nature. One moment we hear that Miami has built more condominiums than buyers are buying. Speculators are carrying the cost and having a hard time meeting the payments. We hear of families who have purchased their homes on “NINA” loans—“No Income, No Assets.” Now they can’t make their mortgage payments and are facing foreclosures. Banks start realizing that they have deadbeat assets due to securitization and hesitate to make more loans to either customers or other banks. Consumers hear this news and switch from credit-based spending to saving, causing companies that sell automobiles, furniture, and other “postponables” to suffer declining sales. These companies, in turn, announce major layoffs that result in less available consumer purchasing power. Meanwhile companies slow down their buying from other companies, creating hardship for their suppliers, who in turn, lay off their workers.
Companies in these difficult times tend to make across-the-board cuts. They deeply reduce their new product development budgets and marketing budgets, both of which undercut their short-term recovery and long term future. Consumers, workers, producers, bankers, investors and other economic actors feel that they are living through an economic hurricane, a maelstrom that is unstoppable and relentless.
Hopefully, this turbulence is only short lived. In the past, it has been. It has not been the normal state of an economy. Yes, economies often do return to “normal” conditions, but in this new era turbulence at varying levels becomes an essential condition. A particular country may be racked by turbulence, as Iceland experienced in 2008 as its banks moved into bankruptcy. A particular industry—advertising, for example—may be racked by turbulence as companies move more of their money from 30 second TV commercials into newer media such as websites, emails, blogs, and podcasts. Some markets may be turbulent, such as the housing market or the auto market. Finally, individual companies such as General Motors, Ford and Chrysler may be buffeted by turbulence while others—Toyota or Honda, for example—may experience less of a plight.
The fact that an individual company can be living through conditions of turbulence, and if long enough, a recession, is underscored in Andy Grove’s well-known book, Only the Paranoid Survive. As the former CEO of Intel, Grove had to deal with all kinds of threats to damage Intel’s preeminent position in the computer chip manufacturing business. It would take just one agile competitor to come out with a superior chip at a lower price to topple Intel. Grove had to live with uncertainty. Intel had to erect an early warning system that would reveal signs of imminent trouble. It had to create different “what if” scenarios. And it had to preplan different responses to the different scenarios in case they occurred.
Grove had to create a system that would insure against risk and respond to uncertainty. We have a name for such a system. We call it Chaotics. All companies must live with risk (which is measurable) and uncertainty (which is un-measurable). They must build an early warning system, a scenario construction system, and a quick response system to manage and market during recessions and other turbulent conditions. But our finding is that most companies operate without a Chaotics system. Their defenses are scattered and insufficient. Motorola doesn’t have a Chaotics system. General Motors doesn’t have one; nor do countless others in the U.S., Europe, Asia, and in markets all around the world.
Most companies operate on the assumption of a built-in self-restoring equilibrium. Economists built price theory with equilibrium in mind. If oversupply occurs, producers will cut their prices. Sales will increase, thus absorbing the oversupply. Conversely, if a shortage occurs, producers will raise their price to a level that will balance demand and supply. Equilibrium will prevail.
We postulate that turbulence, with its consequent chaos, risk and uncertainty is now the normal condition of industries, markets and companies. Turbulence is the new normality, punctuated by periodic and intermittent spurts of prosperity and downturn—including extended downturns amounting to recession, or even depression. And turbulence has two major effects. One is vulnerability, against which companies need defensive armor. The other is opportunity, which needs to be exploited. Bad times are bad for many and good for some. Opportunity occurs when a strong company can take away a competitor’s business, or even acquire a weakened competitor at a bargain price. Opportunity is present when your company doesn’t cut critical costs, but all your competitors do.
If we are correct, companies need a Chaotics system for dealing with uncertainty. We will outline such a system and illustrate it with cases of companies that have been victimized by turbulence’s chaos and many companies that exploited chaos to their advantage. We are hopeful Chaotics will help you lead your company to maneuver, perform and thrive in the new age we’ve now entered—The Age of Turbulence.
Philip Kotler
John A. Caslione
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