Coupling & Crosstalk: Headlines, trend lines, or expertise?

 
Coupling & Crosstalk is my column in the MEPTEC Report. This column appears in the Fall 2015 edition on pages 10-11.

 
Electronic coupling is the transfer of energy from one circuit or medium to another. Sometimes it is intentional and sometimes not (crosstalk). I hope that this column, by mixing technology and general observations, is thought provoking and “couples” with your thinking. Most of the time I will stick to technology but occasional crosstalk diversions may deliver a message closer to home.

Headlines, trend lines, or expertise?

The recent stock market sell-off caused significant emotional distress to many investors who were caught off-guard. Looking past “the sky is falling” headlines, what business lessons should be learned from this “correction” as they say in market-speak? There are many parallels between the stock market and corporate strategic planning. Many of these parallels are also illustrated in the development of a new industry event, BiTS Shanghai.

The same main characters in the financial markets appear in corporate planning: the Trader, the Emotional Investor, the Professional, and the Advisor:

• The Trader has replaced seasoned investors as many financial firms have shifted from Professional Investing to Trading. Traders make money on the transactions and the volatility of the markets versus investing and growing businesses. Similarly, there are those who participate in the planning cycle as another “check the box” exercise or attempt to game it to increase their compensation.
  The Emotional Manager gets swept up in the optimism of the plans and commits many of the mistakes made by an amateur investor.
• The Emotional Investors were the most likely to have been lulled into a false sense of security on the basis of the trend lines mixed with emotional optimism. Like these investors, you cannot assume that short-term trends will result in long-term growth.
• The Professional (who I hope are the majority of readers) realizes that long-term value and profit requires substantial planning because “past performance is no guarantee of future results”. They are planners who value objectivity to avoid the complacency of simply following trend lines.
• The Advisor provides independent strategic and tactical advice based upon their industry expertise and emotional detachment to properly value and analyze the situation. Professionals rely on Advisors because of their specific expertise combined with objectivity to counter-balance the “short-term traders” and emotional players.

Corporate strategic planning is often built on a rosy set of assumptions and linear thinking compounded by emotional attachment of the existing teams. The Emotional Investor incorrectly considers the sunk cost instead of the future and opportunity costs. These plans may fail to include possible disruptions to the overall market or the specific markets in which the company operates. In fact, many of the disruptions that do occur are “black swan” events that could have been identified and predicted in advance.

Why were these potential disruptors not predicted? Perhaps it is due to lack of knowledge or imagination of the current corporate team. The team may have been doing planning the same way (successfully, one would hope) for so long that they have become complacent. Or perhaps the team hasn’t looked far and wide enough to see new trends or technologies. The value of an outside consultant, in the Advisor role, during the strategy planning cycle is that they can provide cross-domain expertise and perspective to avoid black swans. The Advisor’s emotional detachment should also challenge the team to look beyond their default assumptions and consider new opportunities and processes.

There are amateur investors who believe betting against a company and shorting a stock is fundamentally wrong. And there are plenty of C-suite people who are not willing to plan for bad times or significant market disruption since they don’t want to be a pessimist or naysayer. When the original plan fails is not the time to find out that no one considered the strategy let alone had a “Plan B” or a “Plan C”. While tactics can be adjusted on the fly, proper strategy to direct the tactics takes time and considerable effort to develop. The necessary research and development of the fundamentals may take many months and cannot be rushed in the middle of a crisis.

You did not contemplate your two biggest competitors merging so you did not build relationships with others in the industry to team or merge with? A new technology just obsoleted your product and you have no blocking intellectual property or competing technology under development? If these unfortunate scenarios apply to your company, now is time to fix them or move on before you seriously consider shorting your own stock.

Predicting the future is very difficult. If I knew exactly what the market was going to do tomorrow, I would be too busy enjoying my retirement to write this column. What one can and should know is the range of scenarios: the market may go up, the market may go down, the swing may be small, or the swing may be large, etc. And for each scenario what action should one take. Historical data will often show the probability of each scenario which can be factored into the planning process. Like the market itself, in planning there is no guarantees of results.

Yes, there are metrics that provide indicators of a company’s financial health and performance. Revenue, gross margin, inventory, P-to-E (Price/Earnings), dividend yield, etc. are all important. Investors can take these metrics into account as part of their valuation of an enterprise. Judging the quality and past performance of an organization is important in determining one’s investing tactics. Having more data doesn’t allow a prediction of the direction of a company’s stock price but it may improve one’s overall assessment of the intrinsic value and future prospects. In corporate planning one wants more data to predict the future. In this era of Big Data one can dream of having the perfect set of data to predict the future. Big Data works best when talking about large populations to predict average behavior. For example, based on tens if not hundreds of thousands of past transactions if an individual buys these two products they are likely to buy this third item 73% of the time. However, with the type of events and market specifics being forecasted in corporate planning it is unlikely that there is sufficient data such that the law of large numbers applies.

Therefore the proper corporate strategy is to prepare for all the likely scenarios and determine courses of action for each to properly maximize each opportunity and manage the downside risk. If one doesn’t, the organization will be caught unprepared when a 10% probability occurs and their biggest competitors merge or worse.

There are also plenty of situations where there is simply no relevant data available. Or the cost of obtaining that data is greater than the downside risk. In these cases, it is best to proceed with caution and limit the downside risk. A close to home example: the Burn-in and Test Strategy (BiTS) Workshop decided that we should hold a one-day adjunct event in Shanghai China on October 21, 2015. All the workshops in the entire sixteen-year history of BiTS have been held in the spring in Phoenix Arizona. If we chose to do another similar event in the Phoenix area we would be well prepared to estimate attendance, build a budget, and plan the event with reasonable confidence.

However, it is clear that Shanghai is not Phoenix on so many levels. Many of our planning and some of our delivery processes were transferrable however very little of our data was applicable. Yes, we did gauge initial support from exhibitors, sponsors, and past attendees of BiTS which was overwhelmingly positive. Even with this, we needed to be cautious due to the emotional investment of the committee and the potential participants we talked with. What we won’t know until after the event is how well we did in attracting qualified attendees. With a large number of semiconductor design, packaging, and test facilities near Shanghai, we know we can fill the venue more than twice over. But a key success measure is having an audience of qualified attendees who care about the technical content of the presentations and the vendor exhibition.

BiTS Shanghai is clearly a “just do it” project for the entire BiTS committee: engage Advisors, plan to the extent possible, work hard to execute, and measure the results. The Advisors with local knowledge and expertise – not to mention contacts – have been invaluable with both the planning and execution. Without these Advisors, this event would have died in the concept stage. Yes, the first year may be “bumpy” since it is a new event but waiting longer for better data (if it is even available) would be a case of “analysis paralysis”. This is where experience is more informative than data. Our processes will gather data to inform decisions for BiTS Shanghai 2016 and beyond. However, data will not assist in the short term.

Experience provides the knowledge of how to plan and not overreact emotionally. Data is used in the planning to build models that include probabilities and risk. And expertise tells you how to interpret the data, what else to consider, and how to operate when there isn’t data. It is expertise that converts data into knowledge, filters headlines, and finds meaningful trend lines.

As always, I look forward to hearing your comments directly. Please contact me to discuss your thoughts or if I can be of any assistance.