Lessons from Japan- The Worst Case Scenario

It is perhaps the most daunting business paradox; the success of a business is based on a future that is nearly impossible to predict.  It may not have been conceivable that any layman could have predicted a massive tsunami striking Japan. Yet clearly, such a scenario was not that farfetched in a region prone to both earthquakes and tsunamis.

The world has become a volatile place. In the last decade alone, we have witnessed 9/11, Katrina, Mad Cow, Bird Flu, disasters in Haiti and Chili, the Asian financial crisis, the Enron/WorldCom debacles and the more recent global liquidity crisis. There are lessons to be learned from the tragedy in Japan that can better prepare us for what may lie ahead:

Globalization has shrunk the globe:

While globalization has been an enabler in many respects, our businesses can easily be affected by events ten thousand miles away. Numerous companies such as Texas Instruments are shuttering their Japan based operations. GM announced this week that it would temporarily suspend production in a Louisiana truck plant because of shortage of parts [i]. Apple may not be able to source critical components for the iPad 2 including flash memory cards and batteries that are produced almost entirely in Japan.

Solution= Have multiple sources of supply for raw materials and labor for products and services you produce. Whenever possible, vertically integrate as to control downstream supply.

Volatility should prompt us to plan more proactively:

Our economic tsunami was a function of myopia, our collective inability to see beyond the patterns we have come to expect. For Countrywide, Bear Sterns, Lehman Bros to have not seen a meltdown in real estate markets as a viable threat was just completely irresponsible.

The Tokyo Electric Power Co. and Japanese regulators should have considered the scenario of a flood and lost power.  They were clearly ill prepared to provide a measured response (one expert compared dropping  water from a helicopter onto a nuclear reactor with putting out a raging fire with a water pistol).

Solution= Create scenarios and contingency plans in the event external factors should threaten your business. For example, food companies must plan for massive recalls, much like transportation companies must be readied for instant increases in fuel costs. Consider a broad range of factors (including social, technological, economic, ecological and political trends) external to your industry that could affect your business in the future.

We are unable to digest the scale of events as they occur:

At first, the death toll in Japan was reported to be 300, then 1500, now likely more than 10,000. The gut retching human tragedy captured our attention and muted our ability to consider all the ramifications. A nuclear crisis and supply chain shortages were beyond our comprehension.

Solution= Consider all the variables. Ask questions about which of your dependencies could be affected by various global  events. Weigh all investments in light of the risks that may lie beneath the surface.

We react to things emotionally:

In a three day stretch last week, $1.2 Billion in new money flowed into exchanges trading Japanese stocks, after an initial sell off [ii].  After the temporary market spasm, investors returned with a more rational approach knowing that Japan would rebuild.

Solution= Include a diverse range of thinkers in decision making. Whenever there is a threat or opportunity, include a broad brain trust including young/old, male/female, creative/pragmatic, inside resources/outside advisors to assess risks and rewards in a thoughtful manner.

Volatility can be viewed as an opportunity for those who are prepared for it. While we would never wish to profit based on the ills of others, being fully prepared is the cost of admission in a brutal global market, with its many turns and nuances.  In times of volatility, those who have thought through the variables will clearly realize a significant strategic advantage.

All of us wish the best to our friends in Japan and the American servicemen who are taking part in the relief effort. As we have seen in the outpouring of support, the worst case scenario also brings out the best in all of us.

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