Meet the MasterMinds: Peter Navarro on Mining the Business
Cycle for Competitive Advantage
 Peter
Navarro is the author of the bestselling investment
book, If
It’s Raining in Brazil, Buy Starbucks,
and The
Well-Timed Strategy: Managing the Business Cycle for Competitive
Advantage. He is also a business professor
at the University of California-Irvine and an expert on
the “big picture” application of understandable
macroeconomics.
Navarro says that executives are missing out on the opportunity
to create competitive advantage by mastering the business
cycle. We asked Navarro why so many savvy consultants and
other business people ignore the business cycle in the strategic
planning process.
MCNews: What’s missing from the strategic
and operational planning process for most businesses?
Navarro: Typically, companies are missing
three things: sophisticated “business cycle literacy”
among the top management team; the lack of a facilitative
organizational structure; and the absence of a supportive
organizational culture.
Business cycle literacy includes paying attention to, and
understanding, the constant swirl of economic events and
translating that information into strategic and tactical
actions. In the book, I point out Ralph Larsen of J&J
as one of the poster boys for business cycle literacy versus
John Chambers of Cisco and others who demonstrate the consequences
of illiteracy.
 In
some cases, middle managers may see an economic problem
brewing, for example, a recession, but can't get the
message through to the top. |
Organizationally, many companies are structured in such
a way as to make it difficult for forecasting information
to flow freely up and down the chain of command and, equally
problematic, across functional areas. In some cases, middle
managers may see an economic problem brewing, for example,
a recession, but can’t get the message through to
the top.
A severe problem with just that drove Conexant into penny
stock land. In other cases, a company’s marketing
or production team might be really good at managing the
team’s functional area through economic shocks, but
its skills and knowledge don’t translate across functions.
As for organizational culture, at least some companies—Nucor
and Paccar offer stellar models—rely on a business
cycle sensitive organizational culture to complement their
strategies.
MCNews: Given its importance for business performance,
why does consideration of the business cycle seem like such
an afterthought in the business planning process?
| A
lot of senior managers "grew up" during the booming
1990s when the economic cycle really wasn't all that
important, and so they never learned how to manage it. |
Navarro: There are many reasons for so
few “master business cyclists.” A lot of senior
managers “grew up” during the booming 1990s
when the economic cycle really wasn’t all that important,
and so they never learned how to manage it.
Too many senior managers also tend to focus too closely
on their “knitting”: They pay far more attention
to micro issues pertaining directly to their business and
industry than the real game, which is how the broader macro
environment is shaping their business prospects.
Then, too, many managers are victims of the “MBA
mindset.” The problem here is that most business schools
teach from a “functional silo” perspective and
deliver each subject—marketing, operations, HR, and
so on—as a self-contained unit. In contrast, managing
the business cycle is very much a multidisciplinary and
integrative task.
In a recession, for instance, the best “Master Cyclists”
will counter-cyclically increase advertising both to increase
brand awareness and help trim inventories for the
operations management folks, even as other areas of the
corporation are increasing capital expenditures to position
for the next expansion.
A final problem—which is quite problematic indeed—
is that there is an element of aptitude involved
in business cycle management. This means that even if a
CEO understands the importance of the economy, it doesn’t
follow that he or she will be smart enough to implement
strategy. An apt analogy is that we can’t all be concert
pianists or professional athletes no matter how committed
we might be to the goal.
MCNews: You coined the term “Master Cyclist”
for the business executive who knows how to manage a business
through boom, bust, and back to boom. What separates a Master
Cyclist from others?
Navarro: The best Master Cyclists—people
like Ralph Larsen at J&J, Richard Ziman at Arden Realty,
Angelo Mozilo at Countrywide Financial, and Chad Holliday
at DuPont—exhibit a highly sophisticated degree of
business cycle literacy.
They have built and run organizations that are strategically
and tactically business cycle sensitive, and they are quite
willing to engage in countercyclical and often contrarian
behavior in anticipation of economic turbulence.
MCNews: What have Master Cyclists learned over
the years that the rest of us haven’t?
Navarro: Let me provide you with a set
of quotes from three of the best Master Cyclists in the
US executive corps that capture the essence of Master Cyclist
management.
- “We shift our product line with cyclical movements—particularly
leveraging different cycles in different countries and
moving between the public and private sectors.”
- Ray Holdsworth, CEO, AECOM
- “What you try to do when you manage this type
of company is broaden the franchise at the bottom of the
(economic) cycle so that the snap out of the cycle can
be positive.” and "Terex's product and geographic
diversity has helped us deliver better results overall
and partially offset the soft global mining business."
- Ronald DeFeo, CEO, Terex Corporation
- “Nucor has a long-standing tradition of emerging
from cyclical downturns stronger than before entering
them. We intend to take advantage of the economic downturn
to gain market share, penetrate new markets, and emphasize
cost reductions.” - Daniel DiMicco, Chairman, Nucor
Steel
What Master Cyclists know is that well-timed strategies,
which coincide with changes in the business cycle, are essential
to achieving strong financial performance in good times—and
bad.
MCNews: As you look at today’s business
cycle, what do you see now, and what trend or two would
you advise businesses to consider as part of their strategic
planning process?
Navarro: We are on
the cusp of potentially terribly turbulent economic times.
We rode out a collapse of the tech bubble on the wheels
of a housing bubble, with those wheels now coming off the
main economic chassis.
The yield curve has inverted, signaling a recession or
slowdown. Inflation is building. Both the budget and trade
deficits are beyond out of control because of profligate
fiscal and monetary policies. Once volatile oil price shocks
have now become a dangerously persistent feature of the
global economy, and there are a variety of exogenous shocks,
any one of which may be problematic, from war and terrorism
to pandemics.
So watch carefully for signs of recession, or worse, stagflation,
which is simultaneous recession and inflation.
And be prepared for any exogenous shock.
MCNews: When economic trends spell trouble for
a business, investors and others exert tremendous pressure
to control costs such as advertising, marketing, and labor.
What advice would you give an executive for handling that
cost-cutting mentality?
Navarro: The easy answer is: “Stick
to your countercyclical and contrarian guns.” The
more subtle answer is that the business cycle sensitive
corporation will be far less vulnerable to any “tremendous
pressure” precisely because they have managed the
business cycle well and will, therefore, be in a much better
cash flow position.
MCNews: If you could give consultants one piece
of advice about helping their clients tame the roller coaster
of the business cycle, what would it be?
Navarro: The big question I ask every
strategy consultant I meet is this: Why don’t consulting
firms pay more attention to managing the business cycle?
Not only is this an essential element of strategy, it also
presents consulting firms with one of the most lucrative
opportunities on the cutting edge of strategic management.
MCNews: Thanks for your time.
Find out more about Peter Navarro at www.peternavarro.com.
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