Strategy in a "Structural Break" - Richard Rumelt

• Strategy is a cohesive response to a challenge. The most important element is a coherent viewpoint about the forces at work, not a plan.
• Leverage lies at the heart of most crisis. The current crisis is about kickback from leverage in two places: households and financial services. Leverage spreads the pain in ever-widening waves.
• US houshold debt started rising in the early 1980s and its growth accelerated in 2001. Leverage among the five largest broker-dealers rose dramatically after 2004, when the SEC exempted these firms from the long standing 12 to 1 leverage ratio limit. From 1990 to 2007 the whole financial services sector expanded 2.5 times faster than overall GDP, and its profits rose from their 1947-96 average of 0.75 percent of GDP to 2.5 percent in 2007. Then falling home prices led to an unanticipated rise in foreclosure rates and a drop in the value of mortgage backed securities. US consumer spending continued at a high level through the first half of 2008 but by the third quarter had dropped at a 3.1 percent annualized rate. Recession had arrived.
• Structural break : Moment in time-series data when trends and the patterns of associations among variables change.
• The first order of the day is to survive any downturns but the second is to benefit from new patterns.
• In several industry sectors, the most recent structural break occurred in the 1980s, with the development of microprocessors, which lead to cheaper computing, personal and desktop computers, and the rise of a new kind of s/w industry. These innovations begat the Internet and e-commerce.
• Many aspects of structural changes will depend upon the government's policy response. Today, nuclear power, infrastructure repair, and fiber to the home are on the list of possible stimuli.
• The wrong way forward in a structural break during hard times is to try more of the same.
• Another pattern that may generate diminished or negative returns is the complexity of our business and management systems.
• In structural breaks, cutting costs isnt enough. Things have to be done differently, and on two levels: reducing the complexity of corporate structures and transforming business models.