Planning, in most companies, is a waste of time. Most people who plan, as one of my clients puts it, simply substitute error for uncertainty. Producing complex computer spreadsheets with numbers carried out to two decimal places lets planners pretend that the future is more certain than it really is.
Uncertainty, of course, is part of the business landscape, and worrying about the future is an appropriate task for people who run businesses. If you are sleeping well every night, you are probably not doing your job. But effective planners know where to draw the line between the events and conditions that they are pretty sure of -- those they are willing to bet the company on -- and those that are unknown. And they know that precious little falls on the pretty-sure side of the line. Real planning deals with the unknowns.
Given that fact, here are some ways you might begin to think about the unknowns of 1985 and beyond.
First, decide what general shape the world is in, and then decide whether you expect it to continue on the same track during the period for which you are planning. This is the part of planning that relies on economics, but don't get caught up in the numbers. When doing an environmental analysis of this sort, focus on the trends that will be controlling your business environment, not on detailed forecasts of economic indicators. For example, will politics move to the left or to the right? Will inflation rise or fall? Will interest rates be at the one-digit or the two-digit level? If you can get a good handle on the direction of change of the two or three factors that are most critical to your business, you are in good shape. Plans built around trends instead of numbers are both more flexible and more easily grasped.
The most important economic input in planning is a view on inflation. Inflation helps you figure out how the prices of everything you buy, sell, or own will move in the future. Right now, the striking fact about inflation is that it has virtually disappeared. Consumer prices are rising somewhere between 2% and 4% per year, compared with the 10%, 12%, and 14% rates of just four years ago. The key question, however, is whether the rate of inflation will stay low. I think it will, because I believe that low inflation is less the result of technical factors than of a secular turn to the political right.
In the 1960s, large numbers of adolescents, products of the baby boom, needed to be fed, housed, and provided with jobs -- much of that at government expense. Today, the baby boomers, who are in their mid-30s, are paying for government programs instead of receiving benefits. And they don't like it. The maturing of the baby boom is more responsible for the rebirth of conservative politics than any other single factor, and the one sure thing about 35-year-olds is that in five years they will be 40 -- and even more conservative. I believe U.S. politics will continue its rightward drift over the next five years -- meaning, in turn, that the trend will be toward lower government spending and less inflation.
A reasonable range of inflation rates for the next few years would be 0% to 5%. Use the lower figure when budgeting the prices of assets and goods being sold; use the higher figure for budgeting the costs of inputs and liabilities. A company that puts together a plan for making money in those conditions will do well no matter what happens.
Low inflation has other important implications for your operating environment. It means you will have trouble getting customers to go along with price increases and that you will endanger your company's survival if you give workers wage increases that are out of line with your own ability to raise prices.
Low inflation also means that the United States will remain attractive to international investors. As these investors buy the dollars they need to move their capital into the United States, the dollar grows stronger. This makes imports cheap -- a desirable situation if you use imports in your business, but not so desirable if you compete against them. Either way, a strong dollar and cheap imports will stay with us for the next few years. Learn how to live with both.
On the bright side, low inflation means that people do better owning securities than they do with property, collectibiles, and other tangible assets. Over time, this condition will result in stronger and deeper security markets, which are the ultimate source of money for new investments. Moreover, low inflation means that sales and production should grow more rapidly over the rest of the decade (about 5% per year, on average), which can only help profits and the stock market.
However, while growth will be high, I also expect it to be erratic. The economy has gone through a radical conversion from a high-inflation to a low-inflation condition in only four years -- something like undergoing a sex-change operation. Don't be surprised if our voice cracks once in a while as we learn how to live with the new conditions.
The single most important effect of low inflation is its impact on corporate balance sheets. The abrupt decline in the inflation rate left many companies high and dry, holding a bag of yesterday's assets. Four years ago, we were all busy loading up our balance sheets with the types of assets that perform well during high inflation -- real estate, boxcars, drill rigs, Latin American loans, and foreign currencies. Most of the loading up was done with borrowed money, or leverage. With inflation under control, many of these assets have turned into tar babies. Managers would like to sell the inflation-hedging assets to pay off their debts and go forward with businesses that fit today's conditions. The trouble is, nobody wants to buy them -- at least not at book value.
This situation affects the economy in the same way it affects a business: It freezes or reduces the liquidity of its assets. The result is a severe cash shortage, in which companies have bloated balance sheets but can't raise the cash they need to conduct business operations. This explains why real interest rates are high today, and why it is especially prudent for companies that can do so to keep plenty of cash on hand.
Sooner or later, of course, pride will give way to reality (or, perhaps, old managers will give way to new ones), and assets will be written down or depreciated off the books. As this happens, prices of yesterday's assets -- the inflation-hedge vehicles of the 1970s -- will fall still further, and prices of tomorrow's assets, those that make sense in today's low-in-flation environment, will rise. In plain English, this means: Dump your inflation-sensitive assets now for whatever you can realize, and use the proceeds to invest in assets that will help you improve the efficiency and productivity of your operations.
There are only two ways to make money: the easy way, by owning something; or the hard way, by doing something. Since low inflation means you can't make money the easy way, a lot of people are deciding to go back and do it the hard way. That is why productivity is booming.
Here is a short list of suggestions about how to incorporate some of these ideas into your business:
* If you are carrying a significant share (40% or more) of your assets at values higher than you could get in the market, consider adopting a program to write down those assets to market value as quickly as possible. Or, consider sale/leaseback arrangements that allow you to liquefy your current asset base and transfer the remaining price-risk to others.
* If you have a relatively clean balance sheet with little debt, resist the temptation to squander precious liquidity on assets that look cheap. They may be even cheaper tomorrow.
* If your company is one of the few remaining good credit risks, your bankers will be prepared -- indeed, eager -- to lend you long-term, fixed-rate funds to finance capacity expansion. Don't take the money. You may be able to buy capacity later for less than you can build it now.
* If you must borrow money, borrow for short periods at floating rates instead of borrowing long-term at fixed rates. The trend in rates in the next few years should be down, so avoid committing yourself to paying today's higher interest rates five years from now.
* Avoid equity financing at today's prices. Stock prices should increase sharply over the next few years.
* Don't be caught with excessive inventories of unsold finished goods in the event that sales slow sharply for a quarter or two sometime in the next year.
* Beware of overpricing your products. Lost market share is expensive to regain.
* Finally, take care not to promise workers a bigger wage hike than you can afford to pay. Be prepared to explain both the change in general inflation conditions (their costs) as well as your pricing situation (what you can pay).
Focusing on the trends, and on how you can take advantage of them, doesn't make the future any more certain than it is. But it may make the planning process more productive.