The Inertia Trap: When business is good, it’s time to worry

Inertia.  The tendency of a body at rest to stay at rest. Or (the part that many people forget), the tendency for a body in motion to stay in motion.

We view the world from the standpoint of inertia.  When times are good, we settle in and think it will continue.  When times are bad, it’s hard to see the sunrise coming.  We learn what makes money and what doesn’t.  We repeat what succeeds and avoid what doesn’t.

Inertia can be a good thing.  It is hard to live in a world when we have to figure out the rules every day.  It’s easier to figure them out once, and then live by what we have learned.

The problem is that that that’s not how the world works. Change is inevitable and can occur at any time.

These days, I am executive director of a trade association.  My thinking about inertia goes back a few years, when our members mostly had seen good times in recent years, their fates tied to a great degree to the housing market, which had done well.  The formula for making money was apparent. Figure out your costs, build in a margin, win your share of the contracts, work efficiently and deliver quality within your cost structure.

The problem for some of our members was that suddenly the price and availability of steel changed.  Steel suppliers suddenly began passing along price increases on a steady basis.  In some cases, suppliers were telling our members that steel was not or would not be available.

For many of our members, the sudden change in the steel market posed big problems. It had been many years since they found a basic commodity such as steel in short supply and an escalating part of their cost structure.  The lessons that were there to learn 25 years ago in an inflationary time had long since faded away.  Contracts were being written for delivery months out at a price certain.  However, the supply to meet those commitments was iffy and the price had escalated.  This was a formula for losing money.

Our members were already adapting and would continue to adapt. Bids would be set only for short periods and/or contracts would allow for price adjustments.   Inventory policies and sources of supply would change.  Substitutes (such as aluminum, PVC and wood) would gain share.

What are the lessons here?  Two big ones, I think.

First, don’t get caught in the inertia trap.  Assume the basic rules of the game will change. When you do your business planning, game out the bad things that can happen with the basics of your business.  What would you do if your major customer went bankrupt?  How would you cope if a breakthrough allowed a competitor to underbid you?  How would you deal with a commodity shortage?

Build such potential change into your plans.  Have enough resilience and adaptability so that your business won’t fold and fail when market conditions shift and the rules change.

Second, learn to monitor the basic drivers in your business, establish an early warning system to alert you to change and do what you can to head it off or accommodate it early on before your business is really harmed.

In the case of rising steel prices and shortage, the pre-cursors had been there to see:  Foreign countries buying up of scrap.  Protectionism at home curbing foreign supply.   The closure of many domestic suppliers and a big reduction in domestic capacity.

Certainly a few companies recognized these factors and reacted early, locking in supply, building inventories, adjusting bidding strategies and contracting policies.  But some did not and saw negative results.

When conditions are good, complacency is often the result.  The smartest, best managers are not complacent. They are vigilant and worried.  They look at the potential effects of economic trends and policies and political decisions.  They try to see what the result will be and how their businesses might be affected.

Free trade and protectionism are two sides of a coin and generate great debate. In the case of the members of my trade association, they have been hurt by the ability for foreign entities to buy up raw materials from our country, foreign competitors that have driven domestic suppliers out of business and federal government decisions that have curbed imports.

Perhaps those managers who saw the potential effects of free trade and protectionism should have anticipated these effects and argued more strenuously against the policies that ultimately brought the change that created unfavorable supply conditions.  Perhaps that is asking too much.  Maybe the best that can be hoped for is an understanding that change is inevitable, early recognition that change is occurring, and quick-footed adaptation to the change to assure continued business successcess