Gross Galactic Product

Gross Galactic Product: Growth rates, stock prices, and thinking differently in a crisis, by Mark Chussil

The Wall Street Journal reported today that Google’s shares went up more than 8% because profit and revenue growth weren’t “as bad as some had feared.”

Google’s results? Profits up 26%, revenue up 31%. Google is on track to earn profits of about $5 billion on revenue over $20 billion in 2008. I agree, it doesn’t sound bad enough to fear.

Let’s put those numbers in perspective. At that rate of growth, Google will be equal to the rest of the entire American economy in 30 years or so. (If the economy continues to shudder, it won’t take that long.) Another six or seven years, it’ll equal the non-Google gross world product. A few more years and there they are at the gross galactic product. How do I know? I just extrapolate Google’s technological capabilities as blithely as I extrapolate their financial statements. By the time I’ve shuffled off to the Oort Cloud or whatever the airlines would call my final destination, you’ll be able to prove me right or wrong with a Google search for extra-terrestrial business intelligence.

If Google regains the magical 39% growth rate that would allay investors’ fears, you can shave about five years off those numbers. I can see why people would be so eager to restore that growth: who wants to wait another five years for world domination?

Obviously my numbers are not “accurate” even though I based them on real data about the American and world economies and calculated them to n decimal points. But any imprecision in that 30-year timeline is quite immaterial to this essay, or to anything else for that matter.

With the possible exception of the universe itself, nothing sustains a rate of growth forever because nothing grows forever. However, the expectation, the demand, the requirement that each year be bigger and better than the previous leads us to deceive ourselves. It leads us to overreach, cut corners, build houses of cards, and do “whatever it takes” to “make the numbers.” Not unlike the genesis of the financial crisis I described in It’s Working!, and not unlike the analytic circle I described in Self-fulfillment.

Let’s take a step back. So far in this essay I have heroically slaughtered a dragon that we all know doesn’t exist. We all know growth eventually slows. No one expects Google to dominate the world; after all, there has to be room for Wal-Mart, big pharma (which, having begun on this path a while ago, is a few years ahead of Google in struggling to maintain growth), Toyota and/or Tata, and whatever devices let us text-message one another.

But even though we all know growth eventually slows, we don’t want it or expect it to slow today. We’ll talk about tomorrow tomorrow; today we’re talking about my money. If you don’t stay on a roll, I’ll hammer your stock. And my friends and I can do it, thanks to our world of instantaneous information-plus-noise, imperfect analysis, and twitchy trigger fingers.

Knowing that, management reasonably wants to maintain or enhance performance. That’s not inherently bad; it’s how capitalism is supposed to work. But management has little clear guidance on when their efforts go from building up to propping up to puffing up. When did airlines’ cost-cutting go from sensible to fiscally and physically dangerous? When did Detroit’s price-cutting go from occasionally expedient to perennially desperate? When did pharma’s infatuation with blockbuster drugs go from delightful jackpot to essential lifeline?

The problem is not that 39% growth won’t last forever. The problem is not that stock prices rise and eventually fall. The problem is that, judging by results, we often act ineffectively when growth slows. When we push too hard to keep the growth going, we create a bubble that ends up like the financial crisis. When we squeeze too hard to keep costs down, we starve the investment we need to run the business in the future. (One can make a case that we are doing exactly that with the country’s infrastructure.) When we polish our numbers too hard to make everything look peachy, we create new expectations that are even harder to satisfy.

The issue is what we colloquially call denial, as in the refusal to look hard at potentially bad news and take appropriate action. Much, perhaps most, of that denial is not willful; the generally accepted tools that strategists use (e.g., spreadsheets, forecasts, benchmarks) have built-in filters that prevent potentially bad news from reaching strategists’ eyes. (See, for instance, the discussion of accounting-based spreadsheets in With All This Intelligence, Why Don’t We Have Better Strategies?) Plus, denial is strongly reinforced by the rewards we lavish upon those who succeed, by the tickets to “away” we lavish on those who don’t, and by the tomorrow-is-like-today habit that makes us expect the good times to last a little longer.

We don’t always fall into such traps, of course. As I noted in It’s Working!, Viacom bought Blockbuster for $11.6 billion in 1994, and, after a series of losses, “split it off” in 2004 for $2.7 billion (both numbers are in 2007 dollars). The flip side is that someone else sold it for $11.6 billion and didn’t own it as its value went down to its current market value of about $300 million. [Update: in January 2010, Blockbuster’s market value was below $100 million.] [Update, September 22, 2010: Blockbuster Nears Bankruptcy, says the Wall Street Journal. A filing is expected in a few days.]

The best way I know to reduce denial is for people to live through the bad situation. For instance, it’s one thing to tell a person that he or she won’t live forever, and it’s quite another thing for that person to live through a potentially deadly event.

I was fortunate enough to live through a flight with the mid-air explosion of an engine: fortunate both in that I was alive and uninjured and in that I was lucky to have had the experience. I’m not recommending that we blow up lots of engines at five thousand feet so more of us can enjoy growth experiences. What I’m saying is that it was a cheap (for me) way to learn an important lesson.

That’s the key: a cheap way to learn an important lesson. The military does it with war games; lawyers do it by arguing in front of mock juries; actors do it by rehearsing. As they get more intense and immersive, movies are arguably getting closer to being simulations, although they’re presented almost entirely in the third person. Interestingly, the exploding-engine incident was a learning experience for me but not for the pilots of my aircraft. Luckily for me, they’d already had their learning experiences in flight simulators! Which is exactly the point.

In business, the cheap way to learn important lessons is through business war games and strategy simulations, especially because they make it possible to turn the clock back and what-if a different move by you or your competitors. I won’t go into detail here about them because other materials say enough and because this essay isn’t specifically about business war games and strategy simulations. Based on my experience, I’ll just say this (which I believe would be echoed by other professional war-gamers):

• It is possible to overcome common psychological and analytic biases that unintentionally distort our thinking. Add books about social psychology and numeracy to your reading list.
• Every business I’ve seen has found better options. Sometimes they’re much better. Usually they’re surprises. You have to look for them. Start by asking what could make your current strategy fail.
• Solving strategy problems rarely requires getting more decimal points. It almost always requires thinking differently.
• Thinking differently doesn’t happen automatically or overnight. After all, each of us has spent a lifetime practicing our current ways. But thinking differently is possible.
• Perhaps the most-insightful, -useful, and -important part of thinking differently is asking what if.
• Improving your thinking is the fastest, cheapest, and highest-leverage way to improve your business’ performance.

We’re all getting experience now by living through the current financial crisis. Unfortunately, unlike a war game or simulation, we don’t get to turn the clock back and prepare a better strategy. Unfortunately too, without the opportunity to what-if the situation, what we will learn from it depends on how we perceive and interpret it.

So, if you’re not lucky enough to be prospering at Google, what should you do amid the extraordinary market decline and the extra pressure to perform? Here are two things not to do: Panic and deny. Here are two of the generic things others might urge you to do: Get back to basics or hunker down to wait it out. And here’s what you should do first: Outthink your competitors.

See also Do Not Overtighten.

My thanks to RJB, who inspired two of my favorite phrases in this essay.