0:03 [music]
0:03 >> Who are you? And where are you going?
0:11 >> [music]
0:11 >> What do you want?
0:19 >> Hello and welcome to business lessons from the military. I'm [clears throat] your host Kevin Bammel and I'm here every Tuesday at 10:00 a.m. Pacific time to talk about military history, doctrine, and leadership practices and then distill lessons from them that we can apply to our businesses and professional practices uh so that we can make them run better more more profitably, serve our customers and clients better. All of those all of those aspects. So, today is uh episode
0:55 five of the um of a series a 24-part series that I'm doing that's uh really a compilation of um doctrine across all branches of the military. Um more and more uh well, I mean these days yeah, more and more um operations are not just you know, the army or the Air Force or the Navy. So, we see this what's with what's going on right now in the Middle East. Uh there are two uh carrier uh
1:33 strike groups um taking part in the uh combat operations in Iran. Uh but there are also uh Air Force uh planes, refueling assets um and um there there may be uh special operators um from perhaps the the army uh and the Navy there as well. And [snorts] so
1:59 >> [clears throat]
2:00 >> all of whereas in in previous times the army and the navy found it extremely difficult if not impossible to communicate even the marine corps and the navy who are both part which are both part of the navy department in in past times found it difficult to communicate today there is largely seamless operation between different branches of the military. Um and and so
2:35 strategy in combat operations really now um it it it it blankets over all the branches of the military as opposed to having a separate doctrine for the army and another one for the navy and another one for the marine corps and another one for uh for the air force. And so that's why I'm I'm doing this sort of uh we might call it combined arms
3:04 >> [laughter]
3:04 >> um approach to applying military doctrine to to the business world. So the first section is on strategy. I'm talking about strategic concepts
3:19 >> [snorts]
3:19 >> and today's topic is called second order effects. So
3:26 >> [clears throat]
3:27 >> when a military operation is is being planned so it at least in in under current doctrine no decision or no plan ends with the immediate immediate objective. So commanders ask what happens next or and then what, right? So, uh you know, taking Iran as an example. Okay, so the objectives are to destroy their
4:03 nuclear capability, to destroy their ability to launch and make more ballistic missiles, um to destroy their ability to project terrorism into other countries in the world. Okay, those are the I I think there's a fourth objective. It's not coming to mind. Okay, so the so in planning that, presumably and and I have no
4:31 >> [laughter]
4:31 >> I have no inside sources into the planning of this operation. I'm just using it as an example and and and putting some speculation in. But,
4:40 >> [clears throat]
4:41 >> assuming those three objectives are met, there most likely was a discussion of okay, we've met our objections, now what? Okay, and the now what are the second-order effects, okay? So,
4:59 >> [clears throat]
5:00 >> um you know, the senior leadership in Iran
5:04 >> [snorts]
5:04 >> is uh you know, has been killed. Um and in fact, the I read this morning the individual who took over as defense minister yesterday has already been killed today. Right? [snorts] So, that's how quickly the regime is being decapitated. So, presumably this is being done so that, you know, the next person nominated will think twice about essentially accepting that nomination, right? Uh and and so, okay, so now you've got a situation
5:40 of you know, this this this the the sort of maybe the second-order effect is well, now you have members of the regime who will flat out refuse to to take on a leadership role unless um you know, Iran surrenders to the United States and Israel. Um or unless there are some negotiations opened whereby uh you know, an end to the war is one of the conditions of you know, that this particular individual or these
6:15 particular individuals agreeing to assume positions of leadership, right? So, that would be the the the sort of second order effect, right? And then [snorts] there are third order effects as well that that should presumably are um discussed anytime military activity um is is is is is launched. So, in in military doctrine, so leaders evaluate the first order effects, which is the immediate result of an action. Okay? But then they look at
6:50 the second order effects, which is the consequences that follow that act that result. And then the third order effects are the systemic shifts that follow the consequences of the second order effects. Okay? So, the idea is to avoid looking at military action in isolation and with the assumption that okay, military objectives achieved, we're done. Right? [snorts] To use von Clausewitz, uh military action is really just an
7:26 extension of political action and and political goals. Okay? So, military action shouldn't be used just for the sake of using military action. The purpose behind it is to achieve political goals, okay?
7:45 >> [snorts]
7:45 >> So, uh this um So, a strike of a military action, so it may succeed tactically by um or may I'm sorry. Um a a a strike that succeeds tactically may have a second-order uh effect whereby it destabilizes a region, it strengthen strengthens strengthens
8:11 >> [laughter]
8:12 >> insurgent recruitment,
8:14 >> [snorts]
8:14 >> um it triggers a political backlash, and it alters alliance dynamics. So, uh if we take for example uh the war in Iraq uh roughly 20 years ago, right? So, uh uh s- um So, the first-order effect was uh Saddam Saddam Hussein was removed from power and and basically killed, right? They found him in a hole somewhere, literally, okay? But, the second-order effect was a power vacuum, and this was
8:52 this was a big mistake on the part of the Bush administration not considering, okay, once Saddam Hussein is gone, now what? Okay, because um Iraq did not have republic uh you know, Republican small R Republican um governance beforehand. It it had always been essentially a dictatorship or a monarchy. And [snorts] so, it wasn't like there was some wellspring of Republican institutions that were going to swell up, let alone so-called
9:27 democratic institutions. I mean, we tend to con- conflate those two types of governments. Um but, m- m- there are no true democracies i- i- in the in this world, right? Democracies are where every citizen votes on every single, you know, act of the government. We don't have that. We have republics where people elect representatives who then vote on measures of governance. So, that's why I'm using that term to be to be precise in what we're talking about here, right? So, the second order of order effect of the war in Iraq was
10:04 there was a power vacuum. And the third order effects were sectarian violence, insurgency, and regional instability. Um and the result was a country [clears throat] that previously had been in a war with Iran for 10 years aligning with Iran. Right? So, um you know, wouldn't exactly call that a victory in the sense of anything long-term that was worthwhile to American interests being achieved.
10:39 >> [snorts]
10:39 >> Okay? So, this is why in military planning and in military doctrine, second order effects need to be considered. Okay? [snorts] Um again, presumably they they they have been or are being considered um with what with respect to what's going on, uh you know, today. So, uh military, when they're doing planning, they they they hopefully, hm, right, are war-gaming outcomes. So,
11:16 uh you know, they may have red teaming where, you know, one team is is, you know, in in the in the case of the United States, the United States, the other team is the enemy. How does this work out? You know, what what are the second and third order effects? So, they they model scenarios. I'm sure they're using computer modeling these days. And they map out how can things escalate and spin out of control in a in a way that we, you know, would otherwise not think about but for doing this kind of escalation mapping. And finally, what what is how
11:53 will the coalition uh respond or react uh to what's going on? So, you look, again, looking at the current situation, right? Uh Great Britain would not exactly be considered an ally of the United States. Now, they are uh they are letting the United States use some of their bases, but they are by no means um acting as a strong ally in what's going on in Iran. Now, there may be reasons for that. There's a very large uh Muslim um and and a fairly large
12:30 radical Muslim population in the UK. And one would imagine that the Prime Minister is afraid of that, unfortunately, right? Um and so, you know, he's made it very clear that the UK will not engage in offensive operations. Um um you you know, even even more to the point, uh uh you know, he's using this language of we don't want to have another Iraq, where, you know, there's no plan afterwards. That
13:05 would tend to indicate that the UK has was not, you know, brought in as part of the planning of the operation, and one can imagine that that was because there was concern that the UK would leak uh the impending military action to the detriment of that action. There's not a lot of There's not the kind of trust between the UK and the United States these days that there was in former times. Okay? Same thing with France. Worse with Spain, right? Spain has condemned the
13:43 action and has refused to let the United States use use any of its bases. So, you know, I think there is going to be as a result of what's going on in Iran, some significant second and third order effects. They that may affect NATO. It may affect certainly trade relations. President Trump has already come out and said that that there's going to be no trade between Spain and the United States as a as a result of Spain refusing
14:19 the United States to use its bases. There is There is a naval base, for example, in Rota, Spain. Uh and and it would typically be a place where the carrier air group, I believe it's the Gerald Ford USS Gerald Ford carrier strike group that's in the Mediterranean right now, the Eastern Mediterranean. Rota [snorts] would be Rota, Spain would be a place where they would go to to resupply and and also to give the sailors some shore leave. So, you know, presumably Spain is not going to allow that. I'm not We'll have
14:55 to see how that works out. But, these are the kinds of second and third or third order effects that you know, typically would be examined when planning a military operation. Okay? Um And by the way, just because there might be some damage to an alliance as a third order effect doesn't mean that therefore the military action wouldn't be launched. It might be. The the downside of not launching that military action may be of greater
15:33 concern than the damage to the military alliance. I I you know the the threat of of you know Iran getting a nuclear weapon almost surely is a greater threat than damage to the relationship between the United States and Spain, for example, right? And so it may very well be that military planners advise the president, you know, Spain is not on board with any of this. We can we can see in their you know pro-Palestinian statements and their pro-Hamas statements, etc. that
16:09 that you know, they're opposed to any any action that we would take and the president might well have made the decision, okay, fine. And and if they do do that then then you know, we will take the appropriate steps. So the idea of understanding second and third order effects is not necessarily to avoid them. It's to understand them and make some contingency planning as to what the responses to those second and third order effects may be
16:43 >> [snorts]
16:43 >> so that one isn't having to respond on the fly. Okay, so that's the military side of this. Now let's let's look at some of the practical business applications to this idea of second and third order effects. I have five of them, I believe. Yeah, I have five here. Okay, [snorts] so let's let's look at some things that happen in [snorts] businesses that that might be considered the first order okay, and then what might be second third order effects? It's sort of
17:19 an exercise in how businesses how your business, for example, might might view, you know, various activities or various, yeah, business activities. Okay. So, number one, let's say a business decides to do a layoff to cut costs. Okay? So, for example, um
17:41 >> [snorts]
17:42 >> gosh, there was a company that laid off half its workforce. I think you want to say it was Square. I could be wrong about that. It was one of the I think it was one of the financing app companies. So, they laid off 50% of their workforce in one fell swoop, right?
17:59 >> [snorts]
17:59 >> And um the rationale for doing so is going forward, we just don't need these men you know, this size of a workforce. Number one, we can replace a lot of it with with with AI technology. And rather than doing it piecemeal and and the sort of long-term hit of second-order effects, right? This is a company that sounds like they examined second and and and third-order effects. We're just going to do it all at once, and get it over with, and then, you know,
18:34 rebuild and move on or or adjust and move on, not rebuild, adjust and move on, right? So, the first-order effect of of a layoff is you have a low lower payroll expense, right? It's you're not carrying the salary you're not paying the salaries of all of these people, and so that reduces your payroll effect your payroll expense. However,
18:58 >> [snorts]
18:58 >> a second-order second-order effects may be reduced morale among the employees who are remaining who who and you know, especially if they think there may be further layoffs, um would, you know, start looking for other jobs while they still have a job. Or might might start leaving the company because they're concerned that there there may be another layoff. And so you can see in the announcement that um the company made where they say, "Look,
19:33 we're just we're doing one great big layoff and that's it." I think the company was trying to get out ahead of this second-order effect of a a reduced morale by essentially by not not essentially by saying to the employees, "Look, we're doing this all at one time. There's not going to be multiple layers of layoffs. And so we've let go 50% of the workforce and the 50% that remains, you know, you're you're in good shape." So, so that's a second-order effect that
20:09 it appears, again, they were trying to get out in front of. But there are there there need only be one second-order effect. Another second-order effect can be loss of institutional memory. Right? So to the extent that the, you know, the in the in the example I'm using, the 50% of the employees who who were laid off had information that the remaining 50% that are staying don't have, right? That's lost institutional memory. And that can be a detriment to the company.
20:44 It's a very difficult issue to measure, right? Because a lot of us we don't even realize we have so-called institutional memory. It's just things we know about how the company works, how certain clients or groups of clients operate, or how systems work, or whatever it is that we, you know, this information that we have, we just have it Um but you know, and and and the people who are who are staying, they don't realize that some of that or some of that information is lost now that people have been have been laid off. It just
21:20 has to be dealt with, okay? Now company can try and capture data like that and setting up systems to whereby employees are regularly um you know, sort of doing information downloads into a system and and and that might you know, if that is a regular part of the company's operation, that could mitigate some of the institutional memory loss. But in the short term, it can be a difficult thing to do. People may not even realize
21:55 they have the data. Okay? Third order effects of a layoff could be a productivity decline, could be rep reputational damage and difficulty in recruiting if the company wants to staff up again. Okay? So, you say, "Wait, wait, how could it be a productivity decline?" Well, sometimes companies lay off too many people and now they can't handle the workload and so they start you you know, the
22:31 the people are trying to spread themselves too thin, they get burnt out, that causes a productivity decline, okay? Reputational damage, you know, there are people who you know, they they don't like companies that fire a bunch of people which is essentially what a layoff is, right? And then the flip side is you know, some people don't want to go to work for a company that periodically lays people off cuz they feel that there's insufficient stability there. Right? And so again, with with the I I I believe that it's Square, but I
23:07 could be wrong about that. With Square by saying we're just going to do this one big layoff and that's it, they're trying to get out in front of potential recruiting difficulty down the road. I mean, you know, are they going to take a take a reputational hit for this? I don't know. I guess we'll we'll see what you know, what the future bodes. Will they have a productivity decline? Well, they clearly think not because they're going to use AI tools in order to maintain or actually in order to in
23:42 order to increase the productivity of individual employees such that they can, you know, half employees can do as much as what used to be, you know, twice as many employees. Right? So cutting costs, it can increase the risk of subpar performance. And so that's why it's important to consider the second and third-order effects and try and and mitigate some of at least some of those effects
24:17 to make this the initial step that that the company is taking, a layoff, make it more effective in its implementation. Okay, stick a quick break. We'll come back for more.
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25:10 or visit magnumprops.com. Okay. So, going back now to some of the practical business examples of second and third order effects. So, um automate This is kind of the the corollary to the first one
25:28 >> [snorts]
25:28 >> with respect to Square. Uh automation increases efficiency, okay? But, it may also increase risk. So, the the first order effect of using AI, um is potentially improved margins because each employee becomes more productive, okay? And so, more can be accomplished at the same or just, you know, slightly higher expenses, right? So, if if uh AI can increase an employee's
26:06 productivity by 20% um and but they're given only a 10% pay increase, so that's actually worked out well for both the company and the employee. The company is lowering its margins or it's improving its I should say it's improving its margins. It's lowering its cost, but the employee is actually making more money and it's because the employee is more productive, okay? However, again, there are second and third order effects. So, the second order effects are workplace
26:42 displacement like in like in the Square example where they're they fired, you know, 50% of or they're laying off, you know, uh the term du jour. They're laying off 50% of their workforce, and there can be cultural resistance. So, a lot of people are very afraid of AI. They they feel like it's it's, you know, it's it's you know, a universally bad thing. I mean, I I hear from time to time about on podcasts, you know, oh, AI is terrible. It's it's this, it's that. Well, AI is like any other innovation. It's a
27:19 tool. It can be used to do good things. It can be used to do bad things. I mean, tools are agnostic, you know, you can use a hammer to build a house, you can use a hammer to, you know, deal kill someone, right? So, AI is no different in that respect. Um, but for for people who, um, you know, don't want to open up their aperture, let's say, um, it can, you know, these kinds of, um, automation efficiencies, they they they
27:56 approach them with a lot of resistance, and and that resistance can spread within the entire company. So, um, you know, it it'll be interesting to see what happens with Square. Presumably, before they took this action, they they socialized the idea of using more AI tools to increase efficiency, so as to avoid uh the the sort of cultural resistance that might hamper the implementation of that policy. Okay? Now,
28:32 you know, the in in this case, looking at it at it from this side of the example, the workplace displacement of bringing in AI, while it's it's a it's a second uh second uh order effect, it's one that's desirable for the company. So, again, just because there's a second order effect, doesn't mean that it's bad. It's just it's it's it's really something that's a result of a first-order effect. Could be good, could be bad, could be neutral. Uh depends how it's viewed, depends how
29:07 it's planned for. Again, this is why it's so important to examine these um as different initiatives are taken in your business. So, the third-order effect in adopting automation um [snorts] is could be increased regulatory scrutiny. It could be customer backlash. Um it could be a a stagnation of innovation as people uh you know, grapple with the you know, with with dealing with the adoption of of automation and an inability to really
29:45 you know, do anything else. So, let me give you another example where automation um increases efficiency, um but at the same time, there are second- and and third-order effects. So, here in the United States, one of the strongest labor unions is the Longshoremen's Union, who and the Longshoremen unload goods from ships. That's That's what they've done for hundreds of years. Okay? Sometimes they're called stevedores. We call them Longshoremen now. So, the Longshoremen's Union, when their contract comes up for renewal, has
30:22 consistently over the last I don't know, at least 10 or 20 years that I've been following it, resisted greater automation at US ports. Now, if you look at ports around the world, most ports in other another another continents are more highly automated than US ports. There is a great deal of cultural resistance to automating ports in the United States because longshoremen look at it and I I think there is there is there is some uh
30:57 legitimacy to this view. They look at it as they're in the at least in the future there's going to be fewer longshoremen's jobs, right? If technology if automation is is being implemented, that means more can be done with the same or fewer workers.
31:14 >> [snorts]
31:14 >> Here's the problem. US ports tend to operate much less efficiently than other ports, raising the cost of goods to all consumers or I should say all yeah, all consumers who are buying imported goods, right? And so here here is in the case of long the longshoremen, um you know, the the the first order effect is is the implementation of automation. The second order effect has been cult the development of a culture of resistance. The third order effect is as
31:52 a result Americans in general pay higher prices for imported goods than they otherwise would have to if there were not this cultural resistance to further automation of US ports. Okay? Now, you know, if if you're a longshoreman, you probably say that's that's a good thing because, you know, we want to support high-paying jobs etc. If you're a consumer, you may say that's not a good thing because I don't want to have to pay more for imported goods, right? If you're someone who is opposed
32:29 to importation of goods, so then the lack of automation or the resist not the lack, the resistance to automation, uh you look at that as probably a good thing because that constrains at least somewhat the inflow of uh consumer goods. If you are a proponent of um imported goods, maybe because you're an exporter, and so exports and imports tend to work together. So again, you know, you you probably look at the
33:04 cultural resistance to further automation as a bad thing, right? So when [snorts] when I'm using the terms good and bad here, I'm not typically I'm not talking about sort of moral good and bad per se, although I suspect if you if you spoke to the various uh you know, groups that I just mentioned, they would look on the good or bad they look at it from moral terms. Um you know, more or less imports, more or less automation, uh these are not moral questions in you know, in this in the way that that's, you know, been understood for, you know,
33:40 dec- for for millennia, right? But um they they're you know, they're they're good or bad from the perspective of people's interests, financial interests, that sort of thing, okay? So um the the development of greater efficiency by using automation without having a transition plan uh for its implementation and for dealing with its impact is likely to cause instability um in in in your business, right? So
34:15 that's why again, it's important to look at second and third order effects. Okay, next one. Uh changing change by So I have I have a message here from Navtra Visas, not sure who that is, saying excellent, thank you.
34:30 >> [laughter]
34:30 >> Appreciate it. Um all right. [snorts] So, uh, pricing changes. So, uh, pricing changes will alter customer behavior, right? There's that that that is, you know, that's a given, right? So, typically, the first order effect of of increasing prices is, um, increasing revenue. Now, it is interesting because sometimes decreasing prices can cause revenue to go up. So, if you've looked at, uh, fast
35:07 food, um, over the last several years, um, the prices of fast food have crept up. It and um, the same thing is true, by the way, of of the snacks made by, uh, Pepsico. So, the prices have crept up. So, Pepsico has announced, uh, want to say a month or two ago, that they were going to lower prices. And I think the reason they're they're they decided to do that is because they're actually losing revenue at the price points that they've reached. Same for some of the fast food restaurants.
35:42 So, one of the advantages of fast foods of fast food is beyond convenience is it's inexpensive. So, when you raise the price above the level that a a certain, you know, uh, segment of consumers, uh, can afford to pay or is willing to pay, you're actually losing revenue, right? So, that's why I talk about price changes as opposed to price increases. But, the idea of price of changing prices is to maximize revenue. That's always the point, okay? But, [snorts] if we're talking about price increases as
36:20 an attempt to increase revenue, and it might initially is because people are used to buying the product,
36:26 >> [snorts]
36:26 >> they haven't found an alternative yet and they're unwilling to give it up. So, in the short term it may create uh it it may increase revenue. But, as a second order effect, okay, it can reduce customer loyalty. Okay? Now, I'll give you an an example for me. I look at the price of going to Disneyland today. It is enormous. I've always enjoyed going to Disneyland. Just it's too expensive. Sorry. Uh you know, I'm just I'm not I'm just
37:02 not that loyal to pay that much. For a family of four, not that I have a family of four, but for a family of four to spend a day at Disneyland is literally thousands of dollars now between tickets and parking and food. Uh you know, the tickets themselves are one ticket is hundreds of dollars. I think that's inappropriate pricing uh for for a a venue for a you know, a a theme park for from a company that supposedly is based on family experiences.
37:37 Right? So, they by increasing their prices the way they have, uh the Walt Disney Company has reduced my loyalty to the company. Okay? Um [snorts] the another second order effect of increasing prices is it creates greater price sensitivity. So, I know for me eating out, I I used to love eating out, but it's become so expensive, uh I just I'm very I'm very sensitive to the fact of how expensive it is. Um whereas it used to it was a nice
38:13 thing to do and it was maybe, you know, it was more expensive than eating at home, but not so much more expensive that you know, I didn't do it maybe once or maybe even twice a week. Now, it's rare that I go that I go out to eat more than once or maybe twice a month because of the price sensitivity. Right? It's so much less expensive to eat at for me at home, number one. Number two, I can eat, you know, in general better quality food at home when I make it myself. It's fresh, whatever, right? And so, the
38:48 second order effect of the increase in in dining and eating out is greater price sensitivity, right? And that that eventually could translate into lower revenue. Okay? Now, the third order effects of price increases is number one, competitor entry. So, if a comp if if price if prices of one company go up so high, another [snorts] competitor may look at that and say, "Hey, I've got an opportunity to gain business at their expense by maybe lowering my prices or
39:26 by entering into their market where I wasn't before and essentially stealing some of their business, right?" So, this is this is kind of a a a the the flip side of that is a substitution behavior on the part of customers and clients who say, "Well, I'm going to look for something else that's maybe less expensive or maybe it's the same same cost, um but I'm getting a higher quality product for, you know, for the same money, okay?" Other brands may look at have at repositioning themselves in order to take advantage of the price in
40:03 in price increases um that one of the businesses um you know, that another competitor um is pursuing, right? So, we we In business, we can't raise prices in a vacuum. We have to understand the broader market and how are our customers and clients, how do we think they're go they'll they'll respond or react to a price increase? How will our competitors respond to a price increase on our part? By the way, how will they respond to a price reduction, right? If Pepsi if Pepsico
40:41 goes forward with the reduction, you know, price reductions they're planning, what are other snack companies going to do? I'm trying I'm trying to think of a let's see, Frito-Lay is a Pepsico company, so I think SunChips is as well. Trying to think of another snack company. I don't know, Hershey's. Hershey's is a snack company. What is Hershey's likely to do in response to Pepsico reducing their prices, right? These are the kinds of questions hopefully senior leadership at
41:16 Pepsico has considered before embarking on this plan. Okay, that's number three. Number four, rapid expansion. Okay, so um rapid ex- the benefits of rapid expansion are first order, right? First order effect, market share growth, right? That's the idea. I use this example a lot because I'm such a fan of Krispy Kreme Donuts, but Krispy Kreme's mass you know, rapid expansion initially
41:52 increased their market share. It grew tremendously. However, um it diluted governance and as a result there was a second order effect of operational strain. They couldn't keep up with the rapid growth in terms of quality control, in terms of supplying machinery, in terms of uh of supplying the various inputs to to making Krispy Kreme donuts. So, there was a tremendous amount of um of of of
42:27 operational strain that that came as part of Krispy Kreme's rapid expansion, right? And so then third order third order effects um there could be compliance failures, cultural fragmentation, strategic drift, and we actually saw all of those in in as a result of Krispy Kreme's rapid expansion. So, there were compliance failures not in terms of regulatory compliance per se, although certainly uh Krispy Kreme did not live
43:04 up to you know, to Wall Street's expectations, but there were compliance failures in the sense of they didn't keep up with their uh reputation for high-quality products, okay? So, they didn't comply if you will with their own internal standards. And there was also cultural fragmentation as as the the lack of adherence to standards became more broadly felt, so the devotion to Krispy Kreme started to water down. And so finally, you have
43:40 this company that really was strategically adrift. Um it wanted to expand, but it couldn't accommodate the expansion, and it really kind of turned the company on its head, and and it almost it it almost you know, took the company took the company down. They were smart enough to pull back from that rapid expansion, uh shrink the company, and work to rebuild, and of course that's what they've done over the last 10 or 20 years, uh much to their credit, okay? Look, it's one thing to embark on a
44:15 strategic initiative without considering second and third-order effects. It's another thing to keep keep doing so despite recognizing that those second and third-order effects are happening. Uh and in the case of the management of Krispy Kreme, I think they they did not consider second and third-order effects, but once they saw them happening, they realized, "Oh boy, we we we need to pull back." And that's what they did. Okay? And I think in this go-around, they're being much more um they're being much more um uh evaluative
44:51 of second and third-order effects. And so, this time as they expand, it's being more it's more measured, and they're being much more attentive to the culture and and uh brand uh adherence um that you know, that that they were heretofore known for. So, I I've I've a question here. Let's see. What is the malevolent second-order effect you have seen in a business? Oh, the most malevolent malevolent second-order effect you've seen in a business pivot. Wow, that's a great question. The most malevolent uh second-order effect that
45:26 I've seen in a business uh shh Boy, that that's I mean, I'll have to think about that. I'll I'll I'll I'll address it before I um before I uh end end the show. It's a It's a great question. Okay, so um uh going back to rapid expansion diluting governance. So, um growth can change an institute faster than leaders anticipate.
45:56 >> [snorts]
45:56 >> And so, uh you know, the proper planning on a growth initiative would be to say, what happens if it doesn't if we don't grow the way we're anticipating? What happens if we grow according to plan? What happens if we grow slower than plan? What happens if we grow faster than we're planning, right? All four of those need to be examined in terms of the second and third-order effects, right? And then whatever one comes up with you know, what kind of mitigation
46:31 strategies can can be can can come up um for uh you know, for dealing with potential second and third-order effects. Okay, and then uh five, this is uh the last of the five examples I have in for uh the you know, looking at second and third-order effects in a business. So, public statements. Okay, so businesses often make public statements. Now, for publicly traded companies, of course, those public statements are are made mm you know, typically quarterly. There may be quarterly earnings reports
47:06 given. Um they're at least given annually, typically at some sort of annual meeting. Okay, but even uh closely held companies, meaning they're private companies, uh they make public statements. You see it more frequently um more frequently these days, I think, really than ever before uh partly because of social media. So, you will see, you know, people like for example Elon Musk will make uh you know, an um sort of public statements about his companies. Um he's gotten in trouble for
47:41 doing so at times um with with um with regulators. Um but but you know announcements will be made about by companies in social media. So um the the first-order effect of these announcements, I mean really depends at whom they're they're targeted. If they're if they're formal announcements made in, you know, quarterly earnings calls and that sort of thing or at at annual meetings, at public meetings. Um so they're probably, you know, aimed at investors and they're looking to bolster
48:17 investor confidence and momentum, okay? And and that can be a first order effect. Now, if it's a if it's a public statement that's made um more to sort of customers or clients, so the public statement presumably is is being made in order to engender greater client or customer loyalty. And assuming the statement was reasonably well planned, so then the first order effect would be to create greater, uh you know, customer uh client loyalty, right? So
48:53 um here's here's just a little example of this. So this morning, I got a text message from um uh a company from whom I get text messages. It's called uh Red Land Cotton. So they make things like linens, towels, sheets, that sort of thing. Um and they're made from cotton grown in Alabama, woven in Alabama, and the and the and the, you know, sheets and towels and such are sewn in Alabama as well. In other words, they're 100% made in the United States and um
49:32 and and in fact they're I think the reason they're called Red Land Cotton is they're made in Alabama. So I have an I have a connection to Alabama because for those of you who watch the show, I always sign off by with my tribute to Marie. Marie was a a dear friend of mine who lived really her whole life in Alabama, right? So when I first heard about Red Land Cotton, I got their sheets and they're they're terrific. I I love them. They're they're very comfortable. They get more comfortable every time they're washed, all that kind of stuff, right? So, the text message I got today, which would be a kind of public statement, was they're
50:09 celebrating their 10th anniversary. Right? Well, that's cool, right? They've been in business for 10 years. Good for them, right? That little announcement. Now, of course, they're doing it in the hopes that people will uh you know, celebrate their 10th anniversary by buying something, but it's also just you know, it's it's a neat thing. Here's this, you know, brand that I really like, and they're letting me know, "Hey, we've been around for 10 years. Hey, good for you." Right? That engenders a certain feeling from customers, okay? Or customers like me who who feel some kind of investment in
50:45 the brand. That's a first-order effect, right? Um second-order effect is heightened expectations, right? Okay, well, you've been around for 10 years now, so you know, I should be able to expect a clean delivery process, you know, goods that don't have any defects. And and by the way, to their credit, I've bought from them a few times, always gotten goods that were in in you know, you know, no defects, defectless goods.
51:20 Um and and always delivered, you know, quickly, on time, no problems, right? Okay? So, uh you know, but for maybe people who are newer to the brand than I am, you know, "Oh, you've been in you know, you've been around for 10 years." So, the idea that they've been around for 10 years gives them sort of less margin for error in customer interactions than if they if they they've been around for only a year, let say. Okay, so a second order effect of of public statements are heightened expectations because a company is usually using those
51:57 statements to create expectations. Now, here's where um you know, you can look at mitigating public statements. So, if you're talking about, for example, an earnings call, a quarterly earnings call, where those earnings projections are set will set expectations. Okay? They may be heightened expectations, but they also may be lowered expectations, right? If the company says, "Well, you know, due to the following factors, uh we're anticipating earnings that are
52:32 flat with the previous quarter. Or maybe, you know, slightly lower than last quarter, right? There's a lot of discussions about tariffs over the last year or so, right? Maybe due to tariffs, our quarterly earnings are going to be lower this quarter uh than they were last quarter, okay? That wouldn't be a call you would get today, but maybe that that could have been something that was said, you know, last year. Right? So, in that case, you're lowering expectations um as part of your public statement to avoid the second order effect of
53:08 heightened expectations, right? So, this is where the mitigation strategy becomes important.
53:15 >> [snorts]
53:15 >> And then, third order effects, so you can have volatility when performance fails to match what the statement was saying, right? Uh so let go back to my example of Redland Cotton, give them another free plug,
53:34 >> [laughter]
53:35 >> I don't know I don't know who owns it or anything. I just like the company. I I think it's a cute name, Redland Cotton. Um and and I and they they make a great product. But let's say so here's They have one pattern of sheets. They call it their ticking design. Ticking as in ticking it was what historically covered a mattress. T I C K I N G, right? So I have the charcoal gray ticking. See? But they have red ones, right? But I can't ever they're never available, right? So you
54:10 know, you would think okay after 10 years you put out a great product and and then it's not available. People can't get it. It's a little frustrating, right? So you know, I say that somewhat tongue in cheek because it is a small company and there were just a lot of people I suspect like me who thought oh, these are great. I'm going to buy them. I got in too late. So hopefully they're going to make more, right? And they'll they'll be more to to sell, right? But this is this is perhaps them the company not not anticipating how
54:46 much people would like these these ticking design sheets, right? And not anticipating how quickly they would sell and therefore they ran out. So you know, they their initiative was they brought out a new design. They promoted it. I saw it, you know, text messages for it quite frequently and I just kind of ignored them because for whatever reason and then when I happened to finally click through on one of them and see them and really like them it was too late. I couldn't get them, right? And they probably didn't anticipate
55:21 as a second order effect, right? Exactly how popular they would be especially in the red color, right? Now in retrospect they might have thought well, we're Redland Cotton so the red is going to be popular. But I mean this these are the these are the you know, the the issues when when we're in business is we we can't sometimes anticipate all the second and third order effects. So, um but we at least need to do our best to anticipate them, to put in mitigation strategies, uh so that uh in in this
55:57 last case, our public statements as much as possible um are matched by our future performance, right? So, uh we need we need to manage our communication, um so that we don't constrain constrain future flexibility or do damage to our reputation, damage to our brands, et cetera. Okay? So, um the the the the sort of, you know, bottom line of second-order effects is we need to exercise strategic discipline. So, that means building
56:33 contingencies, um preserving reserves, um sequencing our actions, and testing assumptions before execution, okay?
56:44 >> [snorts]
56:44 >> Um and so, that may be doing, you know, modeling a particular um action that we're contemplating taking in business, or figuring out, you know, how will customers respond? How will investors respond to this? Thinking and thinking about, you know, good indifferent or good indifferent bad, right? Those are all potential responses. So, looking at phasing changes rather than making them rapidly, or conversely, in the example I gave of Square, not phasing them, just making
57:21 the abrupt change, knowing there's going to be a second and third order effect, and and and endeavoring to get through it as quickly as possible to mitigate any potential downside. And finally, making sure we ask um what breaks next, okay? So, presumably we're taking an initiative either to fix something that's broken or to build our business, right? And so, both of those follow on they they they have inherent in them
57:57 follow on questions. If we're If we're fix if we're take um if we're launching an initiative to fix something that's broken, the follow on question should be, "Okay, what's going to break next after this is fixed?" And start thinking about that before you initiate the fix to the current problem. If an initiative is being launched in order to enhance the business, so the questions need to be asked, "Okay, once this is launched, what is the next step to enhancing the business?" Okay? And
58:32 start thinking about that and planning for that before you launch the initial business enhancing initiative, so that they can work in concert or hopefully can there's a better chance they will work in concert, okay? So, again, disciplined forward-looking leadership will always consider second second-order, third-order effects, no matter what the size of your business is. Okay, let's see. Please do share your email. Okay. Um okay. So, um so thank you first of all, thank you very much for joining me today. Um when this
59:10 uh when this episode posts in YouTube, um all my social media um links will be there and my email address is there in the show notes, so it'll be there. By the way, not just on YouTube, but it's there in Spotify and Apple Podcast um when when this issue posts on on those platforms as well. So, if you want to reach me, you can always do so. You can reach You can post social media. You can send me a private like DM uh through LinkedIn. Or you you'll have my email address as well. Always happy
59:46 to hear your comments, your criticisms, your ideas, your thoughts. Please share those with me. Um be very grateful for that. Uh and uh oh, we're coming up on time here. So, I just want to thank you again for joining me today. And let's see, tomorrow at 10:00 a.m. is my show People Making Money. And then every other Thursday at 5:00 p.m. Pacific Time is my show Jigger's Place where we have a cocktail and a schmooze and talk about all kinds of topics not related to finances. So, uh several opportunities for us to be together every week and I
60:21 hope to see you again. So, one last time, thank you so much for joining me. Um Navster Vices, thanks for your comments. Really appreciate it. And uh looking forward to seeing you again. And signing off as I always do, Marie darling, you are my bell. Courage at all times, my friends.