We're all busy, with little time to review data and information that doesn't come directly to us through our respective organizations.

But outside information from a wide range of sources may hold insights that are worth uncovering.

Todays' newsletter looks at external "noise," and makes the case for systematically keeping an ear to the ground outside your organization.

I appreciate your comments. Simply reply to this email to send them to me.
Charlie Goodrich 
Founder and Principal
Goodrich & Associates
October 2015 Vol. 4 No. 10
In this issue...
Listening to the Noise. How Paying Attention to Alternative Sources of Information Can Make or Break Your Organization
Heard on the Street - Undisclosed debt in emerging markets
About Us
Goodrich & Associates
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Listening to the Noise. How Paying Attention to Alternative Sources of Information Can Make or Break Your Organization

In most companies, senior management gets information from updates, presentations, meetings and so forth. All very structured; all very filtered; all very focused on whatever senior management believes is important.

But what about all the information that is screened out by your organization? I know, there is not enough time to stay on top of everything and filtering information is what organizations are supposed to do. Besides, most of it is just noise anyway.

All true. But what if there is something important in that pre-screened noise? And, since you may not know, there often is.

Consider the mortgage crisis of 2008, which was not foreseen by most of the big banks, trading houses or the Federal Reserve. As early as 2005, I attended conferences on distressed investing, with speakers talking about the increase in default rates of subprime mortgages. They highlighted the fact that the rating agencies were using the default history from first generation subprime mortgages to predict default rates for subprime mortgage issues several years later (despite evidence that recent subprime mortgages were defaulting much sooner and at a higher rate). This information, however, was filtered out in the big banks, so senior management was unaware.

In my newsletter on "unknown unknowns," I mentioned that, to many others, situations such as the subprime mortgage crisis are often really, in the Rumsfeld lingo, "known knowns." Sometimes they are big, but often they are small and the mass of these small unknown unknowns can paint a picture we wish we saw earlier.

Nate Silver, author of The Signal and the Noise: Why So Many Predictions Fail - But Some Don't, believes that while the 9/11 event itself may not have been preventable or predictable, an event like it certainly was. Why? Airplanes have always been a favorite of terrorists and there had been a pattern of escalating terrorist attacks in general and by Al Queda, specifically. We experienced a failure of imagination, because the bureaucrats in our Federal Government saw the data but screened it out because it didn't fit the patterns they were looking for.

The business equivalent of this is missing competitive responses, new markets, new opportunities and so forth. This is what happens when an organization filters information based on what it assumes to be most important.

Again, information filtering is a by-product of an organization's need for structure and process. But how do we listen to the noise, make sense of it, and not be overwhelmed by the sheer volume?

The answer? Sampling.

You only have so much time, so commit to sampling a slice of the noise filtered out by your organization. You won't spot everything, of course, but it will expose you to information and insights that would otherwise be missed.

Here's how:
  1. Meet your customers, employees and suppliers. Get to know them. Ask unscripted questions. Don't just meet your best customers either; meet a few of the small or marginal ones too, and find out why they don't buy more.
  1. Keep abreast of your industry. Attend trade shows and read industry publications. See what the competition and suppliers are doing first hand - and hear from others what they think of these companies.

    When I worked for Kraft Foods in the mid-80's, I was very much involved with soy bean oil. Kraft took more physical delivery of soy bean oil futures contracts than anyone else, by a large margin. Soy bean oil was 50 to 80% of the ingredients in Parkay Margarine, Miracle Whip, Kraft Mayonnaise and pourable salad dressings.

    I attended a conference on the outlook for prices of soy beans, meal and oil and met several representatives from the American Soybean Association. They were out sampling the "noise," desperate to find out what was going on with palm oil. Why? Palm oil grows on trees that produce for a very long time and soy beans are planted each year. Malaysia and other countries had recently planted large plantations of palm trees and the American soy bean industry was very much concerned about the competitive threat.

    Palm oil was a lot cheaper than soy bean oil and it didn't need to be hydrogenated (turned into trans fats). But it was high in saturated fat, something that was considered bad for you at the time. The trade association men asked me how best to defeat palm oil. I suggested running negative ads - the opposite of the Dairy Association's "milk is good for you" advertising. Two months later, the American Soy Bean Association did just that. Even today, palm oil isn't widely found in American food products.
  1. Sample the competition. Be careful not to land in jail for price fixing and collusion, but in addition to trade shows, do go to industry association meetings and so forth. Read Wall Street reports on your industry and competitors. Not just the ones "staff" forwards with a summary, but others you might find through your own financial planner/advisor or any other competent source that is not part of your business.
  1. Follow relevant world events. Depending on your industry, these can have a significant impact on the future success and competitive threats facing your company. Here as well, develop your own sources and look beyond what is shared internally.
  1. Beware of mind traps. Read my previous article and look for exceptions to your predictions. Look for what doesn't fit your model or prediction when sampling noise. Then find out why.
  1. Put a process in place. The noise may be random, but your process for sampling need not be. Schedule the time - you won't get to it otherwise - and make sure it becomes part of your weekly routine. Just be careful not to screen out sources of information as a consequence of the structure you put in place.
There's a lot of noise out there, much of it of little value. But there are gems as well. Find a way to systematically and reliably keep an ear to the ground, outside the walls of your own corporation.

Heard on the Street

A known unknown: Undisclosed debt owed by emerging market countries and companies.

Read why this matters in this short article by Carmen Reinhart, co-author of This Time is Different and a Professor of the International Financial System at Harvard University's Kennedy School of Government.

About Us

Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent liquidity problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.

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