Strategy

Do Economic Sanctions Work

Posted on by j.giglio

When Western policymakers want to influence an outcome and military intervention is deemed too risky, economic sanctions are a favorite non-lethal tool in their bag of tricks. The war in Ukraine is the latest example of their use.

Attacking a country’s economy through sanctions can be a way of hitting your enemy where it hurts—in the pocketbook. And it’s a lot easier than going to war. The question is whether sanctions cause as many problems as they solve.

Economic sanctions are not a novel concept in international diplomacy. The aim of weakening the enemy through the material deprivation of its population long predates modern times. In fact, it dates back to the ancient Greeks, when Athens imposed a trade embargo on its neighbor Megara in 432 B.C. that helped trigger the Peloponnesian War.

Economic sanctions come in different forms depending on the desired outcome. Besides economic and trade sanctions, these measures include targeted actions such as arms embargoes, freezing assets, commodity restrictions and travel bans on key individuals and organizations.

These sanctions can be imposed by a single country or multilaterally, by like-minded nations, or international bodies such as the United Nations and the European Union. Sanctions can be wide-ranging, banning all transactions with a specific country, while targeted or smart sanctions aim to minimize collateral damage to the general population and instead focus on specific individuals or entities believed to be responsible for offending behavior.

The economic sanctions placed on Russia following its invasion of Ukraine are the widest ranging ever placed on a major economic power. Will they work? Restrictions on Iran, Venezuela, and North Korea, for example, impoverished their populations but haven’t led to political change.

To take just one example, the war in Ukraine has put pressure on European energy markets where supply and demand were already being disrupted. Consider will the European Union’s (EU) proposed oil sanctions on Russia weaken Putin’s ability to finance the war? Fossil fuel exports provide the revenue for Russia’s military buildup and brutal aggression against Ukraine.

The 27 members of the EU buy a quarter of their oil and more than 40 percent of their gas from Russia, paying $450 million per day for oil and $400 million per day for gas. There is no consensus yet among EU members on stopping Russian gas imports.

The EU recently stopped Russian coal imports, and after dithering over a decision to sanction Russian oil imports, the EU Commission has committed to weaning itself off Russian oil. The President of the Commission announced that oil imports from Russia will be banned after six months and refined petroleum products by the end of the year, ratcheting up its efforts to cut off a key source of funding for the Kremlin.

This was the EU’s sixth package of sanctions against Moscow, and its biggest and costliest step yet toward supporting Ukraine and ending its dependence on Russian fossil fuels.

Now the EU is struggling to replace that oil. It is also making a big bet that Russia will not retaliate by turning off natural gas supplies, as they have already done with Bulgaria and Poland for refusing to pay in rubles. Just as Europe hopes to find new oil suppliers, so Russia is working hard to line up alternative buyers such as India to minimize the impact on their bottom line and to continue to take advantage of higher oil prices to compensate for lower volume.

China is a likely market. Last year a third of Russian oil exports went to China. While Russia relies on oil and gas exports for 45 percent of its revenue, according to the International Energy Agency, it may well be that the EU’s oil ban won’t cause large and lasting damage unless China joins the Russian oil boycott, and that is highly unlikely.

But it’s very likely that the proposed ban will hurt the European economy and Europeans are going to have to deal with higher energy prices.

The war in Ukraine and COVID-19 pandemic could spell the end of globalization

Posted on by j.giglio

Times are changing. The global pandemic and Russia’s unprovoked invasion of Ukraine have sparked debate on the future of globalization — nations trading with few barriers, focusing on the industries and services they do best.

The war in Ukraine has strained ties between countries that were already under pressure due to the coronavirus pandemic. It has exposed the risks inherent in economic interdependence among nations with different ideologies and security interests.  It may well be that globalization as it has been known is dead in a post-COVID-19, post-Ukraine war world.

The war has had a big impact on the global economy, especially as supply chain shocks threaten everything from energy supplies to auto parts to exports of wheat and raw materials, and sent prices skyrocketing.  It has also raised concerns about food shortages because Russia and Ukraine are among the major breadbaskets of the world.  Many countries have banned the export of food grains, fearing supply disruptions and higher prices due to shortages.

The CEO and chairman of Black Rock, the world’s largest asset manager, said in a letter to shareholders last month that “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades.” He added that companies and governments will now be forced to further “reevaluate their dependencies and reanalyze their manufacturing and assembly footprints.”

The pandemic dramatically demonstrated vulnerabilities in long supply chains and made countries look closer to home. While it is impossible to predict the outcome of the war, Russia’s invasion of Ukraine on Feb. 24 has upended a world order that has been in place since the end of the Cold War in the 1990s. It signals changes to globalization as the world has known it.

The combination of technology and a relatively stable geopolitical landscape promoted steady expansion of global trade over the last 50 years. In 1970, trade accounted for 25% of global GDP, meaning one quarter of all goods produced were traded with international partners. By 2000, global trade had doubled to 50% of all goods and services produced.

But the trend toward globalization recently started to run in reverse. The world trade share of GDP output peaked in 2008 at 61%.  In 2020, global trade accounted for just 51.6% of worldwide GDP, the lowest since 2003.

Even before the pandemic, the 2008 financial crisis dealt a blow to globalization, as cross-border investments, trade, and supply chains all contracted.  In the last decade, globalization has suffered multiple setbacks in the form of Brexit, the US-China trade war, the pandemic, and now the Russia-Ukraine war.

The conceit that economic interdependence promotes political stability has been shaken. Russia, the ninth largest economy in the world, is being economically isolated from the West, which has responded to Russian aggression with harsh economic sanctions. Consider that the European Union is Russia’s main trading partner, accounting for 38 percent of its exports. Of course, this is partially neutralized by its dependence on imports of Russian gas and oil.

Governments and corporations are recognizing the limits of having supply chains spread out in multiple locations.  For instance, shortages of surgical masks and personal protective gear at the outset of the pandemic in 2020 showed the vulnerability of the world’s dependence on Chinese factories for all sorts of goods.

All this means global trade may have crossed the Rubicon and is heading toward cold war-era trade blocs, one led by the U.S. and the other by China.

Globalization may not fully recover from the pandemic and the war in Ukraine.  A version of it based on different principles and moves away from pure efficiency to consider security, reliability, and partnerships may be in the offering.

Once the most valuable company in the world, GE is making dramatic moves to survive

Posted on by j.giglio

General Electric (GE), the iconic American corporation that says it brings good things to life, announced in November that it is splitting into three public companies. The firm hopes to focus and simplify its business while reducing its debt.

One of the three new companies will focus on aviation, another on health care, and the third on energy.  GE plans to spin off its health care division, which makes hospital equipment, in early 2023. The following year, it intends to combine its power units and renewable energy unit, which makes turbines for power plants and wind farms, leaving only the aviation business.

The firm will then focus on making and servicing jet engines. Existing GE shareholders will get stakes in each of the new public companies.

This is certainly a dramatic move for the 129-year-old industrial conglomerate. The company started in 1892, after the company, which was of course founded by Thomas Edison, inventor of the light bulb, merged with its rival manufacturing company Thomson-Houston Co. to become General Electric, as it is known today. A few years later the company became one of only 12 companies listed on the newly formed Dow Jones Industrial Average.

During the 1980s and 90s, the firm was run for 20 years by the larger than life Jack Welch. He transformed the manufacturer into a conglomerate, buying up companies, including RCA, owner of the NBC TV network.

At its height, under Welch, GE had expanded into the financial sector and was making everything from refrigerators and plane engines to medical equipment and, of course, light bulbs. It became the most valuable company in the world.

But GE’s problems didn’t come out of the blue. There were many factors involved in its demise. One was Welch’s focus on GE Capital, the firm’s financial services arm. In 2000, the lion’s share of GE’s profitability and almost half its revenue came from GE Capital.

During Welch’s tenure, it became far larger and more successful than GE’s other business units. At its height, GE Capital was the seventh-largest US financial institution. GE Capital enabled the company to smooth over its quarterly earnings report and keep Wall Street happy.

GE Capital moved into retail banking, private label credit cards, brokerage services, home loans, mortgage-backed securities, and insurance. It had also become the world’s largest lessor of cars, equipment, and ship containers, and the biggest private mortgage insurer.

In effect, GE, a household name and established global brand, was more of a financial services company than an industrial manufacturing company making stuff the economy needs. This finance arm was a major factor in GE’s demise. In some ways, GE Capital was the tail wagging the dog.

All hell broke loose when the financial crisis hit in 2008, and GE barely survived, as the crisis revealed it to be overstretched. Despite GE’s reputation for management excellence, the firm was overly dependent on its finance business, which melted under the heat of the excessive risks it had taken during a period of low interest rates and a long bull market. With GE struggling to meet is financial commitments, Warren Buffet’s Berkshire Hathaway, Inc. famously stepped in and invested $3 billion.

The American taxpayer guaranteed tens of billions in debt. The U.S. government designated GE Capital a systemically important financial institution, meaning that it had the potential to wreck the economy if it were to collapse (too big to fail).

So much for the myth that Jack Welch was the greatest manager of the 20th century, elevating management to a kind of science, and for the belief that great management can work miracles. GE was supposedly the textbook case of a corporation creating synergy and value across various companies around the world. Soon, you will barely be able to recognize it.

Pearl Harbor Day is a day that should live in infamy

Posted on by j.giglio

Early in 1941, the government of resource-poor Japan realized that it needed to seize control of the petroleum and other raw material sources in the Dutch East Indies, French Indochina and the Malay Peninsula. Doing that would require neutralizing the threat posed by the U.S. Navy’s Pacific Fleet based at Pearl Harbor in Hawaii.

The government assigned this task to the Imperial Navy, whose combined fleet was headed by Admiral Isoroku Yamamoto. The Imperial Navy had two strategic alternatives for neutralizing the U.S. Pacific Fleet. One was to cripple the fleet itself through a direct attack on its warships, or cripple Pearl Harbor’s ability to function as the fleet’s forward base in the Pacific.

Crippling the U.S. fleet would require disabling the eight battleships that made up the fleet’s traditional battle line. It was quite a tall order.

The most effective way to cripple Pearl Harbor’s ability to function as a naval base would be to destroy its fuel storage and ship repair facilities. Without them, the Pacific Fleet would have to return to the U.S., where it could no longer deter Japanese military expansion in the region during the year or so it would take to rebuild Pearl Harbor.

It soon became apparent that the basics of either strategy could be carried out through a surprise air raid launched from the Imperial Navy’s six first-line aircraft carriers. Admiral Yamamoto had a reputation as an expert poker player, gained during his years of study at Harvard and as an Imperial Navy naval attaché in Washington. He decided to attack the U.S. warships that were moored each weekend in Pearl Harbor. But in this case the expert poker player picked the wrong target.

The Imperial Navy’s model for everything it did was the British Royal Navy. Standard histories of the Royal Navy emphasized its victories in spectacular naval battles.

Lost in the shuffle was any serious consideration of trying to cripple Pearl Harbor’s ability to function as a forward naval base. So it was that, in one of history’s finest displays of tactical management, six of the world’s best aircraft carriers furtively approached the Hawaiian Islands from the north just before dawn that fateful Sunday, Dec. 7, 1941, launched their planes into the rising sun, caught the U.S. Pacific Fleet with its pants down and wrought havoc in spectacular fashion. On paper at least, this rivaled the British Royal Navy’s triumph at Trafalgar.

But so what?

The American battleships at Pearl Harbor were slow-moving antiques from the World War I era. As we know, the U.S. Navy already had two brand new battleships in its Atlantic Fleet that could run rings around them. And eight new ones the navy was building were even better.

More importantly, the Pacific Fleet’s three aircraft carriers weren’t at Pearl Harbor. American shipyards were already building 10 modern carriers whose planes would later devastate Imperial Navy forces in the air/sea battles of the Philippine Sea and Leyte Gulf.

Most importantly, as the sun set on Dec. 7 and the U.S. Navy gathered the bodies of its 2,117 sailors and Marines killed that day, all-important fuel storage and ship repair facilities remained untouched by Japanese bombs, allowing Pearl Harbor to continue as a forward base for American naval power in the Pacific.

So in reality, Dec. 7 marked the sunset of Japan’s extravagant ambitions to dominate Asia. Admiral Yamamoto and the Imperial Navy’s other tradition-bound leaders chose the wrong targets at Pearl Harbor.

The dictates of tradition are usually the worst guides to follow when it comes doing anything really important. After all, if they survived long enough to be venerated, they’re probably obsolete.

The return of the Taliban. What went wrong in Afghanistan?

Posted on by j.giglio

Writing about recent events is always hazardous. It can be difficult to establish precisely what has happened and why. There is also a lack of clarity about the relative significance of events.

Americans don’t yet know where the collapse of Afghanistan ranks in the list of American military and foreign policy disasters such as the debacle in Iraq, the fall of Saigon, the failed “Bay of Pigs” invasion in Cuba, and the 1979 Iran hostage crisis.

But three points are surely certain, first, the shambolic exit from Afghanistan is a major setback that will undermine U.S. credibility for years to come. As Henry Kissinger said, “To be an enemy of the US is dangerous, to be a friend is fatal”.

Second, Afghanistan fell because America forgot the lessons of history. It does not understand the world beyond its borders, which is very different than the U.S.

Finally, given how the atrocious implementation of the pullout. of U.S. troops from Afghanistan was, Joe Biden will have to wait a bit before he receives his Nobel Peace Prize. Another black eye for the U.S.

There will be lots of talk in the coming days about the harsh lessons to be learned from America’s retreat from Afghanistan. In April, Biden announced the U.S. would withdraw our military from the country without conditions on the 20th anniversary of the 9/11 attacks. What an awful historical irony that the Taliban will once again be in control on Sept. 11.

Looking back, there are some indisputable facts about what went wrong in Afghanistan, and responsibility is certainly divisible by more than one president.

On Oct. 7, 2001, the first of these presidents, George W. Bush, launched Operation Enduring Freedom—the invasion of Afghanistan. The operation sought to bring the architects of 9/11 to justice and reduce the threat of terrorism. Then the Afghan mission, which often lacked strategic clarity, morphed from counter insurgency to counter-narcotics and then into capacity building to remake Afghanistan as an award-winning liberal democracy.

The result is a painful lesson of what can happen when immense military might is put in the hands of politicians and their minions who lack the understanding to employ it properly. Equally culpable are politicized American military leaders who consistently lied about the strength of the Afghan security forces.

The result is that the Taliban, a UN-designated terrorist group, defeated the world’s greatest military power. Another self-inflicted blow to America’s reputation that will complicate Biden administration goals to check China’s rise by building coalitions in the Asia Pacific.

According to the Costs of War project at Brown University, the U.S. has spent more than $2 trillion in Afghanistan since 9/11. That’s $300 million per day for two decades.

And the human costs are even greater. There have been 2,448 service members killed and over 21,000 American soldiers injured in action, along with 3,846 contractors killed. That pales beside the estimated 66,000 Afghan national military and police and over 47,000 Afghan civilians who were killed.

And because the U.S. borrowed most of the money to pay for the war, generations of Americans will be burdened by the cost of paying for it. The Costs of War researchers estimate that by 2050, interest payments alone on the Afghan war debt could reach $6.5 trillion. That amounts to $20,000 for each and every U.S. citizen.

You do not need to support a continued presence in that arid, stone-age country to recognize that things have gone badly. The execution of the U.S. withdrawal has been disastrous, deadly, and humiliating, handing power back to the Taliban in a matter of days. The dramatic unravelling of the situation in Afghanistan puts President Biden’s reputation for foreign policy expertise at risk.

It is worth bearing in mind what former Bush and Obama Defense Secretary Robert Gates wrote in his memoirs: Biden has “been wrong on nearly every major foreign policy and national security issue over the past four decades”.

But not to worry, this is not your father’s Taliban. They are smarter and tougher.

Leadership lessons from ‘Twelve O’Clock High’

Posted on by j.giglio

The two best examples of crisis leadership for contemporary students of management and leadership are World War I and World War II. The former a gold mine of information illustrating virtually every conceivable way of doing things wrong and World II a nice balance between doing thing wrong and doing things right.

World War II was actually three separate wars that took place at the same time: United States versus Japan in the Pacific, the United States and the United Kingdom (UK) versus Germany in Western and Southern Europe, and the Soviet Union versus Germany in Eastern Europe.

Germany and Japan started World War II having great successes by doing things right. Then they lost their way and ended up doing everything wrong.

In contrast, the Allies (US, UK, and the Soviet Union) started off doing many things wrong, mainly out of ignorance and false illusions, including the misuse of air power.  But they managed to get their respective acts together and wound up doing most things right.  They won the war, and in so doing, reshaped the world.

Running a business has a great many parallels with running a war.  To succeed in either, you must set realistic goals, identify and deploy the relevant resources necessary for achieving these goals, and then skillfully implement the options you select.  After that you have to roll with the punches that inevitably whack you from unexpected events and adjust your strategy with dispatch.

Two fine Hollywood movies made in the late 1940s effectively dramatize “war situations” that are also common in business.

“Command Decision” is one of the movies with themes that translate to business.  It deals with strategic decision making at the command level.  The other is “Twelve O’ Clock High,” which is about a manager taking over a failing bomber group and whipping it into shape through a program of stern discipline.

It is the harrowing story of the first B-17 bombers in England in World War II and the terrible losses they took before long-range fighters were available to escort them on combat missions over Europe. The movie was adopted from a popular novel that was, in turn, based on a real event that affected the Eighth Air Force in England during 1942 and 1943.

The new leader immediately incurs the hatred of aircrews when he comes down hard on the lack of discipline.  He deals harshly with slackers, segregating the worst misfits into a crew known as “The Leper Colony”. He openly criticizes mistakes, insists on a high level of professionalism and is a straight talker who appreciates straight talk in return.

Resentful of the new management style, all the pilots ask to be transferred out of the unit.  But the new commander sticks to his principles. As the bomber group develops combat effectiveness and the group’s performance improves, and the loss of life decreases, the pilots change their minds and support the new commander and his leadership style.

This story dramatizes steps the leader took to restore the morale of people who had come to regard themselves as “hard-luck failures” who had accumulated the highest loss rate and the worst bombing effectiveness record and motivated them to become a winning team.

The film highlights timeless leadership lessons such as creating a strategy; setting clear expectations; creating performance standards; giving clear directions; putting the right people in the right jobs; communicating the “why”; restoring accountability, and pushing, pushing, and pushing until the job is done.

Whether commanding a bomber group or managing employees towards making their numbers, these leadership qualities are essential and universal, especially in situations of extreme emergency and crisis.

Leadership lessons learned from the 1948 movie ‘Command Decision’

Posted on by j.giglio

COVID-19 has turned the world upside down, and it is clear that things will not return to the status quo ante anytime soon. The pandemic has provided a test for societies and for their leaders.

One dimension of leadership always in short supply is the ability to tell people the truth, even if the message is unwelcome, such as that things will get worse before they get better.

In the current climate of fear and uncertainty, the United States needs leaders who can make strategic decisions independent of politics and do the right thing.  This dimension of leadership is captured in the excellent 1948 movie about strategic bombing in World War II, “Command Decision.”

The film deals with strategy, leadership, corporate politics, and is probably the most sophisticated American war film ever made.  It dramatizes a fundamental strategic conflict between two Army Air Force generals. Both are West Point graduates who committed themselves early on to Billy Mitchell’s schtick of air power as a “war-winner in its own right.”

The younger general commands the Eighth Air Force’s strategic bombing units in England during 1943. He’s learned that the Luftwaffe has begun production of a wiz-bang new jet fighter at three plants deep inside Germany. He believes these factories must be bombed into oblivion as soon as possible, no matter what the cost in bomber and air -crew losses, to prevent the jet fighter program from creating a defensive shield over Germany that will make strategic bombing impossible and threaten the planned 1944 invasion of France.

But his older and more politically savvy boss is convinced that the ultimate success of strategic bombing depends on the size of the bomber force Washington allocates to the Eighth Air Force. This will be determined by how effective they are at producing acceptable bombing results without high loss rates,  which rules out the go-for-broke raids the younger general wants to mount against the three jet fighter factories.

The younger general insists that they must take advantage of a period of clear weather to complete the destruction of the factories if strategic bombing of Germany is to have any future.  The older general believes the future of strategic bombing depends on the Eighth Air Force getting enough bombers.  This will be determined at an allocation meeting in Washington, where heavy bomber losses certainly won’t help their case.

In other words, the younger general fights the Germans in Europe while the older general has to fight the US Navy, which wants bombers for the Pacific theater, and Army ground forces which wants to recycle bomber pilots now in training as company commanders.

These dramatic debates between the two generals are breathtaking; two dedicated pros with very different perspectives about the strategic issue at hand pour out their arguments, hopes, fears, and differing career expectations.

The movie’s sympathies lie with the younger general and show that he was right.  At the time the movie was made, there was widespread public acceptance of Air Force propaganda that its Strategic Bombing concept had been successful.  It turned out in retrospect, that the pre-war strategic bombing advocates grossly underestimated the resources needed for this concept to succeed, so the older general was actually right.

The problem the two generals confront is similar to the Covid-19 crisis.  You can impose a protracted lockdown and harm the economy to the point where recovery will take decades, or forego lockdowns and get the economy moving, but with a significant increase in illness and death.

Few people like to hear bad news, but telling the public what it needs to hear and facing problems is an important test of leadership.  The role of a leader is to do the right thing in addressing a wicked problem that may have no clear solution – only an array of possible approaches, each with deleterious consequences.

Pearl Harbor Day is a day that should live in infamy

Posted on by j.giglio

Early in 1941, the government of resource-poor Japan realized that it needed to seize control of the petroleum and other raw material sources in the Dutch East Indies, French Indochina and the Malay Peninsula. Doing that would require neutralizing the threat posed by the U.S. Navy’s Pacific Fleet based at Pearl Harbor in Hawaii.

The government assigned this task to the Imperial Navy, whose combined fleet was headed by Admiral Isoroku Yamamoto. The Imperial Navy had two strategic alternatives for neutralizing the U.S. Pacific Fleet. One was to cripple the fleet itself through a direct attack on its warships, or cripple Pearl Harbor’s ability to function as the fleet’s forward base in the Pacific.

Crippling the U.S. fleet would require disabling the eight battleships that made up the fleet’s traditional battle line. It was quite a tall order.

The most effective way to cripple Pearl Harbor’s ability to function as a naval base would be to destroy its fuel storage and ship repair facilities. Without them, the Pacific Fleet would have to return to the U.S., where it could no longer deter Japanese military expansion in the region during the year or so it would take to rebuild Pearl Harbor.

It soon became apparent that the basics of either strategy could be carried out through a surprise air raid launched from the Imperial Navy’s six first-line aircraft carriers. Admiral Yamamoto had a reputation as an expert poker player, gained during his years of study at Harvard and as an Imperial Navy naval attaché in Washington. He decided to attack the U.S. warships that were moored each weekend in Pearl Harbor. But in this case the expert poker player picked the wrong target.

The Imperial Navy’s model for everything it did was the British Royal Navy. Standard histories of the Royal Navy emphasized its victories in spectacular naval battles.

Lost in the shuffle was any serious consideration of trying to cripple Pearl Harbor’s ability to function as a forward naval base. So it was that, in one of history’s finest displays of tactical management, six of the world’s best aircraft carriers furtively approached the Hawaiian Islands from the north just before dawn that fateful Sunday, Dec. 7, 1941, launched their planes into the rising sun, caught the U.S. Pacific Fleet with its pants down and wrought havoc in spectacular fashion. On paper at least, this rivaled the British Royal Navy’s triumph at Trafalgar.

But so what?

The American battleships at Pearl Harbor were slow-moving antiques from the World War I era. As we know, the U.S. Navy already had two brand new battleships in its Atlantic Fleet that could run rings around them. And eight new ones the navy was building were even better.

More importantly, the Pacific Fleet’s three aircraft carriers weren’t at Pearl Harbor. American shipyards were already building 10 modern carriers whose planes would later devastate Imperial Navy forces in the air/sea battles of the Philippine Sea and Leyte Gulf.

Most importantly, as the sun set on Dec. 7 and the U.S. Navy gathered the bodies of its 2,117 sailors and Marines killed that day, all-important fuel storage and ship repair facilities remained untouched by Japanese bombs, allowing Pearl Harbor to continue as a forward base for American naval power in the Pacific.

So in reality, Dec. 7 marked the sunset of Japan’s extravagant ambitions to dominate Asia. Admiral Yamamoto and the Imperial Navy’s other tradition-bound leaders chose the wrong targets at Pearl Harbor.

The dictates of tradition are usually the worst guides to follow when it comes doing anything really important. After all, if they survived long enough to be venerated, they’re probably obsolete.