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Christmas 2006

2006 will go down as a good year for business, the stock market, private equity firms, youTube, Bordeaux wine futures, Exxon-Mobil, and, improbably, the Saint Louis Cardinals. Faring not so well would be George W. Bush, the Amaranth Group of Hedge Funds, and the Boston Red Sox.

On balance, it clearly was a good year. Why, then, do I feel uneasy? Perhaps it is the ubiquitous economic presence of China. As a student of economics I find much to applaud in their contribution to the world economy, but growing U.S. dependence on a country with as many daunting issues to resolve in their own growth makes me nervous.

Perhaps it is the shadow of Iraq. Certainly the situation there will claim lots of policy-makers' time and lots of resources (i.e. money). The notion that we can fight a war without any domestic economic impact was Lyndon Johnson's, as I recall. He turned out to be wrong.

But enough of unease, what is inspiring my thinking this year? Not China Shakes the World, by James Kynge, the winner of the FT/Goldman Sachs best business book of the year award. If you read the FT or the WSJ regularly, you do not need to read this book. Not Carleton Fiorina. I refused to read her new book on the grounds that mediocre CEO's are unlikely to write great books.

The most illuminating book for me this year turned out to be Sir Basil Liddell-Hart's, The Strategy of the Second World War. This monumental volume by one of the best strategists of the 20th century is long out of print but Amazon found a used one somewhere. Liddell-Hart draws a few startling conclusions; most significantly that the war could have been prevented if Britain and France had joined the Czechs in opposing Hitler, and that the war in Europe should have ended in the summer of 1944 when the Allies missed the opportunity to stream through a hundred lightly defended miles of the German front owing to Montgomery's over-cautious delays and Eisenhower's failure to confront and lead.

As a history buff this is interesting stuff, but the reason for reading this book is Liddell-Hart's approach to strategy, something that I had first studied in my early years at McKinsey. Liddell-Hart calls it the strategy of the indirect approach. His insight was that the development of tanks and mechanized forces would enable an aggressor the advantage of rapid pincer movements around areas of enemy strength. Unfortunately the British and the French took little notice. However, the Germans did and used Liddell-Hart's tactics as the basis for their highly effective blitzkrieg. The obvious parallel in business is to use speed (product development or logistics) to outflank the competition. So, for example, Quicken has carved out a niche on Microsoft's flank and been able to hold it by being faster in design improvements and better in customer service.

A corollary to outflanking is Liddell-Hart's notion that one should be careful never to go head to head with a powerful, established opponent unless one has enormous staying power, in business, the ability to withstand long periods of having ones' margins squeezed. This was a lesson learned powerfully by independent hardware stores in trying to compete with Home Depot and Lowe's. Those that have been successful focus on convenience, selective discounting, greater service, and a much narrower product range.

2006 saw the passing of Milton Friedman, Nobel economist and great champion of monetary policy and the free market. Many view Friedman as the most influential economist of the second half of the 20th century. His views on the key influence of monetary policy on our economy and the dangers of extended high inflation are now accepted truths. Friedman was also the western economist who most influenced reformers in the so-called "Eastern Bloc" before the fall of the Berlin Wall.

On a personal not my wife and I journeyed back to Oxford, England for the 40th reunion of our Head of the River Crew. The English understand how to properly celebrate such timeless triumphs! A black-tie dinner in College hosted by 'the Provost' was followed by a trip to Henley to relive youthful exploits.

Best wishes for the New Year -- I am upping my t-bill position.