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  • Writer's pictureSLP Consulting

Second- and Third-Order Effects

Updated: Jan 25, 2023

Most individuals -- executives and independent contributors alike -- are not accustomed to thinking in terms of second- and third-order effects, to wit: what will be the follow-on effects posed by the immediate effects of a hazard like the novel coronavirus? Two recent articles, one by the BBC and the other by the Wall Street Journal, should get people thinking in such directions. Additionally, the parallels that U.S. public- and private-sector decision makers should be following are not those of China (an authoritarian regime able to mandate and enforce draconian measures to limit the virus' spread,) but what we are seeing in places like South Korea and Italy (more open societies with decision making processes somewhat akin to those found in the United States.)

Organizations accustomed to thinking in terms of the next month or the next quarter, and only then in the simplest "if...then" mechanisms, need to develop comprehensive thinking over the short- and long-terms. To do anything else risks missing opportunities and threats.

"The country's [China's] official measure of manufacturing activity - the Purchasing Manager's Index (PMI) - dropped to 35.7 from 50 in January.

"China makes up a third of world manufacturing and is the world's largest exporter, so this PMI drop - well below analysts' expectations - will have a knock-on effect on other countries.

"According to Bloomberg Economics, Chinese factories were operating at 60% to 70% of capacity this week."

"Auto suppliers are warning of parts shortages. Generic drug manufacturers are paying 50% more for some raw materials.

"The epidemic’s widespread nature and related uncertainty will put a hold on large corporate investments, mergers and hiring, said Stanford University economist Nicholas Bloom, who has researched the impact of uncertainty on business cycles.

"For example, smartphone makers are expected to ship 64 million fewer devices in the first half of 2020, market researcher International Data Corp. said, hampered by component shortages and quarantine mandates."

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