I always liked factor analysis as a strategic tool. To begin with, statistics were never a strength of mine. Factor analysis is different; there is nothing arcane about it. It is simply a method of observing linear combinations of attributes or factors. They may or may not be accurate measures of interdependencies. Multiple attributes can be highly correlated with no apparent reason. And if important attributes are missed, the value of the analysis is reduced accordingly. That said, marketers often use them successfully to construct perceptual maps and other product positioning devices. At the very least, it is a neat, almost elegant, way of capturing and presenting information.

Factor analysis was a tool used cleverly by Steven Levitt, the University of Chicago economist who, with N.Y. Times journalist Stephen Dubner, co-authored Freakonomics in 2005. The subtitle of Freakonomics is apt: A Rogue Economist Explores the Hidden Side of Everything. Cause and effect were turned upside down as they searched for interdependencies and correlations that to others seemed, at best, coincidental. They were able to debunk commonly held theories on many topical issues…as, for example, why the crime rates in New York City fell precipitously under the watchful eye of Rudy Giuliani.

Without being referred to specifically, factor analysis was also used by Malcolm Gladwell in his very clever new best-seller, Outliers: The Story of Success. It takes a leap of faith the size of the Grand Canyon to suggest that Bill Gates’ ultimate success was the result of accumulative advantage starting as an eighth grader when he had unlimited access to a computer, access denied even to university students. Ditto for hockey players who took advantage of the age cut in minor hockey to jump ahead of the pack.

Cultural legacy provides the basis for an even more startling leap from rice paddies to Chinese aptitude for math and deference to Korean Air pilots being the unwitting triggers to a succession of horrific crashes.

Gladwell is near-Holmsian in his ability to apply observation, deductive reasoning and inference to reach his conclusions. But he has the numbers to back up the anecdotal, if anomalous, evidence.

This is a fun book. It is, like Gladwell’s other books, breezy and easy to read. And while some of his theories might be a stretch, they aren’t as silly as, say, the Paul Revere stuff in The Tipping Point. It is replete with interesting concepts and enough terminology – divergence testing, orthogonal intelligence, concerted cultivation and mitigated speech – to wow even the stuffiest psychologist.

Like Levitt, Gladwell makes you think. Unlike Levitt, he offers up the basis, if not the blueprint, for making the most of your potential.

It’s all in the numbers. And, as you know, numbers don’t lie.

My last post (Chaos Theory and the Economy) looked at the ripple effect of what might, to the untrained eye, look like isolated events and localized market dynamics. These ripples sweep outwards in ever widening circles, washing over near everything in their paths, capsizing anything not large enough or small enough to ride the waves. The chaos doesn’t just roll outwards, however; it reaches up and trickles down as well. The trickle is, actually, more of a crunch.

There is a story worth telling that speaks to the trickle-down effect. One plain-talking CEO I knew, during a break in a tough round of labor negotiations, decided to get personal. He dropped in on the union leadership and told its members that while the company was owned by shareholders, the plant they were representing ultimately belonged to the workers. The Board was far away. He, as CEO, would likely move on in one year, three years, maybe five at the outside. But most of the workers had been with the plant for decades and few were about to leave any time soon. They had helped build it and they had made it run through the good times and bad.

If these negotiations were to lead to a shutdown, he told them, a strike would impact their future and the future of their families far more than it possibly could him. They had few options now and would have fewer options were the plant to close. In the current environment and with outsourcing now an economically and politically viable option, a shutdown – and even permanent closure – was a real possibility. This little chat was a break in protocol; there were certainly all sorts of reasons why it was a bad idea. At the very least, it could be construed as a threat. I knew this CEO, though. It wasn’t a threat; it was a plea.

As it happened, the union missed his point. The employees walked out. The company then kept them out long enough for it to really hurt.

I tell this story not to decry union tactics in this particular case…or in any other, for that matter. It is not meant as a commentary on the GM/UAW negotiations…which just happened to be mentioned in the first Chaos Theory post. I relate this story because this particular CEO was stating what I have learned over the years to be an important truth. As the economy slowly but steadily sinks, companies will – as they must – rationalize their operations. Plants will close. Workers will lose their jobs. Their fates are inextricably tied. And so, when it comes, the wave will swamp not just the plant, but its workers and their families. The chaos will have become very specific before it inevitably becomes general.

“The field of consciousness is tiny”, wrote Antoine de Saint-Exupery. “It accepts only one problem at a time.” Would that the economy were so accommodating. The bad news keeps popping up as if the economy were a giant Whack A Mole gopher bash game.

Well before the nuclear blast that was the sub-prime mortgage fiasco, well before the subsequent fall-out spreading like Mt. St. Helen’s ash over the U.S. economy, there were troubling signs. One by one, we were seeing the elements fall into place for a perfect storm.

We focus on the super novas, like the JPMorgan acquisition of Bear Stearns Cos that sent analysts into a tailspin, but what I have found most worrisome are plant closings being announced with unsettling relentlessness and regularity.

There are the biggees. General Motors, for example, has a plan to close or eliminate shifts in a dozen plants as part of a plan to cut 30,000 hourly jobs in the U.S. and Canada by the end of 2008. The controversial agreement recently signed with the United Auto Workers union not only sanctions the closings, but lays the groundwork for drastic wage cuts and opens the door to further unsettling moves.

And then there are the smaller, less known punches to the economic gut. Pilgrim’s Pride, the largest chicken processor in the U.S., is closing a chicken processing complex and six of its 13 distribution centers. The catalyst is soaring feed-ingredient costs resulting from a surge in corn-based ethanol production.

This post is not going to question the corporate strategies that hinge return to profitability on cost-cutting. That is an issue for another day. What I do wish to point out here is that none of these cuts occur in isolation.

As the Pilgrim’s Pride closings indicate, downstream effects, near invisible to the untrained eye, are taking their toll. The chaos theory applies to the economy. With oil profits soaring in a way that gives additional bite to the term ‘crude’, refiners are investing in cokers and other technology to maximize their yield from each barrel . High value extractions like ethanol are being favored in the refining process. As we have seen, this hurts the chicken industry, for one. It also means that the availability of Bunker C (heating oil) as well as paving and roofing asphalt will be diminished and that their costs will also rise dramatically. And, with the rules of supply and demand being adhered to with religious fervor, the cost of natural gas and other oil alternatives will most assuredly keep pace. Plant operating costs will continue their upward trajectory.

The escalating cost of gasoline has, of course, been especially hard on truckers, who also have to contend with reduced backhauls in a downturn economy. To say nothing of regulatory changes and enhanced security measures. For trucking companies to survive, they will have to pass on these costs and inconveniences to customers. Logistics will prove an increasingly troublesome challenge.

With the housing bubble burst and demand for building materials down dramatically, we have seen the shutdown of numerous lumber and OSB (Oriented Strand Board or waferboard) mills. With the closure of sawmills, there are less wood chips available. There is also less recycled paper available thanks to, among other things, increased consumption by the Chinese. The combination makes things tough for manufacturers of LDF wall board and MDF furniture who have also been hit by the downturn in housing expenditures. This downturn is, of course, related to the mortgage mess and the resultant tightening of credit. It is also a reflection of growing consumer nervousness engendered by continuing bad economic news, including plant closures.

And so on.

There is an intertwining of relationships between industries and a cascading of effects as a result of each change in any one industry’s fortunes. We can see the overall impact of all these linkages, but the subtleties are not as obvious as they are telling.