Corporate DNA

In a post on letting GM fail, I discussed what I called "corporate DNA"

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it. 

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA.  And DNA is very hard to change. ...

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation....Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

This seems to match the take of many insiders

To John Shook, a former Toyota manager who worked at a joint-venture plant run by the Japanese company and GM in Fremont, California, that explains why the two automakers are in such different shape today. When it comes to engineering and manufacturing, Shook says, Toyota and GM are about equal. Where they differ is in their corporate cultures.

“Toyota is built on trial and error, on admitting you don’t know the future and that you have to experiment,” Shook said. “At GM, they say, ‘I’m senior management. There’s a right answer, and I’m supposed to know it.’ This makes it harder to try things.”

The whole Bloomberg article this comes from is quite good.  Its pretty clear that GM had every reason to anticipate the current mess 3-4 years ago, and basically fiddled while the cash burned.  My strongest reaction from the article was, please let me have an epitaph better than this one:

Wagoner, a 31-year GM veteran, was the embodiment of its culture, an apostle of incremental change. Exciting as a Saturn, quotable as an owner’s manual....

Posted on December 12, 2008 at 10:00 AM | Permalink | Comments (12)

$485 Billion in Value Destroyed, and Counting

David Yermack has an awesome essay in the WSJ this weekend, encouraging Congress to just say no to spending $25-$50 billion bailing out Ford and GM.  Why?  Well, beyond the obvious moral hazard, these companies are value destruction machines of epic proportions.

Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.

As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. Along with management, the companies' unions and even their regulators in Washington may have their own culpability, a topic that merits its own separate discussion. Yet one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.

Posted on November 17, 2008 at 11:19 AM | Permalink | Comments (2)

Let GM Fail!

This is a reprise of a much older post, but it struck me as fairly timely.

I had a conversation the other day with a person I can best describe as a well-meaning technocrat.  Though I am not sure he would put it this baldly, he tends to support a government by smart people imposing superior solutions on the sub-optimizing masses.  He was lamenting that allowing a company like GM to die is dumb, and that a little bit of intelligent management would save all those GM jobs and assets.  Though we did not discuss specifics, I presume in his model the government would have some role in this new intelligent design (I guess like it had in Amtrak?)

There are lots of sophisticated academic models for the corporation.  I have even studied a few.  Here is my simple one:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot. You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it. 

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA*.  And DNA is very hard to change.  Walmart may be freaking brilliant at what they do, but demand that they change tomorrow to an upscale retailer marketing fashion products to teenage girls, and I don't think they would ever get there.  Its just too much change in the DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you still have a culture aimed at big box low prices, a logistics system and infrastructure aimed at doing same, absolutely no history or knowledge of fashion, etc. etc.  I would bet you any amount of money I could get to the GAP faster starting from scratch than starting from Walmart.  For example, many folks (like me) greatly prefer Target over Walmart because Target is a slightly nicer, more relaxing place to shop.  And even this small difference may ultimately confound Walmart. Even this very incremental need to add some aesthetics to their experience may overtax their DNA.

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you. When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value. Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan). A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one. 

I don't know if GM will fail (but a lot of other people have opinions) but if it does, I am confident that the end result will be positive for America.

* Those who accuse me of being more influenced by Neal Stephenson's Snow Crash than Harvard Business School may be correct.
** Gratuitous reference aimed at forty-somethings who used to hang out at the mall.  In my town, Merry-go-round was the place teenage girls went if they wanted to dress like, uh, teenage girls.  I am pretty sure the store went bust a while back.

Posted on November 11, 2008 at 12:56 AM | Permalink | Comments (14)

Another Reason Bailouts are Bad

I think the incentives issue has been beaten to death pretty well, but there is another problem with bailout:  They leave the productive assets of the failed company in essentially the same hands that failed to make good use of them previously.  Sure, the management has changed, but a few guys at the top of these large companies don't really mean squat.  To this point:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot. You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it. 

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA*.  And DNA is very hard to change.  Walmart may be freaking brilliant at what they do, but demand that they change tomorrow to an upscale retailer marketing fashion products to teenage girls, and I don't think they would ever get there.  Its just too much change in the DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you still have a culture aimed at big box low prices, a logistics system and infrastructure aimed at doing same, absolutely no history or knowledge of fashion, etc. etc.  I would bet you any amount of money I could get to the GAP faster starting from scratch than starting from Walmart.  For example, many folks (like me) greatly prefer Target over Walmart because Target is a slightly nicer, more relaxing place to shop.  And even this small difference may ultimately confound Walmart. Even this very incremental need to add some aesthetics to their experience may overtax their DNA.

David Leonhart (via Carpe Diem) argues that this was exactly the long-term downside of the Chrysler bailout:

Barry Ritholtz — who runs an equity research firm in New York and writes The Big Picture, one of the best-read economics blogs — is going to publish a book soon making the case that the bailout actually helped cause the decline. The book is called, “Bailout Nation.” In it, Mr. Ritholtz sketches out an intriguing alternative history of Chrysler and Detroit.

If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.

Instead, the bailout and import quotas fooled the automakers into thinking they could keep doing business as usual. In 1980, Detroit sold about 80% of all new vehicles in this country. Today, it sells just 45%.

As I wrote about GM:

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value. Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

Posted on September 19, 2008 at 09:09 AM | Permalink | Comments (8)

Wa' Happen?

I know that most non-financial folks, including myself, have their head spinning after this past few weeks' doings on Wall Street.  Doug Diamond and Anil Kashyap have a pretty good layman's roundup on Fannie/Freddie, Lehman, and AIG.  My sense is that their Lehman explanation also applies to Bear Stearns as well.  Here is just one small piece of a much longer article:

The Fannie and Freddie situation was a result of their unique roles in the economy. They had been set up to support the housing market. They helped guarantee mortgages (provided they met certain standards), and were able to fund these guarantees by issuing their own debt, which was in turn tacitly backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly. 

Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over the last year, it became clear that their thin capital was not enough to cover the losses on these subprime mortgages. The massive amount of diffusely held debt would have caused collapses everywhere if it was defaulted upon; so the Treasury announced that it would explicitly guarantee the debt.

But once the debt was guaranteed to be secure (and the government would wipe out shareholders if it carried through with the guarantee), no self-interested investor was willing to supply more equity to help buffer the losses. Hence, the Treasury ended up taking them over.

Lehman’s demise came when it could not even keep borrowing. Lehman was rolling over at least $100 billion a month to finance its investments in real estate, bonds, stocks, and financial assets. When it is hard for lenders to monitor their investments and borrowers can rapidly change the risk on their balance sheets, lenders opt for short-term lending. Compared to legal or other channels, their threat to refuse to roll over funding is the most effective option to keep the borrower in line.

This was especially relevant for Lehman, because as an investment bank, it could transform its risk characteristics very easily by using derivatives and by churning its trading portfolio. So for Lehman (and all investment banks), the short-term financing is not an accident; it is inevitable.

Why did the financing dry up? For months, short-sellers were convinced that Lehman’s real-estate losses were bigger than it had acknowledged. As more bad news about the real estate market emerged, including the losses at Freddie Mac and Fannie Mae, this view spread.

Lehman’s costs of borrowing rose and its share price fell. With an impending downgrade to its credit rating looming, legal restrictions were going to prevent certain firms from continuing to lend to Lehman. Other counterparties that might have been able to lend, even if Lehman’s credit rating was impaired, simply decided that the chance of default in the near future was too high, partly because they feared that future credit conditions would get even tighter and force Lehman and others to default at that time.

A.I.G. had to raise money because it had written $57 billion of insurance contracts whose payouts depended on the losses incurred on subprime real-estate related investments. While its core insurance businesses and other subsidiaries (such as its large aircraft-leasing operation) were doing fine, these contracts, called credit default swaps (C.D.S.’s), were hemorrhaging.   

Furthermore, the possibility of further losses loomed if the housing market continued to deteriorate. The credit-rating agencies looking at the potential losses downgraded A.I.G.’s debt on Monday. With its lower credit ratings, A.I.G.’s insurance contracts required A.I.G. to demonstrate that it had collateral to service the contracts; estimates suggested that it needed roughly $15 billion in immediate collateral.

A second problem A.I.G. faced is that if it failed to post the collateral, it would be considered to have defaulted on the C.D.S.’s. Were A.I.G. to default on C.D.S.’s, some other A.I.G. contracts (tied to losses on other financial securities) contain clauses saying that its other contractual partners could insist on prepayment of their claims. These cross-default clauses are present so that resources from one part of the business do not get diverted to plug a hole in another part. A.I.G. had another $380 billion of these other insurance contracts outstanding. No private investors were willing to step into this situation and loan A.I.G. the money it needed to post the collateral.

In the scramble to make good on the C.D.S.’s, A.I.G.’s ability to service its own debt would come into question. A.I.G. had $160 billion in bonds that were held all over the world: nowhere near as widely as the Fannie and Freddie bonds, but still dispersed widely.

In addition, other large financial firms — including Pacific Investment Management Company (Pimco), the largest bond-investment fund in the world — had guaranteed A.I.G.’s bonds by writing C.D.S. contracts.

Given the huge size of the contracts and the number of parties intertwined, the Federal Reserve decided that a default by A.I.G. would wreak havoc on the financial system and cause contagious failures. There was an immediate need to get A.I.G. the collateral to honor its contracts, so the Fed loaned A.I.G. $85 billion.

Update:  Travis has an awesome post with his own FAQ about what is going on.  Here is a taste:

Lots of financially naive folks think that we can remove all risk, inflation, etc. by only ever trading apples for chickens on the barrel head, and doing away with paper money (so that all money is gold) and doing away fractional reserve banking, so that when I deposit one gold coin in the bank, the bank can then take that actual physical gold coin and loan it to someone else. It turns out that the friction involved in doing things this way is so huge that the effect would make The Road Warrior look like a children’s bedtime story. You want to borrow money to buy a car? The bank can’t just loan money that’s been deposited in someone else’s checking account - the bank has to get that person to sign a note saying “yes, I understand that this money is on deposit until that dude buying the card pays the bank back IN FULL”. And the lender, if he wants his money out ahead of time, is SOL. And even then, there can be a flood, and your car gets totaled, and you get Legionaire’s disease, and you can’t make the payments.

or this:

Now, for the next complication, let’s also imagine that there are 300 million other people watching all of this, thinking “How bad is this? Should I go down to the gun store, stock up on .223 and 12 gauge shells, then stop by the veterinarians to see how much antibiotics I can cadge before heading to the hills” ?

And the Feds really don’t want 300 million armed folks heading for the national forests, so they first try to tell everyone who owns a bicycle “Hey, the value of your bike didn’t really drop! It’s still worth $9!”.

But no one wants to believe that.

So then they go to the guy who’s writing insurance policies on the value of bikes and they say “if you got $100 million, would that calm things down a bit?”.

Posted on September 19, 2008 at 08:41 AM | Permalink | Comments (3)

Thinking about Jeff Skilling

I was thinking a bit about Jeff Skilling (former Enron CEO) today.  What must he be thinking as a series of large firms that were supposedly far more stable than Enron go down one after the other to liquidity crises much like that of Enron?  Bear Stearns and Lehman, two firms that should have been rock solid, go down in the blink of an eye in a credit crunch, and all we hear from the media is how the firms fell victim to larger forces beyond their control.  At least at Enron they were up-front with the market about their taking on large risks.  Now, the government is running around in the background trying to match-make these failing companies and helping to save at least a squidge of shareholder equity.  The only thing the government did in the Enron collapse was hound Skilling and others into jail.   

Sure, Skilling may have made some overly optimistic statements about his company as he was trying to stave off the crunch, but no more so that the happy-face statements issuing from Bear or Lehman in their final days.  Executives who find themselves in a credit crunch are in a nearly impossible position.  The best way they can serve equity holders is to downplay or even bury bad news to head off the looming crisis of confidence.  But if they do so, they face presecution for making false statements about the company, ironically under laws meant to protect equity holders.

Posted on September 12, 2008 at 03:44 PM | Permalink | Comments (4)

The Opposite Problem

Megan McArdle writes:

Let's be honest, coastal folks:  when you meet someone with a thick southern accent who likes NASCAR and attends a bible church, do you think, "hey, maybe this is a cool person"?  And when you encounter someone who went to Eastern Iowa State, do you accord them the same respect you give your friends from Williams?  It's okay--there's no one here but us chickens.  You don't.

Maybe you don't know you're doing it.  But I have quite brilliant friends who grew up in rural areas and went to state schools--not Michigan or UT, but ordinary state schools--who say that, indeed, when they mention where they went to school, there's often a droop in the eyelids, a certain forced quality to the smile.  Oh, Arizona State.  Great weather out there.  Don't I need a drink or something? This person couldn't possibly interest me.

People from a handful of schools, most of them hailing from a handful of major metropolitan areas, dominate academia, journalism, and the entertainment industry.  Our subtle (or not-so-subtle) distaste for everything from their entertainment to their decorating choices to the vast swathes of the country in which they choose to live permeate almost everything they read, watch, or hear.  Of course we don't hear it--to us, that's simply the way the world is. 

I have written before that I go out of my way not to mention my double-Ivy pedigree within my business dealings because it tends to cause my employees (who often have no degree at all) to clam up.  I absolutely depend on their feedback and ideas, and those dry up if my employees somehow think that I'm smarter than they are and they start to be afraid to "look stupid."

But McArdle's post causes me to think of another reason not to be snobbish about my eastern degrees.  I meet a lot of rich and succesful people out here in the Phoenix area, and I can't remember the last one that had an Ivy League degree.  I am thinking through a few of them right now -- ASU, ASU, Arizona, Kansas State, Tulane, no college, San Diego State....  Getting uppity about my Harvard MBA around here only leaves me vulnerable to the charge of "Person X went to Montana State and is worth $10 million now -- what the hell have you been doing with that Harvard MBA?"  Here in flyover country, college degrees and family pedigree are not really strong predictors of business success.

Posted on September 9, 2008 at 11:26 AM | Permalink | Comments (8)

Why Its OK If GM Fails

This is a reprise of a much older post, but since I have limited time for blogging, I thought it might be timely to reprise it:

I had a conversation the other day with a person I can best describe as a well-meaning technocrat.  Though I am not sure he would put it this baldly, he tends to support a government by smart people imposing superior solutions on the sub-optimizing masses.  He was lamenting that allowing a company like GM to die is dumb, and that a little bit of intelligent management would save all those GM jobs and assets.  Though we did not discuss specifics, I presume in his model the government would have some role in this new intelligent design (I guess like it had in Amtrak?)

There are lots of sophisticated academic models for the corporation.  I have even studied a few.  Here is my simple one:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot. You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it. 

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA*.  And DNA is very hard to change.  Walmart may be freaking brilliant at what they do, but demand that they change tomorrow to an upscale retailer marketing fashion products to teenage girls, and I don't think they would ever get there.  Its just too much change in the DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you still have a culture aimed at big box low prices, a logistics system and infrastructure aimed at doing same, absolutely no history or knowledge of fashion, etc. etc.  I would bet you any amount of money I could get to the GAP faster starting from scratch than starting from Walmart.  For example, many folks (like me) greatly prefer Target over Walmart because Target is a slightly nicer, more relaxing place to shop.  And even this small difference may ultimately confound Walmart. Even this very incremental need to add some aesthetics to their experience may overtax their DNA.

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you. When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value. Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan). A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one. 

I don't know if GM will fail (but a lot of other people have opinions) but if it does, I am confident that the end result will be positive for America.

* Those who accuse me of being more influenced by Neal Stephenson's Snow Crash than Harvard Business School may be correct.
** Gratuitous reference aimed at forty-somethings who used to hang out at the mall.  In my town, Merry-go-round was the place teenage girls went if they wanted to dress like, uh, teenage girls.  I am pretty sure the store went bust a while back.

Posted on July 24, 2008 at 09:09 PM | Permalink | Comments (14)

Just When Yout Thought Air Travel Could Not Get Worse...

US Airways has chosen to try to cover rising fuel prices by unbundling their ticket price and charging for services that were here-to-fore free, or built into the base ticket price.  They now charge $15 for the first piece of checked baggage ($25 for the second), and charge for most in-cabin services, including for soft drinks.

I'm not going to argue with them about this.  Airline pricing is a wickedly complex topic, and folks who know more than I do think this is the best way to get incremental revenue.  Really, these charges don't affect me (I almost never check bags, except when on vacation with my family).  In fact, as I write this, it strikes me that the baggage charge is really a price hike mostly on non-business travelers, which is interesting as it bucks the trend of having increasing price spreads over the years between business/last-minute and tourist pricing.

Anyway, the net effect has been to absolutely jam the security screening station this morning.  Every passenger seems to be carrying every bag he or she can on board to avoid the $15 charge.  What a mess.  I can't wait to see what the boarding process is going to be like.  Glad I don't have any bags today.

By the way, a few weeks ago I shipped a 60 pound trunk to my kids' camp for about $16 via UPS.  If these airline bag charges stick, it might be time for UPS to start soliciting the send-your-luggage-ahead business in earnest.  Next time we go skiing or some such place, I am going to seriously consider sending a couple of duffle bags ahead by UPS.

Update: The luggage bins were completely full before the fourth group out of six were called.  There was a fairly long line down the jetway of people gate-checking their bags.  Apparently, the airline is not set up to charge the $15 when they gate-check the bags, so everyone is hauling all of their bags to the gate and either bringing them on the plane or checking them at the gate for free.

Posted on July 24, 2008 at 08:14 AM | Permalink | Comments (15)

Scam Alert: Board of Business Compliance

This may not be of much interest to regular readers, but is being posted so future recipients of this letter may find this article when searching in Google. 

I got this in the mail the other day (click to enlarge)
Board_of_business_compliance_scam

It is laid out to mirror the typical format of a state annual report or business license renewal form.  It purports to be from a government-sounding "Board of Business Compliance."  The layout and wording is very similar to the California State required annual report form, as is the $125 fee the letter claims is "now due."  Only in the really fine print near the bottom right does it admit to being a business solicitation. 

Beware.  Despite all their efforts to fool you, filling out this form and filing this $125 fee is not required by any government agency.   I am not sure if you pay money to this group whether you will actually receive any services (I did not pay).  But I will observe that there is absolutely no way that a third party could create a legally meaningful set of minutes for your company based on the information in this form.  Remember, though, that it is important for small corporations to keep their minutes in order -- but I am pretty sure this is not the best way to do it.

Business that must be obtained this way is not worth having, at least in my book. 

Postscript:  One might ask, how can anyone fall for this?  The biggest problem is the government itself.  Doing business in 12 states, 20 counties, and a number of large municipalities, I get literally a hundred "legitimate" forms like this requiring a $50-$150 filing fee from government institutions all the time.  This form, at first, looks more legitimate than say, the application for egg license I get from two states (which are in fact real government requirements). 

PPS:  Don't even get me started on yellow page vendors, directory listing providers, and companies claiming your URL registration is expiring.

UPDATE: Apparently one of the commenters included contact information at the California AG.  The AG's office has written me asking to have comments and concerns about this issue routed to a different address.  I think poor Mr. Wayne was deluged with a bunch of complaints.  Here is what they sent me as their preferred alternative contact information:

 

Complaints may be filed with the California Attorney General's Office by mail, telephone, fax, the Internet, or email:
 
MAILING ADDRESS:
 
Attorney General's Office
California Department of Justice
Attn: Public Inquiry Unit
P.O. Box 944255
Sacramento, CA 94244-2550

TELEPHONE:   1-800-952-5225 (Toll-free in CA) or (916) 322-3360
 
FAX:   (916) 323-5341

WEBSITE:   http://ag.ca.gov/consumers
 

Posted on July 23, 2008 at 01:59 PM | Permalink | Comments (96)

Loyalty Programs

Kevin Drum and I seldom agree on business and economics related issues, but we both agree that consumer loyalty programs suck.  Here is Drum on loyalty programs, and here is my extended screed.

Posted on May 10, 2008 at 06:45 AM | Permalink | Comments (5)

This Is Pretty Funny

Funny video about the 2009 job market.  Ht:  Maxed Out Mamma

Posted on April 18, 2008 at 10:18 AM | Permalink | Comments (1)

Lost Art of the Business Letter

Way back around 1985, when I was an entry-level engineer at Exxon, the company had a training session with a writing instructor.  The course, if it had a name, could be called "the art of the business memo." 

Now, I know that you 20-somethings in the world of text messaging and soon-to-be-f*cked internet companies are probably cringing at the thought of learning to write business memos the Fortune 50 way.  But there was something about this course I found compelling.  Since then, I have taken a lot of communications courses, particularly presentation courses, of varying utility.  McKinsey & Company taught me the pyramid principal for organizing persuasive letters and presentations, something that has been so useful to me that I wonder why none of the expensive schools I attended ever bothered to teach it.

To this day, I am still compelled by the perfect business letter.  I know this may seem weird, but I still remember several of my best efforts from years ago.  I sometimes go back and read them lovingly.  I have three lifetimes of projects that I would like to put together, but one fun one would be to put together a book collection of great business letters.  I fell like its an art that should better recognized.

Anyway, I was reminded of all this by this letter that has been linked around the blogosphere a bit this morning.

Posted on April 16, 2008 at 08:36 AM | Permalink | Comments (6)

Blaming A Collective Bargaining Issue on the Oil Companies

Everyone wants to blame their industry's poor economics on banks or the oil companies: (via a reader)

Truckers angry about the high price of fuel staged a rolling protest on Tuesday, using their big rigs to slow traffic to a crawl on the New Jersey Turnpike.

The protest was part of a loosely organized nationwide effort by independent truckers to draw attention to the high prices they face....

"The gas prices are too high," said one of them, Lamont Newberne, a 34-year-old trucker from Wilmington, N.C. "We don't make enough money to pay our bills and take care of our family."

Newberne said a typical run carrying produce from Lakeland, Fla., to the Hunt's Point Market in The Bronx, N.Y., had cost $600 to $700 a year ago. It now runs him $1,000...

"The oil company is the boss, what are we going to be able to do about it?" said Rotenbarger, who was at a truck stop at Baldwin, Fla., about 20 miles west of Jacksonville. "The whole world economy is going to be controlled by the oil companies. There's nothing we can do about it."

Well, we talked the other day about how oil industry profits, even at this historic high, amount to twenty cents of current gas and diesel prices.  But lets take a more direct comparison.  I looked at Google finance for ExxonMobil and Knight Transportation (a large trucker based here in Phoenix).  If you sum up sales and net income for 2006 and 2007, ExxonMobil earned 10.2% of sales.  During the same period, the trucker earned 9.9% of sales.  This is a statistical dead heat.  So it is kind of hard to say that trucking companies are suffering at the hand of oil companies when they earn the same profit margins.

So what might be the problem?  The article gives a big fat hint that it might not actually be an oil company problem:

Jimmy Lowry, 51, of St. Petersburg, Fla., and others said it costs about $1 a mile to drive one of the big rigs, although some companies are offering as little as 87 cents a mile. Diesel cost $4.03 a gallon at the Jacksonville-area truck stop.

I would certainly be willing to believe that trucking companies are paying independent drivers a price per mile that hasn't kept up with fuel costs.   In particular, it may be that the independent truckers have the same problem that Bear Stearns had, ie their revenues are tied into long term contracts while their costs float short term.  I'd certainly be bargaining for either higher mileage rates or a new rate structure with a fuel surcharge.

Posted on April 1, 2008 at 02:32 PM | Permalink | Comments (8)

Flaws with the Constitution

From the Arizona Republic:

Three day laborers filed a lawsuit Tuesday that seeks to overturn a suburb's law prohibiting people standing on public streets from soliciting employment from occupants of cars.

The federal lawsuit alleges Cave Creek's law passed is unconstitutional because it restricts the free speech rights of people trying to find work as day laborers.

“Cave Creek does not have the right to pick and choose who has free speech rights,” said Monica Ramirez, an attorney for the American Civil Liberties Union, one of the group's representing the day laborers. “The town cannot bar people from peaceably standing in public areas and expressing their availability to work.”

The stated reason for the law is this, but don't believe it:

Mayor Vincent Francia said the law was a response to concerns raised by residents over traffic being impeded by people congregating on street corners.

If you followed the genesis of this law, it has less than zero to do with traffic.  It was crafted as a way to prevent people of Mexican birth, with or without the proper papers from the US government, from seeking work in Cave Creek.  Which explains why sheriff Joe Arpaio is so eager to help enforce the law, and why, by some statistical fluke, everyone arrested under the law seems to be of Mexican Latin descent  (the three laborers filing the suit are Mexican and Guatemalan and are in this country legally).

I am happy to see this suit get filed under whatever auspices that it can, and have in the past supported using the first amendment to protect free commerce.  Further, I am thrilled to see the ACLU, given its Stalinist origins, for once actively support the right to publicly advertise and conduct commerce.  However, it is sad to me that Thomas Jefferson and company did not think it necesary to enshrine the right to free commerce as an protected right up there with speech and association.

One might argue that the enumerated power concept and the 9th amendment should be protection enough, but obviously Jefferson did not think so or he would not have pushed for the Bill of Rights.   And saying the following may just prove that I am not a Constitutional expert, but it strikes me that another problem with the original Constitution that probably wasn't fixable at the time was the fact that the Bill of Rights did not originally restrain the states, only the Federal government.  Only with the beat-down of states rights concepts in the Civil War and the passage and later interpretation of the 14th amendment did the Supreme Court begin to apply the Bill of Rights to states and municipalities as well.  It is good that they have done so, but these protections enforced on states only tend to be the enumerated protections of the Bill of Rights.  In fact, in this context, the 9th is meaningless because it reserves unenumerated powers to the people or the states, so it contributes nothing to reigning in municipalities, only the Feds. 

All that being said, it should would have been nice to have three extra words such as "or conduct commerce" inserted after assembly:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble [or conduct commerce], and to petition the Government for a redress of grievances.

 

Posted on March 25, 2008 at 08:56 PM | Permalink | Comments (8)

Bear Stearns & Enron

I wondered if folks would find my analogy from Bear Stearns to Enron I posted the other day stretched. 

Because Enron's demise came in exactly this sort of liquidity crisis, and the situations are nearly entirely parallel, all the way up to and including the CEO telling the world all is well just days before the failure.  But no one understood Enron's business, so its failure seemed "out of the blue" and therefore was attributed by many to fraud, lacking any other ready explanation.   In the case of Bear Stearns, the public was educated in advance as to the problems in their portfolio (with mortgage loans) such that the liquidity crisis was less of a surprise and, having ready source of blame (subprime loans) no one has felt the need to apply the fraud tag.

Apparently, the Economist sees the same connection (via a reader):

For many people, the mere fact of Enron’s collapse is evidence that Mr Skilling and his old mentor and boss, Ken Lay, who died between his conviction and sentencing, presided over a fraudulent house of cards. Yet Mr Skilling has always argued that Enron’s collapse largely resulted from a loss of trust in the firm by its financial-market counterparties, who engaged in the equivalent of a bank run. Certainly, the amounts of money involved in the specific frauds identified at Enron were small compared to the amount of shareholder value that was ultimately destroyed when it plunged into bankruptcy.

Yet recent events in the financial markets add some weight to Mr Skilling’s story—though nobody is (yet) alleging the sort of fraudulent behaviour on Wall Street that apparently took place at Enron. The hastily arranged purchase of Bear Stearns by JP Morgan Chase is the result of exactly such a bank run on the bank, as Bear’s counterparties lost faith in it. This has seen the destruction of most of its roughly $20-billion market capitalisation since January 2007. By comparison, $65 billion was wiped out at Enron, and $190 billion at Citigroup since May 2007, as the credit crunch turned into a crisis in capitalism.

Mr Skilling’s defence team unearthed another apparent inconsistency in Mr Fastow’s testimony that resonates with today’s events. As Enron entered its death spiral, Mr Lay held a meeting to reassure employees that the firm was still in good shape, and that its “liquidity was strong”. The composite suggested that Mr Fastow “felt [Mr Lay’s comment] was an overstatement” stemming from Mr Lay’s need to “increase public confidence” in the firm.

The original FBI notes say that Mr Fastow thought the comment “fair”. The jury found Mr Lay guilty of fraud at least partly because it believed the government’s allegations that Mr Lay knew such bullish statements were false when he made them.

As recently as March 12th, Alan Schwartz, the chief executive of Bear Stearns, issued a statement responding to rumours that it was in trouble, saying that “we don’t see any pressure on our liquidity, let alone a liquidity crisis.” Two days later, only an emergency credit line arranged by the Federal Reserve was keeping the investment bank alive. (Meanwhile, as its share price tumbled on rumours of trouble on March 17th, Lehman Brothers issued a statement confirming that its “liquidity is very strong.”)

Although it can do nothing for Mr Lay, the fate of Bear Stearns illustrates how fast quickly a firm’s prospects can go from promising to non-existent when counterparties lose confidence in it. The rapid loss of market value so soon after a bullish comment from a chief executive may, judging by one reading of Enron’s experience, get prosecutorial juices going, should the financial crisis get so bad that the public demands locking up some prominent Wall Streeters.

The article also includes more details of exculpatory evidence that was withheld from the Skilling team and will very likely lead to a new trial.  The Enron prosecution team has not had a very good record in appeals court scrutiny of their actions at trial:

For what it is worth, prosecutors have had a tougher time in the appeals court with Enron-related cases than in the initial jury trials. Convictions have been overturned in a case relating to Nigerian barges that Enron sold to Merrill Lynch. The conviction of the chief financial officer of Enron Broadband has also been vacated, after two trials. So, too, was the decision to convict Enron’s auditor, Arthur Andersen (albeit too late to save the venerable firm from liquidation).

Posted on March 18, 2008 at 08:34 PM | Permalink | Comments (1)

Highly Leveraged Financial Companies Sometimes Fail

Bear Stearns is being bought for a price that is barely indistinguishable from zero:

Just four days after Bear Stearns Chief Executive Alan Schwartz assured Wall Street that his company was not in trouble, he was forced on Sunday to sell the investment bank to competitor JPMorgan Chase for a bargain-basement price of $2 a share, or $236.2 million.

The stunning last-minute buyout was aimed at averting a Bear Stearns bankruptcy and a spreading crisis of confidence in the global financial system sparked by the collapse in the subprime mortgage market. Bear Stearns was the most exposed to risky bets on the loans; it is now the first major bank to be undone by that market's collapse.

This is what happens to a highly leveraged company when there is a liquidity crisis.  Fears about the company's health caused most lenders to withhold short term capital, which then in turn brought those fears to reality. 

While I suspect that we may find a lot of stupid blunders (at least in hindsight) and poor decisions, my sense is that this has nothing to do with fraud of any sort.  Which raises some interesting questions about Enron.  Because Enron's demise came in exactly this sort of liquidity crisis, and the situations are nearly entirely parallel, all the way up to and including the CEO telling the world all is well just days before the failure.  But no one understood Enron's business, so its failure seemed "out of the blue" and therefore was attributed by many to fraud, lacking any other ready explanation.   In the case of Bear Stearns, the public was educated in advance as to the problems in their portfolio (with mortgage loans) such that the liquidity crisis was less of a surprise and, having ready source of blame (subprime loans) no one has felt the need to apply the fraud tag.  (It also did not help that Lay and Skilling kept a higher profile than Schwartz at Bear Stearns, so that they were an easier target for vilification. 

I never really had the time to fully understand all the charges against Skilling at Enron (though I do think he deserves a new trial) but I always thought that it was unfair to try to ring either Skilling or Lay up for fraud because they were out trumpeting the health of the company shortly before its collapse.  Because it is clear from the Bear Sterns collapse that liquidity crises have everything to do with confidence, and you could see the Bear Stearns CEO out there in the last few days trying to boost confidence.  Was that fraud?  Or was that his very legitimate duty and obligation given his fiduciary responsibility to shareholders?   Why is Schwartz at Bear Stearns fighting for shareholders when he is trying to build confidence in the company in a liquidity crisis but Lay and Skilling at Enron defrauding shareholders when they were doing exactly the same thing? 

Posted on March 16, 2008 at 10:10 PM | Permalink | Comments (4)

Lucky Here Too

Travis writes about how a customer of his web service tracked him down at home at gave him a 40-minute earful -- and why he was very lucky the customer did so, in that it revealed some problems in his delivery process of which he was not aware.

Ditto here.  I was just about to write about a very similar experience on Friday, where a customer of ours ran into a new manager who was just hell bent on collecting an extra $4 he thought we were owed -- four lousy dollars -- and this employee managed to progressively anger, then intimidate, and then outright scare a customer, up to and including trying to reach in and grab stuff out of the customer's car.  The father of a woman in the car contacted us absolutely irate -- as well he should have been.  After about 2 hours of patient listening, we got dad and the other unfortunate customers calmed down.  They will all be getting some nice freebies in the mail, and apparently we will end up with a laudatory rather than hostile customer letter, as the customers ended up being impressed that our regional VP and the out-of-state owner would spend so much time with them trying to figure out what was wrong.  I will say it was easy to be sympathetic, as I was horrified by the story.  I felt personal shame that such actions were taken in my name  (if this sounds silly or exaggerated, think again.  I have talked to a lot of people who have built successful service companies, and every one shares stories of experiencing similar shame for boneheaded actions taken by employees on their behalf.)

Unfortunately, the manager in question had to go -- this was the second time in a very short period where the manager had shown poor judgement in customer service situations.  The manager was a nice person who interviewed great and did a lot of things well, but my experience is that if you don't have good judgement on such customer service interactions, you are not suddenly going to get it next week.  So, like Travis, we were lucky to head off a potential problem before it got worse, and we were lucky to be given a chance to turn around the customers' experience.

The frustrating thing for me is that this manager had just been to my personal customer service training.  At this training I lecture several times over two days fairly passionately about customer service issues, and in fact I cover situations almost identical to the one here.  I even say in the training "I don't want you or your employees going to battle with customers over small amounts of money."

We have found that there are certain people who simply cannot put their ego aside when dealing with a customer.  If these type people get it into their head that the customer is somehow trying to get over on them or the company, even for $4, they will dig in their heals and refuse to let the customer come out on top.  In their mind, the customer is a "bad" person and does not deserve to win, and there is no way they are going to take the ego hit in letting the "bad" customer have a small victory at their expense.  But as I tell employees all the time -- if you refuse to apologize to the customer, you are not counting coup on the customer, all you are doing is delegating the task to Warren (the owner) because he is certainly going to give that customer an apology.  And likely a bunch for free camping as well.  And do you know what some employee's reactions are to my giving that customer an apology and some freebies?  They get mad at me, for not backing them up and letting that "bad" customer get away with whatever they think he is getting away with!

While absolutely predictable that some people will act this way, I have found it nearly impossible to screen for this in the interview process, and totally impossible to train this characteristic out of people.  The best we can do is watch for the first signs of these traits and let folks who evidence them go as soon as possible.  That is also why we try to make it a hard and fast rule that we never hire managers directly from outside the company, we only promote managers from field service employees who have shown good judgment on the front lines.  Once in a blue moon we ignore this rule, as we did when hiring the managers I had to fire on Friday.  Which just goes to show that it is probably a pretty good rule for our business.

Posted on March 16, 2008 at 09:38 PM | Permalink | Comments (6)

If I Were A Shill For Industry...

Bravo, Don Boudreaux (responding to the typical anti-libertarian attack that we are just "shills" for large corporations:

If I were a shill for industry...I would oppose free markets. Free markets, after all, are markets open to competition that invariably keeps the profits of existing firms from remaining excessive and, often, even bankrupts firms once thought to be invincible industry leaders. Existing firms almost all deplore competition in their industries. They seek government regulations that hamstring rivals and potential rivals. And, of course, firms are forever pleading for "protection" from foreign competition.

I just wrote a book ("Globalization") in which I make a strong and principled case for completely free trade - not free trade sometimes, for some firms, under some circumstances, with some qualifications, but free trade always, for all firms, under all circumstances, and with no qualifications.

Whether my book's case for unalloyed free trade is correct or not, it is surely not the sort of book that causes the heads of many corporate CEOs to nod in eager agreement. The typical reaction of business people whenever they hear or read me make my case for genuinely free trade is to say something like, "Professor Boudreaux, you don't understand the peculiarities of my industry." And then each executive launches into a laundry list of excuses for why Congress should protect his industry from foreign rivals.

Posted on March 13, 2008 at 01:21 PM | Permalink | Comments (5)

Whew

I just got a 15,000 page bid package (yes your read that right) to the shipper, and so my hell period of the last week is pretty much behind me.  In my business, I bid to be a private operator of public and private recreation facilities, usually on a concession basis (description of why a libertarian is providing services to the government here).  In this case, the government body we were bidding with required 16 copies of the bid, so really the bid was only about 900 pages long copied 16 times, but even generating 900 pages of business strategy and operations plans is tiring.  Not to mention the logistics of making 14,000 copies.

While this may seem to be surprising, it is exactly this type of sales process that attracted me, in part, to this business.  Yes, I know, most of you want to barf just thinking about preparing such a document.  However, I knew myself well enough at the age of forty when I got into this to know that I am really, really good at this type of complicated written presentation and that I am really, really bad at face-to-face cold-call selling. 

Postscript:
So far, the business has been fun to run and we have had some real victories in privatizing public recreation, and new opportunities open up every day, as California threatens to close its parks.  We do a fair amount of private work now, as well.  I can't say that dealing with the government, particularly as a libertarian, is always fun, but so far the business has continued to be a pretty fair straight-up bid process with the best bid winning.  However, the moment I start seeing evidence that the bid process is shifting to lobbying and rent-seeking, I'm out of here.  I can't even muster up even the smallest desire to play that game.

Update: TJIC writes:

It’s fascinating how modern technologies let introverts (or, at least, people who aren’t skilled or interested in traditional glad-handing) thrive in fields that are thought to require exactly that sort of thing.

He was right the first time.  I am an introvert.   And this very blog is another great example of his point.

Posted on February 27, 2008 at 10:28 PM | Permalink | Comments (2)

Well, I lost My Appeal

The California labor board has ruled, in its infinite wisdom, that my company is responsible* for the unemployment insurance payments to an employee who got hurt when he wrecked his motorcycle on his own time and was physically unable to work.  So an employee gets hurt in his off time and leaves us in the lurch when he can't work during our busiest season, and we owe him money for staying home?  Other issues I have with California unemployment here.  The original post about the ruling I was trying to appeal is here.

* Being responsible means that these payments go into the calculation for our unemployment insurance premiums.  Effectively the premiums we pay this year are calculated to match the payouts to our employees (or ex-employees) last year.

Posted on February 26, 2008 at 10:24 AM | Permalink | Comments (14)

IKON: The Perfect Storm of Suck

I had a really bad day today. 

I have a 18,000 page proposal (actually 18 copies of a 1000 page proposal) due next week.  I had a new color printer ordered from IKON Office Solutions scheduled to arrive last week.  When I got in town this morning, I found no copier, even a week after it was promised.  No call, no warning -- just no printer.  I called and my sales guy had no idea what was going on, despite the fact that I had been adamant that I needed to hit this date.  Apparently, he never even bothered to check the schedule.

Anyway, he promised an immediate call back but never called.  I called him again on his cell at noon and he acted like he had forgotten to check and promised to talk to his boss.  An hour later it was confirmed -- I was not getting my equipment in time for this bid.  I told them they could therefore keep it, and I would call Xerox.  I absolutely cannot stand companies that require me to do constant checking and expediting in order for them to deliver on their promises.  I can't tell you how many times I have been promised an immediate call-back from IKON "within the hour" for service only to have to call again and again over the following days to get any response.  I would not have contracted for this new machine in the first place if I wasn't already locked in an IKON lease they won't let me out of -- this would at least have gotten me a better machine for the money.

In the mean time, I prepared to do the proposal mostly in black and white with bits of color from the laser printer.  I was going to use my high speed B&W copier I had under lease from IKON, and which we were planning to replace with the new machine that never showed up.  I had a technician from IKON out just last week to check it so I knew it was in good shape.  WRONG.

Within minutes of use, the machine began spitting out horrible copies.  Looking inside, it was clear something in the heat-finisher was unraveling and very broken.  I called service and was given an emergency designation and assured of a call in one hour.  Nothing.  So I called again, and was again assured that I would definitely hear from a technician in one hour.  Nothing.  Now, everyone has gone home, and the messages all say they will get back to me on Monday, when it will be too late.  I called my sales person on his cell phone tonight (the one that was begging me a few hours earlier, asking me what he could do to save my business) and was told there was nothing he could do and he had no way of getting in touch with a dispatcher or any real human service person until Monday.  Right, they are willing to do anything for me except what they are supposed to do.

So here I am, with a thousand dollar a month copier that doesn't copy, a color copier that is not here, and the prospect of spending all weekend and a couple grand at Kinko's to get my proposal out.

IKON has been informed that they are now in breach of their service contract and may come by any time and pick up their boat anchor.

Posted on February 22, 2008 at 11:10 PM | Permalink | Comments (12)

In Case You Thought I Was Sane

There is a false rumor going around that I may be sane.  Wrong.  As proof, I offer the following.

I recently read that among retail stores, mattress stores have the highest customer conversion.  By "conversion" I mean the percentage of people who actually make a purchase once they walk in the store.  Brookstone and Sharper Image, for example, have close to the lowest conversion ratios because they get so many people just looking at the gadgets with no intention of buying.  Anyway, having read that mattress stores have a sky-high conversion rate  (I seem to remember 80+% of people who walk in the door buy something) I have now taken to walking into any mattress store I encounter, say in a strip mall, looking around a bit, and just walking out.  I figure with the sky-high conversion rates the sales staff must be conditioned like Pavlov's dogs to equate the ringing of the doorbell with a sale, so I like to mess with them.

Posted on February 14, 2008 at 08:41 AM | Permalink | Comments (9)

I Wonder if Book Stores Have Tried This?

TJIC points out a dynamic in coffee houses I have also observed at work among restaurants:

…Strange as it sounds, the best way to boost sales at your independently owned coffeehouse may just be to have Starbucks move in next-door.

That’s certainly how it worked out for Hyman. Soon after declining Starbucks’s buyout offer, Hyman received the expected news that the company was opening up next to one of his stores. But instead of panicking, he decided to call his friend Jim Stewart, founder of the Seattle’s Best Coffee chain, to find out what really happens when a Starbucks opens nearby. “You’re going to love it,” Stewart reported. “They’ll do all of your marketing for you, and your sales will soar.” The prediction came true: Each new Starbucks store created a local buzz, drawing new converts to the latte-drinking fold. When the lines at Starbucks grew beyond the point of reason, these converts started venturing out - and, Look! There was another coffeehouse right next-door!

One wonders if smaller niche book stores, who complain about Borders and Barnes & Noble, have had any similar experiences.

As to the part about "When the lines at Starbucks grew beyond the point of reason," I can say from my limited observations as a non-coffee drinker that there are a lot of things wrong with the Starbuck's model, particularly vis a vis lines.  First and foremost seems to be that their production process doesn't make a lick of sense.  I'd have been laughed out of the room in almost any operations course if I had proposed the production process they use to deliver coffees.  At some point, people are going to realize that waiting in lines does not have to be part of the coffee experience, and then Starbucks is in trouble. 

For years, the Einstein's Bagels near me had the worst production process I had ever seen.  People had to criss-cross one another constantly behind the counter just to complete one order, and the assembly line, from ordering through payment, always had a horrible bottleneck somewhere, thought the bottleneck moved around as they played with staffing.  Every Saturday morning the line and wait would be awful.  I pretty much had given up on them when they suddenly closed for three weeks.  When they reopened, they had a new layout behind the counter, new electronics, and a whole new process.  Since then, I have never seen a line longer than 2 people even in peak periods.  And look at Southwest Airlines.  They have reinvented their boarding process for about the third time  (and I like the changes).  Is it really possible that no one at Starbucks has thought about re-engineering the coffee delivery process?

Posted on January 6, 2008 at 08:27 PM | Permalink | Comments (7)

When Calling in Sick Is Not Enough

I was tempted to title this post "markets in everything", but I just couldn't steal that moniker from the Marginal Revolution folks.  USA Weekend has a story about the Alibi Network, which will, for a price of course, create an alibi for you:

Whether you are looking to skip a day of work or to secretly leave town for the weekend, Alibi Network can provide fake airline receipts or phone calls to your boss explaining your absence and even mock up an entire itinerary for a bogus conference you were "attending." Rarely has lying been so creepily airtight.

The Chicago-based company charges from $75 for a simple phone call to thousands of dollars for extensive lying, on top of a $75 annual fee. The most popular service is the "virtual hotel," in which the fibber can provide a boss or family member with the phone number of a hotel where he's supposed to be. The number rings to one of Alibi's phones, which are staffed by actors who will answer as if a particular hotel has been reached. The incoming call then can be forwarded to the fibber's cellphone, making it seem as if he's in a certain city even though he's not. (We use "he" here, but half of Alibi's members are female.)

Some requests involve a creative solution. One working stiff asked the service to get him out of a boring, week-long training class that was mandated by his office. The solution: Alibi hired an actor to dress up as a courier and barge into the class, informing the man that his house had been robbed and he needed to go home right away. Another request involved a married woman with small children who longed for a relaxing weekend away from the kids. Alibi concocted a story that the woman had won a free spa weekend in a prize drawing and hired an actor to call her home and leave a voicemail message informing her of her "win."

For those of you of need of such services, perhaps on January 2 nursing your hangover, their web site is here.

Update:  Tyler Cowen informs me that I am waaaayyy behind the times, and that this company actually was the first entry in "Markets in Everything" several years ago.  That's what I get for trying to take a break from blogging.

Posted on December 30, 2007 at 09:34 AM | Permalink | Comments (2)

Is it Impossible To Make An Original Observation?

A couple of posts ago, I wondered how Radio Shack still survives when CompUSA is now dead.  Thanks to a reader, I find that the Onion has already plowed this ground:

Despite having been on the job for nine months, RadioShack CEO Julian Day said Monday that he still has "no idea" how the home electronics store manages to stay open.

"There must be some sort of business model that enables this company to make money, but I'll be damned if I know what it is," Day said. "You wouldn't think that people still buy enough strobe lights and extension cords to support an entire nationwide chain, but I guess they must, or I wouldn't have this desk to sit behind all day."

The retail outlet boasts more than 6,000 locations in the United States, and is known best for its wall-sized displays of obscure-looking analog electronics components and its notoriously desperate, high-pressure sales staff. Nevertheless, it ranks as a Fortune 500 company, with gross revenues of over $4.5 billion and fiscal quarter earnings averaging tens of millions of dollars.

"Have you even been inside of a RadioShack recently?" Day asked. "Just walking into the place makes you feel vaguely depressed and alienated. Maybe our customers are at the mall anyway and don't feel like driving to Best Buy? I suppose that's possible, but still, it's just...weird."

I give up.  But the whole Onion article is very funny and worth reading.

Posted on December 12, 2007 at 09:40 PM | Permalink | Comments (7)

Hard for Me To Explain

CompUSA is apparently closing shop, something that is not too surprising observing the follies at my local store.  I can understand how CompUSA was killed by the likes of Best Buy and Fry's Electronics  (not to mention Newegg.com, which is my favorite source).  What I cannot understand is how Radio Shack continues to plod along and survive.  I buy a couple of things a year there (usually something like a transformer replacement or some kind of oddball splitter) but I am always kind of surprised to still find them there -- its like finding a Woolworth's in the local mall.  Though it still seems to make money, with a TTM after-tax margin of about 5%, which is not bad for a retailer.

Update:  here

Posted on December 12, 2007 at 10:53 AM | Permalink | Comments (6)

Great Moments in Marketing Claims

From the Pleo description at Amazon:

"This prehistoric pet interacts and behaves like a one-week-old dinosaur."

Uh, right.  Based on substantial observational data, I am sure.  More correct statement:  "This toy behaves just like the baby dinosaurs you saw that were so cute in that Spielberg movie."

Posted on December 6, 2007 at 08:41 AM | Permalink | Comments (5)

Memo to Customer Service Departments

Dear Customer Service Departments:

In my recent call to your service center, I was forced to navigate a nearly interminable set of menu options (which I listened to carefully since I had been assured that they had recently changed).  After I navigated these options, your automated system then gathered data from me.  It asked me to give my name, then my telephone number, and finally my account number, which I did.

Here is the reason for my letter, and my advice to you:  Once you have collected all my information via an automated system, it is just going to piss me off when your human operator picks up the line and proceeds to ask me for this same information again.  I know this seems to be the current industry standard, as practiced by every company from Citibank to Domino's Pizza, but I can assure you it is incredibly annoying and, perhaps worse for you, introduces me to your organization with the initial impression that you do not know what you are doing.  So, either find a way to put the information you have gathered up on the customer service agent's screen, or don't have an automated system gather it.

Thank you.

PS-  By the way, if you really, really want to start our conversation off on the wrong foot, then you should  make it nearly impossible for me to find a menu option that gets me to a real person.  You can get double extra credit for disabling "0" as an immediate route to the operator.  Oh, and make sure all menus are preceded with long-winded customer service notices that have nothing to do with my problem.

Update

Posted on November 28, 2007 at 06:29 PM | Permalink | Comments (14)

Oops

Bummer:

General Motors Corp. (NYSE: GM) today announced it will record a net noncash charge of $39 billion for the third quarter of 2007 related to establishing a valuation allowance against its deferred tax assets (DTAs) in the U.S., Canada and Germany.

Not everyday you can restate your balance sheet by $39 billion.  Apparently, if you lose money long enough, then FASB rules assume that there is a good chance you may never use your tax-loss carry-forwards, so they have to be written down.

Posted on November 6, 2007 at 05:27 PM | Permalink | Comments (3)

New Comic Book / Graphic Novel Site

One of my favorite bloggers, TJIC, has opened a cool-looking web-site selling comics and graphic novels for 20% off with free shipping.  The site is called HeavyInk.com and is worth a look if you are interested in that genre.  I know TJIC's other online business SmartFlix.com gets very good reviews for service from its customers.

Posted on November 5, 2007 at 11:10 AM | Permalink | Comments (0)

I Second the Motion for UnSexy

TJIC quotes Scott Rafer:

Rafer’s Rule #1: ‘Un-sexy’ is good business. This is a riff on a market principle Rafer picked up from a couple of his ancestors back east: one who ran Rafer’s Kosher Meats; and his grandfather, who ran Rafer’s Army Navy Surplus (both were in business in the 1950s, long before Rafer was born.) The idea here is that there is potential in furnishing a (seemingly) boring business that plenty of people need, but which few people want to do - a.k.a. stuff that ain’t sexy. Which also means you're likely to have a reliable market for your business, and might not have so much competition - good!

I absolutely agree.  I have been in sexy and I have been in boring, and from a long-term profit perspective, boring is better.  Here is the way I put it to friends:  "Avoid any business where there are substantial non-monetary reasons why people might want to start a business there."  For example, the bankruptcy roles are littered with brew-pubs.  Guys have a male fantasy of owning their own bar and brewery, and, shazam, there are way too many of them.  Many parts of aerospace are the same way, filled with guys who love aviation more than making money.

From reading the press, it would seem that what the world is short of is "bold new visions."  But in fact bold new visions are a dime a dozen.  I had to try to sell a number of them when I was in the Internet world.  I would argue that what is in fact in desperately short supply is managers and companies who can focus, day after day, ruthlessly on operational excellence.  I worked for years for a company called Emerson Electric in St. Louis, a conglomerate that owned the world's greatest collection of boring businesses.  In their prime, under CEO Chuck Knight, they were unbelievable at blocking and tackling in boring businesses.

This point about boring and sexy is so important that when I was at Harvard Business School, the first two classes in the first year competition and strategy course hammered these points home.  Class one was the story of Rockwell Water Meters.  Class two was the story of some go-go semiconductor business (maybe Fairchild?)  These two cases epitomized "cool" and "uncool", but in the end it turned out the semiconductor firm never made a return on capital, while the water meter business had stratospheric returns.

The common response I get to this is, "but what about all of those Internet millionaires?"  With a few exceptions (Amazon, eBay), most of the folks who made millions in the Internet did not make them from operating profits.  They made them with timing, selling out inflated stock to the public or to a bigger sucker (e.g. Yahoo) before the whole Ponzi scheme crashed.  Does anyone really think that Maria Cantwell created real value in the marketplace?

Posted on October 21, 2007 at 09:48 AM | Permalink | Comments (8)

I Too Want A Big Picture Job

TJIC has a great link to an article about a guy who doesn't want to grub around in the details, but wants a job to help a company see the big picture and move forward.  LOL.  I can't tell you how many times I get a request for that job.  People are always saying they want a job doing "business development**" or "coordination" or "performance reviews."  The common denominator when I ask people to explain to me what these jobs actually would do is that they involve driving around a lot to different recreation sites I run or might run and "checking things out."

I tell people there is no such job.  I tell them I don't have that job, and I own the company.   It's a TV-inspired view of business, like Dynasty or Dallas, where the protagonists run around and do all kinds of stuff that doesn't look like real work.

Yeah, I get to enjoy some perks now and do some cool stuff running my company.  But how did I get here?   Well, the whole story is too boring to tell, but here is one vignette:  In March of 2003 I spent about 6 straight 90-hour weeks trying to get my new company registered on the fly in 12 states and about 30 counties for tax withholding, sales tax, occupancy licenses, unemployment taxes, workers compensation, and even egg licenses just so I could use the assets I just purchased.  This was at the same time I was programming some add-ons to Quickbooks so the finances could be tracked and setting up some of our first web sites.  All while I tried to keep an unfamiliar company running.  And, oh yeah, while I was thinking all that big picture stuff.  Yes, I think about the big picture - and in fact, I have radically reshaped the positioning of this company over the past five years.  But that is what you do in the shower or on the stationary bike.

I don't explain all of this, of course, I just tell people that I don't have a big picture job to offer them.   TJIC, as usual, is a bit more direct:

Or, phrased another way: you’re a useless drama queen who - instead of compromising your principals and taking a job that doesn’t match the job title you want, and then growing the job position around your abilities - you’d rather stay home and live off your wife’s salary.

** The world's one great moment for such jobs was in the late 90's Internet craze, when every soon-to-be-on-FuckedCompany.com startup employed hordes of business development guys who ran around making grand press-release inducing deals that generated absolutely no money.  "Let's trade our proprietary online merchant services framework no one wants to buy for your proprietary online price management algorithm no one wants to buy.  OK, cool."  When I came into the waning stages of several such companies, the first thing I did was blow all these guys away, followed by a quick inventory of our soft and hard assets to see if we actually had anything anyone wanted to, you know, pay money for.  I still think the whole IT world is tainted by the memory of these glory days for produce-nothings.  Everyone wants to be Steve Jobs without having to actually first produce a salable new technology with their own hands in their garage.

Posted on August 6, 2007 at 10:48 AM | Permalink | Comments (4)

A Question for Managers: Could You Do This?

From a WSJ online article on the iPone:

Aaron Rheingold, an intern at Universal Music, said his boss sent him to wait in line. "I got stuck on iPhone detail," he said. "I'm not getting anything out of this, except maybe a pat on the back and free lunch." He says his boss postponed his flight to Puerto Rico today to be back in the office when Mr. Rheingold returns with the goods.

Perhaps I am just a modern, soft, girly-man, oprah-fied manager, but I could not in a million years imagine asking one of my employees to go wait overnight in line for me so I could get an iPhone before my peers.  And that is in a private company where my employees' salary comes out of my pocket.  I would be even less likely to send out an employee whose salary is paid by the shareholders of a publicly-traded company.

Posted on June 29, 2007 at 02:34 PM | Permalink | Comments (9)

Where's The Symmetry?

I am sitting in the airport now about to fly back to Phoenix.  I generally fly America West / US Airways, because they have a hub in Phoenix and doing so maximizes my chance both of getting non-stop flights as well as accumulating a meaningful frequent flier balance with a singe airline.

After way too many round trips, I have the following observation:  I am much more likely to get an elite upgrade returning home than on the outbound leg.   I have seen this effect both flying the hub airline out of Phoenix and previously flying United out of Denver.   Now, as a hub city, Phoenix has a disproportionate number of US Airways elite members, just as Denver has a disproportionate number of United elite members.  So competing with a lot of other elite members for limited upgrade seats is understandable out of Phoenix, but shouldn't it be symmetric coming back?  I have three theories:

  • Observer error, though I will say I have a fairly large number of observation points to many different cities from two different hub cities
  • I am flying when the Elite's like to fly outbound, but I tend to take unpopular flights back.  Possible.  Most business travelers tend to fly outbound in the morning on the first flight, but they may all come back different times of day depending on their business.  This is one potential asymmetry.
  • The airlines give preference on upgrades to through passengers.  I have never heard this, but it might explain it.  Outbound from a hub, many of the people on my flight are on the second flight, having just changed planes.  Going home, towards a hub, everyone is in the same boat as me, on their first leg.  I don't think the airlines differentiate, but this is the only other asymmetry I can come up with.

Posted on June 28, 2007 at 05:59 PM | Permalink | Comments (3)

First Flight of the Summer

Well, it's my first airline flight of the summer, and, as usual, I have forgotten how awful it is to fly between Memorial Day and Labor Day.  And it is not just the crowds.  I hate to sound overly misanthropic, but summer is when all the folks who have never been on an airplane show up at the security station right in front of me.  It is amazing how long a family of four who has no clue how airport security works can hold up an X-ray line.  Of course, this being the vacation season government employees, capacity actually was lower today (fewer X-ray lines open) to meet the higher demand.

Update: Perfect weather in Phoenix and at my destination in Denver.  So of course we have a 2-hour air traffic hold.

Posted on June 6, 2007 at 02:39 PM | Permalink | Comments (7)

Does Anyone Want This Standard Applied to Them?

OK you folks out there -- ask yourself if you would like the following standard for going to jail applied to yourself.

Over the weekend, Dr. Hurwitz was convicted on drug trafficking charges when it was found that some of his patients were reselling their pain pills without his knowledgeJohn Tierney interviewed several of the jurors: (via Hit and Run)

The evidence in the case – including conversatons during office visits that were furtively recorded by patients cooperating with narcotics agents – showed that Dr. Hurwitz was being conned. On one recording, a patient who’d been selling his OxyContins bragged to his wife (and fellow dealer) that Dr. Hurwitz “trusts the [expletive] out of me.”

“Those patients used the doctor shamelessly,” said a juror I’ll call Juror 1. (All three jurors, citing the controversy over the case, spoke to me on condition of anonymity, so I’ll refer to them by numbers.) This juror added, “They exploited him. I didn’t see him getting anything financial out of it. Many of his patients weren’t even paying him. He had to believe that he was just treating them for pain.”

The other jurors agreed. “There was no financial benefit to him that was very evident to us,” Juror 2 said. “It was a really hard case for all of us. I think that Dr. Hurwitz really did care about his patients.”

So why convict him? “There were just some times he fell down on the job,” Juror 2 said. The third juror echoed that argument using the prosecution’s language: “There were red flags he should have seen.”

Plenty of doctors would agree that he should have paid more attention to those warning signs. Plenty would agree that he fell down on the job. Some have already said he should have lost his medical license. But falling down on the job is generally not a criminal offense, especially when there’s no criminal intent.

Any of you want to go to jail for making a mistake on the job?  Note that this was NOT a malpractice case, and jurors were told that it was not.  Hurwitz was convicted, in effect, for caring about and trusting his patients.  Is this the message you want your doctor to get, that he should not trust what you say and should avoid fully treating your pain?  Because that is the message your doctor just received.

Related case of Richard Paey here, who went to jail for 25 years for what a jury decided was over-medicating his pain.

Posted on April 30, 2007 at 09:21 AM | Permalink | Comments (5)

Who Do We Go To For Arbitration?

We had a couple apply for a camp host job the other day, and try to get us to hire them as contractors rather than employees.  This is not that unusual, since there are a number of reasons someone might prefer this relationship, most of which involve evading taxes.  We, by policy, generally won't play this game, particularly for full time employees. 

What was different in this case was that the couple showed up with a ready-made contract.  What caught the eye of some of my managers was this clause of the contract:

Applicable Law: This Agreement and Contract is governed by the Law of God, also known as Biblical Law, Natural Law, and Christian Common Law, and, barring any conflict with Natural Law, the Common Law Right of Contract.

Hmmm.  So who do we go to with disputes?  Moses?  Maybe King Solomon? 

Posted on April 3, 2007 at 05:17 PM | Permalink | Comments (5)

Wacky Business Models

A reader sends this one in, after reading my book BMOC.  One of the characters in the book is a business man who has a knack for monetizing wacky business models  (one example:  providing free fountains to malls in exchange for being able to harvest the coins out of them).  The book is named after his new company called BMOC, which specializes in making teens popular.

This caused a reader to send me this web site for FakeYourSpace.com.  They are selling popularity their own way, by providing you comments and visits from hot and cool friends on your MySpace pages.  Sort of sock puppetry for teens.

Welcome to Fake Your Space. You have found a new and exciting service which offers help to all the men and women out there who don't feel like they are popular enough on social networking sites such as MySpace, Facebook, and Friendster. If you are tired of seeing everyone else with the hottest friends and want some hotties of your own, then this is the place for you.

LOL.  Wish I had thought of it for my book.  Below the fold is the business model for BMOC, which I thought was crazy enough:

From Chapter 5 of BMOC:

....So that is when Susan, more relaxed, asked what the hell BMOC did.

Let me answer a question with a question,” Marsh began his explanation.  “When TV and radio and magazines sell to teenagers, what are they selling?”

           Oh Christ, thought Susan, tricked again.  One of the pretensions of many interviewers at HBS was that they liked to formulate a short verbal business case for you to solve.  This always struck her as bizarre – if there was anything an HBS grad had been taught to do, it was to analyze and talk about a case.  Thinking of Julian, Susan decided that if she was going to interview HBS students, she would instead focus on the question of whether the student had any friggin’ real-world common sense.  She had taken this interview in large part because it promised to be different than all the rest, and here Marsh went with the case BS.

Well, they sell a lot of cosmetics, and clothes, and CD’s,” Susan answered.

OK, that’s right, but I did not ask my question well.  Put yourself in the teenager’s shoes.  The ads they see … what are they really selling.  For example, when a teenage girl buys a hot new outfit, what is she really buying?”

Hmmm.  Positive comments from her friends; an aura of being cool; popularity, I suppose.”

EXACTLY!  When the media advertises to teens it is selling popularity!  Taken that way, the teenage popularity business is enormous, literally hundreds of billions of dollars a year.  One day, I asked myself: Why so indirect?  They are selling popularity, but they are doing it via a lipstick sale.  That seemed terribly inefficient to me.  If teenagers want to buy popularity, why not let them do it directly?”

Excuse me?  You can’t sell popularity off a rack.”

Ahh, but you can.  The name ‘BMOC’ stands for ‘Big Man On Campus.’ That name, by the way, is one of the reasons you are here – more on that later.  For a fee, we guarantee to make teenagers popular.”

Susan thought about this for a minute.  Was this a trick?  Was this some elaborate case where the key is not to get suckered into accepting such a bizarre business model?  She temporized with a question.  “What does BMOC actually do to make kids popular?  Is it something like wardrobe consulting, helping the dorky kids to dress cooler and maybe take a bath once in a while, that sort of thing?”

Well, that’s part of it, but probably not the most important part.  The keys to our business model’s success are our Local School Operatives, or LSO’s as we call them.  We go into area high schools and seek out and recruit the coolest, most popular people.  We keep them on retainer, paying them a bonus when we have a client at their school that they can help to become popular.  In many cases it’s surprisingly easy – invite the client to sit with them at lunch, to join them on dates, that sort of thing.  We can guarantee popularity, because we literally have the local teenage opinion makers on our payroll.”

Susan smiled.  OK, this had to be fake.  This is all a hypothetical case.  The game was to find the fatal flaw.  And she was pretty sure she knew what it was.

I can’t see the P&L working.  Keeping all of these kids on retainer, plus the bonuses you pay them.  I just can’t see it making a profit, unless your fees are very, very high or you don’t pay your student representatives very much.”

Ahh, a good point, and you’ve hit on our other innovation.  First, you are correct, we charge high fees now, though as we grow with economies of scale, we expect to be able to charge much less.  The real innovation, though is… do you know what a product placement is?”

Sure.  It’s when a company pays to get their product into a TV show or movie – like when Reese’s pieces were used in the movie ET or I guess if you showed Seabiscuit eating Purina Horse Chow.”

Exactly!  And product placements are particularly effective.  They act like an ad but they can’t be ignored like an ad.  Anyway, we have taken product placements one step further:  We get paid by major manufacturers to place their products not in movies but in the hands of the most popular kids in high school, the ones who really lead opinion as to what’s cool and not cool who we…”

Who you happen to have on retainer anyway.”

Exactly.  But be careful how you think about ‘on retainer.’  The natural reaction is to assume this means money, but in our case it’s not.  We keep the most popular people on retainer merely by …”

Giving them free products,” Susan interrupted again, with growing excitement, “that manufacturers are already paying you to put in their hands.”  Marsh nodded, with a big smug smile on his face. Shit, this wasn’t a joke, Susan thought to herself.  It might in fact be brilliant.  It served advertisers better by putting their product in the hands of those that really drive teenage opinion.  And it served teens better, by giving them a clearer, more direct path to their goal of popularity.  And both paid money to BMOC for the privilege.  This really could work.  She saw the implications of this approach immediately.....

Buy the book BMOC

Posted on February 27, 2007 at 01:09 PM | Permalink | Comments (1)

Cost of Centralization

This post actually takes me back to the roots of this blog, roots that most new readers probably have not seen much of.  I originally started this blog as place to share my lessons learned in starting, running, and growing a small business.  I still do some of that, but not nearly as much as I would like.

My company has about 25 line managers who each run the operations for one recreation area (these are spread over 13 states).  I give these managers nearly complete P&L authority.  I set base labor rates and most fee levels, and we have a very clear management process everyone follows.  However, line managers have the responsibility to do all the hiring for their area, as well as most purchasing.   One issue that comes up a lot for us as we grow is how much we should centralize some of these functions for efficiency, most significantly HR and purchasing.  In general, I have resisted efforts to centralize.  Here is why.

Human Resources

Several of my competitors, even ones smaller than I am, have centralized their hiring functions.  They have one person (or more) at central HQ who does all the hiring for the company's operations.  My managers often come to me and say "wouldn't it be more efficient to do this hiring in one place?" 
I say no.  The reason is one of accountability.  I want my managers fully accountable for their operations, and poor-performance excuse #1 is always "well, we're struggling because you saddled us with some bad employees."  No one uses this excuse in my company.  If you have an employee that sucks, you hired him/her and you have to deal with it. 

What I did instead was centralize the Human Resource support for our managers, making their lives easier without relieving them of accountability.  So I invested in some new web sites that capture potential workers and drive them to an application database that collects 10 resumes a day  (I am results 1,3, 4 &8 on Google for camp host jobs and results 5, 6, & 7 for campground jobs).  Then I built a system where all my managers can access these resumes.  I also centralized the HR record keeping and payroll processing.

Purchasing

Centralized purchasing has been a harder impulse to resist, but I still do so.  We order a lot of the same supplies in our various locations, and with more and more stores, many of the same goods for resale.  But I still have my local managers buy most of that stuff for themselves.

Am I crazy?  Well, I would have thought so when I was in business school.  After all, its fairly easy to demonstrate that vendors will give better rates for larger orders, and surely it's inefficient from a labor standpoint to disperse purchasing and to duplicate efforts.

First and foremost, though, I am still a stickler for accountability.  Much of my thinking was shaped by Chuck Knight at Emerson Electric, who was nearly always willing to trade centralized cost savings for accountability.  I would much rather my managers have no excuses than save a few pennies on toilet paper purchases.

However, there are a few things we can do.  We are starting to build a shared supplier database, where managers can share particularly good supplier deals with their peers.  We also have centralized purchasing of uniforms and forms, but even here we have been burned.  In the past, we assigned this task to a central person, who eventually built up a huge warehouse of crap it has taken us years to clean out.  Though we don't get quite as good of a deal, we now have printing and uniform contracts with negotiated corporate rates based on our combined corporate usage, but where managers place their own orders and shipping is directly to the field (rather to a central location for reshipment).  Net, we saved thousands in labor, shipping, and inventory getting out of the central break-bulk business.

For our resale items, I get a lot of presure from individual store managers to let them do purchasing of so-and-so product for the whole company in order to get quantity discounts.   I have allowed this in a few cases, but it may cause more problems than it is worth.  I immediately started getting complaints from manager A that manager B was buying all the wrong stuff, or whatever.  Soon, the folks doing the central purchasing started demanding that they needed more and better information, and started asking for written inventory reports from various store managers each month.  Eek! 

I think instead that I am going to mostly stick with the approach of negotiating corporate deals, and having local managers continue to do their own ordering using these deals.  I also work hard to make sure managers understand that in most cases the corporate negotiated products are optional, and that they may buy other products if they think those are better for their locations (I can guarantee that visitors in Northern California, Nogales Arizona, and Central Florida want different things).

Posted on February 22, 2007 at 04:25 PM | Permalink | Comments (5)

Enron Verdicts Starting to Unravel

Tom Kirkendall has an update on the various Enron cases, starting with the Nigerian barge case where  the conviction of four Merrill Lynch executives was vacated by the Fifth Circuit.  In fact, the appeals court ruling was so damning that the DOJ has decided not to retry the executives, and the case may well be a leading indicator that other Enron-related prosecutions are in jeopardy.

Although expected, the DOJ's decision in the Nigerian Barge case reverberates through several other pending Enron-related cases. The DOJ can retry three of the four former Merrill Lynch executives, but that would be petty by even the DOJ's standards given the eviscerated nature of the original charges and the fact that each of the defendants has already spent a year of their lives in prison based on a prosecution that was based more on resentment than on true criminal conduct. The Fifth Circuit's now final decision in the barge case casts doubt (see also here) on a substantial number of the charges upon which former Enron CEO Jeff Skilling was convicted, and dispositively blows away over 80% of the case against former Enron Broadband executive Kevin Howard. In addition, the re-trials of Howard's former co-defendants from the disaster that was the first Enron Broadband case are now in various states of disarray, as is the pressured plea deal of former mid-level Enron executive, Chris Calger. And don't forget the mess that is the DOJ's case against the NatWest Three (see also here).

Posted on February 20, 2007 at 01:29 PM | Permalink | Comments (5)

Each Day, A little Bit Harder

Every day, the government makes it a little bit harder to run a business.  Today's water drop in the ongoing Chinese water torture comes from TJIC up in Massachusetts

Governor Deval Patrick, returning to one of the more contentious issues of his campaign, has begun quietly putting together a plan to limit employers’ access to the criminal records of potential employees.

Aides have been meeting with lawmakers and advocates working to limit the scope of the Criminal Offender Record Information law, which gives many employers broad access to criminal records. Activists argue that many applicants are rejected for jobs based on minor criminal convictions, crimes unrelated to the post…

Somehow, they are going to do this:

Patrick has not yet settled on specific legislation, an aide said, but wants to give employers access only to criminal information that is relevant to the job being sought.

Let me ask you readers a question:  If a company hires an employee with a criminal background who then does harm to someone (say a customer or another employee) in the workplace, who get's sued:

  1. The employee, who is held individually responsible for his own actions
  2. The employer, who hired the employee in good faith but was not able to get a reference (because lawsuits have pretty much ended the practice of giving honest information about ex-employees) and was not able to do a background check (because the government would no longer share criminal records)

If you answered "1", then you either have been in cryogenic sleep for 30 years or you have never run a business.  No hope, I suppose, of tying liability protection for employers to this legislation, I guess.

By the way, the 800 pound gorilla in the room is the war on drugs.  I am sure the concern here is that more and more white collar workers are saddled with petty drug convictions that are hurting their ability to get jobs.  I would have not problem wiping all the drug possession offenses off the record, particularly since I don't think these possession offenses should be crimes anyway.

Update: From the indispensable Overlawyered.com

Posted on February 12, 2007 at 09:29 AM | Permalink | Comments (0)

Hindsight and Risk-based Decision Making

Last weekend I was watching an NFL game (I forget which one) and the team, which already had a solid lead, was considering going for a TD rather than a field goal at fourth and goal.  The announcer was going "Bad idea, bad decision.  Take the field goal and the sure points.  You don't want to risk getting the other team back in the game with the emotional prop of stopping you at fourth and goal."  Well, the team went for it and made the touchdown, after which the announcer said "I guess it was a good decision after all."

But was it?  If you choose to hit a nineteen in blackjack, and pull a deuce, was it a good decision?  If you  placed a 50-50 bet that a normal die roll will come up with a "6", and it does, was that a good decision?  I would say no.  I would argue that both decisions were bad decisions, despite the fact they happened to yield positive results for the decision-maker.  The reason is that, given the information the decision-maker had at the time of the decision, both moves have an expected value less than zero.

I won't bore my audience with a digression too far into expected value and decision trees.  Suffice it to say that the standard approach for making decisions in uncertainty is to list the possible outcomes of the decision, assign values and probabilities to each outcome, and then total up the sums.  The decision that yields the highest value times probability is the is the one that you would expect, on average, to yield the highest value.   Take the example of the bet on the die roll above.  If you bet a dollar, you would win a dollar on a roll of "6", which is a 16.7% probability.  You would lose a dollar on a roll of 1-5, which is a 83.3% probability.   The value of the "don't bet" decision is zero.  The value of the "bet" decision is 16.7% x $1 plus 83.3% x -$1 equals -$0.67.  So the "no bet" decision is best, since at zero it is higher than the negative outcome of the "bet" decision.  Here is a more complete discussion of the decision tree process.

A couple of provisos:

  • When the situation is more complex, the trick of course is to assign the right values and probabilities.  We can assign these exactly for cards and dice, but it's a little harder for something in the business world, like say Enron's decision to enter the broadband business.  But managers are paid the big bucks to do their best.  And managers have tools at their disposal to manage their lack of information.  For example, once you build a base-case, you can ask questions like  "OK, I am not sure about the size of the broadband market, but how large does it have to potentially be to offset the risk involved."
  • Like many real-world processes as the approach the asymptotes,  things get a bit squirrelly for really small probability events, particularly when they have very large financial values (positive or negative) attached.  Small probability positive events are essentially a lottery, and many people buy lottery tickets, even though we know the expected value is less than the price.  I play blackjack too, despite a negative expected value, because I get non-monetary benefits from the play.  Small probability negative events are called disasters, and are things we insure for.  Many times the decision to buy insurance has a negative expected value, but we do it anyway because we would sleep better at night knowing that we may be throwing away a little expected value, but we have pre-empted an event that would bankrupt us.  Here we get into interesting topics of risk profiles and risk tolerance, which I will avoid.

Unfortunately, in evaluating historical decisions, we often ignore the state of facts and risks the decision-maker faced at the time of the decision.  We argue Mead should have pursued Lee harder after Gettysburg, because we know now Lee's army got trapped behind a swollen river. The Chargers shouldn't have traded half their assets** to move up one spot in the draft to get Ryan Leaf.  And Enron should not have entered the broadband business.   We treat the decision makers in each of these as boneheads today (we even threw Skilling in jail, as much for his failed business decision as for any fraud).  But all of these evaluations are based on the outcomes, not on what the decision-makers were facing at the time.  Mead had been in charge of the army for less than a week, had driven Lee from a battlefield for the first time ever, and had a primary charge of defending Washington.  It is hard to believe today, but the Peyton Manning and Ryan Leaf were considered nearly equivalent in quality in the '98 draft, and the Chargers trade might have been perfectly appropriate if they had actually gotten a Manning-quality quarterback.  Enron's vision of broadband looked like it would become an enormous business, which in fact it did, just five years too late for them.

** The Chargers traded an inventory of picks and players to the Arizona Cardinals, who, true to form, did nothing with this goldmine.  The Cowboys, by contrast, arguably built a whole dynasty in the 90's off the slew of picks they got in the Herschal Walker trade with Minnesota.

Posted on January 19, 2007 at 09:39 AM | Permalink | Comments (7)

Weird Binary World of Sales

This observation is apropos of nothing, but I have noticed something odd about the sales efforts of companies.  They seem to be either too aggressive or downright dormant.

I answer my own phone at work, so every day I hear the parade of people calling me asking for the "person who purchases your printer supplies."  Certain industries, including toner, office supplies, telecom, etc. seem to have irritatingly aggressive sales forces.

And then we have companies like Wham-O.  Yes, the toy guys.  We opened a new snow play area and are selling hundreds of plastic sleds a week.  Unfortunately, we can't find any manufacturer to talk to us about a distribution deal.  So one of my managers spends a part of each week combing every Sams Club and Wal-Mart in Northern Arizona to buy plastic sleds for resale.  I have called Wham-O, a large maker of these sleds, about twenty times.  I have talked to many different people.  I have been referred to several different reps and even the head of the sales department.  And no one will return my call, despite a plea that I want to buy hundreds of sleds a week. 

It is possible that in this Wal-Mart world, volume of this size from one retail outlet is not worth pursuing, but this casualness about making a sale really amazes me.  I would chalk it up to some unique circumstance at Wham-O, but I have had this experience with a number of other companies.  I can't tell you how many times I have left plaintive messages to firms saying "I want to buy a bunch of your product, can someone please call me back to tell me how."

Weird.  Fortunately, we finally had a Canadian company today actually returned our calls and was more than happy to sell us large lots of their product.  Oops, there goes the trade deficit.

Posted on January 17, 2007 at 04:01 PM | Permalink | Comments (7)

US Government Kidnapping

Growing up, my dad was a corporate executive in an industry where family members were routinely kidnapped and held for ransom in various countries.  As a result, I had a no-travel list of countries I could not visit, which included unsurprising entries like certain third world nations but also included countries like Italy and Germany, which we forget were plagued with Red Brigade kidnappings in the 1970's.

Foreign executives may have to add the United States to their no-travel list, as the US steps up its campaign of arresting people for activities they engaged in outside our country and which were legal in their home countries:

The founders of the online payment service Neteller have apparently been arrested  at airports in New York and Los Angeles.

It's not yet clear why they were arrested. But it's worth noting that Neteller, which is based in the Isle of Man, is the only offshore online payment service that decided to continue to allow its U.S. customers to do business with online gambling sites after the new bill banning such transactions passed at the end of the last Congress.

And of course, U.S. officials have made a habit of late  of arresting high-profile offshore gambling executives when they pass through the U.S. to switch planes.

If an American, changing planes in Saudi Arabia, was arrested for being gay, or not wearing a burka, we would be outraged.  Brits should similarly be outraged that their subjects are being thrown in US jails for activities that are perfectly legal in their home country.

Posted on January 16, 2007 at 09:43 AM | Permalink | Comments (2)

Beware Staples Internet Site

I am always suspicious when retailers try to pursue a parallel channel model.  Most tend to screw it up.  Office supply retailer Staples gets my screwed-up online retailer of the year award.  We tried Staples online service when a sales person visited us and offered us a corporate discount to try their remote order service.  The first several orders failed to show up on the promised dates, a hardship for a small office where someone often has to explicitly wait around for such a delivery.  Their delivery windows are worse than even those provided by the cable company, promising only to show up sometime between 9 and 5. 

This week, I waited all day for a couple of filing cabinets, which showed up battered and beaten up.   It was clear that the cabinets were damaged just from looking at the boxes.  I hope no one in my company would ever ship something that looked so banged up to a customers without checking on it.  Sure enough, the cabinets were a mess, and I insisted on sending them back.  The driver said, sorry, you already signed for them, I can't take them, call customer service. 

So I called customer service and they did what?  Scheduled another pickup/delivery.  So I again waited all day today for the replacements.  The driver took the old ones, but the new ones were again in beaten up boxes - one had black electrical tape patching it up.  But I had learned.  I said I would not sign for them until I had opened and inspected them.  The driver said I was not allowed to inspect them until I signed for them.  Great.  Well, like an idiot I signed and then immediately upon opening the boxes found that they were both beaten up.  Obviously they had a bad lot of these type cabinets, and I had begged them to inspect my two replacements first before they came out, but no joy.  And of course, the driver would not take them back because ... I had already signed for them.

This restrictive approach to customer acceptance of merchandise, which I would summarize as "you have to accept the merchandise without inspection" stands in marked contrast to how this works in their stores.  I believe that I would certainly be entitled in the store to look at the actual cabinet, rather than the box, before I decided to accept the merchandise.  Heck, I am pretty sure it was my local Staples store that, when they sold me two chairs, unboxed them and assembled them for free.

 

So tomorrow is yet another visit.  I again begged Staples to inspect the cabinets before they put them on the truck to make sure this third set would be OK, since they obviously were pulling from a bad lot.  The Staples customer service guy said that their warehouse folks don't do that kind of thing.  No shit.

Update: OK, I give up.  The replacements were battered as well.  Why through this no one in the warehouse would have the initiative to check on what is obviously a bad lot they have received from the manufacturer is beyond me.   I have left them on the curb for Staples to get whenever they want them.  They were good about my credit.

Posted on December 27, 2006 at 01:10 PM | Permalink | Comments (2)

Peak Pricing

I know there are folks who get seriously bent out of shape by this type thing (Gouging!), I think this is pretty cool, from Market Power:

I wouldn't have thought this would happen, but it appears that a gas station I pass during my commute practices time-of-day pricing, charging more during the peak period and charging less during the off peak.

For the past two months, every time I have passed the station in the evening, the price of gasoline has been at least three cents/litre lower than it was in the morning on the way to work. This station is very convenient for people to pull into on the way into London, but it is very inconvenient for people who are leaving the city at the end of the workday.

Posted on December 13, 2006 at 01:37 PM | Permalink | Comments (1)

Can Someone Clarify...

What is the difference between "populism" and "fascism by the majority"?    I sure can't see any difference.

I love it when I see stuff like "take on the oil companies" or "take on the drug companies."  The oil companies make about an 8% profit in a good year.  Drug companies are a bit higher, but not that much.  Let's say the government runs their profit down to zero.  That would then yield everyone about a 6% discount at the pump (presumably gas taxes would not go down, thus the lower percentage) and an average 12%-ish discount on drugs.  Is it really the Democrat's intention to trash incentives in these critical industries for future long term investment (oil exploration in one, drug R&D in the other) so politicans can hand out a 6% discount to the voters? 

Posted on December 8, 2006 at 04:31 PM | Permalink | Comments (0)

Ethics of Frequent Flier Programs

Am I the only one who gets ethical qualms about frequent flier programs?  If your job was to buy supplies for the company you work for, and a printer company offered to give you and your family a Hawaiian vacation if only you would have your company buy their printers instead of the competition's, could we all agree that would be a kickback or bribe?  And that it would be, if not illegal, certainly unethical?

So why don't the same rules apply to airline travel?  When buying an airline flight for business, you are acting as a purchasing agent for your company.  And the airlines, in the form of frequent flier miles, are offering you [not the company] something of value to steer your corporate purchasing decisions to their product.  Frequent flier miles are a blatant kickback.  Informal poll:  How many of you have purchased flights that are a worse deal for your company but a better deal for your frequent flier account?

A further rant: OK, if you are not turned off by that rant, here is a related one about Visa cards that give out frequent flier miles.  As mentioned earlier, these are hugely profitable for credit card companies, so much so that they create much of the value in modern airlines.  Credit card companies, perhaps the only stable monopoly I have seen in my lifetime, have perfected the art of forcing retailers to subsidize their credit card users. 

Now, a fairly rational person would expect that a cash transaction is cheaper than doing one on credit.  However, due to the very strong position of MC and Visa processors, credit card customers actually get a lower price than cash customers.  Here is why:  Credit card companies have taken to giving their users a rebate on their purchases, either in cash or frequent flier miles or some other compensation.  These rebates are funded by charging higher interchange fees to merchants (basically a percentage of credit card transactions cleared).  The magic occurs because merchants, in their processing agreements, are generally banned from giving discounts to customers for using cash.  As a result, the higher credit card interchange fees are spread among all customers, cash or credit card, equally.   The result is that credit card customers pay lower net prices than cash customers, when the rebates are factored in.

Though our trade association tries to seek government action of some sort, I am neither confident that this will help or philosophically inclined to ask for such help.  Right now, I am working within the association to try to build support for some sort of one day boycott against accepting credit cards as a starting point to trying to build up some group negotiating power vs. the credit card processors.

Posted on November 15, 2006 at 10:12 PM | Permalink | Comments (14)

Agency Costs and Airlines

Apparently, USAirways (the recently merged product of America West and US Air) has made a bid for buying Delta out of bankruptcy.  The bid is around $4 billion in cash and $4 billion in USAirways stock.  Which got me thinking about airline mergers in general.

Companies can be thought of as having tangible assets (trucks, airplanes, factories) and intangible assets (reputation, employees, brand names, contracts).  Most companies are worth far more than the book value of their tangible assets.  Most of Microsoft's value, for example, is in it's products, its brand, its franchise, its contracts, its people, etc., not in hardware or buildings.  As a result, most acquisitions are completed at prices far above the book value of the assets of the purchased company.  The difference is called "goodwill" by accountants and "enterprise value" by economists.

But enterprise value is a problem in airline mergers.  Most investors expect to pay and get paid a premium over asset values in a merger.  But I am not sure there should be any such premium nowadays for airlines, because I fear that the typical airline's "goodwill", or the value of their intangible assets, may be negative.

Take the example of Delta.  Unlike scrappy competitors like Southwest and JetBlue, Delta has a lot of baggage (so to speak).  First and foremost, they have terrible legacy union contracts that mean that pay all of their employees much more money than do startup airlines and they are much more constrained by work rules in improving productivity.  They have huge and building under-funded retirement and medical accounts.  They have legacy contracts that may suck, and they often have hodge-podge mixed fleets that are hard to maintain.  All of this tends to add up to a negative effect on value.

The one positive intangible companies like Delta have is their brand value, and I would argue that most of that is tied up in their frequent flier programs[** Update Below].  Without these programs, most frequent fliers have demonstrated that they would switch airlines for trivial improvements in fares.  This value in the frequent flier programs was demonstrated in the America West merger (among others), when Juniper Bank contributed $455 million (!) to the merger for the right to issue the visa card attached to the program.  Wow.

Given this problem of negative enterprise value, it is not surprising that savvy upstarts like JetBlue and Southwest before it have not grown by acquiring other companies.  Both are willing to take advantage of bankrupt competitors to grow, but they only have bought assets (like planes and gates) rather than whole enterprises, so they don't inherit legacy contract or union issues.  When the companies who are making money do things one way, and the companies who find themselves in bankruptcy court every five years do it another way, the difference probably matters.

Which brings me to the title of the post and agency costs.  It is really, really uncertain whether buying Delta is good for the USAirways shareholders.  Since buying airline equities has always been a losing proposition over the long haul, the deal only makes sense if 1)  They are getting a screaming deal, either because of Delta's bankruptcy or because they are doing the deal in just the right part of the business cycle; or 2) They can really harvest synergies, which in this case would have to include shutting down entire hubs, such as Charlotte in favor of Atlanta or Cincinnati in favor of Pittsburgh.   While I can't speak to the latter with any facts, you have a better chance betting Arizona will win the Superbowl than betting any acquisition hits its promised synergy values.

But if the value of the acquisition is unclear for shareholders, there is one group that almost certainly benefits:  USAirways management.  Management, even if shareholders don't get a great deal, will benefit in both monetary and non-monetary (e.g. status) ways from running an airline three or four times as large as the current enterprise.  This mis-match in incentives between hired management and shareholders is called agency costs, and is something every board should be more cognizant of when approving acquisitions.

**Update:  A rant on the ethics of frequent flier programs

Posted on November 15, 2006 at 03:30 PM | Permalink | Comments (9)

Hey, I was Actually Right

A number of years ago, when I was in marketing for the commercial aviation business at AlliedSignal (now Honeywell), I made a lot of presentations to folks that they shouldn't bet the farm on the Airbus A380 because it made no sense.  I didn't think it would ever get built.  Well, very few people in the aviation business wanted to hear this.  Most people in aerospace are airplane guys first, and business guys second.  They wanted this plane to be built and longed to be a part of it.  I left before everything was finalized, but my sense is they went off and spent tens of millions of dollars to develop products for the A380.

Well, I was right and wrong.  The plane still makes little sense, but it will get built. Maybe.  Someday.  What I underestimated in the latter question was the willingness of European governments to push the plane against the headwind of economic reality merely as a grand salve for the European ego.

What was wrong with the plane is still wrong now.  The original logic, which the company still parrots today, was that airport congestion would require larger and larger planes.  If airports are at capacity, in terms of the number of planes they could handle, the planes have to get larger, right?  Well, no.  The problem with the larger plane is that the FAA and other air transport regulators will require the larger plane to have larger spacing with trailing planes  (the larger the plane, the more they create turbulent air and very stable wingtip vortices that pose a danger to trailing planes).  In fact, regulators are going to force double or triple the spacing behind the A380 that is required of the 747.  How does the plane help congestion, then, if it holds twice the people but takes up three times the landing capacity?  Answer:  It doesn't.  The same arguments can be made where gate space is at a premium - loading and servicing times for the plane can be expected to be twice as long as a regular plane, so in effect it takes up double the gate capacity.

Glenn Reynolds links to this Popular Mechanics article covering this ground and more on the A380.

Postscript:  The alternate strategy to deal with congestion is to start to abandon the hub and spoke system and move to a point-to-point flight network using smaller planes and involving more airports.  This takes connecting traffic out of overloaded hub airports.  Its the way the market has been moving, with competitors like Southwest and JetBlue developing point-to-point networks.  Asia may be the exception to this development, and it is no accident most A380 orders are Asian airlines.

While I am patting myself on the back, I also said that the Boeing Sonic Cruiser made no sense.  The engine and body/wing technology that would make the Sonic Cruiser could either be applied to generate more speed at constant fuel consumption or to achieve current speeds at greatly reduced fuel consumption.  I predicted that 10 out of 10 airlines would prefer the latter.  And that is the way it played out, with Boeing dropping the Sonic Cruiser, the more monumental and sexy project, in favor of the unsexy but demanded-by-the-marketplace next generation fuel efficient mid-sized aircraft.

Posted on November 8, 2006 at 03:21 PM | Permalink | Comments (8)

Does This Really Work? Stock Scam Update

About once a week, I get a call from some stock sales boiler room that begins "My name is ________, do you remember me?  We talked about 6 months ago about a company named ________."  He then, if I let him, will proceed to tell me that he gave me a buy on this stock at that time and it's gone up some unbelievable percentage since then.

There is one problem.  We never talked before about a stock.  I never, ever let a boiler room guy go more than two sentences without hanging up or challenging his BS, so we couldn't have talked about it.  On a couple of occasions when one of the guys who called actually made the mistake of giving a specific date in the past for his call, a quick check of my calendar showed that I was out of town both times.  One guy got kind of scary.  I made the mistake of saying "Look, I know that Tony Soprano or whoever is standing beside you pushing this stock, but I am not interested and I can spot your line of bullshit a mile away."  The guy then proceeded to tell me, as a thinly veiled threat I guess, about his prior convictions for throwing a Molotov cocktail into the offices of someone he did not like.

What these guys are trying to do is to fake a track record of good stock picking.  Reputable brokers used to call me once in a while and say -- here are ten stocks, write them down and I will call you back in 6 months and you can see for yourself if I know how to pick stocks.  These new guys skip this step, looking backwards to find a stock that did well over the last 6 months and then trying to convince you they told you about it months ago before it went up. 

Is anyone out there so busy that they fall for this, and allow themselves to be convinced they had such a conversation in the past?  I get these calls at least once a week, so if they are expending this effort, it must be working on someone.

Posted on October 24, 2006 at 04:41 PM | Permalink | Comments (3)

What are Business Ethics?

The Market Power blog noticed something that also tweaked my interest, in an article from the Chronicle of Higher Education:

Today's M.B.A. students are not as ethically challenged as recent reports make them out to be, according to the findings of a study being released today at a global conference of business educators and leaders. In fact, 81 percent of those responding to a recent survey believe businesses should work to improve society, and 78 percent of them want "corporate social responsibility" integrated throughout their core courses.

The survey results will be presented during a three-day conference, "Business as an Agent of World Benefit," at Case Western Reserve University, in Cleveland. The conference, which began on Monday, has drawn 440 management educators and business leaders, as well as about 1,000 online participants.

I know this issue has been debated in circles, but I still have real heartburn defining business ethics as "corporate social responsibility."  In my mind, and as reinforced by cases like Adelphia and Enron, the number one overriding ethical responsibility of corporate managers is their fiduciary responsibility to the company's owners.  Second is their responsibility to comply with the law (though sometimes the law is so muddled and contradictory that may be difficult).  Third is the obligation to be honest in dealings with employees, suppliers, and customers and to honor the commitments that the company has made to all three. 

In this context, asking a manager to divert the company's resources away from honoring these commitments or providing a return on the shareholder's investment, instead focusing them on some other nebulous entity called "society," is wholly unethical. 

Posted on October 24, 2006 at 09:32 AM | Permalink | Comments (5)

The Franchise Trap

Yet another company is falling into what I call the franchise trap, as Krispy Kreme's woes continue, including closure of its Arizona stores.  Just about 5 years ago, I remember when they first showed up here in Phoenix - there were long lines and police directing traffic around the stores.  Now, they're dead.  And the corporate parent is struggling.

If memory serves, Boston Chicken (now Boston Market) and Jiffy Lube both had their corporate parents go into bankruptcy at the back end of their wild growth phases.  This is what I mean by the franchise trap:  Franchises generally start out as a single location that does well.  Wanting to grow quickly, and lacking the capital to build their own stores, they adopt a franchise model for growth.  Soon, wild growth may ensue if their concept is good, and they discover that selling franchises is more profitable than selling whatever they sold in the store.  Once the growth phase ends, though, they often hit an iceberg.  Inevitably, they find that many of their franchisees either can't cut the mustard or chose poor locations and go bankrupt.  In addition, they must make the transition back from growing by selling franchises to growing by incrementally improving the core business.  Many can't make this transition back, corporate bankruptcy ensues, and someone who is an operator rather than a franchise promoter comes in and cleans up the house.

Posted on August 16, 2006 at 09:09 AM | Permalink | Comments (4)

I Have Government Derangement Syndrome

Alex Tabarrok of Marginal Revolution makes a point I have been trying to communicate for some time now:

It's naive to only blame particular people (Bush, Cheney et al.) and depressing when people at CT claim that if only "our guys" had been in power everything would have been ok.  When you see the same behaviour again and again you ought to look to systematic factors.  And even if you do believe that it is all due to Bush, Cheney et al. it's not as if these guys came to power randomly, they won twice.  The worst get on top for a reason.  As a result, government ought to be designed (on which see further below) so it works when the knaves are in power and not just when the angels govern.

I made a similar point in this post:

Over the past fifty years, a powerful driving force for statism in this country has come from technocrats, mainly on the left, who felt that the country would be better off if a few smart people (ie them) made the important decisions and imposed them on the public at large, who were too dumb to make quality decision for themselves.  People aren't smart enough,they felt, to make medication risk trade-off decision for themselves, so the FDA was created to tell them what procedures and compounds they could and could not have access to.  People couldn't be trusted to teach their kids the right things, so technocrats in the left defended government-run schools and fought school choice at every juncture.  People can't be trusted to save for their own retirement, so  the government takes control with Social Security and the left fights giving any control back to individuals.  The technocrats told us what safety equipment our car had to have, what gas mileage it should get, when we needed to where a helmet, what foods to eat, when we could smoke, what wages we could and could not accept, what was and was not acceptable speech on public college campuses, etc. etc....

the technocrats that built our regulatory state are starting to see the danger of what they created.  A public school system was great as long as it was teaching the right things and its indoctrinational excesses were in a leftish direction. Now, however, we can see the panic.  The left is freaked that some red state school districts may start teaching creationism or intelligent design.  And you can hear the lament - how did we let Bush and these conservative idiots take control of the beautiful machine we built?  My answer is that you shouldn't have built the machine in the first place - it always falls into the wrong hands.

I am particularly amazed of late at the popular leftish criticism of Bush that he was too slow after 9/11 (spending 10 extra minutes with the school kids), too slow during Katrina, and too slow entering the diplomatic fray in Lebanon.  I can't remember who, but someone lately was quoted publicly saying that they were frustrated with Bush taking vacations and that they would never vote for someone with a ranch.  Is that really the dual criticisms that people have of Bush?  That 1) he is evil and an idiot and 2) they want him to get involved faster and more aggressively in more types of problems?

Here's something everyone should know, which I have embodied in Coyote's Second Law (here's the first) which states:

Any person elected to government office has their effective IQ cut in half

I don't know if politicians wake up from this fog when they leave office or not.  I can easily imagine Bill Clinton, a man who is supposed to have a high out-of-public-office IQ, slapping his head and saying "did I really go running into Somalia and running right back out after the first casualties?' or maybe even better "jeez, I can't believe I turned down the chance to take Bin Laden into custody -- what was I thinking".  Whichever the case, governments are always stupid, even those made up of people provably of high IQ in their private lives.  Tabarrok has this humorous but depressing observation:

The Pentagon is the Post Office with nuclear weapons

Like Tabarrok, I think the bar has to be pretty high to send our military into battle, and I never thought the situation in Iraq justified the excursion.  However, perhaps differing from Tabarrok, I am sensitive to historic precedent and thus doubt that defense can always just end at our borders.  While I think the Bush administration is overly optimistic to think that Iraq will become a shining beacon of democracy that will help rally the democratic forces in neighboring countries, I also think Bush opponents are overly optimistic when they say that terrorists and Middle Eastern fascists will leave us alone as long as we just keep our distance.  There are too many historical reminders that the latter is not true.  Sometimes you do have to go over there to kick their ass before they come over here.  Afghanistan probably met this criteria, but I don't think Iraq did - Iraq feels more like the Gulf of Tonkin, a war certain people in power wanted to fight and for which they needed a public excuse.

All this means that I think that the number of times we need to go out and fight wars overseas is greater than zero and less than what we actually do.  I'm not smart enough, I guess, to make a clearer policy statement, but I would be really interested to ask all those who think they would have prevented Israel and its neighbors from going to war for the 47th time if only they had been in office what their coherent policy statement would be.

Posted on August 4, 2006 at 01:28 PM | Permalink | Comments (5)

An Absurd Demand

Today, Microsoft came under fire from a number of activists:

Activists today accused Microsoft of spending all of its time focusing on software.  "All they want to do is write code for operating systems and applications".  Activists were complaining that Microsoft does not invest any of its huge profits into alternatives to software and operating systems.  "They have not invested one dime in trying to come up with computing technologies that don't require operating systems or business applications."  Activists also accused Microsoft of not investing in any alternative computational approaches, such as abacus research or mechanical calculators.

Makes no sense, right?  Well, that's because I made it up.  But I did not make this up, which is essentially the exact same charge, just against a different target:

Unlike other major oil companies that essentially acknowledge the very real threat of global warming and the need to transition to renewable energy and off of a finite, non-renewable resource such as oil, ExxonMobil is using its profits and its power to continue to keep this country addicted to oil, as President Bush has noted," Hoover said.

ExxonMobil cares only about drilling for more oil, Hoover alleged

You hear this stuff all the time.  But why are the major oil companies responsible for investing to obsolete their own business?  Why are they obligated to invest in things like wind farms or whatever that they know nothing about?   Did we demand that railroads invest in aircraft research?  Do we require cable companies to invest in DirectTV?  For all of its size, ExxonMobil represents a tiny fraction of World GDP -- if all these alternative energy ideas are such great opportunities, let the other 99.99% of the world economy take it on.  Besides, do these guys who think that XOM is evil incarnate really want them controlling the next generation of energy production?

By the way, I thought this was hilarious:

"We believe that ExxonMobil -- primarily through its former president and CEO, Lee Raymond -- has been involved in conceiving of and then promoting the invasion and occupation of Iraq," Reed said. "When the Iraq war was being cooked up, we think ExxonMobil was in the kitchen."

I love the "we believe" part.  I am sure that half these folks also "believe" that aliens are alive and well in Area 51 and that George Bush was behind the 9/11 attacks.  Would it be too much to ask to bring some facts to the table?  Or how about even a motive?  I could maybe come up with a motive if the US invaded Nigeria, since Exxon has assets at risk there that are threatened by rebels and general chaos, but Iraq?  Since Iraq's output was limited before the invasion, invading Iraq only served to put more oil on world markets, which would depress rather than raise prices and profits.  In fact, if there was really an evil genius oil company pulling the strings of government to maximize their own profits, UN-sanctioned Iraq would be just about the last oil producing country in the world you would want your government puppets to invade.

Today XOM has its annual shareholder meeting, and if you ever want to see a great parade of barking moonbats, buy yourself a share of XOM and attend.  Lee Raymond caught a lot of grief for his compensation package, and it did seem overly generous to me, but I am not an XOM shareholder right now so its not my concern.  I will say that having seen one of the XOM shareholder meetings and the ridiculous grief the CEO must endure for a day, my guess is that the XOM CEO would likely knock several million dollars off his comp. package if he could call in sick today.

Posted on May 31, 2006 at 11:43 AM | Permalink | Comments (6)

Reconciling the Skilling Verdicts

I have already read several commenters who have wondered how Skilling could be convicted of fraud (in the form of obscuring Enron's true financial health) but acquitted of most charges of insider trading.  Larry Ribstein (via Professor Bainbridge) asks

"Does this mean that the jury thought he didn't know enough about what was happening to bar him from trading, but that he did know enough to go to jail for fraud?"

Here is how I reconcile it:  The jury decided that Skilling committed fraud, but that it was not for personal gain in his stock.  How can that be?  What other incentive might he have?  Here is my explanation, based on some personal knowledge of Skilling and the Enron business model.

Enron's business model was Skilling's brainchild.  It was nearly 100% his baby.  He invented it at McKinsey and then moved to Enron to make it reality.  The trading model Enron adopted reflected Skilling's ability to handle a lot of complexity and his facility for numbers.  The failure of Enron would be a direct personal failure of Skilling's, perhaps the first and certainly the largest of his life.  Even without holding a single share of stock, Skilling had every incentive to want Enron to survive and in fact thrive.  Enron's failure would be a repudiation of his vision, a forceful proof that maybe he was not as smart as everyone thought he was.

Like nearly every new financial trading business, Enron at first enjoyed large margins on their trading deals.  This has happened throughout history, as the first traders who discover an arbitrage opportunity make lots of money.  However, over time, competition and general knowledge of the arbitrage opportunity tends to erode margins.  Eroding margins are a problem in every business, but particularly in trading.  Here's why:

Trading businesses typically make their money by executing huge transactions at thin margins.  These transactions require a lot of capital, and since margins are narrow, trading companies need to maintain a very low cost of capital.  For a company like Enron, this means maintaining a high stock price and platinum level credit to minimize borrowing costs.

The trap Enron fell into was not a new one.  As trading margins inevitably eroded (as described above) the company had to do more and more volume to maintain profits (it takes twice the volume of transactions when margins are halved to maintain profits at an even level).  But remember, Enron needed a high and growing stock price to keep its cost of capital as low as possible.  So it needed to show ever growing profits, which means in an environment of falling margins, trading volumes had to go up almost exponentially.  But, increasing trading volumes means more capital, much of it in the form of debt.  Borrowing more increased cash demands and put pressure on ratings agencies to downgrade their debt, which would have disastrously increased borrowing costs.  At the same time, falling margins and rising debt meant falling coverage ratios.    Old line trading firms like Goldman Sachs and Soloman Brothers have mostly avoided this trap by carefully husbanding and building their capital over decades.  But Enron tried to build the trading business too fast.

So you see the tiger Enron management was riding.  Any blip in their cost of capital, whether it be a fall in stock price or a downgrading of their debt, would crash the whole company.  But falling margins and a growing need for debt nearly guaranteed that their cost of capital was going to go up.  At first, management sought new growth avenues (e.g. broadband) or windfalls (e.g. California energy crisis) to make ends meet.  Eventually, management appears to have fibbed to bond and equity markets, in the form of false statements and burying the bad stuff in SPE's, trying to keep things from crashing.  Eventually, outsiders figured out what was going on, the commercial paper market dried up, and Enron faced a liquidity crisis that brought the whole thing down rapidly.

In this context, Lay and Skilling's obfuscation of the underlying financial health of the company makes sense.  Enron had reached a point where bad news about the business would do more than just depress the stock price - it could start a chain reaction that would bring the whole company to bankruptcy.  Knowing this, Lay and Skilling apparently sought to hide the true condition of the company, to try to buy time to find some way out.  Skilling, much much smarter than Lay, at some point probably realized that the crash could not be avoided and that's why he suddenly quit.  The tragedy (self-induced, of course) for these men is that nothing was going to prevent the eventual crisis, and Lay and Skilling bought a few months delay in Enron's downfall at the cost of what will probably be their freedom for the next several decades.

So, was Skilling a robber baron intent on nothing more than enriching himself at the expense of shareholders?  Or was he a visionary entrepreneur, who just couldn't accept that his dream and creation of over a decade's work was dying?  I don't really know, even having known the man personally, but the jury's verdict seems to point as much to the latter than the former.  And if it is the latter, has there ever been a visionary who was not the last person to admit his vision was a failure?  I can't tell you how many entrepreneurs I knew in the Internet bubble who were convinced their company was going to be successful almost right up to the day of bankruptcy.  Are we really better off as a society putting all these failed visionaries in jail?

I guess I end up with mixed feelings about the legacy of the case.  I certainly am worried about the prosecutorial abuse.  And cooking the books of a public company is bad and should result in jail time. Having worked once long ago with Skilling, I know for a fact that the man is brilliant and totally detail oriented.  There was no way he could not know about the SPE shenanigans, and for that alone he should face jail time.  My concern is that the other message, beyond just accounting fraud, of this case will be that we are criminalizing CEO's being overly optimistic about their company. And that strikes me as nuts.

Update:  Tom Kirkendall, who has been all over this case, has more here.  Larry Ribstein, whose question started this post, observed:

Many people think that there was so much loss associated Enron that the guys at the center of it must have been villains. But they weren't villains. The jury is saying they weren't even insider traders, as if that would have made a difference. They lost as much as anybody, and that's what drove them to lie, if they did lie. This doesn't make them saints, but it should make even the most hardcore antibusiness types queasy with the denouement of this tragedy. Locking these guys up for pretty much the rest of their adult lives for being unable to face the fact that their dream had ended is not the way a civilized society would deal with this case.

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Posted on May 25, 2006 at 11:52 AM | Permalink | Comments (0)

Lay and Skilling Convicted

Ken Lay and Jeff Skilling were convicted on numerous counts of fraud but were acquitted on most counts of insider training.  Professor Bainbridge has some quickie analysis.

I worked for Jeff Skilling for a brief period of time at McKinsey & Co.  Jeff was easily one of the smartest men I ever met, as well as the most detail-oriented.  It was this latter quality that forced me to concede that he was probably lying to Congress back when he said "I didn't know any of this stuff was going on in my organization."  Whatever else they did, Lay and Skilling will never be forgiven by my family for sucking in a couple of our family friends who were not business people (doctors and such) onto the Enron board, perhaps as dupes who had no hope of crying foul at the complex business machinations that were taken place.  Whatever the reason, our friends will spend the rest of their lives dealing with Enron lawsuits.

My only regret in this case is that I hate seeing some pretty scary prosecution practices get rewarded.  The guilt of Lay and Skilling does not change the fact that we need to start reigning in heavy-handed prosecutors, and disavowing the Thompson memo would be a good start. Update: Tom Kirkendall has much more on prosecutorial abuse in this case and possible appeal points.

Posted on May 25, 2006 at 11:09 AM | Permalink | Comments (0)

Enron Trial Update

My casual, uninformed observation so far has been that for all of its strong-arm tactics and media advantage, the government's case so far in the Enron trial has been weaker than I had been led to expect in the media and publicity run-up.  Tom Kirkendall agrees, and has been all over this case including this recent update.

Posted on May 3, 2006 at 08:31 AM | Permalink | Comments (0)

A New Record!

Bank of America set a new record today.  It sent me the terms and conditions on their treasury services -- 48(!) full 8-1/2 by 11 inch pages with 10-point font.  Unbelieveable.

Posted on April 27, 2006 at 02:50 PM | Permalink | Comments (4)

I May Offer a Libertarian Summer Internship

Over the last month, blogging has been both light and of lower-quality than I would like because I have been consumed with some growth opportunities in my business.  Frequent readers will know that much of my effort has not been business per se, but completing all the government waste paper needed to start a new business in a new state or industry.  A partial list of some of these tasks are here and here.

I am thinking next summer I may go on campus and find the strongest big government supporter I can find and hire them to do all this government paperwork -- my attempt to create one new libertarian each year.  Not sure how I would find the right person, though approaching local PIRG chapter or Campus Progressives organization might be a good start.

PS- What I would really like to do is hire one Congressman a year into that summer job.

Posted on April 26, 2006 at 11:12 PM | Permalink | Comments (6)

More Trouble Than I Thought at GM

Today's announcement that GM will sell 51% of their GMAC financing arm really brought home to me how bad things are at GM.  I haven't really followed the situation, but I had assumed that GM was facing the same type demographic bomb as the airlines, fat and underfunded pensions and retiree health care benefits promised when times were good and US auto makers didn't face much troubling competition.

Here is what I found interesting:  GMAC is reported to make about $2.5 - 3 billion a year in profits.  This might tend to imply a value of at least $25 to $30 billion, which is confirmed by the fact that GM just sold half for $14 billion.  But GM as a whole has a market cap of just under twelve billion.  This means that their entire manufacturing business is valued in the market at roughtly -$16 Billion.  Yes, negative sixteen billion.  Another way to look at this is that if instead of selling GMAC yesterday, GM had instead sold all of their automotive manufacturing, brands, designs, etc. to someone for $1, and became a pure financing business, GM shareholders would be richer by $16 billion, the equivilent of raising the current stock price from about $21 to about $49.

Posted on April 3, 2006 at 09:05 AM | Permalink | Comments (4)

One Thing Every Employee Should Take Away from Enron, Quattrone, etc.

The recent government pursuit of Enron, Frank Quattrone, Arthur Anderson, and any number of other firms has established one "principal" being followed by the government in all of these cases:  They will let large corporations off the hook with fines but no criminal charges IF the corporation agrees to sell out all of its employees.  A large part of this deal, being cut all over the place (and for which Arthur Anderson was destroyed mainly for not agreeing to) is that the corporation will waive attorney client privelege for discussions between employees and corporate attorneys.  Frank Quattrone has been tried twice and will likely get tried a third time mainly based on evidence of emails he sent back and forth with corporate council.  Tom Kirkendall has other examples.

Ten years ago, I would have naively given the advice "don't break the law."  Still good advice, but nowadays in business its hard to tell just what is the law and what is illegal (antitrust is a great example).  So my new piece of advice is "when in doubt, don't use corporate council."  Get your own lawyer.  If the company will pay for it, all the better but do it even if it's out of your own pocket, because it is clear that corporate lawyers are NOT your lawyers, and they will cooperate with the corporation who employs them to put you in jail if that helps protect their real client who pays their salary.

Posted on March 22, 2006 at 09:56 PM | Permalink | Comments (0)

Indentured Employertude

Per the BBC News:

More than 160 people were arrested after clashes erupted in eastern Paris following a day of largely peaceful demonstrations across France.

Vehicles were set on fire and stores were damaged as masked youths clashed with police.

Twenty-four people, including seven police officers, were injured in the violence, which lasted about six hours.

So what is the provocation?  Are youth being drafted to go to war?  Are fundamental civil rights being taken away?  No, the reason for millions of people on the street and outbreaks of violence is...

Protesters are bitterly opposed to the new law, which allows employers to end job contracts for under-26s at any time during a two-year trial period without having to offer an explanation or give prior warning.

The government says it will encourage employers to hire young people but students fear it will erode job stability in a country where more than 20% of 18 to 25-year-olds are unemployed - more than twice the national average.

 Oh my god, its, its....at-will employment.  Head to the barricades!

In reality, what has happened is that Europe has invented a new type of indentured servitude that works in reverse.  If you remember you history, poor Europeans bought their passage to America in the 16th and 17th century by essentially enslaving themselves for a fixed but finite (as opposed to African slavery) period of time.  They got to come to America, but were forced to work for the same employer without the ability to quit for seven years.

The French have taken this same concept, and flipped it on its head.  If an employer hires someone, the employer is prevented by law from ever firing that person.  In effect, an employer enslaves himself to every employee he hires.  Which might just explain why unemployment is so high over there.  I call it indentured employertude. 

These recent riots also turn history on its head.  In the past, many countries with legalized slavery have faced devastating slave riots and uprisings.  In this case, though, it is not the slaves (employers) doing the rioting to be freed, it is the slave holders (ie the employees) rioting to keep the employers captive.

Is France a total loss?

Posted on March 18, 2006 at 11:09 PM | Permalink | Comments (12)

Enron, Week 5

Tom Kirkendall has another excellent roundup of the Lay/Skilling trial.  According to Kirkendall, the prosecution is having some trouble, and in fact have wandered pretty far afield from their original indictment (a document that the prosecution now actually has disowned).  In effect, Lay and Skilling seem to be being tried for different things than they were ostensibly brought to trial for.  Most interesting is this:

On the other hand, the Task Force's case to date has wandered away from the SPE's, so there is a decent chance that a difficult-to-control Fastow could end up being a not-so-important witness in the ever-changing big scheme of this corporate criminal case of the decade.

If Kirkendall is reading the trial correctly, and the SPE's and Fastow's testimony are becoming irrelevant, then the trial has virtually nothing to do with anything we have heard about in the media about Enron.

Barrionuevo and Eichenwald, who have been following the trial for the NY Times, agrees that the government case is shifting but believe it is due to the strength of what has been presented so far.

A steady drumbeat of damaging testimony in the five-week-old criminal trial against the former chief executives, Jeffrey K. Skilling and Kenneth L. Lay, has led legal experts to praise the government case presented so far. That has raised questions about the risks prosecutors would run by putting Mr. Fastow, the former chief financial officer, on the stand as early as Tuesday.

I haven't followed the testimony in any depth, so I can't choose from these two point of views, except to say that the government tactics of essentially changing the charges mid-trial and suppressing defense witnesses by naming a record number as unindicted co-conspirators may or may not be effective, but strike me as fairly scary abuses of the justice system.

Posted on March 6, 2006 at 10:18 PM | Permalink | Comments (2)

Why Its OK if GM Dies

I had a conversation the other day with a person I can best describe as a well-meaning technocrat.  Though I am not sure he would put it this baldly, he tends to support a government by smart people imposing superior solutions on the sub-optimizing masses.  He was lamenting that allowing a company like GM to die is dumb, and that a little bit of intelligent management would save all those GM jobs and assets.  Though we did not discuss specifics, I presume in his model the government would have some role in this new intelligent design (I guess like it had in Amtrak?)

There are lots of sophisticated academic models for the corporation.  I have even studied a few.  Here is my simple one:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it. 

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA*.  And DNA is very hard to change.  Walmart may be freaking brilliant at what they do, but demand that they change tomorrow to an upscale retailer marketing fashion products to teenage girls, and I don't think they would ever get there.  Its just too much change in the DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you still have a culture aimed at big box low prices, a logistics system and infrastructure aimed at doing same, absolutely no history or knowledge of fashion, etc. etc.  I would bet you any amount of money I could get to the GAP faster starting from scratch than starting from Walmart.  For example, many folks (like me) greatly prefer Target over Walmart because Target is a slightly nicer, more relaxing place to shop.  And even this small difference may ultimately confound Walmart.  Even this very incremental need to add some aesthetics to their experience may overtax their DNA.

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one. 

I don't know if GM will fail (but a lot of other people have opinions) but if it does, I am confident that the end result will be positive for America.

* Those who accuse me of being more influenced by Neal Stephenson's Snow Crash than Harvard Business School may be correct.
** Gratuitous reference aimed at forty-somethings who used to hang out at the mall.  In my town, Merry-go-round was the place teenage girls went if they wanted to dress like, uh, teenage girls.  I am pretty sure the store went bust a while back.

Posted on December 2, 2005 at 08:58 AM | Permalink | Comments (7)

Great Pitney Bowes Ink Alternative

A while back I wrote about the unbelievably egregious price Pitney Bowes charges for the ink cartridges on its mailing machines:

Today I bought what may be the most expensive consumer printer ink available.  We have a small Pitney-Bowes postage meter that has a little built in ink-jet printer to print out the metered postage symbol (that sort of red looking stuff that replaces the stamp).  One of their little print cartridges doesn't last more than at most a thousand envelopes, which represents at most the equivalent of 50 pages of text for a normal printer.  For this little cartridge with its smidgen of ink, I paid $39.99.  At the same time, I bought two-paks of the HP cartridges I needed (no bargain themselves) for $25 per cartridge, and these cartridges last for hundreds of pages.  I can't directly compare the volume of ink, but my sense is that the P-B cartridge is priced such that it would be over $500 with an equivalent amount of ink to an HP cartridge.

A reader named Randy Hooker sent me this email, which read in part:

Read your blog post with glee! Almost four years ago I felt the same and developed alternative ink products for many Pitney machines. Our trademarked name is NuPost.
Google that and you'll see there are hundreds of places to buy.

Just as background on the Pitney machines and ink usage: As these meters print "money" rather than images it is critical that the cartridge have ink available at all times.  So, the meter "purges" the print head on a regular basis to insure performance.
This purging uses massive amounts of ink as compared to the printing of a
single indicia.

The Pitney Bowes published output of the cartridge for your machine is 400
to 600 impressions OR 4 months.  If you do not use the meter at all, the purges will exhaust the cartridge over a 4 month period. Infrequent mailers will get very little value from these cartridges, compounding the total cost of ownership.

He was nice enough to send me a sample, which sat on the shelf and I forgot it (sorry).  Then, the other day, I noticed when I ran some mail that the printing looked a lot better than normal - none of bad banding that is typical.  I opened it up and found Randy's cartridge.  This thing is great - its half the price at OfficeMax of the Pitney Bowes cartridge and actually prints better.  Thanks!  (Many online sources of NuPost cartridges here).

Posted on November 15, 2005 at 04:06 PM | Permalink | Comments (8)

Airlines and Credit Cards

Via Marginal Revolution, I thought this was fascinating:  The profits from those airline frequent flyer Visa and Mastercards (like my Citibank Advantage Visa) dwarf those of the airline business itself.  OK, so the profits of my tiny little company probably dwarfed the anemic profits of most airlines last year, just because they were positive.  But the magnitude is staggering:

Juniper bank is contributing $455 million to the merger of America West and USAirways in exchange for the right to issue its frequent flyer credit card. This was a huge blow to Bank of America, which had been issuing cards for both airlines, and BofA is taking the deal to court.

They have several more examples, with credit card companies providing much of the new financing in recent airline bankruptcies.

By the way, why is it that frequent-flyer miles holders, who are a creditor of the airlines after all, are the only major creditor consistently NOT asked to take a haircut in these bankruptcies.  For god's sakes, there are retired workers losing a large portion of their pensions, but I still get to retain all my miles so I can go to Hawaii next year?

Update:  The fact that mileage holders have not taken a hit in bankrupcy does not mean they have not ever taken a hit.  Airlines from time to time devalue miles, by raising redemption rates, as Northwest did last year.

Posted on November 7, 2005 at 09:13 AM | Permalink | Comments (7)

AZ Republic Takes Shot at Oil Companies

In a remarkable example of an anti-business hit-piece called "Fueling Contempt" on the front page of the AZ Republic, the Republic leads with this line:

Reaction to major oil producers' staggering profits ranges from rage at the pumps to calls for profits to be reinvested in exploration, alternative-energy research or simply returned somehow to the public.

The article is mainly focused on the profit announcement at Exxon-Mobil, so I will use their numbers to put "staggering" into context.  E-M announced profits of $9.9 billion on sales of $101 billion.  For those who cannot divide, that is a profit margin of 9.9% of sales.  Since when is a profit margin at a cyclical peak of 9.9% considered "staggering"?  Microsoft makes 30%, in good times and bad, with a fraction of the investment or risk X-M takes.  From this chart, you can see the average for all industry is about 8%, with the oil industry generally below this number in all but cyclical peak quarters and banks, pharma, software, semiconductors, financials, household products and many others all consistently over 10%.  Procter and Gamble makes a margin of nearly 13% of sales selling toothpaste and detergent but we are going to begrudge oil companies 7.6% on average and 10% in their best quarters?

The article does absolutely nothing to put the profits in their proper context, though I was able to do it in one paragraph.  This is the only context the article offers:

The oil companies assert that their profits are no larger than other businesses and that they just look big because it is a big business.

Exxon Chairman Lee R. Raymond said in a statement that the company "acted responsibly" in its pricing and said its fourth-quarter profits would come nowhere close to the $9.9 billion in the third quarter.

That doesn't necessarily wash with Adrienne Valdez of Phoenix.

"I can't afford to buy socks because I am paying twice what I used to for gas," she said. "It's not right that they should be making billions at our expense."

In Phoenix, gas prices soared to $3.14 after Hurricane Katrina hit the Gulf Coast. The average Valley price per gallon, which has been falling in recent weeks, was $2.72 Thursday, according to AAA Arizona.

Bruce Trushinsky, owner of the former Moon Valley Exxon station at 1901 W. Thunderbird Road in Phoenix, called Exxon Mobil's $9.9 billion quarterly profit "disgusting."

He became so upset at the $7.6 billion profit posted by the company in the second quarter that he canceled a longtime branding agreement.

"I ripped down all the Exxon signs and threw them in the garbage,"

he said. Now, after 30 years, Moon Valley Exxon is Carmel Automotive and Fuel. Trushinsky said the high wholesale prices charged by Exxon were devastating to his business and that the last straw was when the company canceled its dealer-incentive program.

"They cut us off, then they announced their (second-quarter) profit increased $2 billion."

This is populist crap, and is the reason the MSM cannot be taken seriously when they say that they are neutral reporters.  They are not reporting, they are cheerleading an anti-oil company bigotry that has existed for decades.  I think that the E-M management should be embarrassed to make such a small return in their best quarter.  Shareholders should take management to the woodshed for investing and risking so much in a cyclical business and making so little.  For gods sakes, they make a lower margin than Jif peanut butter earns.  Is anyone suggesting that we impose a windfall profits tax on Charmin?

I find the title of the article "Fueling Contempt" interesting - I am not sure if it was meant to refer to high oil company profits or if it was just a statement of intent for the article.

UPDATE:

Since 1977, governments collected more than $1.34 trillion, after adjusting for inflation, in gasoline tax revenues—more than twice the amount of domestic profits earned by major U.S. oil companies during the same period

This is just gasoline taxes - it does not include income tax payments, property tax payments, and oil lease royalty payments.

Posted on October 28, 2005 at 11:29 PM | Permalink | Comments (9)

A Nice Irony

With a hat tip to Cafe Hayek, comes this article from the Las Vegas Weekly:

The shade from the Wal-Mart Neighborhood Market sign is minimal around noon; still, six picketers squeeze their thermoses and Dasani bottles onto the dirt below, trying to keep their water cool. They're walking five-hour shifts on this corner at Stephanie Street and American Pacific Drive in Henderson—anti-Wal-Mart signs propped lazily on their shoulders, deep suntans on their faces and arms—with two 15-minute breaks to run across the street and use the washroom at a gas station....

They're not union members; they're temp workers employed through Allied Forces/Labor Express by the union—United Food and Commercial Workers (UFCW). They're making $6 an hour, with no benefits; it's 104 F, and they're protesting the working conditions inside the new Wal-Mart grocery store.

"It don't make no sense, does it?" says James Greer, the line foreman and the only one who pulls down $8 an hour, as he ambles down the sidewalk, picket sign on shoulder, sweaty hat over sweaty gray hair, spitting sunflower seeds. "We're sacrificing for the people who work in there, and they don't even know it."

The union accuses Wal-Mart of dragging down wages and working conditions for other grocery-store workers across the nation. "Whether you work or shop at Wal-Mart, the giant retailer's employment practices affect your wages. Wal-Mart leads the race to the bottom in wages and health-care," says the UFCW's website. "As the largest corporation in the world, Wal-Mart has a responsibility to the people who built it. Wal-Mart jobs offer low pay, inadequate and unaffordable healthcare, and off the clock work."

But standing with a union-supplied sign on his shoulder that reads, Don't Shop WalMart: Below Area Standards, picketer and former Wal-Mart employee Sal Rivera says about the notorious working conditions of his former big-box employer: "I can't complain. It wasn't bad. They started paying me at $6.75, and after three months I was already getting $7, then I got Employee of the Month, and by the time I left (in less than one year), I was making $8.63 an hour." Rivera worked in maintenance and quit four years ago for personal reasons, he says. He would consider reapplying.

LOL.  Frequent readers will know that I usually feel the need to restate the moral of the story to insure everyone gets it.  I don't think thats necesary here.  More on Walmart and wages here and here.

Posted on September 20, 2005 at 05:31 PM | Permalink | Comments (0)

ATM Cards More Expensive to Process than Credit?

Does this make any sense:  It costs us a lot more, for small transactions, to process an ATM / debit card with the pin pad than a credit card.  Bank of America charges a flat 60 cents per ATM card / PIN pad transaction in our stores but charges 10 cents plus 2% on credit cards.  So, on a typical $5 convenience store purchase, BofA charges $0.60 or 12% to process a ATM / debit card but $0.20 or 4% for the credit card.

I understand the difference between value- and cost-based pricing, but in an economy of scale transaction processing business with a lot of competitors, I would think debit would be cheaper to process, even without the credit risk issues. 

Customers give me feedback that I am a neanderthal for not accepting ATM cards with a pin pad at the registers.  This is the reason.  Its cheaper for me to provide an ATM and then have them pay cash - that way they pay the fee, not me.  Also, their fee is lower.  Even if they only take out $20 and pay a $1.50 fee, they are still only paying 7.5% vs. the 12% typical I would be paying.  If anyone knows a company that offers a better deal, the comment section is wide open!

Update:  A couple of notes based on the comments.  First, I do indeed understand that prices are not cost-based.  The notion that pricing should be cost-based is one of the worst economic misconceptions held by the average person (behind the commerce is zero-sum myth).  When prices don't make sense to me, I don't run to the government asking for Senate hearings so corporations can "justify" their pricing, I just don't buy from them. 

Second, to another commenter's point, most card processing agreements and some state laws prevent merchants from passing card processing fees onto consumers in a discriminatory way - ie they can be built into the general pricing but you can't charge one person one price and another a different price for the same item based on what kind of payment they use.

Posted on September 8, 2005 at 01:23 PM | Permalink | Comments (11)

Worlds Most Expensive Printer Ink

Today I bought what may be the most expensive consumer printer ink available.  We have a small Pitney-Bowes postage meter that has a little built in ink-jet printer to print out the metered postage symbol (that sort of red looking stuff that replaces the stamp).  One of their little print cartridges doesn't last more than at most a thousand envelopes, which represents at most the equivalent of 50 pages of text for a normal printer.  For this little cartridge with its smidgen of ink, I paid $39.99.  At the same time, I bought two-paks of the HP cartridges I needed (no bargain themselves) for $25 per cartridge, and these cartridges last for hundreds of pages.  I can't directly compare the volume of ink, but my sense is that the P-B cartridge is priced such that it would be over $500 with an equivalent amount of ink to an HP cartridge.  Insane.  And its worse because the P-B postage meter has this annoying tendency to announce the cartridge is almost out of ink before it is even half empty.  We have gone weeks with the meter telling us the cartridge had to be replaced soon.

I am not sure I fully understand the relationship Pitney-Bowes has to the US Postal Service, but to all appearances, they have been handed a virtual monopoly for decades.  For years business have been forced to pay egregious rental rates for P-B equipment with long, long minimum lease periods because the USPS does not seem to be comfortable with competition.  Only the advent of Internet postage in the late 1990's forced P-B to come out with a small business postage meter that you could purchase at relatively low cost.  I am flabbergasted that the US government continues to give them this monopoly.  It is ironic to me that several of the abusive monopolistic practices used by Pitney-Bowes and encouraged by the US government are the same practices Xerox got busted (under anti-trust litigation) years ago by... the US Government.

Posted on August 15, 2005 at 11:51 AM | Permalink | Comments (9)

What Happened to Prior Art?

I wrote below that I am not an economist, but I am really, really not a patent lawyer.  However, I find this story totally mystifying:

Apple Computer may be forced to pay royalties to Microsoft for every iPod it sells after it emerged that Bill Gates's software giant beat Steve Jobs' firm in the race to file a crucial patent on technology used in the popular portable music players. The total bill could run into hundreds of millions of dollars.

Although Apple introduced the iPod in November 2001, it did not file a provisional patent application until July 2002, and a full application was filed only in October that year.

In the meantime, Microsoft submitted an application in May 2002 to patent some key elements of music players, including song menu software.

I have already become suspicious that the patent process as applied to software and online concepts (e.g. the Amazon "1-click" purchase patent) is broken.  For me, this is more evidence.  How can a Microsoft patent filed in May 2002 have any validity if it attempts to patent concepts already embodied in a competitive product on the market in 2001?

I once found myself in the middle of one of these patent battles several years ago.  I was on the management team at Mercata, an online shopping site who's bit of uniqueness was that it had three or four day purchase windows for various products, and the price of the product would fall as more people signed up to purchase it.  Kind of a fun, with some interesting viral marketing potential if it had caught on, but patentable?  I mean, doesn't Adam Smith have prior art on this?

Hat tip to Prof. Bainbridge.

Posted on August 15, 2005 at 10:02 AM | Permalink | Comments (3)

Great Moments in Labor Relations

My previous post joking about potential union opposition to unmanned military aircraft reminded me of one of my favorite labor relations stories.   Until just the last few years, most railroads continued to pay a "fireman" to ride in the cab of their diesel locomotives, despite the fact that the role of the fireman to shovel coal into a steam boiler was totally obviated fifty years ago by diesel technology.  How this came about is an interesting story.

Railroads were the first heavy or large industry in this country.  For years, if you were to talk about "big business", you were really talking about railroads.  So it is not surprising that when the government succumbed to the pressure of interfering legislatively into the relationship between employer and employee, their first target was the railroad industry.  In a sense, the US has two bodies of labor law.  The first body of law is railroad labor law, and the second is the law that applies to every other industry. 

As much as we can complain about the labor law most of us operate under, it is nothing compared to the hash that the government made of railroad labor law.  From an early stage, details about work days and work rules that would normally be part of a private labor contract between a company and their union or employees were actually embodied in the law.  For example, back in the steam-engine era when trains moved fairly slowly, a full "day" for a train crew was defined by statute as 100 miles (about the distance a steam engine could go without taking on more water).  Once a train crew had traveled that distance, they were owed a days pay.  Other portions of the law gave the unions incredible power, such that the bargaining table at every negotiation with management was always tilted, by statute, in their favor.

Beginning in the late 1930's, but really gaining momentum in the late 1940's, railroads began to replace steam locomotives with diesel engines.  Diesel locomotives were more reliable, easier to maintain, easier to operate (no coal to shovel) and could go much longer distances without service (steam engines stopped frequently for more water).  As this transition occurred, railroad companies very reasonably sought to eliminate the position of "fireman" on diesel trains.  After all, without a boiler and coal to shovel, the fireman role was totally redundant on a diesel engine.  Railroad unions were nothing if not gutsy, and in response they argued that not only would they not accept elimination of the fireman position, but they campaigned for an addition of a second fireman on diesel engines.  Railroads found themselves in the position of actually having to fight a nearly successful effort to increase the number of firemen on crews.  As a result, they ended up accepting the fireman role, and generations of railroad men cruised about the country on engines for the next 40 years, doing virtually nothing for their pay.  Railroads were still fighting to eliminate the fireman in the 1990's.  In some cases, railroads were actually forced to pay "lonesome pay" to some engineers when the firemen were removed from their crew.  LOL.

Other labor statutes and work rules prevented full use of the diesel's capabilities.  For example, the 100 mile rule was now absurd - an inter-modal or other long-distance freight train could cover this in less than two hours.  But US law still insisted that railroad workers be paid a full days pay for 100 miles.  By 1990, after four decades of lobbying and negotiation, the 100 miles had been increased all the way to ... 108 miles.

This article from Regulation is a bit dated, but it still gives a good overview of some of the historical insanities in railroad labor.  An excerpt:

The rail unions deserve the labor equivalent of an Oscar for best sustained performance in reducing industrial efficiency. Restrictive work practices are legendary from firemen on diesel locomotives to train-limit laws. During the 1980s the railroads made minor progress against these practices, but they still have a long way to go. Some crews receive an extra day's pay every time they turn a locomotive around (yard and line haul crews have rigid separations of duties despite identical skills). Carriers are forced to employ three- to five-person crews, while nonunion carriers (Florida East Coast Railway and regional and short-line carriers) use two people. Crew members receive a full day's pay after a train moves 108 miles, even if the trip requires only a few hours. (The current three-member board appointed by Congress may impose a 130-mile rule by 1995.) Some union members have guaranteed lifetime incomes and must only work a few days per month. Some engineers receive "lonesome pay" for giving up the full-time company of a fireman. Until 1987, some Burlington Northern crews received "hazardous pay" for traveling through Indian territory in Montana. Management studies show that work forces could be cut in half, and according to some estimates, labor restrictions cost the industry some $4 billion a year. Despite union concessions on work rules, shippers continue to complain about the carriers' inability to achieve efficient and economical labor contracts. Overall, the RLA and its government-backed unions combine to double labor costs and therefore drive up freight rates from 20 to 25 percent, a very serious handicap in the competition with trucks and barges.

One railroad stood up to the union, and eventually won, but had to withstand a violent 11-year strike, all the while the taking continuous grief in the union-friendly press:

The Florida East Coast Railways, a line long known as "America's most efficient railroad," highlights the woeful labor inefficiencies of the major carriers. Its primary operation is transporting freight from Jacksonville to Miami. When Edward Ball took over the operation in 1961, the unions required the use of three five-man crews-each receiving a day's pay for each 100 miles traveled on the 366-mile trip. Ball failed to see the sense of this scheme and decided to try th change it. Union officials could not see the sense in any change and called a strike in 1963. The violence and vandalism that continued for eleven years demonstrated to other carriers the cost of defying the unions. The railway won, however. The company used two-man crews who were "cross-trained" and paid them a day's pay for eight hours' work rather than for 100 miles traveled. During the 1970s, the railroad's labor costs were 40 percent of total costs compared with 64 percent for all class I railroads, and Florida East Coast Railway earned the highest return of any class I railroad. In addition, the railway consistently won safety awards that fended off another pretext for government control and continues to retain customers while other railroads lose out to trucks.

Read the whole article.  If you have ever read Atlas Shrugged, you will find that a lot of the outrageous legislation in that story that seemed too stupid to be true actually have a basis in the history of US railroad law.  Even the "railroad unification act" that seems totally over-the-top toward the end of the book is based on actual railroad law after WWI:

The Transportation Act of 1920 gave the Interstate Commerce Commission complete control over pricing, issuance of securities, expenditure of proceeds, consolidations, and the construction, use, and abandonment of facilities. The act set up a Railway Labor Board to mediate disputes. Its "recapture" provision required a portion of a company's earnings in excess of an allowable "fair return" to be diverted to railroads with relatively low earnings. Except for the most routine administration, almost everything owners might do was subject to federal regulation or dictation.

More on the transition of steam to diesel here.  I am not very well versed on the subject, but apparently this specialized railroad labor law was later applied to airline pilots, with predictable results.  It is interesting that the two industries covered by the RLA (railroads and airlines) have both seen every major carrier in their industry bankrupted over the last 50 years.

Update:  I have been a fan of railroads for years.  One of my frustrations with my current house is a don't have room for a model railroad layout.  I had one back in St. Louis, where I had a basement, but there are not very many basements in Phoenix.  Here are some photos of that old layout, which was still under construction when I had to tear it down and move.

Posted on August 12, 2005 at 08:53 AM | Permalink | Comments (5)

The Power of Metrics and Expectations

This is my first and probably last baseball post - read this blog if you want more baseball.

I am fascinated with the psychology of the closer position.  Some background:  The best baseball pitchers start games, and on average get through about 6 innings of 9.  The baseball manager's job is to stitch together a number of less talented pitchers to cover the 7th, 8th and 9th innings.  One would expect that the manager would flexibly match pitcher skills against the lineup he is facing.  For example, if the most dangerous batters for the opposing team are scheduled up in the 8th inning, he might send in his best relief pitcher in that inning.  One would not expect to see any particular emphasis on one inning or another:  after all, a game lost in the 7th counts the same as a game lost in the 9th.

This, however, is not how most managers operate.  Most managers have one very highly paid and more talented relief pitcher they call the "closer" that they pitch solely in the 9th inning.  Why?  Why is the 9th more important and deserving of a valuable player than the 8th?

The answer is part baseball conventional wisdom, which is as strong as in any old-line industry.  However, the other part of the explanation must lie in metrics.  If a manager loses a game in the 7th, it is just a loss.  If a manager loses a game in the 9th, the game was "blown".  Newspapers and talk shows keep and publish stats on games blown in the 9th, but not games lost in the 7th and 8th.  Games lost in the 9th are in a sense portrayed as more of a management failure than games lost in the 7th, and this is made worse by the fact that a game lost in the 9th is somehow more psychologically devastating for fans and media.  Managers are not dumb - recognizing that they get dinged on their performance rating more for a game lost in the 9th than the 8th, they have invented the closer role.  General managers take a disproportionately large part of their salary budget for relief pitching and dedicate it to this closer role.

A guy named Theo Epstein a couple of years ago, as a general manager, challenged this conventional wisdom.  He observed that more games were lost in the 7th and the 8th than the 9th, so hypothesized that relief pitching emphasis and salary dollars should be spread more evenly across the three innings.  One of his consultants was the famous Bill James, who has challenged baseball conventional wisdom with facts for years.  Epstein was roundly criticized by media and local fans alike for his "Closer by Committee" approach.  Eventually he was forgiven, when in the following year he brought his town its first world championship in 86 years.

For more on this and similar baseball topics, the book Moneyball is fabulous, and tells this story of the clash of fact-based analysis and baseball conventional wisdom, in a way that might be familiar to change agents in any number of Fortune 500 companies.

Posted on July 25, 2005 at 08:46 AM | Permalink | Comments (1)

Let Some Airlines Die

I missed it last week, but apparently the CEO's of a number of major US airlines took the PR offensive last week to beg for more government subsidies and pension bailouts.  Reason's Hit and Run has the roundup.  They observe that the Senate was open to their pleas:

But luckily for the money-squandering dullards, there are enough members of the Senate Commerce Committee who apparently believe certain businesses are too colossally incompetent to fail:

The Commerce Committee's ranking Democrat, Sen. Daniel Inouye of Hawaii, agreed: "If we do not begin to solve the problems plaguing the air carriers, we will see more failures in coming months and certainly more jobs cut."

Because what is the federal government if not a guarantor of full employment at lousy companies?... If Inouye and his fellow hacks were serious, they could start by privatizing airports, allowing vigorous foreign competitors to own more than 50 percent of U.S.-based airlines, and letting the failures actually fail, for starters. But that would take a belief in free airline markets we haven't really seen since the Carter Administration.

It has always been hard to get airlines to just go away.  Pan Am hung around forever, as did TWA, through bankruptcy after bankruptcy.  My guess is that politician's unwillingness to let airlines fail has only increased with the advent of frequent flyer miles - no congressman wants all of his well-healed constituents calling the office and complaining about the 300,000 United miles they just lost.  By the way, have you ever noticed that frequent flyer mile holders are the only creditor of airlines who consistently come out of bankruptcies whole?  Even the worker's defined benefit pension plans get a haircut before frequent flyer mile holders.

Legacy airlines are really backwards in their practices - for example, many of their supply chain processes are reminiscent of the auto industry in the 60's and 70's, in part because airlines are sheltered from foreign competition while auto makers for the most part aren't.  I used to work in the aviation industry, and the opportunities there are tremendous, but no one in the industry will even listen.  The "not invented here" attitude was invented in the airline industry.

And while the management of these firms is backwards, you also have to deal unions a share of the blame.  Union supporters often accuse companies of "union-busting".  I have never heard the term, but in the case of airlines, one might be able to accuse the unions of "company-busting".  Unions hold out and strike for outrageous salaries and benefits and work rules that far outstrip what similarly skilled people make in other industries.  By the way, unlike conservatives, I don't have some deep seated hatred of unions.  In a free society, workers can try to organize to increase their bargaining power.  I do have problems with the way the US government, through legislation, tilted the bargaining table in the unions' favor, but that is a different story. 

For some of these reasons, and others, I was flabbergasted that local company America West would purchase USAir.  When there are so many planes and gates for sale on the market, and cities are begging for new competitors to enter their airline market, why would you buy yourself a load of trouble in the form of legacy union contracts and frequent flyer obligations?  It is noteworthy that Southwest has never bought another airline, and prefers instead just to buy assets out of bankruptcy.

Posted on July 18, 2005 at 12:06 PM | Permalink | Comments (5)

GM Employee Pricing

When I first heard the GM ad campaign to give consumers access to the same discounts their employees get, I had two reactions:

  • I sure hope that they have some alternative employee incentive lined up.  I remember when I applied to GM as an engineer, this car discount was high on the list of how they sold the job.  Now what are employees thinking, since their employment buys them nothing on this dimension?  They are probably thinking they weren't getting much of a discount if GM can offer that discount to everyone
  • If I were a stockholder, I would be selling, because it sure smacks as desperation.  If you think of all the incentives GM has offered over the years, if they are offering an incentive that is unprecedented in their 80+ year history, then you know there must be some panic in the boardroom

Only GM could come up with a program that makes both employees and shareholders upset.  George's Emploment Blawg has more thoughts along these lines.  This all assumes that "same pricing as employees"  means just that -- remember that this is the industry where "invoice pricing" means nothing of the sort.

Many people have analyzed GM's problems.  It is tempting to say that their main problem is that they have not good cars, but I want to be careful not to substitute my preferences for market research.  So, instead, I will point out a couple of facts:

  • GM makes most of its profit from SUV's
  • All the profit in a car line, given high fixed costs, come from the last 10-15% of the cars produced.

So, as gas prices rise and silly tax loopholes are closed [thanks Mark], SUV sales only need to fall 10-15% to wipe out most of GM's profitability.

Posted on June 13, 2005 at 08:13 AM | Permalink | Comments (1)

Observations on Walmart, Women, and Wages

After my earlier post on Walmart, I got to thinking about a number of Walmart-related topics.  My brain is a bit too fried on Friday night to organize these thoughts too much, so here they are, roughly following my stream of consciousness:

Exxon may have finally handed off the Great Satan title

The socialists of this country (who now generally call themselves progressives but its pretty much the same thing) usually need a company they can focus their attention on.  In the 1960's, this was probably General Motors, though defense contractors in the Vietnam War made a run at the title.  After the oil embargo of 1972, that title clearly moved to Exxon. I remember in one month in the early 1970's, the head of Exxon got called into Congress twice in a few weeks, once to combat the urban myth that oil companies were greedily holding oil off the market to drive up prices, and once to explain to Congress why they were greedily trying to expand oil production in Alaska.  My family and many of my friends worked for large oil companies, and we had several friends who were injured by letter bombs from domestic leftist terrorists (though the media did not call them terrorists then).

Exxon held the great Satan title for a long time.  It probably could have shed the title with low oil prices in the 80's, but the stupidity of the Valdez mess in the mid-80's and the vociferous opposition to the politically correct Kyoto accords in the mid-90's help them retain the title for a record number of years.

Finally, however, it appears that a new contender is at hand.  Walmart, so recently the most admired corporation in America, has become the new socialist whipping boy and lawsuit magnet.  Just search for Walmart in Google and you will get pages and pages of Wal-mart bashing sites.  Its kind of an amazing story how the former blue collar low-price hero of the working man trying to make ends meet has suddenly become a class enemy.  However, coming from a family that had many members who worked for Exxon, it comes as some relief to pass the Great Sata title on.

I wish everyone at Walmart could make $100,000 per year

In this, I am exactly in the same boat as Walmart detractors.  I would love for everyone at Walmart to make a ton of money.  Whether this is realistic is another story.

In America, people take jobs voluntarily

I would generally class this as a blinding glimpse of the obvious, but it appears that it has to be said.  And, if you accept that people are operating in their own rational self-interest (by the way, this is not a given -- many on the left do not think the average American is smart enough to make decisions for themself and that they need smart technocrats to look after them).  Anyway, were was I?  Oh yes, if you accept that people operate in their own rational self-interest, then by definition the job for Walmart employees is their best option, and any other option is worse.

This is the logical fallacy of those who attack Walmart (or offshore companies) for paying too low of wages.  Their concern is that these wages are lower than they, as an outside obviously smarter than everyone else observer, think they should be.  The reality is that these wages are higher than that employee's other options, and therefore is an improvement over that job not existing at all.  Note this story I told in an earlier post:

Progressives do not like American factories appearing in third world countries, paying locals wages progressives feel are too low, and disrupting agrarian economies with which progressives were more comfortable.  But these changes are all the sum of actions by individuals, so it is illustrative to think about what is going on in these countries at the individual level. 

One morning, a rice farmer in southeast Asia might face a choice. He can continue a life of brutal, back-breaking labor from dawn to dusk for what is essentially subsistence earnings.  He can continue to see a large number of his children die young from malnutrition and disease. He can continue a lifestyle so static, so devoid of opportunity for advancement, that it is nearly identical to the life led by his ancestors in the same spot a thousand years ago.

Or, he can go to the local Nike factory, work long hours (but certainly no longer than he worked in the field) for low pay (but certainly more than he was making subsistence farming) and take a shot at changing his life.  And you know what, many men (and women) in his position choose the Nike factory.  And progressives hate this.  They distrust this choice.  They distrust the change.  And, at its heart, that is what opposition to globalization is all about - a deep seated conservatism that distrusts the decision-making of individuals and fears change, change that ironically might finally pull people out of untold generations of utter poverty.  (update:  good post in the Mises blog on Taco Bell and wages here)

It's Wages vs. Prices, not Wages vs. Profits

In aggregate, because they have so many stores, Walmart makes about $10 billion a year in pre-tax net income.  Which is a lot.  But when looked at as a percentage of sales, it is pathetic.  Given its nearly $300 billion in sales, this is about a 3.5% return on sales, which while not unusual for retailers, in the grand scheme of American business is pathetically low.  I would have to shut down my business tomorrow if I only made 3.5% of sales -- I couldn't support the investments I have to make.

Its illuminating to compare this to all those small family owned boutique businesses that Walmart supposedly shuts down.  So here is a little example.  Lets say that the alternative to Walmart in Smallsville, USA would be a series of boutique stores, like the mythical Nan's Clothing Shop.  Lets say Nan does $250,000 a year in sales,which would actually make her shop more successful than average, particularly for smaller town mid-America.  If Nan had to live with Walmart's profit margin of 3.5%, she would end up with an annual profit of  ... $8,750.   And, if Nan is working full-time trying to make the store work, and assuming 2300 hours a year, which is probably low for a small business person, she would be making a whopping  $3.80 an hour running her store, such that she would be much better off (leaving out the personal satisfaction of running your own business) working for Walmart at the average wage there of $6.50 an hour. 

While socialists and progressives are programmed in the deepest recesses of their DNA to blame everything on profit, the wage savings Walmart may get are not going to profit.  Their profit margins are low, in fact lower than most of the smaller stores they are replacing.  If there is a wage trade-off going on, it is between lower wages and lower prices to consumers.  Which obviously makes socialist demagoguery a bit less compelling, since it means that in some sense consumers and not Walmart are to blame if wages are too low, since presumably it is consumers who make the choice to switch from the higher cost traditional boutique alternatives to Walmart.

Walmart detractors have one good point - Walmart gets far too much preferential tax treatment

I don't know why it is, but Walmart is a magnet for taxpayer subsidies.  Not only does the government love to hand out tax breaks to Walmart, it local governments go so far as to use eminent domain to put together land parcels for them.  If I was a local retailer and had my tax money used to subsidize a new competitor, or worse got my land siezed to hand over to Walmart, I would be pissed off too.

I have not really studied Walmart's tactics in this, but my sense is that they have gotten good at getting neighboring communities competing with each other.  This is a crock and a waste of taxpayer money, and nearly as bad as subsidizing sports teams.  I have a long post on the sad practice of subsidizing business relocations here.

A final thought on the most unpublicized economic miracle of the last century

Since many of Walmart's attackers focus on their treatment of women, in part due to numerous accusations of discrimination in pay and promotions, it led me to a final thought about a great economic miracle that occurred in this country in the last decades of the 20th century.

Check this data out, from the BLS:

  • In 1968, the unemployment rate was 3.8%.  22.9 million women were employed in non-farm jobs, accounting for 34% of the work force.
  • In 2000, the unemployment rate was 4.0%.  62.7 million women were employed in the work force, accounting for 48% of the total
  • In these years, the number of women employed increased every single year.  Even in the recession years of 1981-1983 when employment of men dropped by 2.5 million, women gained 400,000 jobs

This is phenomenal.  After years of being stay-at-home moms or whatever, women in America decided it was time to go to work.  This was roughly the equivalent of having 40,000,000 immigrants show up on our shores one day looking for work.  And you know what? The American economy found jobs for all of them, despite oil embargos and stagflation and wars and "outsourcing".

I would love to see women at Walmart making more money, and some day they probably will.  Even so, though, the fact that so many have found work there is a miracle unto itself. Remember that the alternative to a $6.50 job at Walmart if the left is successful in eliminating these jobs is probably not new $15.00 jobs - it is no job at all.  Just ask the French.  Also see my recent post on the minimum wage.

Update:  This is some pretty smart PR by Wal-Mart to deflect the sprawl argument often used against it.  By the way, I challenge someone to define sprawl adequately for me in the context it is used by people who are decrying it.

Posted on April 8, 2005 at 09:42 PM | Permalink | Comments (9)

The Credit Card Prank

This a pretty funny story from Zug about just how little security the signature on a credit card slip provides.  Hat tip: Instapundit

Posted on March 28, 2005 at 09:19 AM | Permalink | Comments (1)

Negotiation Bait and Switch

I was pretty frustrated after my negotiations with Florida State Parks on Friday.  We were apparently the winning bidders for one of their park concessions, but their process requires a "negotiation" after the winner is accepted, something that is very unusual in these situations.  Typically, these Request for Proposals (RFPs) for these projects include all the minimum requirements the bidders must accept.  The RFP then lays out a point system that will be used for scoring the submissions (e.g. 20% of score on bid rent, 20% on financial stability of bidder, 30% on experience, etc).  Usually, the relevant agency reviews proposals to see if they meet all the minimum requirements, throwing out proposals not meeting these minimums, and then choose a winner from the remaining proposals based on the scores.

In this case, in the Florida State Park RFP, there was no minimum rent payment set (rent is usually bid as a percentage of concession sales).  Also, in the scoring, of the 800 total potential points, only 20 or 2.5% were assigned to the size of the bid rent payment.  The other 97.5% of the points were allocated to experience and services offered, etc.

Well, after spending a lot of time and money on the bid response itself, I was called to Tallahassee as the winning bidder to "negotiate".  After we sat down, the first thing they said was "your bid of x% is too low -- we won't accept anything less than twice that".

This is a classic bait and switch.  I assume it is legal under Florida government contracting law but it is illegal for federal contracts and in most other states.  They caused me to spend a lot of time and effort bidding and then flying to Florida on the assumption that there was no minimum rent amount and that the rent amount was a trivial requirement, as compared to quality and experience.  In their negotiations, the revealed the opposite.  They are hoping that now that I have gone through all this time and effort, I will agree to up the $ given my sunk costs.  What they don't know is that I am the world's number one believer in "sunk costs are sunk and therefor irrelevant".

If Best Buy issued an ad in the paper saying they were selling Sony plasma TV's for $500, and I rushed to the store only to find no $500 Sony's for sale but instead a pushy salesman trying to sell me up to the $2500 model that is on hand, they would be breaking the law in most states.  What Florida is trying to do is no different.

I am going to tell Florida that I need a few more days to respond to their hijack demands concerns.  I was taught long ago not to get emotional in a negotiation, and right now I am emotional.  When I calm down, I will sit down and try to calmly evaluate if it is still a good deal at twice the rent.  I will also call up some other concessionaires in Florida to see if this is an isolated incident or see if it is representative of ongoing arbitrary behavior I can expect in the future.

Posted on March 13, 2005 at 10:05 PM | Permalink | Comments (2)

The Loyalty Program Revolt Starts Today

I HATE most new loyalty programs at stores.  When loyalty programs really came in vogue with airlines, they made sense.  Airlines gave their best customers bonuses for spending lots of money with them.  Today, though, every store I go into has a loyalty program.  I have a Fry's card, an Albertson's card, and a Safeway card (grocery stores);  I have a Borders and a Barnes and Noble card;  I have an Ace Hardware card and a Best Buy card;  For god sakes,  I have a TGI Friday's card.  Not to mention the cards from American, America West, Southwest, Hilton, Hyatt, Marriott, National, Hertz and probably 20 others I can't remember off-hand.  I carry a stack of the travel related ones in a big rubber band in the bottom of my briefcase.  The rest bulge my wallet up to about an inch thick, even when it is (all too often) devoid of cash.

Did I mention I hate all these programs?  Most of them have no real reward for purchase volume, you just have to have their card in your pocket to qualify for the best deal.  What is the point of this --its not like they are rewarding purchase volume (in fact, grocery stores do just the opposite, by rewarding the people who buy the least with better service via the express lane).  Why do I need to fatten up my wallet to unmanageable proportions just to get a store's best price? 

This analogy will date me, but its kind of like all those women who used to carry eggs and live chickens in their purses on Let's Make a Deal in the hopes that Monty Hall will ask for that item to qualify for some prize.   When I check out in the grocery store, they even put little asterisks by certain items to remind me that I am not getting their best price because I have not shown them their plastic card.  Come to think of it, my Monty Hall analogy may be flawed.  It is more like the pagan gods refusing to provide rain until their hapless subjects had sacrificed the right kind of goat.  Now how would that be for a loyalty program -- "I am sorry Mr. Meyer, but you sacrificed a goat, and Best Buy requires that you sacrifice an ox to get 10% off that DVD player".

Well, the revolt (or, if you accept the pagan religion analogy, the reformation) begins today.  I chucked everything in a drawer except the travel cards.  The book store cards are easy - its Amazon all the way now.  I used to drop in and buy some impulse items at my local Borders, but with free 2-day shipping for the rest of the year at Amazon (I signed up for the offer) there is no reason to buy anywhere else.  Amazon always gives me their best price without a piece of plastic in my pocket or an animal sacrifice and I don't have to deal with that irritating reminder from the cashier at Borders that without their card, I'm not going to get their best price.

Time will tell whether I can live with the increased grocery prices that will come from not having their card, but I am going to give it a shot on principle.  The revolt begins -- anyone want to join me?

PS - should I name this effort my loyalty pogrom?

UPDATE:  Thanks David, I fixed "principle".

UPDATE #2:  Per the comments, I do indeed understand that  one of the major goals of  well-structured loyalty programs is to gather data about the customer.  However, I would argue that out of 100 companies gathering customer purchase data, maybe 3 know what they are doing with it - meaning that they do more than just make nice powerpoint slides for the bosses with the data.

Take an example of my grocery store, Fry's.  Fry's has a loyalty card you must present at the register to get the best pricing.  Once you present the card, the checkout person will tell you at the end of the transaction how much you saved by using the card.  But half the time the people around me forget their cards, and the checkout person asks other people in line to lend their card, so the hapless customer who forgot theirs can still get the better pricing.  In other words, if the data is really being used, it is corrupted.

But how do they use the data?  Certainly bricks and mortar stores have limited options - they can't do like Amazon does and present me with a custom selection of goods when I first walk into the store.  They might send me a customized coupon package, but I have found no evidence that any loyalty program I have used has ever done this.  My guess is that most of the data just feeds the voracious appetite of the bosses to see data.  At best, the data might be used in vendor negotiations, but I doubt this too.

By the way, here is a bricks and mortar business that is actually using the data to provide a customized customer experience

UPDATE #3:  One of my friends who used to work with me in the pricing practice at McKinsey & Co. suggested that the cards may be a way of maintaining multiple pricing levels for different customers, much like airlines have done for years with business and leisure travelers.  The theory goes that the most price sensitive will get and use such a card, while the busier, perhaps wealthier and less price-sensitive shoppers won't bother.   This is certainly possible, but if this is the strategy, they certainly need to train their register people not to shout all over the store to find a card for shoppers that don't have one.  Since I put my Fry's card in the drawer last week, I have visited the store three times and every time the register clerk, without my asking, has borrowed a card from someone else so I could get the discount.

Posted on March 7, 2005 at 06:07 PM | Permalink | Comments (12)

Bailing out Euro Disney

This, from Marginal Revolution, is kind of funny for its irony value:

For years, France has fought what is sees as an American cultural invasion, powered by Hollywood movies, U.S. pop music and giant brands like Coca-Cola.  Now, it is going to great lengths to save an American cultural icon in its backyard: Disneyland

The French government has just finished helping Walt Disney Co. bail out Euro Disney SCA, the operator of two Disney theme parks outside Paris.  A state-owned bank is contributing around $500 million in investments and local concessions to save Euro Disney from bankruptcy.  This comes after 17 years during which French leaders have spent hundreds of millions of dollars and countless hours to ensure that the land of Money [ed: Monet?] could keep Mickey Mouse.  Still saddled with debt, Euro Disney is gambling that expensive new attractions and an improved tourism climate will deliver a turnaround.

I am not sure the Euro Disney site will ever work.  The main problem is that it was put in the wrong place.  The plurality of European tourists go to Spain for vacation - Spain is the Florida/California of Europe, with its warm weather and nice beaches.  Putting a theme park in northern France may seem geographically logical, on the transportation nexus between England, France, and Germany, but it makes no sense for tourism -- its in a great place for a distribution warehouse, but no one wants to take their vacation there. 

The equivalent would be putting a Disney theme park in Chicago.  Chicago is a wonderful town and sits astride the #1 transportation hub in the US, but few people want to go there on their vacations, at least not for about 9 months of the year (by the way, due to ocean currents the situation is not that comparable, but note that Euro Disney is actually NORTH of Chicago!)

Posted on January 27, 2005 at 03:08 PM | Permalink | Comments (2)

Its Not the CEO's Company

Too many CEO's of public companies in the 80's and 90's seemed to act like they owned the company.  In particular, the CEO's of Tyco and Adelphia appeared to be more interested in lining their own pockets with shareholder financed perks than with managing the company.  And, I highly recommend "Barbarians at the Gate" as not only a great story about the largest LBO of all time, but also as a narrative about CEO perks gone mad.

The fact is that public company CEO's are the hired help.  Talented, well paid, but hired help none-the-less.  Professor Bainbridge has a good post on the demise of the Imperial CEO

In theory, a corporation is run by its board of directors, whose decision-making is guided by the principle of shareholder wealth maximization. In practice, however, all too often corporations are run by their top managers for the benefit of those managers. Times are changing, however. In particular, the cult of the imperial CEO that dominated the business world in the 1980s and, especially, the 1990s is dying a slow death.

I hope he is right - it is past time for do-nothing OK-everything boards to reassert their primacy and fiduciary responsibility.

Posted on January 27, 2005 at 01:49 PM | Permalink | Comments (0)

Outsourcing to Your Customers

So what does valet parking, soft drinks, and firewood have in common?  More in a second.  First, some background.

We have had a problem over the last few years in our California campgrounds.  We sell a lot of firewood to campers, usually in bags of 6-8 sticks.  We are having difficulties getting a good, inexpensive firewood source in the Owens Valley.  We can find a bunch of people who will deliver stacks of firewood by the cord for a very good price, but only one person in the valley bags the wood.  As a result, the bagging step alone is effectively costing us between $1 and $2 a bundle, which is a lot for something we sell for $5-$6. 

In kicking the problem around, we considered what is becoming an increasingly common approach - if bagging is labor intensive and costly, lets see if we can outsource that step to our customers.  Outsourcing to your customers has been around for a while, but has gotten more popular of late.  Many furniture and equipment makers have been doing this for years, by outsourcing final assembly to customers.  While some of this is to reduce shipping costs, part of the benefit to manufacturers is that they save on assembly labor.

Service industries have started to get into the act of late.  Banks have been outsourcing teller functions for years via ATM's.  Most fast food restaurants have outsourced soft drink cup filling to the customers.  Grocery stores (and now Home Depot) have hopped on the bandwagon, providing self-service checkout for those who don't want to wait in line.

What all these examples have in common is that they seem to meet with customer acceptance if they provide some sort of value to the customer(short-circuiting lines, easier drink refills, the right amount of ice in the cup) , and not just cost-savings to the company.

Which brings me to the examples that really irritate me - of companies outsourcing their payroll to me.  [Note, I am a libertarian -- please do not interpret the following as a call for government action!]  Tipping, in its purest form, is a way to reward exceptional (meaning - beyond the standard or expected) service.  Unfortunately, restaurants and other service establishments have twisted this act of reward and generosity into having customers pay the wages of their staff.  Restaurants are simultaneously increasing tipping expectations (from 15% to 20%+) while requiring tips on more and more occasions by building them automatically into the bill.

The event that brought my irritation to a boil the other day actually happened valet parking my car at a restaurant.  As background, the establishment charged $4 to valet park your car.  Now, I am not a socialist, so I accept that value is not driven by cost but rather by what I am willing to pay for it, and I was willing to pay $4 to avoid having to walk a few blocks from the free lot  (those of you from Boston or NY are wondering what the fuss is about -- a valet parking charge of any amount is virtually unprecedented in Phoenix, at least until recently).

So I paid my $4, and then I saw the sign:

"Our employees work for tips"

What?  You mean I just paid your company $4 for what amounts to about 5 minutes of labor, and now you are telling me that in addition, I need to pay your employees' wages for you too?  This is pretty nervy - I mean, other than a percentage concession payment they are probably making to be the parking company at that location, what other costs do they have?  I didn't want to hurt the young guy actually doing the parking, but for the first time in years I didn't tip the valet.  That little sign turned, for me, an act of goodwill into a grim obligation, extorted from me by guilt. 

Which brings me back to firewood.  In outsourcing bagging to the customer, I did not want to tick off our customers like I had been angered by similar steps, so I set two criteria for my managers and any plan they came up with:

  • It had to save a substantial amount of money, some of which we could pass back to customers as a price savings
  • It had to offer the customer more value - a better product somehow.

The plan my managers hit on was to purchase a number of small milk crates that customers could fill with wood for the same price as the old bag.  These crates would hold a bit more than the old bag, so customers can get more wood for their money.  In addition, customers can pick out their own pieces of wood from the stack.  This is actually something that has been requested in the past - some customers complained the bags had too many small sticks, some complained they had too many large sticks.  Now people can get what they want.  We will try this out in a few sites to see what customer reaction is, and, perhaps more importantly, to see if we can hold on to our milk crates without them walking away.

Posted on January 18, 2005 at 08:46 PM | Permalink | Comments (6)

More Parking Lot Blogging!

I bet you thought I was kidding here when I said I might pursue my new niche in parking lot blogging.  Not so - here today is an idea from Ross Mayfield:

My uncle was a guru on wall street when I asked him where I should invest my paper route money. He said to visit the parking lots of Silicon Valley companies during the weekend. If the parking lot was full, there was a good chance they were close to a breakthrough or release.

At the corporations I worked for, this would probably just mean that everyone was working on Powerpoint presentation for an upcoming planning conference.  Anyway, I don't know much about Silicon Valley, so I don't know if it will work, but this is an interesting suggestion to use the Internet to gather intelligence:

But with enough mobloggers, a panopticon of performance may be a great leading indicator.  So this weekend I started the Parking Lot Indicatr group and people have taken interest.

Hopefully, the cars are not all there responding to an SEC inquiry.

Posted on January 15, 2005 at 08:40 PM | Permalink | Comments (0)

Roundup of HR-Related Posts

George's Employment Blawg has a roundup of a lot of good HR-related blog posts.

Posted on January 2, 2005 at 10:56 PM | Permalink | Comments (0)

Messed Up Pensions

Recently, the government announced that it would take over the United Airlines pilots pensions in the government-funded Pension Benefit Guaranty Corp.  This move is irritating pilots, because their pensions get reduced, and it is annoying to me as a taxpayer, that I have to bail out a company that was too screwed-up to fully fund its pension obligations. 

This points up the biggest danger of government guarantees -- it causes companies to be more reckless.  Back in the 80's, banks and S&L's made insanely risky investments with bank deposits.  The people who should have been most interested in this problem - bank depositors - ignored it because they felt safe that the government had guaranteed their deposits.  In the same way, airlines and other ailing businesses with defined benefit pensions cut back on pension funding when times were bad, and the very group that should have been crying foul - the company unions - did not, because they again counted on a bail-out.

I put the blame squarely on the company's management, who made a commitment to employees and then failed to keep it, and now are using government pension gaurantees as a subsidy to close their cash flow gap.  However, it is interesting to look at the role of unions too.  For decades, unions have demanded defined benefit pensions (ones that promise a fixed amount per month at retirement) and have opposed defined-contribution pensions (ones where the company promised to contribute a fixed amount today into an investment fund).  I assume the main reason for this is that unions do not want workers to bear the market risks on investments.

Over time, though, defined benefit plans have, despite this opposition, gone the way of the dinosaur (at least in private companies - most government jobs still have them).  This is for a number of reasons:

  • 401-K accounts now offer much of the same tax-deferral benefits for defined contribution programs that defined-benefit plans had
  • Defined-benefit plans turn out to have market risk too.  One is inflation - benefits levels may be guaranteed, but unexpectedly high inflation can effectively reduce them, while defined contribution plans, if invested correctly, will likely produce returns to offset these inflation losses.  In addition, during go-go stock markets, holders of defined-benefit plans found out that they did not enjoy the benefits of higher investment returns - their employers pocketed them (by the way, may Americans are discovering the same about their Social Security benefits).
  • As employees move around more, workers have found that defined benefit plans are not very portable, and tend to punish workers who do not stay for decades.  401-K plans are much more beneficial to workers who do not stay their whole career, or at least 20 years, in one place.
  • As United pilots have found, defined benefit pension plans are hard to police by current employees- there are just too many variables that allow companies to argue that the pensions are OK.  On the other hand, defined contribution plans are very easy to police- one can check the amount of contribution each month against the amount promised.
  • Finally, defined benefit plans rely on their company staying in business and fiscally sound for decades into the future.  This may have seemed a good bet at US Steel or United Airlines in 1950, but would anyone make that bet today?  For any company?

Posted on January 2, 2005 at 09:06 AM | Permalink | Comments (0)

Well, the Christmas Tree People Hate Me

Yesterday, my kids and I set out to buy ourselves a Christmas tree.  Instead of going to Home Depot first, like we usually do, we stopped at one of those tent places that grow up this time of year on vacant lots, mainly because the tent was closer.  We soon left the tent, though, moving on to Home Depot, but not before the tree sales person made sure to tell my kids that he thought their dad was a jerk.  Here is how we got there:

I walked around the lot - there were only about 20 trees up, which is kindof a small selection, but they were all sitting in a pan of water, which can be a good sign that they are trying to keep the trees fresh.  I immediately saw a couple of trees that would work fine, so I walked up to them, looking for a price tag -- no price.  I looked around to see a posted price list, or a list of prices per foot - no price list.  I asked the guy working there where the prices were - he said just pick the one I liked, bring the tag to the register, and they would tell me there how much it costs.

At this point, I turned to my kids and said "lets go someplace else".  In my book, businesses can operate and price most any way they like, but I can also decide if I want to do business with them.  I don't like doing business with companies that have no posted prices (similarly I hate doing business with people like car dealers whose posted prices aren't the real prices, but that's another story).

The guy asked me why I was leaving.  I should have known better.  I should have just said something like I don't see one I like.  But I actually tried to explain what I was thinking.  I said, "What would be your reaction if you went into a Walmart and none of the items had prices - if the only way you could find out what the prices were was when they rang you up at the register.  Would you shop there?"  What I left unsaid, because I didn't want to discuss it in front of my kids, was that I didn't want to be put in the position of having my kids fall in love with a tree (they get very emotional about this choice) and then having to tell them a few minutes later that sorry, it was too expensive.  I much prefer the Home Depot approach, where each set of trees is clearly marked, so I can steer them away from even looking at the $100+ trees.

Anyway, I confess I probably was huffy about it, because this is one of my hot buttons, and as I called my kids to me the guy told them their dad was a jerk.

I probably am.  I know this guy is trying to make a living.  He may well not have had prices posted just out of lack of sophistication rather than any sinister desire to trap me into buying more tree than I wanted.  So I probably need to be publicly chastised -- feel free to use the comment section to do so.

Posted on December 12, 2004 at 11:25 AM | Permalink | Comments (4)

Sears and Kmart -- Two Drunks Propping Each Other Up

Back in Texas in the 1980's, a number of large tottering banks merged, in an attempt at survival.  The result was called two drunks propping each other up, and it seldom worked.  The classic example is the Pennsylvania-New York Central railroad merger which ended in one of the most catastrophic bankruptcies of all time, and the largest industry nationalization in US history.

It was exactly these precedents that occurred to me today when I heard that Sears and Kmart are merging.  Scrappleface apparently was thinking the same thing, but is much funnier than I am.

UPDATE:

Other good examples in the comments.  I fell over laughing at "the EU".

Posted on November 17, 2004 at 05:12 PM | Permalink | Comments (1)