07.28.07
Posted in General Management at 22:09 by lnxwalt
For the past twenty-five or so years, ever since President Reagan was in office, the American business press has been enchanted by “entrepreneurs”. We define an entrepreneur as someone who starts a fast-growth business, especially a business that operates in a technology-related field. We get excited about speeches and articles and books, as long as the person producing the information is one of the scarce members of this exclusive club.
Is American business really about this kind of entrepreneur? An entrepreneur, according to the meaning of the word, is a risk-taker, someone who risks his or her own capital in establishing a business venture. An entrepreneur, then, is really either an owner-manager or an equity investor in a business that is either new or expecting to expand. Equity investors are very important to funding someone else’s dream, but are most often going to fund “me-too” businesses until there is no doubt that the owner-managers are on to something.
Do you disagree? Read the business section. Isn’t it amazing that the companies getting funded are usually all in the same field of business and even the same neighborhood of the same city? That’s the herd mentality. People that have funds to invest also have assets to protect, and so they are going to be more conservative about how they invest than they would have been during their years of earning the funds with their own labor.
So who is it that really builds the economy and puts people to work? It is the owner-manager. The true builders of the economy are owner-managed businesses (OMBs). Who employs more people in your local community? Who is faster to respond to the needs of customers? Is it big multi-national corporations? I think not.
In fact, MNCs are busy laying off American workers and replacing them with contracted third world workers. In the third world, these workers have few protections and fewer benefits, so companies can not only pay less, but avoid expenses for things like break periods, overtime, occupational safety requirements, medical / dental / vision insurance, workers compensation insurance, disability insurance, medical leave, pensions, the forty hour work week, and environmental protections.
Go to your locally-owned pizza joint. See all those photos of youth sports teams? That is because the owner helped pay for uniforms and equipment (and sometimes even field rentals) for those kids, so the owner gets a small plaque and a team photo to put on the wall. See that jar on the counter with the cheesy photo of someone wearing a cheap wig? Read the label–the local owner-managed business is the one helping raise a little money to help a local resident pay for cancer treatment.
Look at your local non-profits. Who is it that is giving personal time to help improve the community? Is it the manager of the local big chain store? No, it is the local business owner.
Who is it that hires your brother-in-law that has never worked in his life? Certainly not big corporations? Who is it that hires your cousin who just came out of prison and promises that he’s going to get his life together? Not big corporations.
Surprisingly enough, owner-managed businesses (OMBs) are the foundation of a strong and resilient economy. OMBs are frequently also SLOBs [Small, Locally-Owned Businesses]. An economy built upon OMBs and SLOBs survives with little apparent effect when one of the businesses closes. On the other hand, an economy built upon one or a few large businesses suffers hardship when one of those businesses closes.
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Posted in General Management at 3:05 by lnxwalt
James Robertson thinks that China has damaged its brand with its recently-reported quality problems.
There have been too many stories recently involving Chinese goods with problems - they could ask GM what that kind of inattention to detail does to a brand’s image.
China never had a reputation for quality. Their reputation has always been low-price and low-quality. All this is about is finding that the quality was lower than we led ourselves to believe, and that it is often intentionally so.
Think back to business school. There are a few major strategies for any business. One of the key decision points is whether to differentiate your products by features or to concentrate on lowering your costs of doing business. If you choose to compete based on lower costs, you have some options such as passing on lower prices to your customers in exchange for expected gains in market share or pricing similarly to your competitors so that you have higher margins on the same fraction of sales.
In general, companies buy goods from China because of the lower cost. This generally means that quality and other features are reduced, but the size of the cost cut makes it appear worthwhile. For the most part, this is an indictment of American business managers, that they are so devoted to cutting their costs that they refuse to consider the loss of quality. Think back to the 1980s, when American-owned businesses were struggling to rebuild their reputations for high-quality products. Everyone was searching for ways to be more “excellent”. They were sending delegations to Japan to learn from that nation’s companies how to make quality products.
What is the number one thing they learned about quality? Was it statistical process control? Was it pretending to accept “employee empowerment”? Was it that quality is not just the job of “QA”? How about this one: quality is best described as the variation (in performance, construction, appearance, etc) of the product output?
We spent quite a bit of time in college classes looking at statistical methods, as well as management theories and organizational adaptations. Really, as a company, you have more ability to enforce quality (by whatever measure you use) if you have two things: clear insight into the processes and ingredients being used and the authority and influence to change things that may not produce your intended level of quality.
How do you get these two things? Either (1) do it in-house, even if in-house means a company-owned and operated facility overseas; or (2) have it done for you by someone else in your own vicinity, where you can keep an eye on them and the work they do. If you go into a foreign country and have to give up control in order to be there, your future is in someone else’s hands. If you have your product made in a foreign country by a company there, you are depending upon a different set of laws, different history, different attitudes and ideas, because that company and its employees will live by whatever their society dictates, not what you expect or request. This is not in itself a bad thing, but when you voluntarily use ingredients or subassemblies from a country that is known for the low quality of its output, you shouldn’t use them in anything that is critical for your company.
If I start “Joe’s Cat Food, Inc,” then my products reflect on the image of the company. If I start buying ingredients from overseas companies that I cannot properly supervise, then those foreign suppliers have the ability to wreck my company’s reputation.
So, then, quality, or the likelihood of quality, increases when suppliers are nearby and under the same legal and social restraints. Quality likely decreases when suppliers are out of the area and under different legal and social restraints. That is, variations (as measured by statistical methods) are likely to be more frequent when your suppliers slash outsource partners are outside your own country.
I live in California. For the past three months, I have been working in New Jersey. In California, if I go out for lunch, there are certain standards for the food places (not that they all meet them, but the standard is still there). New Jersey has standards, but they are different than California’s standards. Not better, not worse, just different.
China has different standards. Labor standards. Financial reporting standards. Food standards. Drug standards. It isn’t that China is bad, just different.
SLOBs [Small, Locally-Owned Businesses] and OMBs [Owner-Managed Businesses] can reduce the variability of their output (and hence improve their quality) by looking closer to home for their suppliers. Larger businesses can still source all over the country and the world, if they select sources for their quality and features (and for the ability to oversee operations), rather than just price.
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07.27.07
Posted in General Management at 0:55 by lnxwalt
Yesterday, based on a preview of Ford’s earnings report, we discussed their situation. Now we know that Ford actually profited in the second quarter of 2007.
Ford does not expect to be out of its slump until 2009. Because the company is just about to begin negotiations with its employee union about employee concessions, some analysts wondered whether the profit came at a bad time.
Ford’s main business, its North American automobile operations, still lost money, even after huge cost-cutting efforts (primarily labor-related costs) and lower warranty repair costs. The overall company made money due to these factors plus special items, such as the sale of its Aston-Martin unit.
One analyst asked where the company would find other costs to cut, now that it has reduced its workforce by 30%. This signals a change–previously, analysts got excited by layoffs, because this tends to have a fairly quick effect on the bottom line. Layoffs, then, are the “white sugar” of management techniques. While they tend to spark an immediate burst of energy, it quickly burns off, leaving the company depleted. This tends to cause companies to follow with another wave of layoffs.
If you cannot run your company effectively, lay off your employees. Maybe the cost reduction will help hide the fact that you are incompetent long enough for you to retire with a large payoff.
Seriously, does anyone really still believe that American workers are the problem? Isn’t it the management that are making the boneheaded moves that harm the business? Who decided not to invest adequate resources in hybrid vehicles when gas-guzzlers were selling well? Who then jumped on the bandwagon–late–and even then waffled about it? Who had record profits by sticking to big, inefficient, light trucks and sport-utility vehicles when they could have been building for the future?
Since the managers at Ford do not seem to know what to do, I’ll make a few suggestions:
- Several years ago, Ford had the slogan “Quality is job 1.” Ford should be focusing on making problem-free, long-lasting vehicles. There should be a ten year, 120,000 mile powertrain warranty and scheduled maintenance, not because the company needs to prove itself (although it really does), but because management and labor together are confident in their work and their product.
- When consumers view commercials for auto dealerships, it is often “sale price” or “rebate” or “special financing”. Once entering the lot, the old back-and-forth of negotiating begins. Now, when two acquaintances buy the same vehicle, they should get the same price–regardless of negotiating skills. When people share what they paid, some people find that they overpaid. That person may then choose to deal only with a different dealership or automotive brand, solely because of the impression that they got cheated. Your dealer franchisees need to have effective leadership in putting the customer first, selling the vehicle that the customer needs, even if that is the lower-priced economobile rather than the higher-priced luxury vehicle. They need to focus on long-term satisfaction of their customers, rather than having the transactional get all I can right now attitude.
- Fuel prices. Draw yourself a graph. The bottom left corner should say “Today.” The top right corner should say “Next Year.” Make a heavy black line connecting the two. Now, place that graph in a place where you will see it every day. Act as though prices will double in the next year. Make your vehicles such that people who buy them will not have to park them and walk to work when prices rise again.
- When one of your managers says, “let’s make a big, gas-guzzler, so we’ll make more profit per vehicle,” assign him to read and follow number three above.
- Financing. Recognize that the reason for the finance company is to get more people into Ford-made vehicles. Run the finance company in such a way that it contributes to your sales. That should include the branch that handles lower-income buyers. Lower-income buyers and first-time buyers, if you treat them properly, represent future repeat buyers. Authorize the finance company to do all sorts of creative things to enable buyers to obtain and keep Ford-made vehicles.
- Management bonuses and benefits. Anything that you won’t give to the people who actually produce your products, don’t give it to managers either. The robber baron era was 100 years ago. Work with your employees and the communities where you have facilities to satisfy your customers.
- Suppliers. There has been a major move by North American automobile companies to squeeze their suppliers. Suppliers have to cut costs, meet quality standards, ship items based on just-in-time requirements (which often means they are holding inventory instead of the big auto makers holding it), and be quick to retool when any change is requested. In exchange, they get to sell to the big auto makers until someone else beats their pricing. Far better to have a group of suppliers that meet present requirements and make a commitment to help them remain profitable without the self-destructive anti-labor moves that have characterized recent moves by big auto makers.
- Employees. Tie them into the equity side of the company, whether through stock or profit-sharing. Make sure that they get rewarded when something positive happens, such as when the company makes money on their labor or the stock price goes up. It is amazing how much they will become cost-cutters and waste-watchers and profit-pushers when these things show up in their wallets too.
Now the thing is, if Ford’s managers don’t already know these things, they should resign immediately. A high school kid learns this in his first month or two working in a local fast food joint.
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07.26.07
Posted in General Management at 1:17 by lnxwalt
http://news.yahoo.com/s/nm/20070725/bs_nm/ford_results_preview_dc_1
Ford, the longtime number 2 in the U.S. market, continues to lose money. According to the article, Ford lost $1,200,000,000.00 last year and $282,000,000.00 the first quarter of this year. Ford’s recovery plan is simple: sell off the profitable British luxury brands to get enough cash to finance closing plants and cutting employees, then stick it to whomever doesn’t leave during contract negotiations.
Ford’s problems are really not labor-related. Ford made a big bet on the SUV and light truck market. For several years, it paid off nicely. Many of the top ten selling models each year were made by Ford. I can still recall hearing Lindsay Wagner on their commercials saying “doesn’t anybody else make cars any more?”
So what happened? Two things:
- Ford missed out on the hybrid market. They then promised to bring hybrid technology to their big selling models. Meanwhile, Toyota and Honda were selling hybrids like hotcakes. I think that once Ford actually did start to bring out some hybrids, sales were not as great, so they vacillated.
- Ford’s focus on big, gas-guzzling vehicles got them caught off-base when the price of fuel rose. For a good portion of the past three years, regular unleaded gasoline has been at or above three dollars per gallon in Southern California. At certain times, the price has neared four dollars per gallon. Suddenly, many buyers were looking for hybrids and economobiles again. Ford had little to offer to those buyers.
I believe they should have anticipated these things. Way back in the late 1970s, during the original gas crisis, the OPEC oil embargo, Ford and Chrysler had been focusing on higher-margin large vehicles (remember “land yachts”?) and suddenly could not even give their huge and thirsty vehicles away. After that time of hardship, no automobile manufacturer should ever cease to have a ready supply of economical vehicles available for just such an occurrence. Oil prices rise and fall based on events in a very unstable part of the world. What kind of executive fails to account for the risks that oil price increases will stall sales of the largest and most profitable vehicles?
Ford acts as though its only problem is its labor costs, after its executives made such a critical error. Granted, the UAW contracts may raise its costs above those of its Japanese-owned competition. In that case, Ford’s leaders should have openly advocated for federally-required employer-paid health insurance and pension plans at some standardized level–imagine how their labor relations would be right now if they had done this–which would have placed those competitors in exactly the same position.
Ford is in an industry where there is a tremendous capital investment necessary to begin or to continue to compete. There are possibly even greater investments necessary to exit the business, with all of the potentially toxic metals and compounds that are used. This makes it a field where smaller, locally-owned, owner-managed businesses are not going to enter and could not be viable competitors if they did enter. This gives the choices that are made by a few people in a small number of boardrooms an enormous impact on American competitiveness.
It is important for Ford, Chrysler (are they still DaimlerChrysler?), and GM to recognize that the rules have changed. It may have been management against labor years ago, but if American-owned automobile manufacturing is to continue, labor and management are going to have to unite around what is best for the company and its employees, even at the cost of getting rid of executive dining rooms, company-supplied vehicles, special parking areas, anti-fraternization policies, and bonus packages.
Tax policies affect the weighted average cost of capital. If American companies have a significantly higher WACC than their foreign counterparts, such as return on equity needing to be higher because dividend payments are taxed first at the corporate level and then at the individual stockholders’ level, then Ford and other companies that are affected by the issue need to make it clear to citizens and congressional representatives that this is a problem. This could, if true, cause companies to seek riskier capital structures based on leverage.
If these were tiny companies, they would see that you can only go so far by laying off productive employees. You eventually have to keep the people who make your product or service and the people who sell it to customers, while trimming down and lowering the pay of those whose only contribution is telling productives what to do. Because these companies are so large, we see wave after wave of the same failed strategies: layoffs and plant closings, with rebates and other financial incentives to try to stimulate sales from people who would not otherwise buy at the time.
Big companies, with their overpaid big-egoed CxOs, are failing because they are still living in the late 19th century. Those days are long gone, thank God, and American businesses need to be smaller, locally-owned, owner-managed, and closely associated with their employees and their communities. SLOBs and OMBs are the future of American business in most industries.
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07.23.07
Posted in General Management, Political, Small Business at 10:07 by lnxwalt
I am currently working out of state, over 2700 miles from home. On my daily phone call home, the kid says that he wants his best friend to go to an out-of-area college.
“Why?”, I asked.
“Because I don’t want him to get stuck here.”
That is a telling indictment of our local economy. This year’s high school graduates are making each other promise to leave the area and never return. They see what our elected leaders (and most businesses with locations in the area) do not see. Until we find a way to offer a decent living to substantially all of our local residents, this remote area we call home is toxic waste.
I resolve the situation by working mostly out of the area–locations like Reno, NV; Albany, NY; Binghamton, NY; and the unforgettable Pasadena, CA–but it is getting old. I would certainly take a look at an opportunity that put me in one place (such as the Atlanta area) that gave me the ability to truly launch my business because I’m actually going to be around to run things.
The sad thing is, this is not a bad place. It has its positives and its negatives like any other. But our leaders have consistently used taxpayer funds to try to attract large, out-of-area businesses to relocate or expand into the area. These corporations are not full of fools. They realize that they can play one area against another and win tax breaks, payroll subsidies, financing help, and even free land (well, $1 land). Then, these companies often pay their employees so little that it does not really even help the local economic situation.
If our local governments would only support (and not just with their lips) SLOBs, a lot of this could be reversed.
Use Local Governmental Funding
Our local governments spend thousands of dollars per year on brochures, trade show materials, and the annual “High Desert Opportunity” show. The problem is, the targeted companies are getting the same pitches from other areas all around the nation. If it makes financial sense for a large company to come to the area, they will come without a lot of dollar-waving. If it does not make financial sense, they may come anyway, but your cities and residents will have to absorb the difference.
Instead, we need to devote most of that funding to training and establishing small, locally-owned businesses (SLOBs) that already have an incentive to remain in the area. This might entail providing both technical (that is, industry-specific) and business (that is, general to any business) training and advice. It could also involve providing space in an incubator program to get businesses started.
Another way to help is to provide grants and loan guarantees to SLOBs for the formation & establishment or expansion of their businesses.
Leadership
Follow-Through
The most important factor, after the funding mentioned above, is follow-through.
In the early 1990s, I used to work for Carl’s Jr Restaurants. The best (most effective) manager I ever had was there. He came in one night at 1AM, while we were cleaning up the restaurant, then bent down and cleaned out a floor drain. If you don’t know it, a floor drain collects fluids so that they do not pool on the floor. However, a floor drain also collects solids, which must be removed so they do not clog the drain and pipes, and so they do not decay and fill the kitchen with foul odors. Because the solids have been soaking in fluids all day, cleaning floor drains is an unpleasant experience, so most employees avoid it.
When Vince, the manager, cleaned the floor drains himself, none of us could make any excuse. By cleaning the floor drain that one night, he assured that we would keep them clean afterward. A fantastic lesson. I later worked for a competitor where the philosophy was “I’m not paying a manager $20 per hour to sweep the floor.” Not surprisingly, only a very few employees would put much effort into cleaning the place.
If our cities really want to reap the benefits of SLOBs, they need to follow-through. When purchasing, seek small, locally-owned vendors. Ensure that they are selling you locally-produced products and services whenever possible. It does not really help the local economy when you buy software from a local vendor who forwards most of the revenue to an out-of-area company. Neither does it benefit your community when you hire an out-of-area contractor to build your roads if someone in your community can do the work at an acceptable level of quality and within an acceptable time frame.
Relentless Commitment To SLOBs
Just as selling your community to out-of-area businesses takes complete commitment (you just wait until a new sewer bond is about to be passed that will affect them!), so you have to be completely committed to supporting smaller, locally-owned businesses.
One fast food chain, for example, used to put large banners on the side of their buildings to promote the monthly special. The local inspector would come and issue a take-down order and sometimes a fine. One of the largest supermarkets continually had large banners on their building. (In either case, it was a local branch of an out-of-area corporation, so it is difficult to feel sorry for them.) However, it does show a curious problem: big corporations seem to buy laws to suit their desires, which somehow seem to have the most impact on smaller businesses.
If you want to heal our local economy, you’re going to have to stop spreading the city’s butt-cheeks to large corporate interests. If a SLOB cannot have a banner (or paint advertising on their windows), then neither should a big, out-of-area corporation be allowed to have a banner or paint advertising on their windows.
Meeting and talking with your local chambers of commerce is also important, as you are likely to find areas of concern. However, the very smallest and most financially vulnerable businesses are not likely to be members. You have to go out of your way to find them and to involve them in policy discussions both at the mayor-and-council level and at the city enforcement bureaucracy level. And that means modifying some policies that would otherwise appear to have general support, so that they are less harsh on SLOBs.
Summing Up
If we want the Victor Valley area to be attractive to the brightest and most ambitious individuals, we have to stop kowtowing to large out-of-area corporations and instead cater to the home-grown enterprises that will stick with the area through the hardships of life. We need to assist these locally-owned businesses with formation, with finances, and with regulation. We need to buy from these businesses and promote these businesses. We need to encourage these businesses to produce locally, with local labor and materials.
The crudeness was unavoidable. Sometimes it seems like our cities give corporations everything that they want while penalizing the smaller, locally-owned businesses that actually provide most jobs. If this makes you change your behavior, it was a good thing.
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