Too big to fail is just what we need

Time is running out on the #1 topic – creating jobs.  The Sunday papers and TV pundits are all finally agreeing on the same thing- this could be a jobless recovery through the next 4 years.  The stats are overwhelming in their magnitude.  One pundit said “we would have to create 150,000 net new jobs each month for 48 months just to lower unemployment to 9%”.  An article in the press says unemployment will increase before it comes down, through at least this year.  Driving by Port Elizabeth yesterday on the NJ Turnpike, I saw mountains of shipping containers, where 2 years ago not a single container or trailer chassis was in sight.  Nothing is coming in our out.

Contrast this to a picture on the front page of yesterday’s NY Times news section.  In full color there were 7 workers making wind turbine blades.  The very kind of work we can do here if it were not for the little fact that China is rapidly becoming the world’s leading supplier of wind energy parts. Same way we’re dependent on OPEC for oil, we could be dependent on China for wind turbines.  European companies are responding to the Chinese market by opening plants there, and I suppose GE and our suppliers could do likewise, but that does not help our unemployment situation back home.  The article also mentioned how Chinese state owned banks back these new ventures.  I’m not trying to say all of China’s new energy generation will be green, but I am trying to point out that vision, on the part of a people, a government and banks can rally a country to prosperity.

Vision on a grand scale can have immediate impact.  There’s an early stage maglev train project under development for a high speed line between Washington, DC and Baltimore, 40 miles away.  This project is estimated to provide 16,000 man-years of construction work and another 500 man-years of annual operation/upkeep. That doesn’t even include the rolling stock.  So the real way to bring down unemployment is not just by opening a few stores here and there and basically waiting  it out.  Our only way out of this is to put on our vision goggles and think big.

We need a national dialog on our next ‘man on the moon’, that huge scary, audacious goal capable of energizing the population.  Perhaps we can have a national focus on reversing pollution, or racing China for wind turbine leadership, just as long as it has two traits, 1- it’s a huge leaping goal, and 2 – the average person ’gets it’ and feels it.  The list is long. It has to take on the form of an Industrial Policy, combining tax credits, education, financing by our banks/PE funds and most importantly, it has to have the status within our society formerly accorded hi-tech.  It has to be so important, it’s hands-off to our current political stalemate. The President’s new budget can be debated but one part is unfortunately clear – without ascribing blame, we’re in over our heads in debt and there are only a few ways out.  We can either hope and pray for some breakthrough political compromises (sure!) or hope for massive growth.  Since ‘hope is not a strategy’, we need to plan and execute.  The default path is to wane and I deeply fear that is the path we’ll take by doing nothing.

Moribund societies think in terms of former glories, limited current resources, structural unemployment-brain drains and their “proper place in the new order”.  They think small and personal and their overall society reflects this lack of vision.  We need to redefine ‘too big to fail’ to be a positive, constructive part of our new shared Industrial Policy.

Rich Eichen is a Managing Principal of Return on Efficiency, LLC, who’s website is www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years experience reshaping companies, Operations and key initiatives. He can be reached at richard.eichen@growroe.com

A Camry is not a Pinto and a T-Bill is not a Synthetic Swap

Toyota is at the top of their game.  Good for them in stopping production of their best selling models until they can figure out what’s causing the accelerator pedal to stick in the 3-2-1- blast off position.  The lesson they learned is not from the Tylenol recall, but from the Ford Pinto scandal of the 1980’s when a document was put forth allegedly claiming Ford did a cost benefit analysis, concluding it was cheaper to pay for the fatalities than to recall millions of cars for an $11 repair.  For those who can barely recall this, Ford produced a compact car, one of the first import fighters, with this nasty design flaw whereby, in a rear end collision, a bolt could puncture the gas tank, transforming the car (as was said at the time) into “the barbecue that seats four”.   Ford lost a very public court case, and paid millions in damages but more importantly, it began their slide which took basically a generation of new drivers unfamiliar with the Pinto debacle from which to recover.  Everyone is saying this is a big hit to Toyota’s reputation for quality, but I disagree.  To me, it shows a company willing to get it right and not willing to sell a car it knows to have a serious defect.  Imagine going to a dealer to buy a Camry and hoping yours won’t be the 1 in 10,000 that will run away and kill you. Remember how Audi handled the Audi 5000 issue?  It cost them 20 years in the US market.

Now in today’s Bloomberg there’s an article saying Wall Street is recovering from the recession based flight to quality and going back, very aggressively, into those Synthetic Swaps which caused all that havoc only a year ago.  Why?  Well, first of all, these exotics are hugely profitable which is a very good thing.  Secondly, the people who buy them are very sophisticated money managers at big pension funds and the like.  The problem is not the instrument, but the originating entity who may be so leveraged it will need a bailout if all the Swaps trigger at the same time.  How would we fix this?  The usual answer is regulation but that’s not what’s needed.  The biggest problem with these exotics is the lack of a simple engineering risk mitigation process called Failure Mode Event Analysis where we take the worst case scenarios at a market level as well as by portfolio and work them through, trying to see how to mitigate risk up front.  Perhaps the best path forward is an SEC run Financial Services FMEA committee of SMEs and Quants (no lawyers or Compliance people), mapping out these complex instruments,  finding out which begets what when failure occurs.  This ties in to our Toyota discussion – stop selling them until we understand them and fix them appropriately.

As we write and read this posting, the world’s political and economic leaders are rubbing shoulders in Davos, networking and overdosing on truffles.  It’s where real business is really done.  Reports are last year’s speakers, mostly bankers, were replaced with regulators this year, with everyone trying to figure out how heavy a burden will be imposed.  Worst yet, small business (a leading area of job growth) tends to borrow from regional and Community banks who, until they figure out the new rules of this new game, are not lending no matter how much the President begs and jawbones.  So let’s stop the rush to regulating to look like we’re doing something.

OK, there’s various schools of thought on who began this crappy economy, but with all due respect, Financial Services is any economy’s source of ‘vitamin green’ and making it as hard as possible to raise capital or borrow is not the answer.  Making it as hard as possible to write instruments you don’t really understand makes sense.  Stopping issuing exotics until we dissect them and deeply understand the interactions between various complex instruments, maximum leverage levels and such makes perfect sense.  Then you regulate only those factors and combinations needing oversight, do it fast and let the economy recover.

Toyota didn’t wait for a judge to tell them what to do, neither should Financial Services.

Rich Eichen is a Managing Principal of Return on Efficiency, LLC, who’s website is www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years experience reshaping companies, Operations and key initiatives. He can be reached at richard.eichen@growroe.com

Chairman, CEO and now Convincer

Yesterday it was announced that the current Chairman of GM, Ed Whitacre, will be named as permanent CEO as well. According to Mr. Whitacre, “I don’t know how to be a chairman and not a CEO”. He was, if you recall, the head of that other shining star of Corporate America – AT&T. In all fairness, he does seem to be a take no prisoners leader, easily firing anyone who took too long to get into their new positions and affect change.  We have written in this Blog about some missteps at GM of late. But, perhaps this might be the first time in recent history when the board of GM might have taken a step in the right direction.

It seems that Mr. Whitacre is serious about paying back the $52 billion the government of the US and Canada gave them so they could get over the “too big to fail” scenario.  Mr. Whitacre’s actions are beginning to reverberate in the market. He banished the former CFO to China. The Buick and Chevrolet Brand Managers have been jettisoned from the business. He has begun to refocus the marketing spend away from trucks more toward cars and he is combining sales and marketing and consolidating control of GM’s core North American market under one executive. He also seems impatient to spur the plodding culture of GM, where decision by committee, an isolated upper management and fear of risk produced mediocre cars for years.

These are all great steps; but the jury is still out as to if he can significantly initiate a “culture change” in the lumbering GM. Driving cultural change through an organization is hard enough, doing so without the participation of all levels will be impossible. To date we have only seen these changes occur at the top. Mr. Whitacre will need to enroll the talent at the supervisory level as well. Why? Because they know how the operation really works and without their help and buy-in Mr. Whitacre won’t get accomplished what is required for GM to turn the corner.  One of the main problems is the Talent levels knowing ONLY how GM did it and will no doubt push back without offering anything constructive in return.  Perhaps there’s a process here which can make a serious contribution to GM – convene an Employees Convention to come up with a plank of ideas which they will implement, spanning the Plant Entrance Gate to the deep carpets and think wood paneling of the GM tower in Detroit.  On the other hand, he did (as we mentioned earlier) fire a series of old-hands leaders who were reshuffled into new jobs and this sends the exact right message to the Talent levels.

Like other large and old-line organizations, there are a hundred years of layers pressed into the fabric of GM.  Only if and until Mr. Whitacre reaches down into the bowels of the organization to convince the supervisors and the people on the assembly line something new has to be done, can he affect change and save GM. Mr. Witacre is the commander now and he had better get out there and motivate his enlisted soldier to keep on fighting.

Tom Bergeron is a Managing Principal of Return on Efficiency, LLC, who’s website is www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years experience reshaping companies, Operations and sales organizations. He can be reached at tom.bergeron@growroe.com

If Somali pirates can have a banner year, why not me?

While many firms had a rough year, the Somali pirates had a banner year in 2009, with 214 new prospects leading to 47 new customers, a significant rise over 2008’s 111 new prospects and that represented a 200% increase over 2007. Just the other day they closed a $7M deal with a Greek shipper. What are they doing right and can we look at our own organizations to see if we’re pirate material?

They respond quickly to shifts in their market

With all the various patrols in the gulf, the pirates have moved operations to the Southern and Eastern coasts of Somalia which remains largely not patrolled. Have we looked at our salesforces to see if they are calling where the competition is the heaviest and not looking for new, fertile ground not that far away?

They understand their market and employ technology to extend their reach
Time was, these pirates were low tech, using RPGs and other run of the mill sales techniques. Today, they use sophisticated electronics, heavy weapons and well as larger and faster ocean ready boats. Are we still using the same sales methods in this poor economy? Have we adapted to changing customer and competitor facts? For example, until recently, per Consumers Reports Magazine’s 2009 Customer Satisfaction Survey for cars, most consumers were very green conscious. Today, it’s quality, safety and value. Unless we adapt our messages, product portfolio and pricing, we’re selling 2007 in 2010.

Many of us are postponing technology decision until the very last minute, which in this economy makes eminent sense. Unfortunately, the world is not as binary as that. What we should be saying is “what parts of my technology is hurting my ability to either sell or deliver”? For example, you can probably live quite well with a somewhat dated and inefficient General Ledger system. Given today’s transaction volumes, you can probably get by for a while. However, what about your configuration and order entry systems, allowing you to price customer orders, or the link between the configuration/order entry system and Inventory tracking, so you really know how much you can build at any given time, optimizing raw material spend?

The pirates attack the ship, not the crew – ex, they know their true customer
Pirates know their customer is not the poor 3rd world sailor. Not to be course about it, but truth be told, I’m not sure if the President of a major shipping line stays awake at night wondering about crew status compared to wondering if his multi-million dollar 1,000 foot long supertanker is Ok. They fire at the bridge, intimidating the captain to stop the ship. Now that’s having a brand. If you can be in a 50 foot boat and intimidate a 1,000 foot ship to stop, you’ve achieved brand equity and you obviously know your customer very well. Who is our customer in this economy? Is it the big box store stocking our product or is it the end consumer who goes to that store? Given what little money we have to increase (or hold even) marketing, figuring out who actually makes the purchase and getting into their mind is crucial.
They also seem to target customers worthy of high profits, not just revenue. After all, which is harder to collect – $7M from a Greek shipping tycoon or $25,000 from a retiree on their 40 footer? IBM recently announced record operating results, mostly due to their very successful switch from commodity hardware to software and services, plus a very smart focus on account profitability and not just top line revenue.

Now the pirates are killing each other to get more than their fair share of a recent $7M sale

An article on Yahoo yesterday showed that even perfect capitalists are not always perfect. The pirates forgot to lay the rules for inter-departmental or cross territory revenue sharing and aligned compensation. Each pirate deal is paid out on a complex formula involving multiple sales representatives, delivery people, investors, officials, etc. That method worked Ok when the ship was relatively average sized (and so was the ransom), but when they closed this one deal of a $7M ransom, all civility went out the window and they began shooting each other. Our lesson is to think about how we divide territories and compensation to see if we can put in place some revenue sharing rules allowing and facilitating cooperation and joint activity. More to the point – are our reps out there selling 120% or are they also wondering if they can grab part of someone else’s revenue based on some technicality? Make sure all your rules for splits, selling/delivery credits are well codified and published so everyone keeps their eyes on the horizon and not on the rep in the next cubicle.

Rich Eichen is a Managing Principal of Return on Efficiency, LLC, who’s website is www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years experience reshaping companies, Operations and key initiatives. He can be reached at richard.eichen@growroe.com

Golf Digest has quite an interesting cover for its January, 2010 edition

Right big smack center is a picture of a crouching President Obama geting golf tips from Tiger Woods and it shows how print media, with its long lead times,  can take it on the chin every now and then.  Obviously this was planned months ago, and was printed and sent to their subscribers weeks ago, but still, what timing.  Many people today are debating whether print media is dead, if only electronic media will survive.  My take is less presentation media supremacy, instead focusing on the real values of independence, fact checking and analysis.  Not to mention digging for new facts and exposing cover-ups.

Be it via e-reader or on paper, the real value of journalism is content and that costs a lot more money than assembling a bag of links and sending it out along with some pop up ads.  Is there room for both e-media and accurate, well written content?  The WSJ has a thriving business model; the Times tried a charge for service and failed.  If you ever visit a newspaper building, you’ll see rows of writers and then an entire factory of paper movers and house sized presses, leading to loading docks and trucks.  I recently toured the Bloomberg building in NYC and saw what a 21^st Century news organization looks like.  Instead of printing presses, there were rows of programmers and system administrators, along with radio and TV studios.  If in newspaper plants you can sense the ink, here you could sense the bytes.  The number of printing related jobs must be immense and costly, distorting any business model.

Fortunately, there’s a business model emerging here. Many physical businesses use outside parties to provide them with private labeled ebusiness front ends, in many cases ranging from ordering to fulfillment. GSI Commerce and others come to mind, serving such companies as Toys R US, Ralph Lauren, Major League Baseball, and so forth and you can’t’ tell it’s not the actual company.  Another firm, INTTRA, is owned by multiple ocean container carriers (i.e.: Maersk) providing a full online booking, documentation and tracking service.  At some point, the remaining newspaper organizations may have to create an INTTRA like service, in a GSI like wrapper.  Thus, content is delivered via an industry cooperative/association infrastructure, while the GSI component is the custom look, feel and branding of each newspaper/magazine, i.e. no loss of identity.

All well and good, but here’s another approach.  Who has a nationwide set of pipes big enough to handle this bandwidth load without having to re-run cables across the country?  Power companies are using their hi-voltage lines to send internet traffic and are rapidly building out their own last-mile for the smart grid to be used to both conserve energy and to handle the expected loads of a nation of electric vehicles all needing recharging nightly.  Utilities already have massive billing and customer service (and sometimes customer dis-service) organizations and under deregulation, are hungry for new revenues. It can also help transform utilities from slow moving behemoths with ‘go along to get along’ cultures to faster paced agents of innovation. Everyone wins.

Rather than build its own servers and distribution infrastructure, print media should team with these utilities, charging a flat fee for content under their own logo,  included in a regular monthly bill so content becomes another utility – expected to always be available on demand, quality assured.

Rich Eichen is a Managing Principal of Return on Efficiency, LLC, who’s website is www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years experience reshaping companies, Operations and key initiatives. He can be reached at richard.eichen@growroe.com

This just in – Planet GM discovers rarified air

It’s no surprise to me that Fritz Henderson resigned; frankly, I was shocked that, in the infinite wisdom of the GM Board, they even gave him the job. As a matter of fact back on June 2^nd in this blog we said that Mr. Henderson was not the right guy for the job because he was too connected to the past at GM.  I don’t know Mr. Henderson personally but he seems to be an articulate, smart, upbeat kind of guy. But during his career (even though he wasn’t in charge) GM has steadily lost market share and even worse designed and made awful cars that Americans’ just were not inclined to buy.

If you believe in the philosophy, “you are what you eat”, you could say that Mr. Henderson has been eating the “GM dog food” for the last twenty-five years and it was not a healthy diet. GM is big, lethargic and from my personal experience, lacks the gumption to fix itself. In my own consulting career, I have engaged GM multiple times to address different parts of the business. In every single engagement our teams made significant strides to improve productivity or remove non-value add or even compress cycle time but every engagement when complete went no further than one small pocket of the company. It seemed that the management overseeing the successful project got enough data and knowledge and then tried to fix things on their own. Frankly, not a bad management posture “learn and do” if your people are sufficiently trained, hands-on experienced, empowered and don’t mind playing ‘bet my job’ to affect true change. Not what a consultant wants to hear because if it all works going forward, it was the internal team that pulled it off.  If it doesn’t work, blame the consultant who very well may have advised against going it alone with so little hands-on experience. Done correctly, it’s healthy for an organizations take on this ’we’ll do it ourselves’ mantra; it fosters the collaborative spirit for craft workers and management to work together facilitated by a consulting team.

It always surprised me that in particular, GM (of the big three) seemed to consistently be on “Planet GM” where the terrain and the air were different. But, back on earth where mere mortals live, GM’s decisions seemed to be counter intuitive. For instance, why would GM choose to make cars in two different divisions that were almost exactly alike except for minor “skin” differences? Did you guess, Buick and Oldsmobile? Eventually, GM had an internal epiphany and closed down Oldsmobile under the pressure of heavy losses and a very embarrassing lawsuit where it’s long-term tag line of its unique  Rocket 88 engine was not true; they all used the same engines. What about the acquisition of country brands, around the globe, to gain market share as they did with Saab and Opel? These two products were never integrated into the supply chain to gain economies of platform design and build. When Mercedes Benz acquired Chrysler the company quickly integrated the previous generation Mercedes Benz “E” Class into the Chrysler “300” Series, significantly reducing R&D and eliminating duplicity, thereby reducing cost. Oh, by the way, did I mention, it also made the Chrysler 300 one of the most popular sedans in Chrysler’s history!

Back to my opening premise it is no surprise to me that Mr. Henderson was asked to resign. The last missive that was sent from Planet GM was within the last two weeks when Mr. Henderson announced to the press that GM was going to begin repayment of the massive loan the American people made to GM. This repayment was being made at a time when GM’s business model was tenuous at best; GM had not finalized all the asset sales and worst of all the company had a negative cash flow. The air on Planet GM must have some odd ingredients because Mr. Henderson’s announcements made no sense to this mere mortal. But, it is indicative of the culture at GM. Edward Whitacre Jr., the current Chairman and interim CEO, has said that a search for a new President/CEO will begin immediately, hopefully it will be someone from outside the industry because selecting someone like Bob Lutz could only continue the morass at GM. Perhaps, the GM Board should take a play from the Ford Motor Company playbook. Ford’s Board hired outsider Alan Mulally who, by the way, took no money from the government and turned a profit when the other two in Detroit biggies filed for bankruptcy.

This is not a GM specific problem; most firms with long-tenured executives have similar problems but even these can be turned around, as Lou Gerstner did at IBM in the early 90’s.  Sometime you have to go outside to get it done.

Tom Bergeron is a Managing Principal of Return on Efficiency, LLC, who’s website is www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years experience reshaping companies, Operations and sales organizations. He can be reached at tom.bergeron@growroe.com

58% will decrease their holiday spending by approximately 25%

You can make a case that people who travel on vacation overseas during a deep recession must have disposable cash.  Hard to relax if you’re spending the money which could save your house or if you think your job is at risk.  Last week, on a business trip overseas, I saw multiple Duty Free shops banged up, closed, ‘For Rent’.  Not many people wearing non-business attire carrying bags of trinkets. Lots of anxious looking café owners peering forlornly onto the sidewalks.  Perhaps this was due to the exchange rate of USD 1 = Euro 1.5, but I think it’s the canary in the coal mine.

In the ‘States, the recently published Black Friday weekend retail results had average spending falling to $343 a person, down from $372 a year ago (per the National Retail Federation).  While the drop in spending per person was only around 8%, a recent survey of a panel of ‘Highly Involved Moms’ from a well known market research firm (National Data) has some scary implications for Holiday Season shopping:

Holiday spending in 2009 vs. 2008

- 58% will decrease their holiday spending by approximately 25%
- 18% will increase their holiday spending by approximately 35%
- 24% will spend about the same

Category spending most on in 2009
- 29% said Clothing
- 27% said Electronics
- 22% said Toys
- 13% said Gift Cards

Traveling by air in 2009?
- 67% said No
- 33% said Yes

While items already in the stores were imported months ago (note big issue for the US economy as I didn’t say ‘manufactured’), it does show a bad 2010, no matter what the economic and market gurus say about a V shaped recovery.  If people won’t spend during this Holiday Season, forget about anything but basic replacement based consumption for next year.  As a planning premise, the consumer is out of the market and so our recovery will have to come from somewhere else.

During that business trip I ran into the proprietor of a Wine shop in San Juan, Puerto Rico, with an interesting perspective on the recovery.  In Puerto Rico, the Pharmaceutical industry was lured to the island by multi-year tax breaks (the same way we lured foreign car plants to the Southeast) and now has some 60 factories on the Island.  Why not, he proposed, offer a US Corporate Income Tax free ride for 10 years on any manufacturing jobs returned to the US?

The point is everyone is starting to realize that a nation of consumers working for, or as, importers/brokers/service providers/house flippers and suing each other all the time is not really sustainable for the entire country and we need to focus on US value added and not just cheapest import price and adjust public policy accordingly.

How can we do this in our tightly interconnected globalized economy? We most certainly can bring jobs back to the US with a new manufacturing policy based economy as my friendly wine merchant proposed.  At the very least we have to focus on being the source of the most value added in every product, including the design, product vision, local support and contracting/sourcing components because unless you supply the most value added inputs in a cash to cash cycle, you’re supplying cheap labor.  Even China has this reality.  Apple’s iPhone is made from components sourced mainly in Japan and South Korea, based on a US design, but only assembled in China, who gets only about 5% of the total iPhone value.  Foreign car manufacturers get this.  Based on US Gov’t data, those foreign car plants in the Southeast actually supply only around single digit value add in the form of final assembly and painting.  For example, GM engines are often made in Mexico, while those of BMW and Mercedes Benz are produced in the Fatherland.  Thematically, they use their expensive labor to produce high value add goods which we, at cheaper labor rates (remember – we have to work like dogs so a German car worker can take 10 weeks off by law), put through final assembly or drive off the ship and polish up before it hits the dealer’s showroom.

Economists love to quote statistics and charts, and the BLS has a 2009 beauty showing US manufacturing actually holding its own and slightly growing from 1980 on.  These tend to be in high value added items, such as computer chips, CAT tractors, defense equipment, etc.  Meanwhile, most of us buy things on a daily basis having  much less value add, such as clothes and consumer electronics and that is where the huge number of manufacturing jobs reside. And so, there’s a statistical imbalance between quoting a healthy manufacturing sector and total US manufacturing employment as a percent of the economy. If you get HBO, look at their documentary on the garment industry, ‘Schmattas – From Riches to Rags’ to get the picture and its effect on people. Having grown up in a family with blue collar manufacturing based roots, I got to see that a factory is the center of a micro-economy of parts and supplies vendors, and so every factory returning to the US would employ not just its own workforce, but a set of concentric rings of employees. For example, where China uses cheap labor to produce cheap consumer electronics, we could use robotics and flex assembly lines in lean processes.  We would then have people produce not just assembly line equipment, but the ‘O’ rings, fasteners, welding rods, lubricants, spare parts, components, etc.

We used most of our Cash for Clunkers dollars to help mostly Japan recover faster than we are, because our leaders looked at revenue numbers, not value add. Rather than rely on economic theory about the markets to run our economy, we should focus on value added in the US as our underlying rationale for all decisions.  In 1933, during the Great Depression, Willie Sutton was caught by the FBI and asked why he robbed banks.  Looking amazed at the stupid question, he replied “because that’s where the money is”.  In 2009 and beyond, during the Great Recession, we have to focus on “where the value add is”.

Rich Eichen is a Managing Principal of Return on Efficiency, LLC, who’s website is www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years experience reshaping companies, Operations and key initiatives. He can be reached at richard.eichen@growroe.com

Disregard the sound of innovation passing you by

The number of US firms making horse-drawn vehicles dropped from nearly 5,000 in 1904 to only 88 by 1929 and shortly thereafter, it was just a handful of artisan shops.  By the early 1900’s, general availability of components made assembling a carriage at low cost very easy.  Was their means of production so nailed down (sorry for the pun) they couldn’t see they were actually in the people/freight vehicle business?

This is hard to say from someone who has spent the last 15 years implementing lower cost operating strategies and methodologies, including Six Sigma and Lean.  Problem is, like the early Business Process Redesign world of the 1990’s (the Dr. Hammer and Index era), you can make your production so finely tuned that innovation becomes a disruption. Case in point is Toyota, which produces great but mostly bland cars.  In a world where cars, particularly luxury cars, had spotty reliability, Toyota’s quality was their competitive advantage.  Now with virtually all cars reliable, quality is the new norm and Toyota was taken back a few months ago by the founding Toyoda family to put some passion back into it. How do you lock down proper process while still embracing innovation?

The knee jerk answer is listening to your customers, which is so intuitive it has to work.  Well, it does, but only under 2 conditions.  First, the fundamental way you use the product has not changed in eons, basically because the underlying biology or physics are unchanged.  Office chairs come to mind.  People have sat the same way since the African Savannas 200,000 years ago.  You can make the chair more ergonomic or stylized, but basically it has to have a seat and back.  Secondly, your product or service has to be so widespread no single group of vocal customers or power users/consumers can hijack the conversation and misdirect the product to suit their needs while you miss emerging markets. Twitter is well regarded for monitoring its millions of users, observing widespread use of new user-created features and adaptations.  Those with the most ‘legs’ are then built into future releases.  The counter example is a long defunct software company, ISSCO Graphics, which by listening to its few power users and largest customers missed the desktop graphics market transition from a select few customers on Sun workstations at $7500 per license to mass adoption of PowerPoint at $250 for the entire Office suite.

Innovation, the game changing new product/service or business model, is as much about intuition as it is about low cost, high quality production.  Steve Jobs realized his iPod was a game changer while walking in NYC shortly after rollout, noticing someone with the distinctive white ear buds, then turning a corner and seeing two more people and so on.  All during an era dominated by the Discman and it’s evolutionary competitors.  The safe bet was to develop a white (Apple’s signature color) Discman clone, produce it at low cost and high quality.  Design it, implement Six Sigma defect free production and let the units slide off the conveyor and right into the dustbin of history. Instead, Apple used intuition and imagination to take 70% market share and control of the future by defining the new market of listening to customized content rather than transporting at-home music to the outdoors. Similarly, Apple could not get shelf space, no matter what the slotting fees, at the big box stores where most people still buy PCs.  No doubt, these stores did the ‘on one hand vs. on the other hand’ equation and decided not to totally tick off Microsoft, Dell, Sony and HP.  Apple instead built their own retail stores, which sold both product and experience, and now Best Buy has Apples on their shelves.  Innovation creates new revenue streams.

To innovate, the culture has to be the antithesis of Six Sigma.  What, how can this be, Six Sigma is the default answer to every ill in business, or so goes the common logic.  In a fast moving product cycle or where an entirely new product is required, the focus has to be reversed from “how can we have no defects” to “what is the customer wanting to experience?”   This is less the land of quantitative analysis than it is based on a heuristic view of the world. There is a transition point where the innovated product becomes a ‘standard’, but first, there has to be that innovation.

This is not to say Six Sigma does not have a place.  If you are making the same thing for years, it’s a no-brainer to lock down a production line into a well oiled machine, forcing vendors into ever tightening quality parameters so assembly/integration/mixing is easier.  As example is a syringe, where the parts supplied by vendors have to snap together without rework so billions can be assembled each year.   Another would be food, where once the recipe and form are finalized, cranking it out for years becomes the norm.  Candy bars come to mind.  Take a look at how long these bars have been around:

• 1900 Hershey’s Milk Chocolate Bar
• 1916 Clark bar
• 1923 Reese’s Peanut Butter Cups
• 1923 Butterfinger
• 1923 Milky Way
• 1925 Kandy Kake (the original name of the Baby Ruth),
• 1925 Oh Henry
• 1925 Mr. Goodbar
• 1930 Snickers Bar
• 1932 3 Musketeers Bar
• 1933 Kit Kat
• 1938 Nestle’s Crunch
• 1941 M&Ms

The point is someone had to invent each item, ex: innovate, and then ramp up production. Without the innovation, the ‘secret sauce’, each candy would have been just another flavor of some else’s product and probably failed.

Will your company survive by simply making what it currently does cheaper and faster?  Wonder how it felt to be in one of the 62 now defunct US locomotive factories hearing Charles Edgar Duryea’s horseless buggy and the Wright Brothers’ Flyer pass by?

Rich Eichen is a Managing Principal of Return on Efficiency, LLC, who’s website is www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years experience reshaping companies, Operations and key initiatives. He can be reached at richard.eichen@growroe.com

What happens on Wall Street stays on Wall Street

There’s talk now of ending the anti-trust exemption for Insurance companies, forcing them to really compete in each state without inter-firm ‘alignment’ of rates and coverage terms.  We’re now talking about changing the business model of medicine, where the service providers will be paid on outcomes, not procedures.  Wall Street is being pilloried for selling highly risky products and being paid based on sales or profits.  Now the talk is to change their compensation to a longer range plan, mostly in stock and as Goldman does, forcing them to keep 75% of their stock until retirement.  By the way, Bear Sterns employees had a similar culture and when their company blew up, so many homes went up for sale in the Hamptons  we had to mint a whole new generation of entertainers to buy them up. And for each suggested ‘fix’, our esteemed legislators, mostly lawyers (who are well known for their own efficient business operations), think up a new Agency to regulate them.  Soon, we’ll need the Agency Agency to regulate the regulators.  Let’s call a spade a spade; we already have an agency to effectively control Wall Street, no need for another.

The Nevada Gaming Commission was founded in 1959 to license, control, audit and tax the casinos in that state and has, overall, done a great job.  Currently, its functions include Investigations (of current and prospective employees), Corporate Securities (for publically traded companies),   Technology (wonder how they would look upon High Volume Trading if it meant the dealer showed me your cards 30 milliseconds before you got them), Audit, Tax – Licenses and Enforcement.  Say what you will, this is a tightly controlled industry which is why, even with the bad odds of beating the House, we all enjoy a trip to Vegas. When was the last time you enjoyed a trip to Wall Street, Second Grade?

Proving that my idea is not so novel and truth is stranger than fiction, Swaps (more generally, Derivatives) were specifically exempted from state gambling laws by Federal Legislation in 1992. In 2000, the Presidential Working Group on Financial Markets (PWG) recommended some minimal oversight on OTC Derivatives contracts but the power of Lobbying was in full force and hence the Bailout of 2008. Treasury submitted draft regulation to Congress, this past August, looking for “comprehensive regulation of all over-the counter derivatives”.  ‘Comprehensive Regulation’ would include open trading and clearing (the actual settling up on the bet) for Standardized OTC Derivatives (in casino parlance, think slots, table games, craps and ‘the window’) and new standards on non-standardized bets (like those made in the back rooms of the Social Clubs in my old Brooklyn neighborhood).

The likelihood of this occurring is near zero, which is a pity.  Too much money is being spent on K-Street and J-Street for this to take hold, no matter how good an idea this may be and then we have the Wall Street insiders comprising the PWG itself.  How ‘inside’ are ‘insiders’?  How about the Secretary of the Treasury, or his designee (as Chairman of the Working Group); the Chairman of the Board of Governors of the Federal Reserve System, or his designee; the Chairman of the Securities and Exchange Commission, or his designee; and the Chairman of the Commodity Futures Trading Commission, or his designee? You can hear the revolving door spinning. Even Congress, in hearings going on this week, expressed severe reservations about expanding the Fed’s reach because it and other regulators were asleep at the switch.

Main Street needs this new legislation.  Even if we are not actual users of derivatives to mitigate risk within our companies, recent events shows how secretive and not fully understood instruments hurt us all.  If not enacted we have a fallback plan – turn the Derivatives markets over to the Nevada Gaming Commission and comp everyone for a good dinner. Steve Wynn would run a great Goldman Sacks.

Rich Eichen is a Managing Principal of Return on Efficiency, LLC, who’s website is www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years experience reshaping companies, Operations and key initiatives. He can be reached at richard.eichen@growroe.com

Exit 9 to Stupidville is paved with gold

Back in May of 2009 I posted a blog entry “Taking Exit 9 to Stupidville” where I commented about the situation with Ken Lewis, then the Chairman and CEO of Bank of America and why he allowed the Federal Government to jam the acquisition of Merrill Lynch down his throat. Shortly thereafter the Board stripped him of his Chairman title while he and his management team were “high fiving” it in their local bar. I questioned why the board didn’t take his CEO title as well.

Now, Ken is leaving the bank as of January 1, in what appears to be an early retirement. Enter the government once again. Kenneth Feinberg, the anointed Obama Pay Czar has stipulated that because of the banks poor performance Mr. Lewis should not be allowed to take his $1.5 million salary. What about the $60 million in bonuses the bank is going to pay him? $1.5M isn’t punishing him, at his level it’s a rounding error.  If you think he was such a bad boy take something that is actually punitive. It’s a joke to think that the Pay Czar with all of his alleged power is going to do something so trivial. If that is the case we surely don’t need Mr. Feinberg.

I am a strong believer in the “free market”, survival of the fittest etc. In most cases, I am not a believer in government intervention, especially when the government intervenes and does something patently stupid. What is even worse is that no one on the B of A Board raised an eyebrow but I’ll get to that in a minute.

If Mr. Feinberg wants to set a punitive bar for Mr. Lewis or for that matter any executive, set the bar high enough that it will be a real deterrent. Let Mr. Lewis have his salary for coming to work every day and going to meetings but take away the $60 million in bonuses. Taking away a $1.5 million and paying $60 million makes no sense and frankly is hardly punitive. A much bigger question here is; why has no one on the Board made any overtures about salary and bonuses due Mr. Lewis?

I have served on the Board of Directors for several companies over the years and I always took the position very seriously. Especially, when I came to the Board as a “friend” of the CEO; I had a fiduciary responsibility to the shareholders and not my friend. Being asked to join a board is not about being in a beauty contest. It’s about bringing to the Board a set of skills and experience that complements the other Board members as well as the company. The job of the Board is to advise the CEO and his team about hidden pitfalls regarding actions on which the company is about to embark. Or perhaps issues that come up regarding audit, compensation, ethics etc. The Board is also meant to be a sounding board for acquisitions and divestitures and how that might play into overall strategy.

Is Mr. Feinberg the only one on the planet who perceives that Mr. Lewis’ on the job performance was something less than stellar? If that is the case and I don’t believe it is, why is it that not one of the B of A Board members had their voice heard either way? The outward appearance is that the entire Board abdicated to Mr. Feinberg. Shame on the Board! In my view Mr. Feinberg should not be making decisions about compensation limits and size.  It is the Board’s responsibility to set upside and downside limits on compensation issues and enforcing them! Until B of A’s Board steps up to its duty, Mr. Feinberg will and perhaps we should punish the Board by withholding some of their compensation.

Tom Bergeron is a Managing Principal of Return on Efficiency, LLC, who’s website is www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years experience reshaping companies, Operations and sales organizations. He can be reached at tom.bergeron@growroe.com