Telling It Like It Is

THE ENTERPRISE--GM & Wal*Mart

THE ENTERPRISE

Thanks to some of my friends and to a couple of recently published works, I have this issue of THE ENTERPRISE "half written" but it's a long one! The first topic, GM, is a headline in so many news stories, I wonder what I can add. The answer is, I can add a lot, but I'd rather restate the words of another executive with whom I agree. That, surprisingly, is the CEO of GM, Rick Wagoner. This poor guy may have the toughest job in America (well, maybe after George W. Bush). The second part is about the wisdom of Peter Drucker, and about Wal*Mart. (Who else?)

-----Large Excerpts from: "A Portrait of My Industry" by Rick Wagoner, Chairman and CEO of General Motors
Since mid-October, General Motors has announced plans to cease production at 12 North American manufacturing facilities and eliminate 30,000 jobs by 2008; trim $1 billion in net material costs in 2006; and, in cooperation with the United Automobile Workers, reduce GM's retiree health-care liabilities by $15 billion, or about 25%, for an annualized expense reduction of $3 billion. The reason for these dramatic actions is no secret: GM has lost a lot of money in 2005, due to rapidly increasing health-care and raw-material costs, lower sales volumes and a weaker sales mix -- essentially, we've sold fewer high-profit SUVs and more lower-profit cars. What is less clear is why things turned sour so fast for GM, as well as for other American auto makers and suppliers. To put it another way, why are so many foreign auto makers and suppliers doing well in the United States, while so many U.S.-based auto companies are not?
Despite public perception, the answer is not that foreign auto makers are more productive or offer better-quality or more fuel-efficient vehicles. In this year's Harbour Report, which measures manufacturing productivity, GM plants took three of the top five spots in North America, including first and second place. In the latest J.D. Power Initial Quality Study, GM's Buick and Cadillac ranked among the top five vehicle brands sold in America, ahead of nameplates like Toyota, Honda, Acura, Nissan, Infiniti and Mercedes-Benz. And GM offers more models that get over 30 miles per gallon (highway) than any other auto maker. The fact is, we're building the best cars and trucks we've ever built at GM, our products are receiving excellent reviews, and we're running the business in a globally competitive manner.
So why, fundamentally, are GM and the U.S. auto industry struggling right now? Intense competition, for one. The global auto business grows tougher every year, and we accept that. ... Beyond that, our performance in the marketplace has not been what we've wanted it to be. ...But competition and marketplace performance are not the whole story. To fully understand why GM and the U.S. auto industry are struggling right now, we have to understand some of the fundamental challenges facing American manufacturing in general -- challenges well beyond the control of any single company.
One is the spiraling cost of health care in the United States. Last year, GM spent $5.2 billion on health care for its U.S. employees, retirees and dependents -- a staggering $1,525 for every car and truck we produced. And the figure is going up again this year. Foreign auto makers have just a fraction of these costs, because they have few, if any, U.S. retirees, and in their home countries their governments fund a much greater portion of employee and retiree health-care costs.

*******Some argue that we have no one but ourselves to blame for our disproportionately high health-care "legacy costs." That argument, while appealing to some, ignores the fact that American auto makers and other traditional manufacturing companies created a social contract with government and labor that raised America's standard of living and provided much of the economic growth of the 20th century. American manufacturers were once held up as good corporate citizens for providing these benefits. Today, we are maligned for our poor judgment in "giving away" such benefits 40 years ago.*******

...Another factor beyond our control is lawsuit abuse. ... Another major concern is unfair trading practices, especially Japan's long-term initiatives to artificially weaken the yen. ...
There are other issues, of course, but my point is this: We at GM have a number of tough challenges that we must and will address on our own -- but we also carry some huge costs that our foreign competitors do not share.... It's critical that government leaders, supported by business, unions and all our citizens, forge policy solutions to the issues undercutting American manufacturing competitiveness. We can do this. And we need to do it now."  
URL for Wagoner's entire article is http://online.wsj.com/article/SB113383985657014845.html

Start By Creating "Hot" Products--with Emotional Appeal--But That's Not All of It
I cut a lot of Wagoner's words out and strung together some of his lists of challenges without listing his explanations.  The reason I did this is to make a couple of points. Things are seldom as simple as they seem, and GM's woes are no exception.
---1) One thing he didn't exactly say is that GM no longer makes many cars that "excite" the buying public. That is a huge problem. Car buying, after all is an emotional decision tempered by logic and economics. If products aren't exciting, that is a huge, maybe insurmountable disadvantage from the start. And no amount of advertising can "convince people" that they are exciting. It takes a combination of time,styling, performance, quality, value and some indescribable element I'll call "the sizzle factor," which is built up from an accumulation of experiences, reviews, word-of-mouth and the fact that the product is "HOT." Or it's NOT.
---2) After Peter Drucker's recent death, I went back and started re-reading one of his landmark books, Concept of the Corporation published in the late 1940's. In it, Drucker used GM as the company he studied and I wasn't far into Chapter One when I read this statement:  "The large industrial unit has become our representative social actuality; and its social organization, the large corporation in this country, our representative social institution." Now page back up and read Wagoner's paragraph that I separated from the text with ********.

The large corporation's role in the social fabric of America and global competition
As I read further in Drucker's book, I realized that nearly everything he said could have applied as much to Wal*Mart today as it did to GM a half-century ago. Consider this phrase of Drucker's "The large corporations do not employ more than a minority of industrial labor but their labor relations set the standards for the nation, their wage scale determines the national wage scale, their working conditions and working hours are the norm, etc." Is Drucker talking about GM circal 1950 or Wal*Mart circa 2005? Is history, sort of repeating itself, in a slight different form?

"Don’t Blame Wal-Mart" --"The giant retailer isn’t evil—just caught up in the global economy"
Finally (yes, I will end this one soon), I want to close with some words from Geoffrey Colvin of FORTUNE in his column entitled "Don’t Blame Wal-Mart" --"The giant retailer isn’t evil—just caught up in the global economy"

"[Robert Greenwald’s new documentary] new film [Wal-Mart: The High Cost of Low Price], awful though it may be, is a cry from the hearts of people being wrenched from the old world into the new and not liking it. There are millions of them, and they will demand to be heard in the media, the markets, and government. And the world’s largest corporation is, inevitably, the most inviting target they can find. Why they’re unhappy is no mystery. In the new world it’s possible to coordinate supply chains and distribution networks with precision and efficiency never before imagined.
Result: big-box retailers with extremely low prices. Wal-Mart’s critics (including the new movie) dwell heavily on how the company heartlessly drives small-town stores out of business. One never hears the obvious problem with that allegation: that Wal-Mart can’t drive anyone out of business.(my emphasis added) Only customers can do that, and millions of them happily drive right past those little stores because they’d rather pay lower prices. Of course it isn’t just Wal-Mart that draws them. Home Depot and Lowe’s have been death for small hardware stores, Zales for mom-and-pop jewelry shops, Sports Authority for the old sporting goods retailers. They’re all using the plunging cost of computing power and telecommunication to create previously impossible business models that give customers what they want. That trend is not going to stop.
The new world also makes it impossible for employers to pay people as they used to. Maybe the most important part of the new world for many Americans is the advent of a genuinely global labor market, in which workers around the world compete. Of course nobody in Mumbai can directly take the job of a retail clerk on the floor of a Wal-Mart. But a lot of labor is fungible; a given person could work in a store or factory or office. So global competition for workers in factories or info-based jobs, where work can be offshored, pushes down the pay of millions of others—bad news for Wal-Mart employees and potential employees.
...Again, welcome to 2005. Everybody’s medical coverage is getting stingier because in a global economy, where U.S. workers compete with those in Datang and Wal-Mart competes for capital with every other business on earth, American companies can’t continue paying the world’s highest health-care costs. Don’t blame Wal-Mart; blame America’s inability to devise a national health plan that takes the burden off employers.
This film’s greatest disservice is to tell people, as it does in its closing sequence, that victory consists of stopping Wal-Mart. That’s a delusion. The only true victory will be adapting to the world that’s coming, like it or not and regardless of who brings it."
©Nov 28, 2005 Issue of FORTUNE magazine, p. 69

In a future edition of THE ENTERPRISE, I'll review a new book by Charles Fishman, a columnist for FAST COMPANY magazine who wrote an insightful article a couple years ago (the one I was interviewed for and quoted in). Charles took a leave from his columnist duties to finish his book on Wal*Mart, which is just now being published. I suspect I will agree with some of it and disagree with some--but we'll see when I get the advance copy that's coming my way.

Until then, get that Christmas shopping done, listen to some Christmas Carols and smile a bit (or a lot) more than usual. In just a week, Santa Claus is coming to town!

Best, John

THE ENTERPRISE--Innovation & Service

THE ENTERPRISE--Innovation & Service

Customer Dis-Service
I went furniture shopping today--at a major department store chain. This is not my favorite pastime, but we needed a new recliner chair, and compared to the jam at the mall, this was an easy choice. After sit-testing 4-5 models, my wife and I actually agreed on one. (Amazing!) I won't go into the price, maker, specs, etc. except to mention that our choice was favorably influenced by a brand name we knew and felt good about--one that made the first furniture we bought when married 41 years ago. Then came the fun.(NOT)

Of course no furniture is ever "in stock", so that meant ordering it, but only from "the warehouse" (which must be located in some village in a remote and distant Asian country). Why? Because our chair (with one of the 4 stock fabrics offered), purchased in mid-Dec. MIGHT arrive by mid-Jan. Then there was a $65 delivery charge. If we wanted to pick it up, (when it arrived at the local distribution center), there was "only" a $15 handling fee. What? I guess that's extra pay for the warehouse person to move it from the dock to our vehicle--if we had one that would carry a large recliner.

Then there was the fabric treatment, to prevent stains. At $89 it's a steal--NOT. Finally, since this chair had some rather esoteric functions, there was the warranty. Which was either 5 years, 3 years, or 1 year, inversely related to the likelihood of failure (more likely to fail = shorter warranty). And, if we want service , the retailer will do it ONLY if the chair and what failed is under warranty. Otherwise, (I guess) we have to import an elf from the Black Forest, (or a native of that Asian country?) to fix it--or I get out my roll of Duck tape...  (I wasn't going to identify this retailer, but this is a note to Terry Lundgren. Instead of posing for FORTUNE, try out the "experience" you are giving your customers. Maybe your brand new $30B chain needs a tune up before it declares success.)

Somehow, this retailer's policies and the multiple "nibbles" (add-on fees, services, premiums) for more price/profit, took the excitement and joy out of a major purchase, and added nearly 1/3 to the "sale price." Only the Sales Associate redeemed herself by offering to wait to enter the order until Wed. when an added 10% Discount sale started. Since we are waiting a month, what's 3 more days?

The Easy Way
Experiences like this make it apparent why going into a Wal*Mart or Lowe's, slapping down the old Visa card at the checkout and wheeling "it" out the door is so appealing. As Wal*Mart (and Target and Costco before it) carry more and more upscale merchandise, and make the purchase a "clean deal," more and more consumers shop there and bypass the so called "full service" (joke) stores. FYI--Don't try "simple shopping" at Best Buy, because "it" doesn't work there either. In fact, I read that Wal*Mart is offering extended warranties on electronics now...but at 1/2 the cost of the major electronics stores. I don't know if that's good news or bad news.

Do you ever use your own service?
Earlier this week I had two awful web experiences (make that 3, but there were two at the same retailer--Sears). USA Today may be America's Newspaper, but try to buy a gift subscription and you'll quickly see that no one in its management ever has used its intractable/illogical web site/process. I finally got it ordered only to discover that in providing the recipient's email ("so they could be contacted in case of problems, I was told, later"), an email was sent to them, revealing the Christmas present 2 weeks early. I was also told that the errant email would be deleted. It wasn't. And when the first one was intercepted and deleted, a second came and blew the surprise anyway. DUH.

Then there is Sears. I needed hardware/auto sort of stuff, so of course, that is right down its alley. I won't belabor the details except to say that after multiple e-mails and a lengthy phone conversation about duplicated orders due to web site malfunctions, the Sears rep made a return call (as promised) to assure me the duplication was taken care of--it hadn't been--my son still got two of the same item on his birthday. I have no idea if the order was cancelled as I was told, but clearly the D.C. guys at Sears didn't hear about it. Will I get charged twice? Anybody taking odds on that one?

I was having lunch with a local executive who is very web knowledgeable and experienced in that field. She related her problems with yet another well-known web site or ordering entertainment tickets, and her blunt comment to the "famous" Chairman of that company. Bottom line, he had no idea that their site was awful to use. He'd never used the site. Nor, he confessed, had he ever used the web to buy anything. So much for knowing the business you are investing in.

Walk the Talk? Or NOT?
It's so easy to SAY the nice sounding words about how important customers are to a company. Just go on hold sometime, and you'll hear them every 15-30 seconds. But most of these people are LYING to us. If they really cared, they might (just once in a while) call their own toll-free numbers and see what a person has to go through (3-4 layer menus leading to dead-end loops). Or maybe they should actually try to buy something via their web site, or deal with their own customer service function. Or they might even shop their stores "in disguise" (that means not wearing the designer suit or announcing yourself to the store manager upon arrival.) It's a fair bet he or she could shop for 30 minutes or more, in jeans and a sweatshirt and never be noticed by a store associate, (unless the store associates sell on commission).

Even the best get stuck in a rut...
In case you haven't caught up with your reading, Dell, the king of making PCs to order is struggling to rack up those huge sales gains these days. Gee, 2Q-'05 earnings were only up 28%. Could the fact that the sheer math of generating big sales gains is tough for a $50 Billion company. At some point, they have to obliterate competitors whose sales are equal to the GDP of small nations. Or they have to EXPAND THE MARKET via innovation. That is lots harder.

Wal*Mart discovered this too. At $250 Billion, even a 5% sales gain is a whopping $12.5 Billion in new sales, more than most retail chains sell in total. Dell compounded its problems by selling lots of cheap computers to unskilled users, and then moving customer service to someplace half-way around the world (next to that remote furniture warehouse?) and installing, let's say 2-3 phone lines. So after holding for interminable wait-times, listening to how important you are, you talk to someone who seems to speak English, but neither understands you nor has a clue about how to help you. So you get put on hold again. Or, if you are unlucky, you get cut off and have to start over. Only after many tries or enormous time spent, MIGHT you get real help.

That's enough for now...you get it.
You know all this. You've been through it. That's why I use Amazon's One-Click system and it's easy Return Label creation systems. And I use Apple computers, and pay full list (we all do), so I might as well go to the cool Apple store and buy them. There are actually demo products you can play with and people who know what they can do. Walter Mossberg, the technology columnist for the Wall Street Journal just gave the new Apple iMac an unabashed review naming it as the best computer to buy (unless you are a heavy duty gamer, or tie into a proprietary work-related system).

Apple, with its 5%+/- market share and Steve Jobs with his turtle neck and jeans may not be the end-all be-all, but he knows, and I know, and now you know too...that the answer in business in this early part of the 21st Century is to innovate, innovate, innovate, and then service, service, service. As long as the price isn't outrageous...the pleasure is worth it. Gotta go now, to plan my trip to the Apple store, to play with the new iPods. Santa Claus is coming to town!

Best, John

PS: Anyone who thinks there are commodities where innovation is impossible, I'd say "lettuce," and if that isn't clear enough, "bagged lettuce." A multi-billion dollar business was created to relieve the time pressures of chopping up a head (or stalk) of lettuce and a few veggies. For 3 times the price (and I'm sure a lot more profit), one can buy 1/3 the product, chopped and bagged in any of two dozen or more lifestyle packaged versions. Now that is "Innovation"--solving an unrecognized "want" (not need) of consumers.

THE ENTERPRISE-CHANGING THE GAME

THE ENTERPRISE--Changing the Game

I suspect we may be at the cusp of a major societal change. Almost a century ago, as large corporations became the major source of employment and new jobs, the government and employers discovered the issues of providing for workers and families.

The changes will come in three areas, and at accelerating rates: Pensions, Health Care and Education. Save this edition of THE ENTERPRISE and read it each year right after Thanksgiving. I think you'll be surprised at how fast this transition moves once it gets rolling. I have personally resisted the government taking too large a role in these areas, but as more and more corporations collapse under the weight of pension and health care legacy costs, there will be few viable alternatives.

Ironically, the cusp and reversal in education will be in the opposite direction, back to more privatization and a smaller role for government; a larger role for parents and "communities of interest" (which might be geographical, religious or some other aggregation based on needs, interests or social situations).

First a little history on each.

Pensions
Although employer-provided retirement plans are a relatively recent phenomenon in the private sector, dating from the late 19th century, public sector plans go back much further in history to the Roman Empire and the early-modern nation state. Military pensions, in particular, have a long history, and they have often been used as a key element to attract, retain, and motivate military personnel [They might still be a good tool for that purpose.]. In the United States, pensions for disabled and retired military personnel predate the signing of the U.S. Constitution.

Like military pensions, pensions for loyal civil servants date back centuries. Prior to the nineteenth century, however, these pensions were typically handed out on a case-by-case basis. The nature of work in that early 20th century wore out the workers such that men of 50 were "old" and life expectancy was in the mid-60's. By 1930, pension coverage in the public sector was relatively widespread in the United States, with all federal workers covered by pensions and an increasing share of state and local employees included. In contrast, pension coverage in the private sector during the first three decades of the twentieth century remained very low (10 to 12 percent of the labor force). Even today, pension coverage is much higher in the public sector than it is in the private sector. Over 90 percent of public sector workers are covered by an employer-provided pension plan, whereas only about half of the private sector work force is covered.

When Social Security was created in the 1930's, the life expectancy of a workingman was in the mid-60's. Thus the retirement age was set at 65, in hopes of helping those who lived beyond a "normal life expectancy." Today, with life expectancy in the upper 70's [admittedly, a lot of that gain is due is better infant mortality rates] the retirement age in Social Security is still in the mid-60's. That is an example of what's wrong with government-controlled programs. They are slow to respond to change. Still, as more and more companies dump under-funded plans on an under-funded Pension Benefit Guaranty Corporation, the inevitable future outcome becomes more apparent.

This is just the beginning, so rather than resist the inevitable, it's time to take the "bull by the horns" and manage the outcome. A combination of Social Security, revised to be more effective in its investment returns and slightly less generous in its pay-out (especially at the upper levels of income) will need to be integrated with PBGC's liabilities into a new American Retirement Act on which all employers and employees are taxed to fund benefits for ALL retirees who live beyond the normalized "working-life expectancy," which will soon be closer to age 70. Actuarially reduced early retirements can be provided, and those in the age 65-70 ranges can be grand-fathered at a scaled down rate. CONGRESS & PRESIDENT BUSH: The time is now.

Health Care
There are ample writings about the relative strengths and weaknesses of national health care systems such as the UK and Canada. I had first hand exposure working with the UK's system while preparing for a keynote speech to its annual convention about 8 years ago. It has problems, but largely of its own making. Canada's works better, but both have proven that a "national plan" for all, and the option of buying private health care for those who choose and can afford it is probably the best combination.

If one considers that Medicare's administration costs run 2% and private health care plans (insurance based) run 12-17% it is easy to see that there are some things the government can actually do more economically. The US health care cost by any measure is higher, by far, than many countries that generate equal or better health care results. It is time for an overhaul of the system, concurrent with an overhaul of the processes used. This is best done with (at least) governmental oversight.

Information technology is one area that is ripe for providing huge savings and improved results. Personal, portable medical records must be developed, provided and carried by all Americans seeking health care. Mandated standardized system formats for health care institutions and providers with uniform data transfer of CT and MRI (etc.) records are no harder than developing the Internet protocols was. Another is mandated consolidation/use of the widely duplicated and very expensive diagnostic equipment/centers (MRI, CT Scans, etc.)

Limiting medical malpractice liabilities to dramatically reduce spending on lawsuits and malpractice insurance is still another. Medical savings accounts alone have not worked or been widely used. But these could be integrated into the American Retirement Act (as a starting place) and rolled out broadly in a new, broader version of National Medicare. The abusers and flagrant users could be sorted out and restricted as they are in some welfare system control processes. The know-how to do this exists. All that is lacking is the incentive, and as health care costs spiral further out of control and the quality of care languishes, the motivation is here. CONGRESS & PRESIDENT BUSH: The time is now.

Education
During the 19th century, American classrooms were a sparsely decorated and furnished, the result of a largely rural, agricultural economy. Women educated their children, unless there was a small "schoolhouse" nearby where churches or communities could pay a "schoolmarm" to provide education, since many mothers were uneducated as well. Rural communities had few resources to spend on education, and there was a lack of commercially available products for schools. Often the school would be open only for a few months of the year, usually when children were not needed to work at home or on the farm. In the one-room schoolhouse sat students of all ages and abilities. The sole teacher was usually an unmarried woman; sometimes the students were older than the teacher. Using only the most basic tools - slate, chalk, and a few books - teaching and learning was mainly done in basic literacy, penmanship, arithmetic, and “good manners.” Farmers supplied the wood or other fuel for the stove to keep the schoolroom warm in the winter. Parents built school desks and took turns cleaning and stocking the stable that housed the horses the children used to get to and from school each day. Teachers often lived with local families, rotating from household to household. Honestly, they had the right idea, just on a far more primitive level.

The elementary and secondary educational system in the US is "broken." We keep dumbing down elementary and secondary educational content. More students than ever require remedial classes just to move from high school to college. Colleges, the US bastion of educational strength, are just starting to "catch the illness." Grade inflation is rampant, pressured by parents who would rather try to "rig the game" than act responsibly. It's time to shift the educational burden back onto parents, communities and social groups. School vouchers are a start. Legislated limits on the percentage of spending on administration [bench-marked to best practice school districts] is another. Legal limits on teacher's union power is yet another. Indemnification of teachers from lawsuits by parents and students is a fourth. Tightening qualifications for teachers and raising pay is another way to enhance educational standards.

Then let's create a tier of "Educational Associates" who can assist fully degreed teachers and do the more mundane, time-consuming educational work (grading papers, monitoring exams, preparing educational materials, etc.). This can provide employment for thousands of responsible but unemployed or underemployed manufacturing workers, in jobs that would preserve their self-respect and dignity, and provide them a "summer" opportunity to attend school retraining themselves [tuition-free via tax credits] in return for stepped up pay grades as appropriate education is added. We can grow our own new educational system and the people to staff it. Radical ideas? Sure. But what we are doing now is not working. Quit the "No Child Left Behind" platitudes and actually change the system and processes. CONGRESS & PRESIDENT BUSH: The time is now.

Conclusion
There you have it. A traditional, conservative former executive espousing increased roles for government in two cases and a dramatic reversal to privatization in the third. Will anyone have the nerve to do something? Think about it and pass this on if you know someone in a position to improve on it. There are plenty of brilliant people out there who can improve on these core concepts. This is just a "straw man" to get us out of the loop of "insanity" we are trapped in now. [Insanity: Doing the same thing over and over and expecting different outcomes.]

How about we quit the petty partisan politics and do something positive for America's future? CONGRESS & PRESIDENT BUSH: The time is now.

Best, John