Telling It Like It Is

THE ENTERPRISE--When Growth Is Elusive

THE ENTERPRISE
When the radio talk show hosts need to take a little time off, they re-run the "best of" shows.   

When I want to take a weekend off in the summer, I dig into the files of the several hundred columns I've written over the past 10+ years and find one of my own "best of" and put it out just before the weekend starts.

According to my editor at the time, this was a good one.  I am surprised how current it seems, given that it was written 9 years ago.   I hope you enjoy it.
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When Growth Is Elusive, Don't Panic.
How to prop up the stock price and please Wall Street
© John L. Mariotti 1997

Growth is the hot word these days in business circles.  The era of cutting and trimming, downsizing and right sizing seems to be over.  Lean and mean is yielding to innovative, entrepreneurial growth.  At least that's what my fellow pundits are saying.

There is a small glitch in all this growth talk.  Really meaningful growth is often hard to come by in an economy that is only growing at 2 1/2% per year.  It takes really new, exciting products and services.  If we go back to basics, growth is only achieved one of three ways:  1)  Take market share from your competitors, which may be tough and is usually costly in terms of lower prices which could even touch off a price war!  2)  Find new markets to sell something into, which infers learning new businesses and creating whole new products, services, marketing skills, etc.  3)  Expand the current market by innovating in products or services or adding some of either products or services to the ones already sold, and do it before (and better than) competitors do!  See the glitch--this growth thing is hard work!  Takes real skill and brains!

Fortunately there is another approach that will satisfy the Wall Street sharks (analysts), and that many companies are practicing these days.  No, I am not going to talk about mergers and acquisitions.  Those aren't real growth--just  rearranging who owns the real estate--that's too obvious to fool anyone.  I am talking about real subterfuge!  Here's the drill:

When there is the slightest inkling that the current earnings estimates of Wall Street for your company are a pipe dream, start this way.
o  First, downsize something--a division, the whole corporation, whatever.  Nothing like a little blood to get the sharks enthused.
o  Next, announce some closings of facilities.  There must be a few around you don't need. So what if they serve customers, what's important here anyway, serving customers or propping up the stock price (so the old options pay off)?
o  Then take a big write-off, to cover the severance and facility closings.  Use this to disguise the chance to fill up the "tomato cans*."
(* "tomato cans" are just one of the euphemisms used to describe those lovely accounting " restructuring reserves" and "deferred accrual accounts" that money can be charged against now and "discovered" to be available/unused later, when the earnings for the next quarter or two need to be propped up--because that old devil growth didn't materialize!)

Now we have taken care of the first "growth shortfall!"  What happens when the growth dreams become nightmares the next time (in a couple quarters usually--most "tomato cans" don't hold enough to last for a year or more!).  We have more trickery up our sleeve!  And it sounds pretty reasonable too!
o  Cut products or stock keeping units (this helps fill the "obsolete inventory tomato can" and that's a hard one for the auditors to argue with!)  Claim you are simplifying the business, and everybody knows that's good (even if customers still want those discontinued products--after all who are we here to serve anyway?)
o  Next, consolidate a couple divisions.  This will create more closing reserves, some additional heads will roll, so severance reserves can be raised again.
o  Take a big write-off and refill the "tomato cans" again.  (Are you getting the hang of this yet?)

Of course, all of this is more likely to depress growth than help it, but Wall Street will be ecstatic.  The company is getting "repositioned" for more profitable growth in the future, and lowering its break-even in the present.  The fact that it hasn't generated any real growth in several quarters goes unnoticed in all this "positive" restructuring!  This is like losing weight by amputating limbs!  The scale looks great until you try to use the mutilated body!

Finally the tomato cans are running low again, and the darn growth just isn't happening yet!  I wonder what comes next? 

o  First, sell a division or two.  This will generate some cash (if it is a good one) or some more write-offs (if it is a loser).  Either way, claim that the division(s) were not "core" to the business.  Wall Street will rejoice--we are getting down to what is core!  (In eating an apple, when you get to the "core" not much useful is left!)
o  Next, buy acquisitions for stock (it is up handsomely because of the "good news" about restructuring) and be sure to sell the divisions for cash.  This will sufficiently confuse the earnings per share enough to let you do what...?
o  Of course, take another write off for "absorption of acquisitions" and "exit costs for divestitures," and re-fill the tomato cans--again!  By now, any smart executives will have cashed in their stock options for a few million more than they should have been worth and are ready to "pursue other interests"--like their vacation home in the Caribbean, or their new boat and sports cars.  You see growth does pay off in the end, for the few who know how to manage it--whether they actually create any or not.

P.S.  Someday--after a few consecutive years of this,  there will be an expose', but the miscreants will be long gone--or else they will be summarily terminated (and only receive a multi-million dollar severance package for the mischief).  You see this story is a composite of a few true ones.  Only the names have been omitted to protect the perpetrators!
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FYI--I was a Group President at Rubbermaid from 1992-1994, when "growth was elusive" and I learned a lot.  Some of it was good, and some of it was not so good.  'Nuf said?

Best, John

THE ENTERPRISE--Father's Day

THE ENTERPRISE

HAPPY FATHER'S DAY to all the Dads out there.  I hope yours was a nice as mine.  I suspect Phil Mickelson won't be so happy (another "runner-up" spot in a US Open after leading by 2 shots with 3 holes to go). I know it was a sad one for Tiger Woods, as he missed his first professional cut ever, but more than that, I am sure he missed his Dad, Earl more than anything.  It takes a long time to get over the death of any parent, but when the father-son relationship was as strong and continuous as this one...it will take months or forever.  That doesn't mean Tiger won't find his golf swing again, but golf is above all else a  mental game and a game of concentration.  No wonder the poor kid (he really is still young) didn't play well.

ON THE BOOK FRONT
There was cause for me to celebrate this past week, as I hit the "SAVE" button on my Mac iBook for the first draft manuscript of THE COMPLEXITY FACTOR.  Now to read it and see if it makes any sense.  It is always scary trying to edit your own writing, but worse when you start reading it and wondering "where the heck was I going with that thought?"  Anyway, initial reaction from those who have heard the concept of the book has been very positive, so I am motivated that IF I can get it edited in the next month and make it clear enough to understand, it will help solve many nagging business problems and guide managers and companies to greater success.  At least that's the plan.

WHEN ENOUGH IS ENOUGH   
Here's an observation.  Instead of mucking around in the constitution over gay marriage--which is not where the founding fathers planned for the constitution to make law--how about amending it to fix another real problem. There are arguments about term limits for legislators from time to time.  I think it is time to set a retirement age for Congressmen and for Supreme Court Justices.

Sure, I know different people age differently and some are still intellectually brilliant into advanced age, but that is statistically not the case.  I believe there should be a mandatory retirement from both Congress and the Supreme Court at age 80.  Even with advances in health care and aging, there seems to be a marked drop off in mental acuity and quickness at 80+.

There should probably also be a term limit on Congressmen and Senators and Justices of 30 years.  That is 5 Senate terms, which is really too long, but if a Senator is elected fairly young, he/she might still be a good legislator somewhere in his/her 60's, or even early 70's.  But enough is enough.  If Strom Thurmond didn't prove that before, then Robert Byrd is still here to remind us of how long is too long.  Enough is enough, isn't it?  But would any sitting member of Congress have the nerve to author a bill to limit these old lions terms?  I hope so, for our country's sake.

THE PRICE OF "PROGRESS?"
Add another legendary plant or two to the casualty list.  The Maytag, Newton, IA plant is going to be history.  Odds are good that the Hoover (vacuum cleaner) plant in Canton, OH is also likely to join the ranks of places like my two alma maters--Huffy Bicycles (Celina, OH) and Rubbermaid (Wooster, OH).  These are just a small fraction of the US plants that are gone.  These are just a  couple that had some significance either in my world...or were notable in recent news.  The jobs those plants provided are gone, at least temporarily.

I hope the displaced employees will learn new skills and that their states and communities will attract new jobs for them.  Sadly, the old term "job security" only exists in the history books, but the basis for it resided in an employee's own personal skills and his/her education.  I feel bad for those affected.  It's called "progress" sometimes, but it doesn't feel so good if it's your job, or the livelihood of someone close to you that gets wiped out by "progress."  Hopefully, when one door closes, another will open.

Week of June 12-16, 2006 -- Some general economic directions that seem likely:
This week's readings of inflation at the wholesale and consumer levels heightened fears that inflationary pressures linger in the domestic economy.  After 30 consecutive months increases in commodities like oil, metals and paper, what should we expect?

These concerns increase the odds that the Federal Reserve Board's Open Market Committee will raise interest rates for the 17th consecutive time at its June 28-29 meeting to 5.25%. But that will probably be it for this year, unless something extreme (terrorism, etc.) happens later in the year.   Ben Bernanke and the Fed wants to rein in inflation--but not by causing a recession.

Consumers are turning cautious and spending should trend slower this summer, dampening inflation in other than oil pricing--which goes--(who knows where?) probably upward.  Every one of the 18 categories of consumer spending monitored by BIG Research's Economic and Consumer panel was trending DOWN from May levels.  Is that a good enough indicator?

Everyone wonders, and I sure don't know, but I'm betting that the stock market will likely meander about, trading in a range and over-reacting (temporarily) to the slightest of scares.  I don't think it will tank, nor do I think it will soar--absent some very unusual events.  There is still a lot of money looking for places to go.  Companies have lots of cash sitting on balance sheets, and while the robust economy is slowing, it isn't stopping.

In other news, business inventories and retail sales rose less than expected, industrial production decreased unexpectedly, and a look at regional economic conditions hinted at a deceleration in economic activity in most areas. Expect housing to slow and become less volatile as demand slackens along with rising interest rates and the apprehension among speculators that the best days for flipping are over. 

As campaigning for the 2006 mid-term elections really heats up, it will garner the lions share of attention in the news, which is not all bad.  But that's another story entirely.

All in all, as our country suffers economic cycles, and we must suffer them too--hopefully, we can suffer them wisely.  We live in the best place in the world, and have (overall) the best standard of living.  If we act prudently, and elect the right officials, we should be able to stay that way for many Father's Days to come--China, Korea, Iran, Venezuela and Iraq, et. al. notwithstanding.

Best, John

THE ENTERPRISE--Looking Ahead

THE ENTERPRISE

---Blame it on the Fed Chairman (The dog ate my homework.)
Well, it's time for Wall Street to go through its spasms of ups and downs worrying each time Fed Chairman Ben Bernanke opens his mouth--or doesn't open his mouth--or makes a face, good or bad.  In other words, he's at fault no matter what he does.   Of course there will be some inflation people.  Look at the info below on commodity prices:  Copper (its used in all those cute electronic gizmos we all have), Oil (and of course it is used in fuel for cars, electricity generation and to create feed stocks for plastics) and Paper (the boxes everything comes in, the newspaper no one reads, but get printed by the millions every day)...all three have risen in cost for over 30 consecutive months. Bernanke just inherited the smooth Greenspan's legacy of perhaps being to easy,  too long, and if Ben is too tough for too long, he could actually be the bad guy that he is being accused of.  Let's hope he understands all this...we don't need a Fed caused recession (which was what the one in 2001 was).

---The definition of inflation
Inflation is when you must pay more money for the same or lesser value.  When commodities, usually based on things we dig out of the earth or plant and then harvest, go up in cost because the demand outstrips the supply--the result is inflation.  DUH.  The Fed doesn't cause inflation directly.  It can (sort of) cause inflation indirectly by running the US government printing presses and creating more money, thus reducing the relative value of all the money that's out there now--but that's a different matter.   Actually, the Fed can't even really stop inflation directly either.  The Fed can be sort of a wet blanket by setting higher interest rates which eventually will (or may) dampen demand by raising the cost of borrowing to companies and individuals, and thus (may) give supply a bit of a chance to catch up.  But the world is much more complex than that, isn't it?  And inflation that takes hold for too long, often can only be reined in by a recessionary shock that depresses demand.  That's unfortunate, but true.

---Complexity--a big topic--and growing
By now you know I am in the midst of writing a book on complexity and its effects on businesses.  I was reading the other day and it dawned on me that although we all decided the dot-com and tel-com bubbles burst and so forth, the growth and complexity of the Internet is greater than ever.  I won't go into all the research citations, but based on a chart in FORTUNE  last month, the number of high-speed Net connections has grown about 1500% in the last 5 years, from 5 million to 75 million, the amount of time of Internet use has nearly doubled, e-commerce sales have grown by 250% with the growth actually accelerating, not slowing, and the Internet is the new, new thing in big-time advertising.

I'd say that just added a healthy dose of complexity to everyone's lives.  Yet our days still have only 24 hours, and we need a few hours for sleep.  We can only focus our attention on so many things, and digest so much information.  That means the big question is:  What in the hell should we pay attention to out of all that clutter?  I don't know all the answers--I just know that this is an important question for which we need to determine some answers.  This issue of how to deal with growing complexity, how to eliminate the unnecessary part of it and capitalize on the useful part--well, that's a big part of what the book I am writing right now covers.  Stay tuned.

---Microsoft and Ray Ozzie
A year ago, I made a big deal in THE ENTERPRISE about Microsoft snagging Ray Ozzie and his company Groove.   I said getting Ray Ozzie to join Microsoft was one of the biggest coups of Bill Gates recent career.  The May 1, 2006 edition of FORTUNE features Ozzie's new role--a huge one--in an article entitled "Microsoft's New Brain."  I don't want to belabor all the content in the article, you can find it on-line and read it if you choose to.  There are a few key points that are worth belaboring.  First of all, it characterizes Ozzie as "outside-in" focused, which is exactly what innovative leaders must be to get inside the heads of their company's customers.  Next, it points out how approachable he is, which means he gets input from all kinds of sources that Bill Gates has become to famous and too imposing to access (although he use to do that--it is the problem of being "The Richest Man in the World.")

Finally, I want to re-emphasize the concept of my nearly 10 yr. old book, THE SHAPE SHIFTERS--Continuous Change for Competitive Advantage.  Bill Gates wrote his momentous letter in 1995 on "The Internet Tidal Wave" that signalled a huge shape-shift inside Microsoft to embrace the Web.  (R.I.P. Netscape.)  Now Ray Ozzie and Gates are doing it again.  "The Internet Services Disruption" is the title of this most recent memo.  It signals that Microsoft will be putting its brain power, led by Ray Ozzie and Bill Gates (a potent duo) and using its huge cash hoard ($35 Billlion+/- a few bucks) and its prodigious earning power (over $3 billion/quarter) to drive a new "shape-shift" in the tech world.

You know I think Apple is neat and exciting .  Everyone swears that Google is the new big thing.   Yahoo is also hot,  And EBay may be coolest of all.  But Microsoft is HUGE, powerful, smart and pervasive...and I wouldn't bet against it once it put its prodigious resources to work in the right direction.   After all, a company that has its software entrenched in space on 95+% of the PC/Mac desktops is a force to be reckoned with

Recognizing change and capitalizing on it is a big deal.  Doing it in a way that doesn't explode into still more complexity (one of the drawbacks to open-source software based entities) is also a big deal.  Watch this unfold.  It will take another year.  You read about it here.

Best, John

THE ENTERPRISE--Things Not What They Seem

THE ENTERPRISE

REVISIONS?  HOW ABOUT JUST PLAIN WRONG?
Does it concern anyone else that these government statistics that form the basis for Wall Street's big reactions are never right the first time?  Does it make you wonder if they are right after the revisions?  Check these phrases from Economic Week in Review below:
The annual rate of growth in 1Q  non farm productivity was revised upward from of 3.2% to 3.7%. In addition, 1Q growth in unit labor costs was revised downward from an annualized 2.5% to 1.6%. More dramatically, growth in 4Q unit labor costs was revised downward from an annualized 3.0% increase to a 0.6% decline—a revision described by one analyst as "enormous."   What the hell is that all about?

How about that it says we have "no idea" about the accuracy of what the initial report might say.  Decisions--big decisions--are being made on this erratic and flawed reporting.   Worst of all, these decisions are being guided by the "expectations of the analysts."  That makes it even worse because now systemic mathematical and statistical error is being compounded by human reaction errors of analysts.  I have begun taking these reports as "possibly, directionally indicative of something"....and nothing more.  It might be wise if Wall Street (although it is infested with "analysts") would do the same thing.  Meanwhile, I still worry about how everyone and everything reacts to our government's obsolete, misstated and constantly revised reports.  Does anyone else worry about this?  (Like leaders of the agencies that produce them?)

Regarding the government and it's actions, the naming Henry Paulsen as Treasury Secretary, this seems to be one of a string of improved moves by the Bush Administration.  Could it be that someone in the White House is listening?  Perhaps!

CHINA—FOULING ITS OWN NEST
A small article on p. A6 of Wed. Wall Street Journal could have big implications.  In it, China leading environmental experts are reporting that the Yangtze River, the world's 3rd longest and China's most prominent waterway is massively polluted. Not only is the river "dying" but it is no longer a viable source for drinking water for some 300 million Chinese living in the 186 cities if flows through before dumping into the sea at Shanghai.  China's other major rivers are also fouled with industrial and agricultural waste, promising a critical clean-water shortage in coming years.

US, CHINA & INDIA ON GRADUATES
We keep reading about how poorly US is doing compared to China and India in college graduation rates.  No one ever calculates what impact the huge population differences have on this fact.  In raw numbers, the Number of Degrees awarded in 2004 are: China 351,500; US 137,400; India 112,000. Advantage China--lots of people to educate. When converted to per-capita information, the picture changes:  (degrees per million citizens)  US 468; China 271; India 104.  Perhaps the reports of our academic demise are a bit premature. (Although our primary and secondary schools are still fouled up.)  No one has yet put an index how the quality of the graduates and degrees vary from country to country, but that is the big (unanswered) question.

IT DEPENDS ON WHOSE OPINION YOU ASK--BUT PERCEPTIONS ARE REALITY
When asked what was the determining factor in granting salary increases, a recent study showed that there was a very different perception between managers and non-managers.  A Mar. 20-26, 2006 Hudson study of 10,000 employees came out this way:
--Employees who do a better job get paid more:  Managers agree 48%; Non-managers agree 31%
--My last raise was based on performance: Managers agree 46%; Non-managers agree 29%
I wonder who sees things more clearly?   Remember, people's perceptions are their reality.

FAT PEOPLE--A BIG PROBLEM AND A BIG OPPORTUNITY
I am technically obese.  My body mass index is too high and my waist measurement is too big.  Too many Americans are like me--victims of a sedentary lifestyle and too-large portions of too-rich foods.  Part of the health problem in America is caused by this--perhaps a big part of it.  Of course, every dark cloud has a silver lining.  Fat people are a big market that is growing. There are 60 million Americans that fall into the Obese class.  That is up from 23 million in 1980.  That is a whopping 260% increase in 25 years.  Another 28 million are expected to join us in the ranks of the obese in the next 7 years (by 2013).   (Who comes up with these numbers, and how do they know?) Markets for large size clothing, wider chairs, larger beds, and yes, airline seat belt extenders, are growing like American's waistlines. 

I know I'm no "skinny minnie" to sit next to in an airplane, but at least I still fit in the seat and within the armrest.  If you have had the bad fortune to sit next to a 300+ pounder who used all of their seat and 1/4 of yours, you know the problem well.  The airlines have recently increased their assumption about average weights of passengers for calculation fuel load and take off factors.  I don't think they raised them enough based on my visual observations as a traveler. 
There is a big flap coming (pun intended) if airlines ever really start cracking down on people who won't fit in one seat, and require them to buy TWO. (They can't even crack down on excessively large carry-on bags so they won't do this either.) 

Meanwhile, all you marketers out there, listen up.  Reduce the mix of Small and Medium in your assortments and increase the XL, XXL and XXXL.  It may not be good health, but it is good business.  By the way, on some airlines, you can pay more to upgrade into a coach seating section that has more leg room, but the width of the seats are unchanged, so that solution doesn't "fit" this problem either.

ANYTHING CAN BE REINVENTED WITH SOME CREATIVITY & TECHNOLOGY
If you don't believe this you have not seen or worn CROCs.  These are the comfy, simple, ugly molded shoes that are taking hold like wildfire.  Technology plus common sense paid off for "Duke" Hanson and his partners from Niwot, CO when they found a synthetic molding compound (from a Canadian plastics company) that both molds to the foot, and resists moisture, mildew, bacteria, fungus, etc.  Not only have CROCs grown into a $100 million business in less than 5 years, but it is line-extending the products into more than the one original configuration.  Who sez innovation isn't the best solution?

There's lots more to talk about, but these few tidbits should start your week with an "aha!" or two. Find the opportunities that are right under your nose.  As Apple's ad campaign of a few years ago said, "Think Different."  It isn't just fun, it's profitable too.

Best, John