THE ENTERPRISE-What works and what doesn't
A LEGEND PASSES--JOHN MCCONNELL
John McConnell was a "bowling ball" of a man; short, stocky, and for a lot of years, bald. He was a legend here in Columbus where he built Worthington Steel into a world class company. He also brought big-league hockey to Columbus, (although the Blue Jackets are still struggling to make the Stanley Cup Playoffs). I first became aware of McConnell years ago at a University of Dayton Conference where he spoke to one of the breakout sessions.
I'll never forget his messages. Worthington Steel didn't need a big policy manual, he said, because what we believe fits on a credit card size laminated card. I'll paraphrase what I recall, because I don't have one of the cards, but it was pretty simple: Take care of customers and give them a good value for their money; Treat each other with dignity and respect; and Give a good day's work for a good day's pay.
A member of the audience (who clearly worked at a large, bureaucratic company) asked what Worthington did with people who either misbehaved, treating customers or others poorly or didn't "give a good day's work for a good day's pay." McConnell answer was straight from the heart and true. "We have a pretty simple answer for that too; we warn them a couple of times and then, if they don't get with our culture, we move them out." The questioner, still seeking some "bureaucrat-ese" pursued the question further, asking how do you "move them out?" McConnell's voice raised a couple of notches as he glared at the man and said, "We fire them, that's how. We own the company; we can do that." That's the kind of down to earth common sense and directness that builds great companies.
UPS LOWERS FULL YEAR OUTLOOK
That headline is a better indicator of the economic slowdown than a room full of economists because this one works, and the economists' forecasts don't. Last month FedEx reached the same conclusion. These global transportation leaders have their finger on the pulse of business--the movement of goods--and that pulse is slowing right now. Part of the earnings decline is due to fuel costs and the other part is due to a slowdown in the movement of goods. Whether we ever agree if this is technically a recession, these two reports are good enough for me--and should be for you. "Batten down the hatches" because this year will be a stormy one, and only those who accept that fact, simplify their businesses (driving out complexity) and manage well, will come out OK. I've devoted other issues of THE ENTERPRISE to what this means, so I'll refer readers who missed them to the archives at http://mariotti.blogs.com/my_weblog/
MACY'S FORMULA--CAN IT REALLY WORK?
When Macy's gobbled up regional department store chains, there where a couple of big questions: First, how would they deal with brand loyalty; Second: could the department center model work, or was this just an aggregation of stores that was destined to fail. School is still out--on both scores. One thing is certain. Brand loyalty, such as Chicago's affection for the venerable Marshall Field department stores, is very strong. Macy's lost business at almost all the converted stores--nowhere more than Chicago. It has now decided that a "localization" strategy, in which the merchandise (10% of it actually) is varied by local preferences. That sounds like something Macy's Terry Lundgren might have thought about a lot sooner--like when he acquired the other stores.
The really staggering fact (according to a recent WSJ article) is that a single Macy's store, depending on its size, stocks 1.5 million to 4 million different items, which means that "localization" will affect 150,000 to 400,000 items in each "localized" store AND addup to create yet more complexity for the store chain to manage. There are instances where a company can charge a premium for the value of variety. The question is: Is this level of variety "over the top?" Being a Macy's shopper, and observing the huge sale racks, markdowns, etc. I'd say the answer is that Macy's can charge a premium, but it cannot a large enough premium. Maybe I should send Lundgren a copy of THE COMPLEXITY CRISIS, just in case he needs some new ideas. Prediction: Macy's unique position and sheer size will carry them just like inertia carries a car forward even if it has engine trouble. But, Macy's complexity will bring them down eventually, unless and until Lundgren, et. al., can find a way to make its structure and processes more amenable to that mind-boggling variety--AND command a suitable price premium for it.
DELTA + NORTHWEST--A BIGGER, BAD-SERVICE AIRLINE
In case anyone thinks this merger will make their air travel cheaper, more convenient or more pleasant--dream on. This is purely about "rearranging the deck chairs on the Titanic." Just imagine this complexity issue: 1000+ airplanes distributed among 19 different models from 10 aircraft families, and several manufacturers, ranging in size from 44 seats to over 400 seats. How would you like to manage maintenance, and the systems that allocate aircraft to routes, seating charts, and on and on in that kind of complexity? I wouldn't.
Industry insiders used the terms "goulash" and "mishmash" to describe these two fleets. Not only are there way too many kinds of planes, but they are OLD, too. That means even more costly maintenance, that is very complex to manage. And this is a good idea? For Delta and NW, maybe; for travelers, no! I only hope Southwest sticks to its simpler, better methods , and American (arguably the best of the remaining large airlines) learns and improves on the fleet simplification it started a few years back. We may still have at least one large hub & spoke and one good point-to-point airline left.
MOTOROLA---ANOTHER ICON IN TROUBLE
I've been using Motorola's cell phones for a long time. A few years back, it seemed that Motorola was really getting it right. First it simplified its cell phones and drove out a lot of complexity. Then it introduced the popular RAZR family. Somehow, it loses its way about every 7-10 years. Could be top management issues, maybe? Now the CEO wants to split off the money losing cell phone business and give it to shareholders, while he stays with the other part of the business--that makes money. Isn't it nice to have a CEO who looks out for himself while the shareholders get screwed? He says it will "unlock value" which is just so much gobbledygook for saying we don't know how to run it profitably, so maybe someone else will. And that CEO, like the prior failed ones, will no doubt get a nice, handsome compensation package for "unlocking the value." B---S---.
LAST ITEM--THE CROOKS HAVE FOUND ANOTHER HIDING PLACE
The latest ruse in accounting practices, is borne of the huge financial write-offs taken by such vaunted institutions as Citigroup and Merrill Lynch. The new hiding place is for money that doesn't seem to be fit to be called "losses", "bad debts" and similar names for bad management mistakes. It is an innocuous line on the balance sheet under "shareholder's equity," and it is labeled "other comprehensive income." The problem is that this income is negative--in other words--losses. Now we'll have to watch yet another place that mistakes get buried. So far it's only about $80 billion of these kicking around, muddying the financial statements, after the accounting and finance folks did such a nice job of tidying them up.
These are the same accountants who didn't even want to even discuss Complexity accounting with me when I asked 3 different "senior partners/experts" (one from KPMG, one from PWC and a former FASB member) about it in NYC last winter. Oh, yes, there is one neat little detail too. There is no hard and fast rule defining when companies have to deem these losses to be "more permanent" and take a hit to profit. No wonder we have reams and reams of SEC and FASB regulations rolling out every year. Even those aren't stopping the lying. The manipulators are ahead of the regulators once again.
WHAT WORKS AND WHAT DOESN'T
Now that I've cited an couple of examples of what works, and a couple of what doesn't, I guess it's time to stop this rant for now. It's a tough world out there, perhaps the toughest in 25 years. Stay frugal, Sell hard. Conserve cash, because new loans are impossible to get. And while you are driving out complexity, use some of the time you free up to work on innovation. The frugal, smart innovators will lead the way out of this downturn.
Best, John.
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