THE ENTERPRISE--LIFE AFTER THE ELECTION
THE ELECTION IS OVER--AND IT IS TIME TO GET ON WITH BUSINESS
While I did not support Barack Obama, his inspirational acceptance speech combined with John McCain's graceful and patriotic concession speech leads me to believe that the right man won--for this time around. Over time, I suspect I will not like Obama's politics and policies. But right now, the country needs to pull together and find some consensus solutions to our many problems and issues. Congress is a larger concern (to me) because the leadership in place is poor, and there seem to be no plans to replace it. World leaders have welcomed Obama. That's good for the US.
However, many races were very close, so Obama's electoral vote "landslide" was not nearly so decisive in the popular vote in many places. Clearly the young, the minorities and the affluent many who were fed up with Bush and his party, "spoke with their votes." Let's hope the US can successfully recover not only from the recession, but from the crisis of divisiveness that has worsened over the past decade. It is time to recall those famous words, "United we stand; divided we fall." The largest risk: For Obama to show the rapid action he wants and needs, it will have to be via Executive Order. This can be good--or bad--depending on the issue and your point of view. We'll know in a few months which matters he chooses to take action upon, and which wait for the Congress to move. Congress has such a poor record--and poor approval rating--that it will have to run hard to catch up to the popular new President-elect.
PROBLEM 1: CLEAN COAL IS AN OXYMORON--AND ENERGY PLANNING IS FAR MORE COMPLEX THAN PORTRAYED
Energy is still the preeminent factor in our future. It was one of the most bandied about topics during the campaigns--and most of what was said was either fluff or just plain wrong. Few things in our lives can proceed normally without energy. Try using the Internet when there is no electricity to run the servers. Can't see, you say? Without lights, it's hard to see. Factories, offices, transportation, freight, in fact, just about everything in our 21st century world requires energy in some form to operate. Now do you see why whoever controls its energy, controls its destiny.
Let's set a few things straight here and now. Clean coal is an oxymoron in the context of global warming. I'm still not sure if we are causing it or it is just happening, but one thing is certain. Coal adds to the Carbon Dioxide load on our atmosphere more than about any other form of energy. All of the "cleaning" done has been to remove some of the other noxious byproducts of burning coal as a fuel: sulfur dioxide, carbon monoxide and nitrogen oxide are removed by scrubber technology, thus reducing the risk of acid rain--but those improvements do little or nothing to reduce the CO2 emissions. There are no existing technologies to take it out on a large scale, and if there were, there are even fewer technologies for "storing or disposing of it." Remember the laws of physics--"matter cannot be created nor destroyed;" it only changes its form. CO2 emissions storage is still a scientist's idea never yet tried on any large scale.
Then what should we do? Nuclear energy is a good, clean mid-term solution, albeit with its own waste storage challenges. However, contrary to politicians wishes, IF all the permits and capital were ready now (both problems you know--environmentalists fight the permits and there is a huge capital crisis right now), a nuclear plant started today wouldn't generate a kilowatt of energy for years. How many? That depends. It could be as few as 3-5 and as many as 7-10 years. For a country that cannot build a few hundred miles of border fence in a couple of years--I'm betting on the longer answer.
Wind power is a good, clean, and renewable energy source. So is solar power -- as long as the sun burns brightly. Both cost a lot more to convert to electricity than burning fossil fuels at today's prices and technologies. Where there is a lot of sun, or wind are good places for these kind of plants. The Western USA desert areas have lots of rooN for new solar plants. The Great Plains states have lots of wind, so windmill "farms" might be most efficient there. Unfortunately, many of the people (who are all for it) and live/work in places that use the electricity (from the environmentally friendly, renewable resources) are in strips along the East and West coasts. We have a little distribution problem. The electric distribution "grid" is already too close to its capacity, and no one entity either owns or controls it (it's not like the Interstate highways--more like a series of "toll roads" that have been maintained spottily). I guess windmills could be put offshore--where there aren't oil platforms--if coastal states didn't object to that (which they will). See--it's a sticky problem.
One final thought on windmill farms. In physics, the term observer effect refers to changes that the act of observation will make on the phenomenon being observed. This is often the result of instruments that, by necessity, alter the state of what they measure in some manner. This effect can be observed in many domains of physics. The parallel here is that whenever we disturb the natural order of things in nature, it somehow compensates--or not. How do we know that adding 1000% more wind farms won't alter the prevailing wind patterns in the already turbulent center of the country, and spawn new unexpected storms? FYI, Norman, OK is the center of the tornado monitoring work in the USA--because the cold Canadian air meets the warm Gulf air and starts spinning. What would 10 million windmills do to the weather in the Central US? Or will they just get obliterated by tornadoes each year?
Natural gas is another plentiful fossil fuel which CAN be burned more cleanly than coal. Three small problems: gas available from current sources is not enough (fixable--drill for more); gas distribution, like electric distribution is a problem--the gas isn't where the electrical demand is; most of the largest uses of energy are not set up to deliver, store or burn natural gas (that's fixable too--and the knowhow exists.
Hydro-electric and tidal power are clean, and renewable (within reason) but are limited in scope and location. Plus, building large dams and tidal basins also takes a lot of time and money--and will undoubtedly raise the ire of a dozen or more environmental special interest groups.
NOW--remember that I am far from being an expert on energy. I am just an avid reader who was trained as a scientist/engineer and worked as a manager/executive--so I appreciate the nature of "real world problems"--both physical and social/political. See what President-elect Obama faces? And this is just ONE of the problems. I'll reflect on the other problems in THE ENTERPRISE, just so we are all thinking in real world terms. Remember the rules for problem solving: 1) Understand and define the problem; 2) Solve the problem. (Not in the inverse order.)
PROBLEM 2: ECONOMIC CONDITIONS ARE WORSENING
Credit is still very tight where it is available at all. Many companies are either already in breach of lending covenants or headed that way. That will provide banks an opportunity to penalize (charge fees and higher interest) those companies in the process of renewing financing. That's bad for corporate earnings--except for the banks. That depresses the stock market which makes everyone fearful and they stop shopping. No shopping and business slows down. Production and services slow too. Jobs are still dropping due to two factors: consumer demand is way down as anxious consumers hunker down; productivity is still doing pretty well. That means it takes fewer people to produce the same amount of goods or services--and if demand is down--to produce less goods and services will take still fewer people. Thus you can expect job losses and unemployment to grow for most of 2009.
What to do? Here's the short list. Start by not panicking. Break the problem down into steps and work it one step at a time.
1. Conserve cash, be frugal, save instead of spending. You can spend later on.
2. Reduce expenses hard, and don't borrow at all if possible. Use "zero-based" budgeting.
3. Cultivate the best customers and take good care of them. Customers are where all money comes from as they buy things and pay for them.
4. Partner with the best suppliers, shop at the best value places, and buy wisely. Only with good suppliers can you make good stuff.
5. Focus on improving productivity--of both people and resources--and especially concentrate on the stuff you (and your organization) should NOT be doing.
6. Listen to your people!! Collaborate, team up, reach compromise and achieve consensus. Aim for "Win-win" outcomes.
7. Banish complexity--it wastes valuable time and money. Clean it out and keep it out. (Unless someone will pay you for it.)
8. Innovate--find unmet needs and meet them--show what might be possible that no one else has yet discovered.
BAILOUTS ARE LIKE LIFE PRESERVERS
When a ship is sinking, or a person falls overboard, a life preserver can save them. It doesn't make it an enjoyable experience, however. And it sure doesn't replace the "status quo" of a comfortable situation. This point needs to be constantly recalled both by those getting the bailouts and those giving them. Ironically, the Democratic policies have shuddered at the idea of privatizing part of Social Security. It that had been done, there would be an even greater level of panic than there is now. Yet, privatizing the banking industry, the insurance/financial services industry and perhaps several more industries in the name of the "good of the country" is analogous to privatizing part of Social Security. What has happened is the government now owns part of these companies. Will it be wise enough to stay distant from operating them like smart investors do? Don't bet on it. The great risk these "bailed out" companies face is that the government bureaucrats tell them how to operate. Worse yet, if the politicians get involved, and meddle in operating companies, real problems will arise. If everyone does what they are intended to do--perhaps it will all work out. But don't bet on that happening. It WILL be messy at best, calamitous at worst.
MONEY DOESN'T CURE STUPIDITY
AIG can't seem to get out of its corporate head that it is a company in deep trouble, being sustained by government largess. Yet, it still continues to "enjoy" expensive boondoggles, ridiculous perks and severance packages, etc. It's hard to imagine what could be done to impress AIGs management with the foolish irresponsibility of its ways. Perhaps personal fines and criminal penalties have to come into play. That's a shame, but as Forrest Gump said, "Stupid is as stupid does." This rule also applies to GM, Chrysler, et. al. Both need to dump dealers, dump complexity, and focus on what they do best. Isn't that basic business strategy? Ironically, just about the time that high gas prices force them to focus on more fuel efficient vehicles, gas prices come back down. Will they regress? Or worse yet, will foolish consumers resume their wasteful ways, rolling up massive SUVs to the pump and guzzling gas like the supply is endless? Don't be surprised if that happens.
NOBODY IS INVINCIBLE--INCLUDING GE & WAL-MART
The very part of GE that insulated it from quarter to quarter earnings fluctuations--GE Credit--is not the problem child for this industrial behemoth. There's been plenty written about this problem, so I will simply say that an old Chinese proverb comes to mind: "Whom the Gods would punish, they first give 40 years of success." On the other hand, perhaps Wal-Mart has awakened. It is now simplifying and focusing its merchandise assortments--a long overdue move. It is also, hiring people who used to work for suppliers to manage categories instead of relying on vendor "category captains." This could be good--and could be bad. Wal-Mart built its success under Sam Walton by relying on vendor partners to bring it the best value goods and keep it competitive. If it becomes "drunk with its own size and power" again, it could improve, only to regress further. China is its workshop--but the variability of Chinese products is a problem; the lack of Chinese knowledge of what American consumers want is a bigger problem. Wal-Mart can specify what it wants, but it will be looking only through its own lens--as a retailer. The way to win is to partner with the best suppliers and expect them to bring the products--current and innovative new ones--so the retailer can then do its thing: present, display, promote and sell them. Whenever one party tries to do the entire "value stream" you can be sure that some parts of it will be done inexpertly, leaving room for competitors to win.
THE RULE OF 2 OR 3 IS EVEN FAILING
Big box retail models, and in fact many industries models have seen the top 2-3 competing firms come out on top, defeating other competitors and either driving them out of business or into niches. Retail in general is "over-stored." It has been for decades, and a recession "weeds out" the weaker players. This one will take down many retailers. Mervyn's is already in liquidation. So is Linen's N Things. Circuit City is clinging perilously to the precipice of bankruptcy. Major sporting goods chains are in tenuous places, since the combination of variety, margin and turn rates make this segment a very difficult one in which to sustain profitability in a national chain. A number of years ago, I theorized that most retail formats had to achieve a combined gross margin and inventory turn rate that, when multiplied together came out to about 1.25+/-. Warehouse clubs operate at about 11% GM but turn inventory 12-13 times. Discount stores get 25% and turn inventory 5 times. Department stores earn 30-40% but only turn inventory 3-4 times. While these are inexact approximations, they make the point that retailers must either sell goods at high margins or turn over their inventories rapidly. Otherwise the return on investment just doesn't work. This recession will either cripple or kill marginal retailers--and in fact, marginal competitors in many industry segments. Choose carefully who you align with--you want them to be around next year.
SPEED KILLS--OR AT LEAST IT WINS
When I was writing Marketing Express 8 years ago, I discovered a Company with a fascinating new business model: Zara, part of Inditex a Spanish retailer. The premise was simple. Own the factories that made clothing, and preferably have them located not too far away. Design a new clothing line and make limited quantity, rapidly and move them into retail stores. Watch what is selling for a week or two. Then drop the ones that aren't selling and design new ones, and rush more production of the good sellers into the stores--in a 2 week time frame. As US retailers choke on slow-movers and reel from deep discounts to clear out excess of slow movers, Zara & its parent Inditex are now the second largest apparel retailer in the world at $13.8B. It was $2B when I wrote about it in 2000. Not bad. Is this approach obvious? Sure. But the devil is in the details--execution and supply chain management--and knowing what you can, and cannot, do rapidly. Others a mimicking the "fast fashion" approach: LA's Forever 21, Spain's Mango and Britain's Topshop--which is moving into the NYC market next year. The challenge in this approach, like all revolutionary approaches, is that you must commit to it. No half-hearted, sort-of, we'll try it. As the STAR WARS character Yoda said, "TRY? There is no 'try!' DO--or not do."
DON'T BELIEVE EVERYTHING YOU READ (OR HEAR)--AND DON'T EVEN READ (OR LISTEN TO) EVERYTHING--TRY THINKING!
Folks have asked me what I think of a book titled "Simplexity." I read it--or at least as much of it as I could stand to read. It's like a cream puff--tasty in places, dull in places, and once you are done with it--you are still hungry. It is a classic case of a catchy title and a fairly skilled writer saying a lot but not leading anywhere. Save your time. FYI--I was not a fan of "Freakonomics" for the same reason. Interesting, but so what? On the other hand, Malcolm Gladwell's "Blink" and "Tipping Point" both reached a conclusion or two along the way. Much better. The October 20 issue of the WSJ had the most egregious piece of misinformation I've read lately: "Mistakes Marketers Make" by an Australian professor David Corkindale. If you missed it--you are lucky. If you read it, rewind and erase what you read and concluded. His assumptions are flawed, his premises are shallow and his conclusions, therefore, are nearly useless. Every so often the WSJ's Marketing section features someone who does this. They either make a big deal out of something that is old news (but the writer is too inexperienced to know that) or they find a catchy headline and then fill 1/2 page with misguided bunk. There is far too little quality assurance on written works. Use your own best judgement as you read. If it seems like it's wrong--it probably is.
NEW BOOKS COMING--IN MONTHS TO COME
I will review some new books that are worth reading in the coming editions of THE ENTERPRISE...and give you a "heads up" as to why, what, etc. make them worth your time and money.
Until then, go back to the 8 point list and get started.
Best, John
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