THE ENTERPRISE
EXPECTATIONS--A FUNNY THING HAPPENS
A man once told me that the greatest curse one could face was unfulfilled expectations. The problem is that while our words and actions can create expectations, the real expectations are in the eyes, and mind of the person who has them--and we simply cannot control those. In the business world, Wall Street and economists create many impossible expectations.
Many companies spend untold millions trying to "shape" those expectations, usually to "tone them down." Employees try to manage the boss's expectations. Husbands try to live up to wives expectations--and vice versa. Kids aspire to meet parents (and peers) expectations. And on it goes. The toughest group of all are politicians. After all, campaigning is all about creating expectations to get elected. The problem is how to deliver on those expectations once you are in office. That is Obama's HUGE challenge--modify the expectations to the level that is deliverable--and make nice with the GOP-ers still in Congress to help get things done. (Pelosi & Reid are big liabilities. Waxman for Dingell is a dicey tradeoff--but takes the biggest advocate of subsidizing the car industry out of the power seat.)
IF YOU CAN DRIVE EXPECTATIONS LOW ENOUGH, EVEN POOR PERFORMANCE LOOKS "GOOD"
Both Home Depot and Lowe's surprised analysts with their earnings this past week. Of course one was down 31% and the other 24% from LY--but the earnings were not down as much as feared. Expectations are a funny thing. Bend them down, and even lackluster results are encouraging. I expect we'll see a lot of this in coming months. Expectations have been driven down. Results will be bad vs. LY, but may well be better than those lowered expectations. In the long haul, what matters is the earnings per share and return on equity. There's no easy "fudging" on those two. Analysts speculate that these two retailers were among the first to feel the impact of the housing downturn, and may be among the first to signal a climb back up from the doldrums--but don't hold your breath. It could be late 2009 before you see it. Expect it to be bad--and hope to be pleasantly surprised.
A VERY GOOD MOVE--PROMPTED BY OBAMA--PLUS SOME OTHER "OK" MOVES
Democrats are letting Senator Joseph I. Lieberman keep his chairmanship of the Senate Homeland Security Committee, despite his support of the Republican presidential bid of Senator John McCain. Now that is being bi-partisan in the right way. Of course, selfishly, the Democrats did not want Lieberman to caucus with Republicans because it would be one less vote in the Senate--but still a good move. Lieberman stood up for his principles and his friend and is still standing--a rarity among today's politicians. Obama is taking a very measured approach to assembling his first group of appointees. Give him good marks--whether you like Hillary as Sec. of State or not--she's so popular and so well known, and she IS smart enough, that she has a good chance at doing a credible job. AND, she's not a pacifist. It is the one job (assuming he clears the conflicts of interest) that having Bill whispering in her ear is not bad. After all, he's more experienced than she is. Geithner is a good pick. I don't like Daschle, but he's a decent choice for H&HS sec. Keeping Gates in defense "for now" would be a smart move, especially with Lieberman keeping his DHS committee chairmanship--so let's watch and see if Obama does it.
OBAMA'S BIGGEST PROBLEM? EXPECTATIONS--AT HOME AND ABROAD
Many of his supporters came from the parts of US citizenry that don't dig very deeply for information, accept 7 second sound bites on the TV news, and believed everything Barack Obama said he'd do for them. The cartoon below is so nearly true that it is scary. Obama is smart enough that he is already attempting to modify expectations. The problem he will have is no amount of toning down promises now can match the scope of his campaigning. Too many Americans have adopted their own version of the "Katrina Vicimitis"--that's where people got mad because some one didn't respond fast enough to their cries of "Save me, save me." Obama will struggle to meet the expectations he has created with middle class and lower income Americans. If he tries too hard, he'll "break the system," and harm the true wealth creators--who will revolt in one way or another--finding loopholes to suppress earnings and not pay more taxes.
Worse yet, many countries are waiting for his inauguration to begin their "lobbying" (in one way or another). He is so much more desirable to most foreign countries than George Bush, that they too will have huge expectations. Some, he will live up to. Others, he cannot possibly attain. What that will do to his stature and credibility remains to be seen. Hillary Clinton could help Obama by moderating expectations early on.
EXPECTATIONS ARE THAT SOMETHING HAS TO BE DONE WITH THE DOMESTIC CAR MAKERS & INDUSTRY (DON'T FORGET SUPPLIERS!!)
WHY DOESN'T THE UAW HELP BAIL OUT GM?
The UAW has $81B that it needs to invest--money that it got from none other than GM for taking over health care liabilities. Why doesn't the UAW help protect its own members jobs, and invest it in the automakers? Or is the UAW too smart to invest it there? If the investment is a bad one and the car makers don't make it, there won't be that many employees to insure anyway. Plus, the capability of UAW workers in GM & Ford plants to make cars effectively exists right now. Between automation and computers and improved work methods, American auto plants (some of them--not all) are pretty competitive on the labor hours it takes to build a car--assuming the car is designed well. It's just that each hour costs nearly twice as much. Quality is even much, much better, with Ford nearing Toyota levels of build quality, and some GM plants and models closing in. We'll see about durability as time goes by.
MANAGEMENT IS AT THE ROOT OF THE PROBLEM--GIVING THEM MORE MONEY WITH NO CHANGES & NO STRINGS WOULD BE STAGGERING STUPIDITY!
American automaker management has been at the root of the problem--along with Wall Street and investors' unrealistic expectations. The companies should have refused to sign some of those contracts over the past few decades, and taken the long strikes that would have resulted. Sure earnings would have suffered--but all management did by signing the contracts was to keep paying the ransom, and now, the time has come that it is no longer affordable. Now it's time to start the hard trimming. The dilemma faced by Congress: Chapter 11 would allow the legal termination of many of the most burdensome contracts with the UAW, retirees, landlords, etc. It also will cause the "victims" to wail mightily--and a labor friendly Democratic Congress and President can't have that.
After all, they were "promised" cradle to grave security for decades--and many get 95% pay for not working a lick. The problem? Legacy costs, legacy work practices which are inefficient, and do waste time and money, all embedded in contracts that should never have been signed. Chapter 11 allows changing most of those burdensome agreements, but it will also cripple or kill several large suppliers, rippling through the entire domestic US auto industry.
Some of the steps to start with:
Replace "some" (quite a few?) of the senior management--and some (most) of the board--(This is the most difficult choice to make, since some are OK--and doing good work! Too many have been there too long and are "in-grown.")
Freeze pay levels for management for a year, and cancel executive bonuses completely for the top 2-3 levels of executives
- Suspend all dividend payments to shareholders indefinitely and reinvest the money into the company
- LIquidate inventory--the cars known to be harder to sell--at rock bottom prices to generate cash
- Institute draconian spending controls under the guidance of a group of outsider "Cost Cutting Czars," -- to wring out excessive/wasteful spending practices
- Shut down excessive dealerships (Perhaps 1/3 of them?) based on sales, geography and profitability (Some communities will suffer, but the number of cars sold won't change, just the number of lots with inventory on them will go down) Imagine you were starting with a clean sheet of paper--and place dealers--then match that map with existing dealers (to keep).
- Shut down the least productive, least profitable plants (sure people will suffer--but it will happen anyway). Align capacity with realistic market share needs
- Eliminate the "jobs bank" program ***see below) that pays workers for not working--however necessary. No work = no pay. Period.
- Price cars competitively vs. competition and get rid of the rebates (financing programs can stay--they're needed in today's markets)
- Reduce health care programs for both workers and retirees, cutting the most lucrative benefits--dental, optical, etc. to maintenance or preventative levels
- Identify the consensus "best cars in the line" and promote them with comparative advertising (not rebates). Make sure there are not "duplicative models" to fragment sales of the best ones.
- Discontinue (or sell-off) excessive "models/brands" & take the write-offs/losses, shut down dealerships that sell them:
- GM--drop Saturn, Saab, Hummer and eliminate "different skin" which are "duplicative models"-- that are the same vehicle, sold under trim & different badges, keep only 5 "core brands" Chevrolet, Pontiac, Buick, Cadillac & GMC (limit to trucks only); Combine & share dealerships to sell & service multiple car brands.
- Chrysler--drop duplicated models with different "skins", leaving Jeep, Dodge and Chrysler names only; that's still too many but it's hard to trim further.
- Ford--drop Mercury, already gone are Jaguar & Land Rover, etc., leaving Ford, Volvo and Lincoln. That's plenty.
From a Detroit Newspaper: WAYNE, MI circa 2005 -- Ken Pool is making good money. On weekdays, he shows up at 7 a.m. at Ford Motor Co.'s Michigan Truck Plant in Wayne, signs in, and then starts working -- on a crossword puzzle. Pool hates the monotony, but the pay is good: more than $31 an hour, plus benefits. "We just go in and play crossword puzzles, watch videos that someone brings in or read the newspaper," he says. "Otherwise, I've just sat." Pool is one of more than 12,000 American autoworkers who, instead of installing windshields or bending sheet metal, spend their days counting the hours in a jobs bank set up by Detroit automakers and Delphi Corp. as part of an extraordinary job security agreement with the United Auto Workers union. The jobs bank programs were the price the industry paid in the 1980s to win UAW support for controversial efforts to boost productivity through increased automation and more flexible manufacturing.
TO READ MORE ABOUT THIS: http://www.npr.org/templates/story/story.php?storyId=5185887
BUT--THE JOBS BANK IS NOT THE MAIN PROBLEM--IT'S SIMPLY MISMANAGEMENT
It is just a symptom of excesses throughout the industry that must be cleaned out. Too many models, too many plants, too many badges, too many dealerships, too many management, too much COMPLEXITY in designs, too many benefits, too much pay, too many Union work rules, too many obsolete practices, ... get it? And the "great new hope" the Volt electric car? It is expected to lose money even priced at $40,000, and that's after GM has negotiated a subsidy of $7500 per car (already in a law that has been passed) and a contingent deal that would declare the Volt to be calculated into CAFE standards as a 100-mpg car! If you think charging a car for 6 hours to drive 40 miles is a feat of engineering, think again. Next time you go out running errands, etc., set your trip odometer to zero and watch how fast 40 miles comes up. That's like having a cell phone you have to charge all night to talk for an hour. NUTs!
HYBRIDS ARE A RUSE--EVEN TOYOTA ISN'T "CLEAN"
In case you have a some money left that the stock market crash hasn't wiped out and want to buy a Lexus 460, the top of the line model, you can get the hybrid or if you want better mileage get the regular gas version. What? Right! Hybrids are a hoax too. If you add the premium they cost over regular "high mileage cars" (like Honda produces), the payback time on gas savings is NEVER! And, if consumers really saw a truly "GREEN" car that had a payback, they'd buy it. Why do you think the Honda Fit and Civic are such good sellers? Check the mileage ratings on them. Compare.
HOPELESS--NOT QUITE--BUT ALMOST
If some group in government gets really smart, they might put somebody like Mitt Romney in charge of the US auto bailout (What a deal, if he fails, he is damaged politically, as is his party; If he succeeds, it is the Democrats who chose him that can beat their chests. The problem is, EVEN IF US AUTOMAKERS GET REALLY COMPETITIVE, THEY MIGHT NOW SUCCEED. Why? Because there are 2-3 decades of damaged trust and failed promises wrapped in all those American cars. Sure there are some good ones out now. Ford's Fusion; Chevy's Malibu, Caddy's CTS, Buick's Enclave, Chrysler's ????. But head to head with Honda, Toyota, Subaru, Hyundai, BMW and Mercedes--they still don't win the consumer choice often enough. It takes a decade, give or take a few years, or maybe a whole generation to reverse a legacy of mistrust, quality problems and LOUSY RESALE VALUES.
EXPECTATIONS: WRITE IT DOWN: ANY KIND OF TURNAROUND FOR THE AMERICAN AUTOMAKERS, "BAILOUT OR NOT" IS A 7-10 YEAR PROPOSITION IF DONE RIGHT, 2015!
Things happen too slowly in the auto industry. Designs take 3-4 years to come to fruition. Then there is the problem of plant conversions. And legacy issues to resolve. If Obama pushes the Energy "project" concurrently, there could be some synergies that help US carmakers. Going after infrastructure projects, like highways and bridges might also be slightly synergistic. Our country is based on energy, cars/trucks, and roads. We'd better pay attention to all three. Try to imagine life with out those three key ingredients. And cars & trucks are next door neighbors technologically to weapons systems. Both use a lot of the same or similar technology, so defense spending could be loosely tied in for technology development. Is this all "pie in the sky" dreaming. Perhaps not. How to go about it, with a Democratically controlled government might be a big issue, but in times of recession, the government has to spend--even if it risks creating big inflation, because no one else can afford to.
CHANGING THE EXPECTATIONS? WHEN SOMEONE ELSE SAYS IT BETTER---SHARE THAT
This is a column sent to me by Mike Hoban, a "friend by email" who I first met through my son Mike (they worked for the same company). I learned that Mike writes a column for a local paper in Indiana, where he lives. He has shared many of his columns with me over the years we have been corresponding. I thought this one was particularly on target, especially given my line in last week's edition asking "Where can I get a job like that?" I guess a lot of people wonder that too.
The Failure Bonus – Sign Me Up!
Dear Boss:
It’s nearing the end of the year and we’ll soon be conducting my annual performance review and I must say it’s been a dreadful year. I’ve lost customers, missed my revenue targets and have had to lay off 30% of my department. Things are a mess around here and I know the whole company has lost a ton of money this year. But I’m looking forward to my bonus. Yes, I did say bonus. I’ve read that the Wall Street banks have set aside almost $20 billion for bonuses this year despite the most awful performance imaginable. They had to be bailed out by the government after destroying several hundred billion dollars of investors’ wealth and their actions contributed to the global financial chaos. Sure, I had a really lousy year as did our company, but I didn’t screw up as badly as Wall Street did so I think I deserve a bonus.
That news about the banks expecting to pay out those huge annual bonuses to people who have run their companies into the ground was a revelation for me. I used to be so naïve and thought that a bonus was something earned by someone as a result of excellent performance. A reward for accomplishments. What was I thinking?
Besides, to borrow a phrase from those Wall Street executives, “it wasn’t my fault.” I love that phrase and used it all the time as a kid to avoid accountability, but I think it’s appropriate even now. Wall Street blames “economic head winds” and “perfect storms” and lots of other things supposedly beyond their control.
So if this economic crisis wasn’t their fault, it seems reasonable to continue their year-end bonuses. And that logic works for me. You see boss, all my missed deadlines, the customer complaints, the budget overruns, the high absenteeism on the part of my employees – it wasn’t my fault. I had some crazy head winds and perfect storms of my own which affected my and my department’s performance.
Boss, I think those Wall Street wizards are on to something here. The Phillies won the baseball World Series earlier this week and they will get very handsome bonuses for winning. But shouldn’t the last place Seattle Mariners who lost almost twice as many games as they won also get big bonuses? That’s right. Perhaps it wasn’t their fault they stunk up the league with their poor performance. I’m sure there are head winds and perfect storms in baseball and it wouldn’t be fair to penalize them for something out of their control. Besides, I’m sure that like on Wall Street, they worked hard.
Boss, now I realize that “pay for performance” doesn’t necessarily mean pay for excellent performance. It could mean pay for mediocre performance or in my case, for wretched performance. Why didn’t I catch that nuance before? And since rewards apparently have no connection with results, I suppose we’ll have to reward both candidates on November 4 regardless of their results. My failure bonus – awesome. Two Presidents – priceless
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Mike Hoban, of Crown Point, IN is a senior consultant for an international leadership development and training firm. Send mail to him at [email protected]
THANKS MIKE--YOU SAID IT SO WELL...
YOU GET IT BY NOW--EXPECTATIONS DETERMINE BEHAVIORS--GOOD OR BAD.
I don't know how much else to say about the coming Administration, and how its policies will influence the current equity/financing/banking meltdown. It will be grim. I also don't know all of the things that need to be done to "save" the US automakers--IF they are "save-able."
I do know that there are hundreds of smart, competent managers, executives and consultants out there who can help. It's time to draw on all the brainpower in the USA. Hell, let's "put a car on the moon"--figuratively speaking, and let's do it with renewable, cleaner fuel sources. Impossible? Nope! Difficult? Sure. Better that we do it before the Chinese figure it out.
Best, John
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