Wednesday, November 30, 2011

Why Big Corporations Are Failing - 1

Over the past two postings, we have talked about the critical role played by small businesses and entrepreneurs in building our economy, and the need to “buy locally” to sustain our employed population.  While we are supporting all of that at the smaller end of our economy, what is the current picture at the large, (multi-)national corporate end of the spectrum? 

In a single word, it is “disconnected.”  With certainly some notable and admirable exceptions, many big corporations and their leaders have become isolated, disconnected, and not really plugged into the customer base they attempt to serve.  Many corporate headquarters have become not leaders of the economic empires they have created, but fortresses built to preserve the leadership itself.  Size for its own sake has become the objective, and the results are unmanageable entities in which management anarchy and disconnection often reigns.  This shows up in two distinctive characteristics:

#1. Loss of the “product guys.”  A few years back, colleges and universities created an educational cash cow program called the Masters in Business Administration (the MBA), and to sell it they convinced corporate America that these were the people needed to run business operations.  They were trained in manipulating financial statements, “crunching the numbers,” interpreting market surveys and demographic statistics, and steeped in supply-chain concepts.  With “MBA” stamped on their foreheads, they were hired directly into (upper-)middle management good-income positions to lead the company’s future.  Unfortunately, what they were not steeped in was the actual core product of their industry which is the real heart of the corporation’s existence.  They did not spend time out in the plant, the warehouse, making the sales calls, seeing firsthand how their customers actually use their products day-to-day.  Coming into the corporation at the management level, thinking that business success is simply a matter of managing the income statement and generating market share, these kinds of corporate leaders never really understood the product that justifies the corporate being, or the people throughout the corporation who make it all happen (or not).  They did not understand all of the different pieces that must come together to get that product into the hands of customers.  The many dangers of missing that understanding is why the smart business owners of yesterday always started their rising stars at the bottom of the organizational rung and let them work themselves up – so that they would truly know how that business worked top to bottom.

Bob Lutz is a lifetime car guy.  He was hired by GM in 2000 to try to turn that corporation around on the inside after years of GM’s downward slide in sales, market share, and profitability against its competition.  His very excellent book, Car Guys Vs. Bean Counters, The Battle for the Soul of American Business, is highly recommended to those interested in understanding the decline of American business.  It details his experiences encountering GM in 2000 versus the company he had left 30 years earlier towards becoming a successful auto manufacturing executive.  This giant corporation that once exemplified American can-do success had become choked with focus groups, decision-making-by-committee, oppressive generations of statistical numbers and irrelevant marketing projections.  All while the “car guys” (of whatever gender) – the people who lived, breathed, designed and built cars simply because they loved cars and truly understood Americans’ longstanding love affair with their cars – were marginalized to the sidelines.  The finance/MBA folks focusing on the numbers had taken control of the company at the expense of the engineer / product designers who intuitively understood the product and the people who wanted to buy it.  This gap resulted in a massive disconnect between company and consumer, fully exploited by the Japanese auto industry, ultimately leading GM into structured bankruptcy.

We can only hope that real automotive people are moving back into running the American auto manufacturers; early indications show such a potential revival.  What is clear is that GM’s experience is but an example of a wider-spread problem – that when the creative entrepreneur who started the business based on his/her love of the product move out and are replaced by “the suits” (the finance people who should be supporting the business leaders not trying to run things), that is when the disconnect happens between corporation and consumer.  (E.g. – think Steve Jobs’ tenures at Apple.)  It explains why the consumer takes a product home and, after numerous bad experiences trying to assemble / use / consume it, is fully convinced that because it is so unusable / unfriendly the corporation’s leaders must surely have never actually used their own product themselves.

This disconnect between corporation and consumers also creates an internal disconnect between corporate leaders and workers.  Corporations that get too big, well beyond the point where size creates true benefits of scale, progressively get further removed from what is actually happening inside their companies.  Leaders are so busy holding the seams of the organization together, focusing on their own survival and personal monetary success and promoting the image of the company instead of strengthening its product, they become virtually clueless about the substance of what is actually happening at the factory / retail / classroom / branch office level.  So employees and operational middle-managers are either ignored or left to their own decision making without adequate guidance, supervision or ethical example.  Or they become so bottled up in ill-thought, overly-broad generic corporate-written rules, regulations and policies that they cannot respond to the real-world needs, problems and creative ideas that arise each working day.  In management theory it is important to delegate and allow for initiative in the ranks; such has been a hallmark of American business and military success.  But in the last few years we have heard far too many excuses from business and educational leaders that “I never knew that was happening,” not understanding that such ignorance does not take them off the hook; it puts them squarely on it.

Truth is, large corporate size can be a good ingredient for business success.  It can bring an aggregate power to production and marketing leading to cheaper cost and wider distribution.  But when size creates insulation, and corporate leaders are no longer connected to nor understanding of their customers or employees, when corporate success is no longer shared top-to-bottom in recognition of the interdependency and contributions of all levels and functions of employees, and mere personal survival is more important than product, then failure sits at the CEO’s door.  In big corporate America, we have too many instances of the wrong people running the show.  We need the product people back in charge, and the finance people back at their computers doing the important advisory job keeping financial score.  Good business success is about good product from good employees clearly focused on customer needs.  When that is in place, the balance sheet will be automatically taken care of.

[Next upcoming posting: #2 – Corporate Customer Service]

Saturday, November 5, 2011

Don't Bank On It

In my last two blog postings, I wrote about the importance of small businesses to our American economy, and the need to “buy local” and support our neighbors economically.  Business and economics are not my normal areas of continuing discussion.  But poll after pundit keeps saying that jobs and the economy are the #1 priority on the minds of Americans and the dominant 2012 election issues.  So these continue to seem appropriate areas of reflection for this and some subsequent postings as we begin to head into 2012.

Which brings us to the subject of the American banking industry.  Banking, and more specifically lending, is really a ridiculous business proposition, in my opinion.  A great aura is built up to make us believe that getting credit or a loan is a “reward,” an anointment a banker makes certifying our good financial character.  The whole banking persona is geared to make us believe that “they” are the dominant player in our relationship, and we are the subservient ones begging for their endorsement.  But this is all crap.  They hold the purse (temporarily); but the borrowing public holds the purse strings.

As a young adult, I thankfully came to an early conclusion that bankers needed me at least as much, if not more, than I needed them – assuming I was willing to reasonably live within my means.  The worst liability a banker has is cash sitting in the vault unused.  The deposit side of a banker’s ledger yields no income to the banker; it is simply their debt to their depositors.  Bankers only make money by lending or investing that money – to non-bankers like you and me.  And there are plenty of bankers/credit companies looking to loan their money.  So when I take out a loan, on which I am willing to pay the bank interest (income to them), who is doing whom the real favor?

The problem is, during the last three years of economic crisis brought on by the biggest banks, that “mutual interest” has been forgotten.  Those big banks who irresponsibly went headlong into risky investments and paper profits from worthless mortgages have tried to recover not through newly-found good business practices and management, but by taking one-way handouts, creating new nickel-‘n-dime side income (fees), and trampling on good customers.

Americans have always had a hate affair with the banking industry, often with good cause, going back to our earliest founding.  Our forefathers resisted establishing any national bank, or concentrating the banking industry into too few hands.  In the early 1900s, the American economy was dominated, if not ruled, by the mega-rich of Wall Street, not unlike today.  President Theodore Roosevelt tried to break up this monopoly somewhat, but it took the extreme depression of the 1930s to finally break this banking stranglehold on the economy and on Congress, resulting in some of the best regulatory legislation from that decade to keep these financial titans in check from risky speculation.  Unfortunately, the 1990s eliminated many of those and other newly-needed restraints, resulting in the free-wheeling rush to unsubstantiated paper profits that created the 2008 banking crash.  Three years later we still have not cleaned up that mess; apparently this substantial recession has not provided Congress with the sufficient gumption to reinstate the regulatory controls truly needed.  Wall Street bankers and their lobbyists are still playing fast and loose, all in the name of “free enterprise” (which is not free), while paid-for friends in Washington inexplicably go along with them.

If ever a meeting of diverse minds between Tea Partiers and Occupy Wall Streeters could ever find common ground, irresponsible banking would seem to be the issue to do it.  In the meantime, Bank of America – probably now the worst run company in America’s worst run industry – continues to be the leader in arrogantly shooting itself in the foot.  Seemingly every week new stories emerge about mortgages improperly foreclosed, new fees imposed to make up for “lost” (i.e. “blown”) income, and an arrogance to its customer base that no amount of p.r. can ever disguise.  Other big guys are just as bad, but a bit less obvious.

The truth is, banks are just not the same as other normal manufacturing / retail / service businesses.  Why?  Because first and foremost their “inventory” is other people’s money held in trust, not their own.  If a private investor wants to wildly speculate with his/her own money, go for it – hopefully do well, or eat the consequences, your choice.  But my bank is holding my money to facilitate my bookkeeping and bill paying.  And for a small interest income on my deposit, I am also OK with the bank making some profit on their own through their larger reasonable interest fees.  But they need to stop thinking that this is their money to use as they please.  I am a depositor, not an investor in their bank.  Their first job is to ensure that their fiduciary responsibility to me is secure.

Since responsible government regulation does not seem to be able to manage these banking CEOs, what is left?  Well, some people have shown that the consumer marketplace still has some power to work.  Recently, a very public online petition organized by one young fed-up lady in Washington, D.C. garnered over 350,000 signatures; the ensuing publicity halted an industry-wide move towards a planned $5/month debit card usage fee.  More people are pulling their money out of these big banks and moving it to smaller, local community banks and credit unions, where people rather than just balance sheets still seem to matter.  And people are borrowing less and saving more; in the short term this hurts our overall consumer economy but may force bankers to get back to honest basic business.

The problem with the bank bailout attempt was that it was done through the banks and led by banking industry veterans.  It was a wrong mindset.  If we had gone directly to the public holding problematic mortgages and worked with them directly instead of the bankers, we would probably already be out of this economic mess.  The idiocy of banking is that when a loan is paid off (or even foreclosed), banks have to immediately go find new borrowers for that same money, else no profits are to be had.  (Just look at all the mailers asking me to take out new credit cards and refinance my mortgage in the midst of this supposed no-credit recession.)  Conceptually, loan money is never paid back, but is in a constant state of lending.  If the bankers had just skipped foreclosures, left people in their houses, and made any kind of refinancing deal possible with troubled buyers (who cares whether they pay it back anytime soon as long as some monthly payments are coming in), then deposits would still be lending, profits would still be coming in, the housing industry would still be reasonably intact, and the economy would be injured but doing reasonably well.  Our paper-based economy would still be going strong.

Mass foreclosures due to non-creative bankers mentally stuck in an old and bad business model of their own creation engenders neither sympathy nor a sense of responsibility on my part.  So take your business elsewhere and get out of their game.  Buy locally from small banks whenever you can.  There are still options.  The consumer marketplace still works.