One thing this recession can provide executives is more time. Typically the pace of business slows during a recession so it creates opportunity for dialogue and reflection. This gives business leaders an opportunity to adopt a "fresh take."
Adopting a fresh take is what John Chambers, CEO of Cisco Systems, is seeking to do. Since its founding in 1984, Cisco has endured six recessions (including the current global downturn). As Chambers told BBC News, the dotcom bust of 2001 was a very serious threat. "[Customers] were gone," said Chambers. "We went from 70% annual growth to minus 45%."
As before, Chambers is working to ensure that his company will emerge stronger from this recession than before. Cisco's recent purchase of Pure Digital Technologies (maker of the Flip camera) opens the personal digital video market. Cisco is also offering a new videoconference application, Telepresence. In short, Cisco is looking for new opportunities in new places, a process that requires a fresh outlook.
Having such an outlook does not happen by accident. You need to discipline yourself to adopt new and different perspectives. First, you need to assess where you stand now and in the short term. With acknowledgment to the 4Ps offered by the marketing thought leader, Philip Kotler, I propose three questions framed around three words each beginning with the letter P:
Do our products continue to meet customer needs? Product development for most businesses is a continuum. You never stop developing and refining your offerings. But as Cisco has done, you need to ask yourself what other businesses you might enter or exit. Reducing the number of products in order to focus on core products is a strategy, as is doing the opposite. Talk to your customers about how you might serve them better. But don't take their word as the final one. After all, as Henry Ford famously opined, "If I had asked my customers what they wanted, they would have said a faster horse." You need to lead the development process.
Do our processes ensure that we can meet those needs? Now is the time to turn your creative types loose to optimize design, development, operations and customer service. Give them the opportunity to streamline processes. Look to take out the steps that may satisfy internal requirements but add nothing to product or service value.
Do we have the right people in place to fulfill those needs? Look for opportunities to put up-and-comers in positions of greater responsibility. Give them the authority they need to develop new products or redesign new processes. Managers stay awake nights worrying if they have right people in place — so take this opportunity to find out.
Looking at your business in new ways will not necessarily save it. If you are on the wrong side of the business cycle, as some manufacturers, newspapers and television stations have found themselves, your business will not survive as is. It will need to be redesigned completely. And even then there are no guarantees.
Even businesses that will survive must find new ways to meet customer needs. That is why adopting a fresh take approach is vital to emerging from this severe recession. Now is an opportunity to refocus yourself and your business on what you do well — and could do better.
Monday, October 12, 2009
Has Obama Built a Strong Foundation?
President Obama's first stretch in office, focusing on a second key dimension: laying a foundation. Has he laid a solid foundation for accomplishing his A-item priorities during the remainder of his first year in office?
Early wins - the first dimension - help new leaders get off to a good start, but they are not sufficient for continued success. Like all newly-appointed executives, President Obama should also have begun to lay a foundation for the deeper changes he plans to make. The process is not unlike the launching of a multi-stage rocket into orbit; securing early wins (or avoiding early losses) lifts a new leader off the ground, and efforts at foundation-building provide the thrust necessary to achieve orbit and avoid falling back to earth.
In evaluating President Obama's effectiveness on this dimension, the first question concerns whether he has appointed a strong team of officials to develop his policies and press for their implementation. My assessment is a qualified "yes." He got off to a record-setting start before the inauguration with appointment of key officials that virtually everyone acknowledged were highly qualified, including the critical hold-over of Robert Gates at Defense. Then the President hit some turbulence when several senior appointees withdrew due to tax troubles. There also was some early criticism of the performance of Timothy Geithner, and the glacial pace at which sub-cabinet appointments at Treasury were made; ironically this was partially the result of the very strict vetting process the President put in place. (The recent Swine flu outbreak has also highlighted similar staffing weaknesses at the Department of Health and Human Services).
At this point, however, Geithner appears to have recovered from his early stumbles. The appointment of Gates is looking inspired as he uses his credibility to push through a reform agenda at Defense. Hilary Clinton is proving to be both a very solid choice on the substance and a big political asset in laying the foundation for the President's international agenda. No other senior officials have yet found themselves in really hot water. While negative surprises are of course possible, at this point everything seems on track with the team.
Less good has been the President's approach to the other key element of foundation building: creating supportive alliances to push forward his legislative agenda in this session of Congress. The stimulus package is a case in point. President Obama won passage of the stimulus bill and advanced his budget largely on the strength of Democratic control of the Congress. But by ceding control of the drafting of the stimulus bill to Democratic law makers and by pushing the resulting bill through the Senate with the minimum possible support for Republicans, he immediately positioned himself as a partisan-in-sheeps-clothing. The bloat associated with the bill also opened him up for attack from fiscal conservatives who rightly paint it as a sign that Democrats have not forsaken their high-spending ways.
Given the ambition of his policy agenda, especially in areas such as health-care and energy, Obama cannot hope to move things forward without building a stronger coalition of the center. This will mean a combination of more inclusive and politically moderate policy development combined with continued outreach and bridge-building.
Given this, my assessment is a solid "B+" for laying a foundation for achieving key goals by the end of his first year.
Early wins - the first dimension - help new leaders get off to a good start, but they are not sufficient for continued success. Like all newly-appointed executives, President Obama should also have begun to lay a foundation for the deeper changes he plans to make. The process is not unlike the launching of a multi-stage rocket into orbit; securing early wins (or avoiding early losses) lifts a new leader off the ground, and efforts at foundation-building provide the thrust necessary to achieve orbit and avoid falling back to earth.
In evaluating President Obama's effectiveness on this dimension, the first question concerns whether he has appointed a strong team of officials to develop his policies and press for their implementation. My assessment is a qualified "yes." He got off to a record-setting start before the inauguration with appointment of key officials that virtually everyone acknowledged were highly qualified, including the critical hold-over of Robert Gates at Defense. Then the President hit some turbulence when several senior appointees withdrew due to tax troubles. There also was some early criticism of the performance of Timothy Geithner, and the glacial pace at which sub-cabinet appointments at Treasury were made; ironically this was partially the result of the very strict vetting process the President put in place. (The recent Swine flu outbreak has also highlighted similar staffing weaknesses at the Department of Health and Human Services).
At this point, however, Geithner appears to have recovered from his early stumbles. The appointment of Gates is looking inspired as he uses his credibility to push through a reform agenda at Defense. Hilary Clinton is proving to be both a very solid choice on the substance and a big political asset in laying the foundation for the President's international agenda. No other senior officials have yet found themselves in really hot water. While negative surprises are of course possible, at this point everything seems on track with the team.
Less good has been the President's approach to the other key element of foundation building: creating supportive alliances to push forward his legislative agenda in this session of Congress. The stimulus package is a case in point. President Obama won passage of the stimulus bill and advanced his budget largely on the strength of Democratic control of the Congress. But by ceding control of the drafting of the stimulus bill to Democratic law makers and by pushing the resulting bill through the Senate with the minimum possible support for Republicans, he immediately positioned himself as a partisan-in-sheeps-clothing. The bloat associated with the bill also opened him up for attack from fiscal conservatives who rightly paint it as a sign that Democrats have not forsaken their high-spending ways.
Given the ambition of his policy agenda, especially in areas such as health-care and energy, Obama cannot hope to move things forward without building a stronger coalition of the center. This will mean a combination of more inclusive and politically moderate policy development combined with continued outreach and bridge-building.
Given this, my assessment is a solid "B+" for laying a foundation for achieving key goals by the end of his first year.
MBAs vs. Entrepreneurs: Who Has the Right Stuff for Tough Times?
The one growth business in this shrinking economy is speculation about where MBAs and other elite students will flock now that Wall Street is a vast wasteland. "What will new map of talent flow look like?" wondered a piece last month in the New York Times. The tentative answer: towards government, the sciences, and teaching, "while fewer shiny young minds are embarking on careers in finance and business consulting."
Just five days after that article, the Times was at it again, chronicling the difficult career choices for business students, including one former Goldman Sachs intern who started her own shoe-importing company, and a Wharton grad contemplating rabbinical studies. (He wound up in real estate.)
Now, I understand the use of students from elite business schools as a proxy for "talent" in the business world. But as the economy experiences the most deep-seated changes in decades, maybe it's time to change our minds about what kinds of people are best-equipped to become business leaders. Is our fascination with the comings and goings of MBAs as obsolete as our lionization of investment bankers and hedge-fund managers? Is it time to look elsewhere for the "best and the brightest" of what business has to offer?
One place to look for answers is the fascinating research of Professor Saras Sarasvathy, who teaches entrepreneurship at the Darden Graduate School of Business at the University of Virginia. It's been a long time since I've encountered academic research as original, relevant, and fascinating as what Professor Sarasvathy has done, in a series of essays, white papers, and a book. Her work revolves around one big question: What makes entrepreneurs "entrepreneurial?" Specifically, is there such as thing as "entrepreneurial thinking" — and does it differ in important ways from, say, how MBAs think about problems and seize opportunities?
The answer, Sarasvathy concludes, is an emphatic yes — and the differences boil down to the "causal" reasoning used by MBAs versus the "effectual" reasoning used by entrepreneurs. Causal reasoning, she explains, "begins with a pre-determined goal and a given set of means, and seeks to identify the optimal — fastest, cheapest, most efficient, etc. — alternative to achieve that goal." This is the world of exhaustive business plans, microscopic ROI calculations, and portfolio diversification.
Effectual reasoning, on the other hand, "does not begin with a specific goal. Instead, it begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with." This is the world of bootstrapping, rapid prototyping, and guerilla marketing.
The more Sarasvathy explains the differences in the two styles of thinking, the more obvious it becomes which style matches the times. Causal reasoning is about how much you expect to gain; effectual reasoning is about how much you can afford to lose. Causal reasoning revolves around competitive analysis and zero-sum logic; effectual reasoning embraces networks and partnerships. Causal reasoning "urges the exploitation of pre-existing knowledge"; effectual reasoning stresses the inevitability of surprises and the leveraging of options.
The difference in mindset, Sarasvathy concludes, boils down to a different take on the future. "Causal reasoning is based on the logic, To the extent that we can predict the future, we can control it," she writes. That's why MBAs and big companies spend so much time on focus groups, market research, and statistical models. "Effectual reasoning, however, is based on the logic, To the extent that we can control the future, we do not need to predict it." How do you control the future? By inventing it yourself — marshalling scarce resources, understanding that surprises are to be expected rather than avoided, reacting to them fast.
Ultimately, she says, entrepreneurs begin with three simple sets of resources: "Who they are" — their values, skills, and tastes; "What they know" — their education, expertise, and experience; and "Whom they know" — their friends, allies, and networks. "Using these means, the entrepreneurs begin to imagine and implement possible effects that can be created with them...Plans are made and unmade and revised and recast through action and interactions with others on a daily basis."
Sounds like a plan to me! So the next time you read an article about what MBAs are doing, don't forget to think about what entrepreneurs are doing as well. They're the ones with the right stuff for tough times.
Just five days after that article, the Times was at it again, chronicling the difficult career choices for business students, including one former Goldman Sachs intern who started her own shoe-importing company, and a Wharton grad contemplating rabbinical studies. (He wound up in real estate.)
Now, I understand the use of students from elite business schools as a proxy for "talent" in the business world. But as the economy experiences the most deep-seated changes in decades, maybe it's time to change our minds about what kinds of people are best-equipped to become business leaders. Is our fascination with the comings and goings of MBAs as obsolete as our lionization of investment bankers and hedge-fund managers? Is it time to look elsewhere for the "best and the brightest" of what business has to offer?
One place to look for answers is the fascinating research of Professor Saras Sarasvathy, who teaches entrepreneurship at the Darden Graduate School of Business at the University of Virginia. It's been a long time since I've encountered academic research as original, relevant, and fascinating as what Professor Sarasvathy has done, in a series of essays, white papers, and a book. Her work revolves around one big question: What makes entrepreneurs "entrepreneurial?" Specifically, is there such as thing as "entrepreneurial thinking" — and does it differ in important ways from, say, how MBAs think about problems and seize opportunities?
The answer, Sarasvathy concludes, is an emphatic yes — and the differences boil down to the "causal" reasoning used by MBAs versus the "effectual" reasoning used by entrepreneurs. Causal reasoning, she explains, "begins with a pre-determined goal and a given set of means, and seeks to identify the optimal — fastest, cheapest, most efficient, etc. — alternative to achieve that goal." This is the world of exhaustive business plans, microscopic ROI calculations, and portfolio diversification.
Effectual reasoning, on the other hand, "does not begin with a specific goal. Instead, it begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with." This is the world of bootstrapping, rapid prototyping, and guerilla marketing.
The more Sarasvathy explains the differences in the two styles of thinking, the more obvious it becomes which style matches the times. Causal reasoning is about how much you expect to gain; effectual reasoning is about how much you can afford to lose. Causal reasoning revolves around competitive analysis and zero-sum logic; effectual reasoning embraces networks and partnerships. Causal reasoning "urges the exploitation of pre-existing knowledge"; effectual reasoning stresses the inevitability of surprises and the leveraging of options.
The difference in mindset, Sarasvathy concludes, boils down to a different take on the future. "Causal reasoning is based on the logic, To the extent that we can predict the future, we can control it," she writes. That's why MBAs and big companies spend so much time on focus groups, market research, and statistical models. "Effectual reasoning, however, is based on the logic, To the extent that we can control the future, we do not need to predict it." How do you control the future? By inventing it yourself — marshalling scarce resources, understanding that surprises are to be expected rather than avoided, reacting to them fast.
Ultimately, she says, entrepreneurs begin with three simple sets of resources: "Who they are" — their values, skills, and tastes; "What they know" — their education, expertise, and experience; and "Whom they know" — their friends, allies, and networks. "Using these means, the entrepreneurs begin to imagine and implement possible effects that can be created with them...Plans are made and unmade and revised and recast through action and interactions with others on a daily basis."
Sounds like a plan to me! So the next time you read an article about what MBAs are doing, don't forget to think about what entrepreneurs are doing as well. They're the ones with the right stuff for tough times.
India's Informal Economy and the Global Recession
There are four distinct characteristics of the Indian economy that soften the impact of today's conditions: demographics, regulation, exports, and the informal economy.
First, India's demographics are favorable to growth. It's a young country with low dependency ratios. Millions of Indians under the age of 30 are slowly receiving better access to healthcare and education, which enables younger Indians to drive the economy by virtue of middle class growth. They will become consumers, spend discretionary income, and enjoy the associated status. This growing middle class will continue to create large levels of domestic customer demand for goods and services.
Second, the fall of Satyam may turn out to be a blessing in disguise for India. The scandal has intensified calls in the country for greater financial transparency, corporate governance, and shareholder activism. Furthermore, the swift and strong response by the country's regulatory agencies has provided global investors with a positive signal that the Indian government, while not perfect, is dead serious about smart financial regulations and accountability.
Third, the Indian parliament is on the verge of passing a bill that would create hundreds of special economic zones (SEZs) around the coastal perimeter of the country. These zones provide the Indian government a vehicle with which to attract significant foreign direct investment (FDI) from overseas and indigenous multinational corporations (MNCs). The SEZs, while not without controversy, are attractive to global investors for their favorable land policies and generous tax incentives. In the global race for FDI, India's SEZs could afford it an unmatched competitive advantage among other emerging economies.
Finally, and most critically, the country's vibrant informal economy, in which goods and services have been traded in the absence of official markets for hundreds of years, affords India's overall economy an invaluable -- and unique -- layer of protection. While traditional development and financial statistics estimate Indian market segments for the global business community, these analyses rarely capture the true weight of this economic activity, which by nature is difficult to approximate.
As the global recession affects its foreign direct investment inflows and exports, India's informal economy acts as a piece of elastic, connective tissue that picks up slack in the system and provides markets for goods and services that may not have been otherwise traded given the circumstances. The existence of this informal economy combined with an emerging middle class, a growing financial regulatory environment, and the creation of more SEZs makes India uniquely situated to survive the current economic storm, no matter if it is a roaring tiger or a slowly moving elephant.
Semil Shah is a principal at India Strategy Consulting, a boutique services firm that advises small and medium enterprises and global universities on how to approach India strategically. Semil is also a principal at de Novo Labs, which takes equity positions in clients' start-up ventures relating to India.
First, India's demographics are favorable to growth. It's a young country with low dependency ratios. Millions of Indians under the age of 30 are slowly receiving better access to healthcare and education, which enables younger Indians to drive the economy by virtue of middle class growth. They will become consumers, spend discretionary income, and enjoy the associated status. This growing middle class will continue to create large levels of domestic customer demand for goods and services.
Second, the fall of Satyam may turn out to be a blessing in disguise for India. The scandal has intensified calls in the country for greater financial transparency, corporate governance, and shareholder activism. Furthermore, the swift and strong response by the country's regulatory agencies has provided global investors with a positive signal that the Indian government, while not perfect, is dead serious about smart financial regulations and accountability.
Third, the Indian parliament is on the verge of passing a bill that would create hundreds of special economic zones (SEZs) around the coastal perimeter of the country. These zones provide the Indian government a vehicle with which to attract significant foreign direct investment (FDI) from overseas and indigenous multinational corporations (MNCs). The SEZs, while not without controversy, are attractive to global investors for their favorable land policies and generous tax incentives. In the global race for FDI, India's SEZs could afford it an unmatched competitive advantage among other emerging economies.
Finally, and most critically, the country's vibrant informal economy, in which goods and services have been traded in the absence of official markets for hundreds of years, affords India's overall economy an invaluable -- and unique -- layer of protection. While traditional development and financial statistics estimate Indian market segments for the global business community, these analyses rarely capture the true weight of this economic activity, which by nature is difficult to approximate.
As the global recession affects its foreign direct investment inflows and exports, India's informal economy acts as a piece of elastic, connective tissue that picks up slack in the system and provides markets for goods and services that may not have been otherwise traded given the circumstances. The existence of this informal economy combined with an emerging middle class, a growing financial regulatory environment, and the creation of more SEZs makes India uniquely situated to survive the current economic storm, no matter if it is a roaring tiger or a slowly moving elephant.
Semil Shah is a principal at India Strategy Consulting, a boutique services firm that advises small and medium enterprises and global universities on how to approach India strategically. Semil is also a principal at de Novo Labs, which takes equity positions in clients' start-up ventures relating to India.
Recession Leadership: On Sinking the Boat, Missing the Boat, and Rocking the Boat
ames Surowiecki reminded us of the bold strategic moves that repositioned companies and redefined industries during periods of turmoil. He told the story of how Kellogg, during the Great Depression, "doubled its ad budget, moved aggressively into radio advertising, and heavily pushed its new cereal, Rice Krispies." As a result, Kellogg became (and remains) the industry's dominant player. It's also worth remembering, he points out, that Texas Instruments introduced the revolutionary transistor radio during a recession in 1954, and that Apple launched the iPod six weeks after the September 11 terrorist attacks — hardly the best time to start a pop-culture phenomenon.
So why, Surowiecki wonders, given all the evidence of the chance to gain ground during periods of economic upheaval, "are companies so quick to cut back when trouble hits?" One answer involves a distinction made by two business professors nearly 25 years ago. In a paper published by the Journal of Marketing, Peter Dickson and Joseph Giglierano argue that executives and entrepreneurs face two very different sorts of risks. One is that their organization will make a bold move that fails — a risk they call "sinking the boat." The other is that their organization will fail to make a bold move that would have succeeded — a risk they call "missing the boat."
Naturally, most executives worry more about sinking the boat than missing the boat, which is why so many organizations, even in flush times, are so cautious and conservative. To me, though, the opportunity for executives and entrepreneurs is to recognize the power of rocking the boat — searching for big ideas and small wrinkles, inside and outside the organization, that help you make waves and change course.
You don't have to be as bold as Kellogg or as daring as Steve Jobs. But don't use the long shadow of the economic crisis as an excuse to downsize your dreams or stop taking chances. The challenge for leaders in every field is to emerge from turbulent times with closer connections to their customers, with more energy and creativity from their people, and with greater distance between them and their rivals. The organizations that I admire are determined to offer a compelling alternative to a demoralizing status quo — as the only way to create a compelling future for themselves.
So why, Surowiecki wonders, given all the evidence of the chance to gain ground during periods of economic upheaval, "are companies so quick to cut back when trouble hits?" One answer involves a distinction made by two business professors nearly 25 years ago. In a paper published by the Journal of Marketing, Peter Dickson and Joseph Giglierano argue that executives and entrepreneurs face two very different sorts of risks. One is that their organization will make a bold move that fails — a risk they call "sinking the boat." The other is that their organization will fail to make a bold move that would have succeeded — a risk they call "missing the boat."
Naturally, most executives worry more about sinking the boat than missing the boat, which is why so many organizations, even in flush times, are so cautious and conservative. To me, though, the opportunity for executives and entrepreneurs is to recognize the power of rocking the boat — searching for big ideas and small wrinkles, inside and outside the organization, that help you make waves and change course.
You don't have to be as bold as Kellogg or as daring as Steve Jobs. But don't use the long shadow of the economic crisis as an excuse to downsize your dreams or stop taking chances. The challenge for leaders in every field is to emerge from turbulent times with closer connections to their customers, with more energy and creativity from their people, and with greater distance between them and their rivals. The organizations that I admire are determined to offer a compelling alternative to a demoralizing status quo — as the only way to create a compelling future for themselves.
When Customer Loyalty Is a Bad Thing
The economic crisis has jolted companies into the need to redouble efforts to foster customer loyalty. Numerous articles now tout the increased importance of giving customers premium service in troubled times to ensure customer retention. The underlying reasoning is simple — loyal customers help a company to weather the storm through their continued patronage.Without question, there is some truth to this logic. No firm can survive for long without loyal customers. The problem, however, is that success through loyalty isn't nearly so simple. Like most "big" ideas, there are conditions where it is unarguably correct and less popular but equally true conditions where it is wrong.
Loyalty is a big idea. At its most basic level, it is a feeling of attachment that causes someone to be willing to continue a relationship. And while exclusive loyalty has been replaced in customers' hearts and minds with multiple loyalties for many if not most product categories, often greater than 50% of a company's customers would classify themselves as holding some level of loyalty to a particular company. Even if we narrow our classification of loyalty to customers who feel loyal and give the majority of their purchases in a category to the firm, typically we find this to represent one-third of a firm's customers.
The fly in the ointment is that typically only 20% of a firm's customers are actually profitable. And many — often most — of a company's profitable customers are not loyal.
This presents managers with a loyalty problem, although not one that they expect. If typically most loyal customers in a firm aren't profitable, how exactly does a customer loyalty strategy ever generate a positive return on investment? Instead asking whether you have enough loyal customers in your customer base, you need to ask yourself three more complex questions: 1) which loyal customers are good for the business, 2) how do we hang onto them, and 3) how do we get more customers like them.
In this down economy, customers in both B-to-B and B-to-C settings are naturally much more sensitive to economic issues. Furthermore, companies in B-to-B relationships are often more reliant on their vendor partners to help them shoulder this burden. There is nothing inherently wrong with this, and we as managers need to recognize that our job is to meet our customers' needs if we are to deserve their loyalty.
But the simple solution to improving customer loyalty in a down market is to offer price deals. In fact, firms that track their customer loyalty can be guaranteed that loyalty scores will increase with each substantial decrease in price all things being equal.
But that's a bad loyalty strategy. No, this doesn't mean we should not find ways to be more efficient so that we can pass cost savings on to our customers. But price-driven loyalty is always the lowest form of loyalty. It means that we aren't offering differentiated value to our customers.
The place to begin any loyalty strategy is to determine which loyal customers are profitable and which are not. A closer examination of these two types of customers always reveals very different reasons for their loyalty. Unprofitable loyal customers tend to be loyal for one of two reasons: 1) they are driven by unprofitable pricing or exchange policies, or 2) they demand an excessive amount of service that they are not willing to pay fairly to receive.
Profitable loyal customers on the other hand are almost always driven by differentiating aspects of our product or service offering. The key to a successful loyalty strategy is to become crystal clear as to what these are, and to focus on tangibly improving these elements. It is also imperative that we actively let customers and prospective customers know that these are the things the company stands for and that the firm is committed to being best at. By doing this, our best customers will have the necessary information to clearly articulate why our organizations deserve their loyalty in good times and in bad.
Timothy Keiningham is global chief strategy officer at Ipsos Loyalty. Lerzan Aksoy is associate professor of marketing at Fordham University. Tim and Lerzan are authors of the book Why Loyalty Matters, forthcoming in July 2009.
What You Can Learn from Small-Town Auto Dealers
Until recently, one of the less-reported aspects of the crisis in the automotive industry is the effect that its radical downsizing is having on auto dealers. Now that General Motors and Chrysler have axed roughly 1,100 and 800 dealers respectively, stories of dealerships closing are front page news. While cuts have come largely at the expense of urban dealers, some smaller rural stores are surviving — at least for now.
Many of these smaller dealerships are family enterprises; three and even four generations old. Their longevity is a testament less to Detroit's products and more to their smart and sharp business practices. And now that some of their competitors are closing they may do even better. Let's consider what business leaders can learn from these small-town auto dealers.
Know your customers. Small-town auto dealers know what vehicles their customers prefer. This comes from having long-lasting ties to individual families, selling new cars and trucks to grandparents and parents, and putting the children into affordably priced used cars. Part of knowing your customers means considering their changing tastes. Decades ago many of smaller dealers signed franchise agreements with Asian and European manufacturers like Honda, Nissan, Toyota and VW to provide their customers with even more makes and models from which to choose.
Service matters. Dealers will tell you they make more servicing cars than selling them. Manufacturers pay for warranty repairs but good dealers, particularly those in small towns, will keep their customers returning after the warranty expires because they provide reliable servicing. They also have a reputation for honesty, a word that is not often associated with automotive retailing. Local dealers have no alternative to treating their customers right; they live in the community, and word gets around.
Invest in the community. In many areas, car dealers are the soft touch for youth sports teams as well as school musicals and church raffles. True, it is good visibility to have your store's name on scores of soccer uniforms and and church bulletins, but something more is at work. Car dealers are part of the life of these towns; their philanthropy supports causes and activities that add texture to the community.
Maximize opportunity. Dealers are entrepreneurs. Those who are not closed will get aggressive. As reported in the Wall Street Journal, surviving dealers will buy up inventory at a good price, add salespeople (some from former competitors), and expand their sales reach. One Dodge dealer in Jackson, Michigan — right in the heart of "downturn valley" — said, "I'm going to buy every car I can find with every dollar I have until I run out of money." While that attitude may have led investment bankers to run Wall Street into the ground, hearing it from a dealer sounds more optimistic. He has faith in himself, his business, and his community.
Not every dealer is worthy of imitation. Just as there are poor businessmen in every field, there are less-than-reliable automotive retailers, especially ones who cheated their customers, not to mention their own employees. But these smaller, successful dealerships can teach us a lesson or two that may help us grow our own businesses.
As a youngster I recall the dealer showroom windows that were papered over every September in anticipation of the sparkling new models that would soon be introduced. I still remember drooling along with my chums at the brand-new 1963 Corvette parked at the corner of Carl Schmidt's Chevrolet in Perrysburg, Ohio. We ran our fingers over the radical new lines of the first Stingray. No salesman shooed us away; our ogling and awing was a kind of third-party endorsement.
Maybe that's another lesson; let the kids touch the merchandise and one day, he'll tell his friends about you.
Many of these smaller dealerships are family enterprises; three and even four generations old. Their longevity is a testament less to Detroit's products and more to their smart and sharp business practices. And now that some of their competitors are closing they may do even better. Let's consider what business leaders can learn from these small-town auto dealers.
Know your customers. Small-town auto dealers know what vehicles their customers prefer. This comes from having long-lasting ties to individual families, selling new cars and trucks to grandparents and parents, and putting the children into affordably priced used cars. Part of knowing your customers means considering their changing tastes. Decades ago many of smaller dealers signed franchise agreements with Asian and European manufacturers like Honda, Nissan, Toyota and VW to provide their customers with even more makes and models from which to choose.
Service matters. Dealers will tell you they make more servicing cars than selling them. Manufacturers pay for warranty repairs but good dealers, particularly those in small towns, will keep their customers returning after the warranty expires because they provide reliable servicing. They also have a reputation for honesty, a word that is not often associated with automotive retailing. Local dealers have no alternative to treating their customers right; they live in the community, and word gets around.
Invest in the community. In many areas, car dealers are the soft touch for youth sports teams as well as school musicals and church raffles. True, it is good visibility to have your store's name on scores of soccer uniforms and and church bulletins, but something more is at work. Car dealers are part of the life of these towns; their philanthropy supports causes and activities that add texture to the community.
Maximize opportunity. Dealers are entrepreneurs. Those who are not closed will get aggressive. As reported in the Wall Street Journal, surviving dealers will buy up inventory at a good price, add salespeople (some from former competitors), and expand their sales reach. One Dodge dealer in Jackson, Michigan — right in the heart of "downturn valley" — said, "I'm going to buy every car I can find with every dollar I have until I run out of money." While that attitude may have led investment bankers to run Wall Street into the ground, hearing it from a dealer sounds more optimistic. He has faith in himself, his business, and his community.
Not every dealer is worthy of imitation. Just as there are poor businessmen in every field, there are less-than-reliable automotive retailers, especially ones who cheated their customers, not to mention their own employees. But these smaller, successful dealerships can teach us a lesson or two that may help us grow our own businesses.
As a youngster I recall the dealer showroom windows that were papered over every September in anticipation of the sparkling new models that would soon be introduced. I still remember drooling along with my chums at the brand-new 1963 Corvette parked at the corner of Carl Schmidt's Chevrolet in Perrysburg, Ohio. We ran our fingers over the radical new lines of the first Stingray. No salesman shooed us away; our ogling and awing was a kind of third-party endorsement.
Maybe that's another lesson; let the kids touch the merchandise and one day, he'll tell his friends about you.
Use Green to Grow (Not Just Cut Costs)
In the face of the current recession, there has been much talk about using sustainability to "get lean" by being more efficient. But in every crisis is also a hidden opportunity to grow, and today's economic turmoil is no exception.
For society and business, this crisis presents the rare chance for deep, fundamental, and significant change. Leading businesses, then, will look beyond cost-cutting. They will use sustainability as a lens to find ways, even in today's economy, to grow their top line — and to be poised for breakthrough success when macroeconomic conditions improve. Smart businesses will emerge from this downturn stronger than their competition by focusing on their customers' changing energy and environmental needs, preparing for a new policy landscape, and investing in tomorrow's clean technologies. Here are three ways to start:
1. Create more products that meet customers' energy and environmental needs
Seldom does a global trend provide the opportunity for businesses to fundamentally redefine their value propositions and relationships with their customers. The rise of the internet was one such trend; so is the run-up in mainstream awareness of energy and environment issues. Companies that are creative and disciplined will seize the opportunity of environmental sustainability to create innovative new offerings built around energy and environmental issues for consumers and business customers of all stripes.
Although the economic crisis may have caused resource scarcity and climate change to fade temporarily from the top of the public's agenda, the serious challenges we face remain. Companies that provide products and services to help their customers meet environmental challenges will out-green and out-compete those that don't. For an example, look at Johnson Controls, which is focusing on retrofitting existing buildings with systems that use energy more efficiently. (The building sector is responsible for about 40% of energy use in the U.S.). Similarly, a prominent real estate investment firm is leveraging the extra time its deal originators now have on their hands to scan the portfolio for efficiency retrofit opportunities that will increase asset values when the market rebounds.
You might think that green sales have slumped, but emerging research suggests that green products and services are in fact less recession-prone. While "eco-luxury" has fallen out of fashion, a range of recent studies suggest that the market for environmentally smart products remains strong. (This makes sense when you consider that the biggest obstacle to a green purchase is not cost, but customer knowledge that the product or service exists - that there's something better than the market's status quo offerings.)
2. Set your sails for new policy winds
A dramatically different policy environment has arrived. For new laws on climate, it's no longer a question of "if," but "when." Legislation to slow or reduce greenhouse-gas emissions is coming and it will affect every business, in every sector. And it's just the beginning. From new building requirements to fuel-economy rules to billions instimulus funding for green jobs, there is a lot at stake.
Firms that anticipate and understand the range of likely policy scenarios, and build defensive and offensive strategies to address them, will succeed where their competitors won't. IBM, with its Smarter Planet initiative, is just one company that is actively engaging its customers to help them address the challenges and opportunities of the changing policy landscape.
3. Invest for tomorrow, starting today
We can't be certain whether we have started to hit the bottom of this recession, but we will eventually — and mortgaging the future, particularly where environmental issues are concerned, is a poor strategic choice. Economic recovery is likely to raise energy and commodity prices, bring more of the world's people out of poverty, and further the demand for breakthrough green products and services, from the 80-mpg car to environmentally aligned financial products and professional services. Investment in tomorrow's offerings must begin today. In the spirit of this investment, GM is sticking with its commitment to produce the potentially game changing electric Chevrolet Volt, even in the face of potential bankruptcy. Will your company show the same courage?
Environmental innovation is a crucial component of the corporate strategies needed to succeed in the current downturn — and thrive when it ends. A relevant, credible, and differentiated sustainability strategy remains a path to business success. Embarking on that path is the opportunity of our time.
Nicholas Moore Eisenberger is Managing Principal of GreenOrder, an LRN Company. GreenOrder is a strategy and management consulting firm that, since 2000, has helped leading companies turn sustainability into business value. Ted Grozier is an Associate at the firm.
For society and business, this crisis presents the rare chance for deep, fundamental, and significant change. Leading businesses, then, will look beyond cost-cutting. They will use sustainability as a lens to find ways, even in today's economy, to grow their top line — and to be poised for breakthrough success when macroeconomic conditions improve. Smart businesses will emerge from this downturn stronger than their competition by focusing on their customers' changing energy and environmental needs, preparing for a new policy landscape, and investing in tomorrow's clean technologies. Here are three ways to start:
1. Create more products that meet customers' energy and environmental needs
Seldom does a global trend provide the opportunity for businesses to fundamentally redefine their value propositions and relationships with their customers. The rise of the internet was one such trend; so is the run-up in mainstream awareness of energy and environment issues. Companies that are creative and disciplined will seize the opportunity of environmental sustainability to create innovative new offerings built around energy and environmental issues for consumers and business customers of all stripes.
Although the economic crisis may have caused resource scarcity and climate change to fade temporarily from the top of the public's agenda, the serious challenges we face remain. Companies that provide products and services to help their customers meet environmental challenges will out-green and out-compete those that don't. For an example, look at Johnson Controls, which is focusing on retrofitting existing buildings with systems that use energy more efficiently. (The building sector is responsible for about 40% of energy use in the U.S.). Similarly, a prominent real estate investment firm is leveraging the extra time its deal originators now have on their hands to scan the portfolio for efficiency retrofit opportunities that will increase asset values when the market rebounds.
You might think that green sales have slumped, but emerging research suggests that green products and services are in fact less recession-prone. While "eco-luxury" has fallen out of fashion, a range of recent studies suggest that the market for environmentally smart products remains strong. (This makes sense when you consider that the biggest obstacle to a green purchase is not cost, but customer knowledge that the product or service exists - that there's something better than the market's status quo offerings.)
2. Set your sails for new policy winds
A dramatically different policy environment has arrived. For new laws on climate, it's no longer a question of "if," but "when." Legislation to slow or reduce greenhouse-gas emissions is coming and it will affect every business, in every sector. And it's just the beginning. From new building requirements to fuel-economy rules to billions instimulus funding for green jobs, there is a lot at stake.
Firms that anticipate and understand the range of likely policy scenarios, and build defensive and offensive strategies to address them, will succeed where their competitors won't. IBM, with its Smarter Planet initiative, is just one company that is actively engaging its customers to help them address the challenges and opportunities of the changing policy landscape.
3. Invest for tomorrow, starting today
We can't be certain whether we have started to hit the bottom of this recession, but we will eventually — and mortgaging the future, particularly where environmental issues are concerned, is a poor strategic choice. Economic recovery is likely to raise energy and commodity prices, bring more of the world's people out of poverty, and further the demand for breakthrough green products and services, from the 80-mpg car to environmentally aligned financial products and professional services. Investment in tomorrow's offerings must begin today. In the spirit of this investment, GM is sticking with its commitment to produce the potentially game changing electric Chevrolet Volt, even in the face of potential bankruptcy. Will your company show the same courage?
Environmental innovation is a crucial component of the corporate strategies needed to succeed in the current downturn — and thrive when it ends. A relevant, credible, and differentiated sustainability strategy remains a path to business success. Embarking on that path is the opportunity of our time.
Nicholas Moore Eisenberger is Managing Principal of GreenOrder, an LRN Company. GreenOrder is a strategy and management consulting firm that, since 2000, has helped leading companies turn sustainability into business value. Ted Grozier is an Associate at the firm.
A Primer on the G.M. Bankruptcy
General Motors followed Chrysler into bankruptcy on Monday in a case that will be one of the largest and most complex in history. Here is a quick look at some basics of the G.M. bankruptcy and how it may affect owners of G.M. vehicles and company stock. The questions were answered by Micheline Maynard, who writes about the auto industry; Ron Lieber, the Your Money columnist; and Tara Siegel Bernard, a personal-finance reporter.
A Hummer showroom in Tustin, Calif., had as many potential customers on Monday as it did salespeople on the floor: none.
A Chevrolet and Buick dealership in Santa Monica, Calif., wants customers to know it is still in business despite G.M.’s troubles.
Q. Is G.M. going out of business?
A. No. G.M. is reorganizing under Chapter 11 of the United States Bankruptcy Code. The law allows companies to sell assets, restructure debt, cancel contracts and close operations that normally would have to continue running. Once the companies secure financing to emerge from bankruptcy, they are reconstituted as new legal entities.
Q. How long will this take?
A. Senior White House officials say the essence of the case should take 60 to 90 days. General Motors plans to use Section 363 of the bankruptcy code to sell assets, rid itself of liabilities and restructure its debt, creating a new version of G.M.
Late Sunday, the bankruptcy court approved the sale of Chrysler assets to Fiat, only a month after its case began. The remaining pieces of Chrysler will remain in bankruptcy for at least several more weeks. Such quick bankruptcies are unusual; most take much longer.
Q. Who will make decisions about G.M.’s future car and truck models?
A. G.M. says it will. But the Obama administration recently announced stricter fuel economy standards, and the president is an advocate for hybrid electric vehicles and small cars. So G.M. may indirectly be guided by government priorities.
Q. What happens to G.M. dealers?
A. G.M. is able under bankruptcy to cancel franchise agreements with its dealers. It has already announced plans to eliminate 1,100 dealers and may cut more. The company wants those dealers to close within 18 months. Dealers can sue to block the action, but a final decision would be up to the judge. In the meantime, G.M. will continue to provide dealers with vehicles.
GMAC, with support from the government, will provide financing for G.M. customers. It is also providing financing for Chrysler.
Q. What’s the biggest difference between the G.M. and Chrysler cases?
A. Chrysler had reached an agreement to sell assets to Fiat before its case began. G.M. is trying to restructure on its own, with financing from the Treasury. The Treasury is providing G.M. with $30 billion in debtor-in-possession financing so it can operate while in bankruptcy, in addition to about $20 billion G.M. has already received. It is likely the Treasury will provide more scrutiny and guidance in the G.M. case, since such a large amount of taxpayer money is at stake.
Q. What happens to G.M. employees?
A. G.M. employees who are not union members do not have any job security. The company can ask a judge for an immediate pay cut for its salaried employees, and can announce job cuts and close offices, just as it can outside bankruptcy,
Contracts covering members of the United Automobile Workers union and other unions will remain in force, unless the company asks a judge to void them. But U.A.W. members approved changes last week, and the new G.M. is expected to honor that contract.
Q. Are pensions and retiree health care benefits protected?
A. The White House said Sunday that, assuming the sale went forward, G.M. workers’ pensions and health care benefits would transfer to the new company and remain in force.
Companies have the right under bankruptcy law to ask to terminate their pension plans. If pensions were terminated, employees would receive reduced benefits through financing from the federal pension agency.
A company can also eliminate retiree health care benefits for nonunion employees; they would subsequently be covered by Medicare if they were 65 or older.
Q. What happens to G.M. suppliers?
A. The White House said supplier contracts would remain in force, and it has created a program to provide federal help to parts makers. But in bankruptcy, supplier contracts can be canceled.
G.M. is likely to tell the court which suppliers it wants to keep doing business with and which contracts it wants to reject. Suppliers can challenge the rejection of their contract, but most likely they will have to reach a settlement with G.M.
Q. Will the warranty for G.M. vehicles be honored?
A. Yes. The Treasury Department has already said it will stand behind warranties for cars purchased during the restructuring period for both G.M. and Chrysler. And G.M. itself said that it would honor existing warranties. If you own, say, a Saturn and the company ultimately does away with the brand, other G.M. dealers will perform the repairs.
Q. Are any current stockholder’s shares worthless? What options exist for stockholders?
A. Sell, if you possibly can.
The shares will no longer trade on the New York Stock Exchange beginning on Tuesday. But the stock is likely to trade, in a limited fashion, on the Pink Sheets, an electronic quotation system for companies that do not meet the listing standards for the stock exchanges.
Most shareholders are typically wiped out in bankruptcy, financial planners said, which is why G.M. stockholders should probably dump their shares if they can. Warren F. McIntyre, a financial planner in Troy, Mich., said that many people “don’t realize that usually a new share class is issued and the holders of the old shares are wiped out.”
But getting rid of the stock may be difficult, and if you have too few shares, the brokerage commission alone may wipe out any proceeds from the sale.
If you have the actual stock certificates, you might try to sell them on eBay. You may be able to get more for them as collector’s items. It’s worth a shot.
Q. What is a G.M. car worth?
A. The value of G.M. cars will probably fall faster than it would have absent bankruptcy. How much further the value falls will depend on the model, the year, economic conditions in the future and how the company handles itself in bankruptcy.
Q. What will happen to the Hummer brand, servicing for owners and buying out a leased Hummer?
A. There’s some good news here. It appears that G.M. will be able to sell the Hummer brand and all of its dealers to another company. If this happens, the new company will aim for a seamless transition. It probably won’t be seamless, but it most likely will beat the alternative, which is G.M.’s dropping the brand altogether.
Q. Is G.M. still going to honor recall notices?
A. They’d be crazy not to, but we can’t confirm this yet. Here’s what Kelly Cusinato, a G.M. spokeswoman, said in an e-mail message: “We understand that customers have many questions. As you know though, there are certain things we cannot answer until the judge makes rulings.”
Keep an eye on http://gm.com/restructuring for more information as it becomes available. Or call (866) 405-4005, though so far the people answering the phones there seem to be mostly reading off scripts or from the Web site.
Q. Why would anyone buy a G.M. product during bankruptcy?
A. Some of the cars are going to be real bargains. A dealer being forced to close will want to get rid of inventory quickly. Or, if you visit a dealer with nearby Japanese or German competition, that dealer needs to move the metal.
Anyone worried about disappearing dealers and parts shortages could hedge a bit by buying one of the few G.M. cars with above-average reliability ratings.
This article has been revised to reflect the following correction:
Correction: June 5, 2009
An article on Tuesday about the practical implications of the bankruptcy filing by General Motors described incorrectly the size of payments to retirees should the automaker terminate its pension plans. While many retirees would receive lower benefits from the federal Pension Benefit Guaranty Corporation than they were expecting from G.M., the payments would depend in part on their age at retirement and would not necessarily be “about a third” of their expected benefits. The error also appeared in a similar article on May 1 about the implications of Chrysler’s bankruptcy filing.
A Hummer showroom in Tustin, Calif., had as many potential customers on Monday as it did salespeople on the floor: none.
Q. Is G.M. going out of business?
A. No. G.M. is reorganizing under Chapter 11 of the United States Bankruptcy Code. The law allows companies to sell assets, restructure debt, cancel contracts and close operations that normally would have to continue running. Once the companies secure financing to emerge from bankruptcy, they are reconstituted as new legal entities.
Q. How long will this take?
A. Senior White House officials say the essence of the case should take 60 to 90 days. General Motors plans to use Section 363 of the bankruptcy code to sell assets, rid itself of liabilities and restructure its debt, creating a new version of G.M.
Late Sunday, the bankruptcy court approved the sale of Chrysler assets to Fiat, only a month after its case began. The remaining pieces of Chrysler will remain in bankruptcy for at least several more weeks. Such quick bankruptcies are unusual; most take much longer.
Q. Who will make decisions about G.M.’s future car and truck models?
A. G.M. says it will. But the Obama administration recently announced stricter fuel economy standards, and the president is an advocate for hybrid electric vehicles and small cars. So G.M. may indirectly be guided by government priorities.
Q. What happens to G.M. dealers?
A. G.M. is able under bankruptcy to cancel franchise agreements with its dealers. It has already announced plans to eliminate 1,100 dealers and may cut more. The company wants those dealers to close within 18 months. Dealers can sue to block the action, but a final decision would be up to the judge. In the meantime, G.M. will continue to provide dealers with vehicles.
GMAC, with support from the government, will provide financing for G.M. customers. It is also providing financing for Chrysler.
Q. What’s the biggest difference between the G.M. and Chrysler cases?
A. Chrysler had reached an agreement to sell assets to Fiat before its case began. G.M. is trying to restructure on its own, with financing from the Treasury. The Treasury is providing G.M. with $30 billion in debtor-in-possession financing so it can operate while in bankruptcy, in addition to about $20 billion G.M. has already received. It is likely the Treasury will provide more scrutiny and guidance in the G.M. case, since such a large amount of taxpayer money is at stake.
Q. What happens to G.M. employees?
A. G.M. employees who are not union members do not have any job security. The company can ask a judge for an immediate pay cut for its salaried employees, and can announce job cuts and close offices, just as it can outside bankruptcy,
Contracts covering members of the United Automobile Workers union and other unions will remain in force, unless the company asks a judge to void them. But U.A.W. members approved changes last week, and the new G.M. is expected to honor that contract.
Q. Are pensions and retiree health care benefits protected?
A. The White House said Sunday that, assuming the sale went forward, G.M. workers’ pensions and health care benefits would transfer to the new company and remain in force.
Companies have the right under bankruptcy law to ask to terminate their pension plans. If pensions were terminated, employees would receive reduced benefits through financing from the federal pension agency.
A company can also eliminate retiree health care benefits for nonunion employees; they would subsequently be covered by Medicare if they were 65 or older.
Q. What happens to G.M. suppliers?
A. The White House said supplier contracts would remain in force, and it has created a program to provide federal help to parts makers. But in bankruptcy, supplier contracts can be canceled.
G.M. is likely to tell the court which suppliers it wants to keep doing business with and which contracts it wants to reject. Suppliers can challenge the rejection of their contract, but most likely they will have to reach a settlement with G.M.
Q. Will the warranty for G.M. vehicles be honored?
A. Yes. The Treasury Department has already said it will stand behind warranties for cars purchased during the restructuring period for both G.M. and Chrysler. And G.M. itself said that it would honor existing warranties. If you own, say, a Saturn and the company ultimately does away with the brand, other G.M. dealers will perform the repairs.
Q. Are any current stockholder’s shares worthless? What options exist for stockholders?
A. Sell, if you possibly can.
The shares will no longer trade on the New York Stock Exchange beginning on Tuesday. But the stock is likely to trade, in a limited fashion, on the Pink Sheets, an electronic quotation system for companies that do not meet the listing standards for the stock exchanges.
Most shareholders are typically wiped out in bankruptcy, financial planners said, which is why G.M. stockholders should probably dump their shares if they can. Warren F. McIntyre, a financial planner in Troy, Mich., said that many people “don’t realize that usually a new share class is issued and the holders of the old shares are wiped out.”
But getting rid of the stock may be difficult, and if you have too few shares, the brokerage commission alone may wipe out any proceeds from the sale.
If you have the actual stock certificates, you might try to sell them on eBay. You may be able to get more for them as collector’s items. It’s worth a shot.
Q. What is a G.M. car worth?
A. The value of G.M. cars will probably fall faster than it would have absent bankruptcy. How much further the value falls will depend on the model, the year, economic conditions in the future and how the company handles itself in bankruptcy.
Q. What will happen to the Hummer brand, servicing for owners and buying out a leased Hummer?
A. There’s some good news here. It appears that G.M. will be able to sell the Hummer brand and all of its dealers to another company. If this happens, the new company will aim for a seamless transition. It probably won’t be seamless, but it most likely will beat the alternative, which is G.M.’s dropping the brand altogether.
Q. Is G.M. still going to honor recall notices?
A. They’d be crazy not to, but we can’t confirm this yet. Here’s what Kelly Cusinato, a G.M. spokeswoman, said in an e-mail message: “We understand that customers have many questions. As you know though, there are certain things we cannot answer until the judge makes rulings.”
Keep an eye on http://gm.com/restructuring for more information as it becomes available. Or call (866) 405-4005, though so far the people answering the phones there seem to be mostly reading off scripts or from the Web site.
Q. Why would anyone buy a G.M. product during bankruptcy?
A. Some of the cars are going to be real bargains. A dealer being forced to close will want to get rid of inventory quickly. Or, if you visit a dealer with nearby Japanese or German competition, that dealer needs to move the metal.
Anyone worried about disappearing dealers and parts shortages could hedge a bit by buying one of the few G.M. cars with above-average reliability ratings.
This article has been revised to reflect the following correction:
Correction: June 5, 2009
An article on Tuesday about the practical implications of the bankruptcy filing by General Motors described incorrectly the size of payments to retirees should the automaker terminate its pension plans. While many retirees would receive lower benefits from the federal Pension Benefit Guaranty Corporation than they were expecting from G.M., the payments would depend in part on their age at retirement and would not necessarily be “about a third” of their expected benefits. The error also appeared in a similar article on May 1 about the implications of Chrysler’s bankruptcy filing.
GM's Second Great Crisis
General Motors is back in trouble, again. The last time it faced a crisis so severe was in the stretch from 1917 to 1922, when World War I precipitated a collapse in the demand for automobiles and Ford's mass market model had started producing cars at prices GM couldn't match. GM was at death's door, and only a healthy infusion of cash and financial restructuring saved it. Actually, not just saved GM — made it great.
But unlike this time around, when the heavy hand of the government is at the wheel, it was an investment from DuPont, whose chairman was instrumental in bringing in the legendary Alfred Sloan to run GM, and a financial restructuring orchestrated by J.P Morgan, that saved the day.
By 1923, Sloan had arranged for the GM management team to acquire a large block of the company's stock from DuPont, financed with a non-recourse loan that would be repaid by diverting bonuses. GM's management effectively participated in the incentives of a leveraged buyout of the firm, but without imposing a like financial risk on the company itself. As for the bonuses, they were based on simply allocating a sizable portion of GM's operating profit above a 6% cost of capital hurdle rate, which gave the managers unlimited upside for achieving income efficiency and balance sheet asset management. There was no calibration of the bonuses to a market pay scale, which only tends to institutionalize a guaranteed level of pay irrespective of performance. There was the risk and the return of the owner on the shoulders of management.
And that, coupled with excellent management, set the stage for greatness.
Over the years, GM moved away from the incentives and value focus of an owner to the incentives of a bureaucrat. Bonuses were hitched to growth in earnings-per-share, and a raft of situational metrics that obscured responsibility for delivering real value. Responding to these incentives Roger Smith, GM's CEO in the 1980s, made a series of decisions that precipitated GM's current woes. The easiest way for him to buy labor peace and keep EPS on a roll was to offer overgenerous retirement benefits in exchange for keeping wages lower than they might otherwise have been because, at the time, accounting rules allowed companies to ignore the eventual costs of meeting retirement obligations.
But accounting is not reality, and companies that let accounting numbers govern how they see the world will inevitably make big mistakes.
A second problem with EPS is that it places a woefully inadequate charge on investing capital. It effectively ignores the cost of equity. A mature, surplus generating company like the 1980s GM that does this will invest its cash in ill-advised and ultimately value-destroying investments while keeping its EPS on the rise. Let's count the ways: Saturn; investments in robots that can't be made to work; global expansion and the acquisition of luxury badges.
Spend, spend, spend is the mantra of the EPS-addled manager. And so they did, and now, it's time to pay the piper.
Will GM be able to repeat history and emerge from the ashes? It's not likely. Rather than a passionately interested and committed investor like DuPont, we have the Feds in charge. Will they put in place the incentives of the owner and not the bureaucrat? This is the government, right? And will they find the equivalent of George S. Patton to pound through the cultural thicket and entangling contracts and legacy issues and union commitments and restore economic logic and value? I fear not.
***
Bennett Stewart is founding partner of Stern Stewart & Co. and CEO of EVA Dimensions. He is the author of The Quest for Value, which is regarded as the definitive guide to the EVA ("economic value added") financial management and incentive compensation framework now employed at over 350 companies worldwide.
But unlike this time around, when the heavy hand of the government is at the wheel, it was an investment from DuPont, whose chairman was instrumental in bringing in the legendary Alfred Sloan to run GM, and a financial restructuring orchestrated by J.P Morgan, that saved the day.
By 1923, Sloan had arranged for the GM management team to acquire a large block of the company's stock from DuPont, financed with a non-recourse loan that would be repaid by diverting bonuses. GM's management effectively participated in the incentives of a leveraged buyout of the firm, but without imposing a like financial risk on the company itself. As for the bonuses, they were based on simply allocating a sizable portion of GM's operating profit above a 6% cost of capital hurdle rate, which gave the managers unlimited upside for achieving income efficiency and balance sheet asset management. There was no calibration of the bonuses to a market pay scale, which only tends to institutionalize a guaranteed level of pay irrespective of performance. There was the risk and the return of the owner on the shoulders of management.
And that, coupled with excellent management, set the stage for greatness.
Over the years, GM moved away from the incentives and value focus of an owner to the incentives of a bureaucrat. Bonuses were hitched to growth in earnings-per-share, and a raft of situational metrics that obscured responsibility for delivering real value. Responding to these incentives Roger Smith, GM's CEO in the 1980s, made a series of decisions that precipitated GM's current woes. The easiest way for him to buy labor peace and keep EPS on a roll was to offer overgenerous retirement benefits in exchange for keeping wages lower than they might otherwise have been because, at the time, accounting rules allowed companies to ignore the eventual costs of meeting retirement obligations.
But accounting is not reality, and companies that let accounting numbers govern how they see the world will inevitably make big mistakes.
A second problem with EPS is that it places a woefully inadequate charge on investing capital. It effectively ignores the cost of equity. A mature, surplus generating company like the 1980s GM that does this will invest its cash in ill-advised and ultimately value-destroying investments while keeping its EPS on the rise. Let's count the ways: Saturn; investments in robots that can't be made to work; global expansion and the acquisition of luxury badges.
Spend, spend, spend is the mantra of the EPS-addled manager. And so they did, and now, it's time to pay the piper.
Will GM be able to repeat history and emerge from the ashes? It's not likely. Rather than a passionately interested and committed investor like DuPont, we have the Feds in charge. Will they put in place the incentives of the owner and not the bureaucrat? This is the government, right? And will they find the equivalent of George S. Patton to pound through the cultural thicket and entangling contracts and legacy issues and union commitments and restore economic logic and value? I fear not.
***
Bennett Stewart is founding partner of Stern Stewart & Co. and CEO of EVA Dimensions. He is the author of The Quest for Value, which is regarded as the definitive guide to the EVA ("economic value added") financial management and incentive compensation framework now employed at over 350 companies worldwide.
Making Money in Chaotic Times
The economy will always have its ups and downs. That's why our company has two playbooks: one for running the company in an up period and another in a down period. If we enter a down period, we immediately switch to the down period playbook with its set of well-defined behaviors. Is this a good idea? And can a company still make money during bad times?
To answer your question, I decided to turn to Philip Kotler, the well-known marketing guru at the Kellogg School of Management, Northwestern University. Phillip has just recently published a book with John Caslione called Chaotics: The Business of Managing and Marketing in the Age of Turbulence. Here's his advice:
PK: Having two playbooks, one for good times and one for bad times, is a good start but far from sufficient. For example, at the start of a downturn, companies tend to cut their hiring, advertising, and new product development. But to do this mechanically without addressing the causes of the downturn, the actions of their competitors, and the perceived length and depth of the crisis doesn't make sense. I am against robot responses.
A company can make money in bad times. Some companies will be favored because they are known to offer good value for a low price, such as Wal-Mart and McDonald's. Their sales will increase and although their profits might be lower than in good times, they will do fairly well.
Other companies have a number of options:
* Lower your prices to create a better ratio of value to price. You can lower your list prices or initiate more sale promotions (discounts, two for the price of one, etc.)
* Introduce a lower-cost version of your offering where you have removed some features or benefits. It will probably cannibalize your higher priced offer, but it is better to cannibalize yourself than to have competitors do this to you.
* Add some additional benefits to your standard offer. Offer free shipment, extend your guarantee, or create a more generous return policy. In the latter case, Hyundai recently offered to take back a purchased car if the buyer loses his or her job. GM and Ford have offered to make the laid-off car-buyer's payments for them.
In taking any of these steps, make sure that your company doesn't dent the favorable aspects that have drawn customers to prefer and respect it. For example, a company that is admired for its level of service should never cut its service quality and risk losing this point of differentiation and preference. The key is to understand your customers' new problems and to consider how you can help them solve or resolve these problems. You have to coach your customer about possible solutions.
These are some ways to respond to the current downturn. But what about anticipating the next one? Every company is vulnerable not only to an economic downturn but to other disruptions that may come from technological change or from new global competitors. So the question becomes: how can companies do a better job of anticipating disruption? Companies generally do a poor job of monitoring the environment for clues to these threats. They lack an early warning system that might pick up weak signals of change. An early warning system would greatly reduce the level of surprise and chaos felt by a company that was too naïve.
The company then has to go further and imagine additional possibilities even before there is a sign that they might be taking place. For example, General Motors might ask: "What if China finds a way to make a battery that can hold a charge for 200 miles instead of the 90 miles that we are hoping to get out of our new battery?" A company must imagine new surprises.
Business is now exposed to continuous turbulence, not occasional turbulence. We aren't going back to normal times. The "new normality" is one of turbulence coming from two big forces, namely technological advances and globalization. All this spells higher risk and vulnerability.
There is a little rainbow in all of this. Change presents opportunity as well as vulnerability. The companies that succeed are those who look more at the opportunity side than the vulnerability side. If your company is having trouble, so are your competitors. If you are better funded, you can initiate lower prices or better benefits that they can't match. You can end up buying some of your competitors or putting them out of business.
Your customers, suppliers, and distributors are all suffering. Think about how to help them. Think about developing a new business model, a new product or service, a lower cost distribution channel, a lower cost supply chain. Rather than just relying on a rulebook, be more robust, resilient, and responsive to changing conditions
To answer your question, I decided to turn to Philip Kotler, the well-known marketing guru at the Kellogg School of Management, Northwestern University. Phillip has just recently published a book with John Caslione called Chaotics: The Business of Managing and Marketing in the Age of Turbulence. Here's his advice:
PK: Having two playbooks, one for good times and one for bad times, is a good start but far from sufficient. For example, at the start of a downturn, companies tend to cut their hiring, advertising, and new product development. But to do this mechanically without addressing the causes of the downturn, the actions of their competitors, and the perceived length and depth of the crisis doesn't make sense. I am against robot responses.
A company can make money in bad times. Some companies will be favored because they are known to offer good value for a low price, such as Wal-Mart and McDonald's. Their sales will increase and although their profits might be lower than in good times, they will do fairly well.
Other companies have a number of options:
* Lower your prices to create a better ratio of value to price. You can lower your list prices or initiate more sale promotions (discounts, two for the price of one, etc.)
* Introduce a lower-cost version of your offering where you have removed some features or benefits. It will probably cannibalize your higher priced offer, but it is better to cannibalize yourself than to have competitors do this to you.
* Add some additional benefits to your standard offer. Offer free shipment, extend your guarantee, or create a more generous return policy. In the latter case, Hyundai recently offered to take back a purchased car if the buyer loses his or her job. GM and Ford have offered to make the laid-off car-buyer's payments for them.
In taking any of these steps, make sure that your company doesn't dent the favorable aspects that have drawn customers to prefer and respect it. For example, a company that is admired for its level of service should never cut its service quality and risk losing this point of differentiation and preference. The key is to understand your customers' new problems and to consider how you can help them solve or resolve these problems. You have to coach your customer about possible solutions.
These are some ways to respond to the current downturn. But what about anticipating the next one? Every company is vulnerable not only to an economic downturn but to other disruptions that may come from technological change or from new global competitors. So the question becomes: how can companies do a better job of anticipating disruption? Companies generally do a poor job of monitoring the environment for clues to these threats. They lack an early warning system that might pick up weak signals of change. An early warning system would greatly reduce the level of surprise and chaos felt by a company that was too naïve.
The company then has to go further and imagine additional possibilities even before there is a sign that they might be taking place. For example, General Motors might ask: "What if China finds a way to make a battery that can hold a charge for 200 miles instead of the 90 miles that we are hoping to get out of our new battery?" A company must imagine new surprises.
Business is now exposed to continuous turbulence, not occasional turbulence. We aren't going back to normal times. The "new normality" is one of turbulence coming from two big forces, namely technological advances and globalization. All this spells higher risk and vulnerability.
There is a little rainbow in all of this. Change presents opportunity as well as vulnerability. The companies that succeed are those who look more at the opportunity side than the vulnerability side. If your company is having trouble, so are your competitors. If you are better funded, you can initiate lower prices or better benefits that they can't match. You can end up buying some of your competitors or putting them out of business.
Your customers, suppliers, and distributors are all suffering. Think about how to help them. Think about developing a new business model, a new product or service, a lower cost distribution channel, a lower cost supply chain. Rather than just relying on a rulebook, be more robust, resilient, and responsive to changing conditions
Why This Is the Right Time to Go Green
The green movement may be at risk of slowing down, especially within the business community. Many business people hold on to an outdated view of green: the misconception that environmental practices always cost a lot of money. So logically, in this economy they're asking, "Is this really the time for green? Can we really afford it now?"
At same time, most of the global discussion about getting the economy on track focuses on the macro picture — large stimulus packages at the national and industry level. But how can the economy as a whole get on its feet if individual companies don't as well?
I believe that these two questions — can we still go green and how do we revive the economy — are heavily intertwined. In this time of austerity, sustainability is perhaps even more relevant and will provide a path out of this mess. One of the core pillars of going green is doing more with less — saving physical and financial resources. So while the instinct may be to pull back from green initiatives in hard times, that would be shortsighted and a huge mistake.
Not only should companies not put their green efforts on hold, they should accelerate them in targeted ways to save money quickly and prepare for the future. Those who navigate these tricky waters the best will emerge from the downturn in better shape than their competitors.
The reality is that most of the forces driving companies to go green have not gone away — in fact, many of these factors have increased despite, or even because of, the economic situation. Environmental crises such as climate change and water shortages continue to evolve. Megaforces such as technology-driven transparency and the long-term mismatch between supply and demand of oil and most critical resources (billions of new consumers and not a lot more stuff in the ground) continue to advance.
Closer to home, key stakeholders still demand more of companies than ever, especially corporate customers greening their supply chains (they want to save money right now, and it's pretty easy to demand that your suppliers reduce waste, energy use, and cost). Even your employees, both of whom are under extreme financial pressure, still want a measure of environmental performance and social responsibility in the companies they work for and buy from. In fact, employees may want more green programs as they look for meaning (beyond money) in tough times.
Luckily for business, the solutions to both economic and environmental problems overlap heavily. The same strategies and tactics that address long-term environmental challenges will help you survive today's economic conditions.
Getting lean, particularly on energy and resources, will save money and reduce carbon impacts (as well as making you more competitive when energy prices inevitably rise again). Thinking through your value chain and getting creative about how you can help your customers manage their environmental impacts and lower their costs will help you grab market share in tough times. And it will likely do much more to address environmental challenges than focusing only on your own environmental impacts. Getting your people engaged around a dual mission — save the company money and preserve our collective bounty and assets — will help boost morale in tough times and keep your company going strong.
In many ways, the economic and environmental challenges are the same. We overleveraged financial resources and overextended ourselves. Isn't that exactly what we're doing with natural resources? Isn't now the right time to cut back where it makes sense, but also to innovate and grow in better, smarter ways?
Your company's, and our economy's, recovery may depend on how we all handle these multiple challenges at once. We can't afford to tackle them one at a time.
At same time, most of the global discussion about getting the economy on track focuses on the macro picture — large stimulus packages at the national and industry level. But how can the economy as a whole get on its feet if individual companies don't as well?
I believe that these two questions — can we still go green and how do we revive the economy — are heavily intertwined. In this time of austerity, sustainability is perhaps even more relevant and will provide a path out of this mess. One of the core pillars of going green is doing more with less — saving physical and financial resources. So while the instinct may be to pull back from green initiatives in hard times, that would be shortsighted and a huge mistake.
Not only should companies not put their green efforts on hold, they should accelerate them in targeted ways to save money quickly and prepare for the future. Those who navigate these tricky waters the best will emerge from the downturn in better shape than their competitors.
The reality is that most of the forces driving companies to go green have not gone away — in fact, many of these factors have increased despite, or even because of, the economic situation. Environmental crises such as climate change and water shortages continue to evolve. Megaforces such as technology-driven transparency and the long-term mismatch between supply and demand of oil and most critical resources (billions of new consumers and not a lot more stuff in the ground) continue to advance.
Closer to home, key stakeholders still demand more of companies than ever, especially corporate customers greening their supply chains (they want to save money right now, and it's pretty easy to demand that your suppliers reduce waste, energy use, and cost). Even your employees, both of whom are under extreme financial pressure, still want a measure of environmental performance and social responsibility in the companies they work for and buy from. In fact, employees may want more green programs as they look for meaning (beyond money) in tough times.
Luckily for business, the solutions to both economic and environmental problems overlap heavily. The same strategies and tactics that address long-term environmental challenges will help you survive today's economic conditions.
Getting lean, particularly on energy and resources, will save money and reduce carbon impacts (as well as making you more competitive when energy prices inevitably rise again). Thinking through your value chain and getting creative about how you can help your customers manage their environmental impacts and lower their costs will help you grab market share in tough times. And it will likely do much more to address environmental challenges than focusing only on your own environmental impacts. Getting your people engaged around a dual mission — save the company money and preserve our collective bounty and assets — will help boost morale in tough times and keep your company going strong.
In many ways, the economic and environmental challenges are the same. We overleveraged financial resources and overextended ourselves. Isn't that exactly what we're doing with natural resources? Isn't now the right time to cut back where it makes sense, but also to innovate and grow in better, smarter ways?
Your company's, and our economy's, recovery may depend on how we all handle these multiple challenges at once. We can't afford to tackle them one at a time.
Regulating CEO Pay Is Not the Answer
We're at a crossroads for CEO pay - and by extension for corporations and competition in general.
The conventional wisdom says executive pay played a substantial, perhaps dominant, role in the financial crisis and recession by encouraging excessive risk-taking. As a result, there's huge public support right now for the idea that the basic executive pay model should be changed that it should be rethought, reformed, legislated, and regulated. This is a natural reaction to unprecedented events. And the Obama administration is about to present its own philosophy on CEO pay in the form of compensation rules for twice-bailed-out companies.
But legislating and regulating executive compensation has the capacity to do real damage. Our research has shown that the traditional executive pay model using cash and stock incentives continues to work for the vast majority of companies. It motivates leaders to steer their companies toward high performance. Luck plays a part in whether or not the companies actually get there, but the pay-for-performance model certainly sets companies up to succeed. Our research shows that in general, high-performing companies' CEOs get paid a lot, and low-performing companies' CEOs get paid much, much less.
Furthermore, CEO pay is already self-correcting. Boards have heard the outcry from shareholders, activists, the media, and the public. All across corporate America, the compensation committee debates of the past few weeks have been notably different from previous years'. To borrow President Obama's language, the board members "get it." We survey directors annually and have found they have become far more conservative in making their CEO pay decisions.
An important factor prompting this change in board behavior has been the freezing up of the CEO labor market. This year, CEOs don't have as many employment alternatives as they used to. In past years, the intense competition for good CEOs helped boost executives' pay packages. In fact, a poor understanding of the executive labor market underpins much of the conventional wisdom about CEO pay. Many assume that some chief executives must browbeat their weak-willed boards into giving them lucrative deals--even in bad years. But in the vast majority of cases, that's simply not so. Boards do "buckle," in a sense, but only to the realities of the labor market. Big-company directors are convinced that the right CEO can add billions of dollars' worth of value for shareholders, and in most years, the right CEO is a scarce commodity.
CEO pay will self-correct in another sense too: Profits and stock prices are likely going to increase more modestly in the coming months and years, and that slower rate of growth will affect chief executives' realizable pay--the true value they earn in incentive and equity pay.
So I would suggest not a wholesale rethinking of the traditional executive-pay model but a more measured approach that specifically counters the role that pay may have played in causing excessive risk taking. As many have argued, perhaps it was the failure of the financial firms' risk models to identify the true downside risks that led to this crisis.
While this moment in history presents challenges for corporations, it also presents an opportunity for boards to get rid of executive pay components that irritate shareholders and employees. And that is what we recommend. Directors now have more clout to stand up to CEOs and refuse things like lucrative severance packages in case of takeovers, and they have eliminated some prerequisites. CEOs often don't realize how big an impact some of these perks can have on people's attitudes. We recommend protecting core incentives and minimizing the irritants, with an eye on balancing the risk components in the pay program with the pay-for-performance components.
But our recommendations are always framed in practical, economic, rather than moral, terms. Outraged employees and investors are bad for the CEO and bad for the company. For example, if employees are annoyed at their leader, productivity and thus profitability might slip. What matters to me isn't whether there's a moral crisis in executive compensation but whether companies can stay competitive and balance pay for performance with the right risk profile.
The conventional wisdom says executive pay played a substantial, perhaps dominant, role in the financial crisis and recession by encouraging excessive risk-taking. As a result, there's huge public support right now for the idea that the basic executive pay model should be changed that it should be rethought, reformed, legislated, and regulated. This is a natural reaction to unprecedented events. And the Obama administration is about to present its own philosophy on CEO pay in the form of compensation rules for twice-bailed-out companies.
But legislating and regulating executive compensation has the capacity to do real damage. Our research has shown that the traditional executive pay model using cash and stock incentives continues to work for the vast majority of companies. It motivates leaders to steer their companies toward high performance. Luck plays a part in whether or not the companies actually get there, but the pay-for-performance model certainly sets companies up to succeed. Our research shows that in general, high-performing companies' CEOs get paid a lot, and low-performing companies' CEOs get paid much, much less.
Furthermore, CEO pay is already self-correcting. Boards have heard the outcry from shareholders, activists, the media, and the public. All across corporate America, the compensation committee debates of the past few weeks have been notably different from previous years'. To borrow President Obama's language, the board members "get it." We survey directors annually and have found they have become far more conservative in making their CEO pay decisions.
An important factor prompting this change in board behavior has been the freezing up of the CEO labor market. This year, CEOs don't have as many employment alternatives as they used to. In past years, the intense competition for good CEOs helped boost executives' pay packages. In fact, a poor understanding of the executive labor market underpins much of the conventional wisdom about CEO pay. Many assume that some chief executives must browbeat their weak-willed boards into giving them lucrative deals--even in bad years. But in the vast majority of cases, that's simply not so. Boards do "buckle," in a sense, but only to the realities of the labor market. Big-company directors are convinced that the right CEO can add billions of dollars' worth of value for shareholders, and in most years, the right CEO is a scarce commodity.
CEO pay will self-correct in another sense too: Profits and stock prices are likely going to increase more modestly in the coming months and years, and that slower rate of growth will affect chief executives' realizable pay--the true value they earn in incentive and equity pay.
So I would suggest not a wholesale rethinking of the traditional executive-pay model but a more measured approach that specifically counters the role that pay may have played in causing excessive risk taking. As many have argued, perhaps it was the failure of the financial firms' risk models to identify the true downside risks that led to this crisis.
While this moment in history presents challenges for corporations, it also presents an opportunity for boards to get rid of executive pay components that irritate shareholders and employees. And that is what we recommend. Directors now have more clout to stand up to CEOs and refuse things like lucrative severance packages in case of takeovers, and they have eliminated some prerequisites. CEOs often don't realize how big an impact some of these perks can have on people's attitudes. We recommend protecting core incentives and minimizing the irritants, with an eye on balancing the risk components in the pay program with the pay-for-performance components.
But our recommendations are always framed in practical, economic, rather than moral, terms. Outraged employees and investors are bad for the CEO and bad for the company. For example, if employees are annoyed at their leader, productivity and thus profitability might slip. What matters to me isn't whether there's a moral crisis in executive compensation but whether companies can stay competitive and balance pay for performance with the right risk profile.
How the Recession Is Changing Talent Management
By now we've all heard the phrase that a recession is too precious to waste.
Recessions are times when we make changes in the way we do things — consciously or not. Although it would be smart to do it consciously, probably some of the most significant changes have just, well, happened.
The shift underway today, embedded in companies' responses to this recession, will have major unintended consequences for the relationship between organizations and the individuals who perform work (I hesitate to even use the word "employees"). As msnbc reported recently, there's been a "furlough frenzy" in corporate America lately.
We're on a slippery slope.
Recent history illustrates how significant shifts in the nature of the relationship between organizations and workers have resulted from practices put in place during a recession. For example, it was during the recession of 1981 that the idea of a "layoff," meaning a permanent separation with no prospects for recall, came into widespread use. Prior to that recession, the idea that an employer would dismiss workers permanently was so rare that the Bureau of Labor Statistics did not even keep track of such cuts! Furloughs, with the clear commitment of a return when business picked up, were used instead. The reality that jobs were no longer "for life" sunk in.
The recession of 1991 saw another substantial change: many individuals became contractors out of necessity — and a significant proportion chose to continue to work as contractors even after "permanent" jobs became available. We accepted the idea that some people may never be full-time employees again and began our evolution to a "free agent nation."
This recession is ushering in a return to furloughs. Hewitt Associates recently surveyed 518 U.S. firms and found that 70 percent had implemented or were considering implementing furloughs. Major companies such as Dell, American Airlines, and DuPont already have announced plans to send workers home for a few days or a few weeks without pay as a way to cut costs.
Much of the attention paid to this trend has focused on the cost-savings opportunities for employers and worried about the economic hardships and potential rights violations to employees. Employers who use temporary hiatuses rather than layoffs save on severance costs, as well as future rehiring and retraining expenses when an economic turnaround eventually comes. Employees, in theory, suffer through some hardship, but not as much as would have occurred with a layoff. Yes, but . . .
This practice is further changing — in irrevocable ways — the relationship between employers and employees. This practice is reframing, perhaps even severing, the idea of "full-time" as many of us have understood it for years.
When I took my first job out of graduate school, my employer had me sign an agreement that whatever I did — whatever I created, invented, wrote — whether or not it occurred during some official forty hour period, was the property of the company. Since then, I and most of us in professional or managerial roles have viewed the work we do as only loosely related to any particular hours. We work nights and weekends. We grumble about work-life balance. We accept that the deal we have had with our employers was all encompassing.
But the idea of furloughs, particularly for managers and professionals, is planting the seed of a new way of looking at work in our minds. Suddenly companies have asked us to work, say, 32 hours a week rather than 40. Hmmm. What does that really mean? Most of us were never working 40 hours — we might have been working 50 or maybe even 60. We were answering emails at odd hours, writing in the early hours, calling Singapore at night. Does this mean that we should now work 20% less than we were before . . . or does it mean we should work literally 32 hours?
For many, I believe the conclusion will be that we should work the hours specified by the company and perhaps do other things — start new businesses on the side perhaps, sell stuff on eBay, take another job, go back to school, whatever — with the other time.
In this shift, companies will lose far more than the number of hours they think they've cut back. Companies will lose that sense of total dedication — the sense that what I produce on my own time is theirs, that I have a responsibility to answer emails whenever they arrive or participate in odd-hour phone calls.
This shift sits well with many in Gen X who have already tended to bind their involvement more carefully than have the all-out Boomers. But for both generations, it will be a new way to look at work — another step on the slippery slope of recessionary lessons moving us from (1) you don't have a job for life, to (2) you may never find full-time work with one employer, to now (3) even a full-time job is really only a contractor job in disguise.
From a talent management perspective, it's essential to recognize that decisions you're making this year are likely to set the tone for the relationship with employers for decades to come.
I hope you'll share your thoughts and experiences.
Recessions are times when we make changes in the way we do things — consciously or not. Although it would be smart to do it consciously, probably some of the most significant changes have just, well, happened.
The shift underway today, embedded in companies' responses to this recession, will have major unintended consequences for the relationship between organizations and the individuals who perform work (I hesitate to even use the word "employees"). As msnbc reported recently, there's been a "furlough frenzy" in corporate America lately.
We're on a slippery slope.
Recent history illustrates how significant shifts in the nature of the relationship between organizations and workers have resulted from practices put in place during a recession. For example, it was during the recession of 1981 that the idea of a "layoff," meaning a permanent separation with no prospects for recall, came into widespread use. Prior to that recession, the idea that an employer would dismiss workers permanently was so rare that the Bureau of Labor Statistics did not even keep track of such cuts! Furloughs, with the clear commitment of a return when business picked up, were used instead. The reality that jobs were no longer "for life" sunk in.
The recession of 1991 saw another substantial change: many individuals became contractors out of necessity — and a significant proportion chose to continue to work as contractors even after "permanent" jobs became available. We accepted the idea that some people may never be full-time employees again and began our evolution to a "free agent nation."
This recession is ushering in a return to furloughs. Hewitt Associates recently surveyed 518 U.S. firms and found that 70 percent had implemented or were considering implementing furloughs. Major companies such as Dell, American Airlines, and DuPont already have announced plans to send workers home for a few days or a few weeks without pay as a way to cut costs.
Much of the attention paid to this trend has focused on the cost-savings opportunities for employers and worried about the economic hardships and potential rights violations to employees. Employers who use temporary hiatuses rather than layoffs save on severance costs, as well as future rehiring and retraining expenses when an economic turnaround eventually comes. Employees, in theory, suffer through some hardship, but not as much as would have occurred with a layoff. Yes, but . . .
This practice is further changing — in irrevocable ways — the relationship between employers and employees. This practice is reframing, perhaps even severing, the idea of "full-time" as many of us have understood it for years.
When I took my first job out of graduate school, my employer had me sign an agreement that whatever I did — whatever I created, invented, wrote — whether or not it occurred during some official forty hour period, was the property of the company. Since then, I and most of us in professional or managerial roles have viewed the work we do as only loosely related to any particular hours. We work nights and weekends. We grumble about work-life balance. We accept that the deal we have had with our employers was all encompassing.
But the idea of furloughs, particularly for managers and professionals, is planting the seed of a new way of looking at work in our minds. Suddenly companies have asked us to work, say, 32 hours a week rather than 40. Hmmm. What does that really mean? Most of us were never working 40 hours — we might have been working 50 or maybe even 60. We were answering emails at odd hours, writing in the early hours, calling Singapore at night. Does this mean that we should now work 20% less than we were before . . . or does it mean we should work literally 32 hours?
For many, I believe the conclusion will be that we should work the hours specified by the company and perhaps do other things — start new businesses on the side perhaps, sell stuff on eBay, take another job, go back to school, whatever — with the other time.
In this shift, companies will lose far more than the number of hours they think they've cut back. Companies will lose that sense of total dedication — the sense that what I produce on my own time is theirs, that I have a responsibility to answer emails whenever they arrive or participate in odd-hour phone calls.
This shift sits well with many in Gen X who have already tended to bind their involvement more carefully than have the all-out Boomers. But for both generations, it will be a new way to look at work — another step on the slippery slope of recessionary lessons moving us from (1) you don't have a job for life, to (2) you may never find full-time work with one employer, to now (3) even a full-time job is really only a contractor job in disguise.
From a talent management perspective, it's essential to recognize that decisions you're making this year are likely to set the tone for the relationship with employers for decades to come.
I hope you'll share your thoughts and experiences.
The Value Every Business Needs to Create Now
In the vast majority of boardrooms I've been in this year, decision-makers are asking fundamental questions about profitability. And they're not the only ones. Here's an exchange between Stephen L Carter, an eminent law professor, and James Kwak, one of his students — debating the merits of megaprofits. Their exchange mirrors the very first question I'm often asked: when should we strive to profit — and when shouldn't we? Is profit a "good" thing — or isn't it?
My answer is: not all profit is created equal.
Consider David Pogue's recent campaign to ask mobile operators to do away with hidden and unfair charges:
"I've been ranting about one particularly blatant money-grab by American cellphone carriers: the mandatory 15-second voicemail instructions.
...These little 15-second waits add up-big time. If Verizon's 70 million customers leave or check messages twice a weekday, Verizon rakes in about $620 million a year."
Pogue then adroitly points out that these messages are strategic — they're there for the benefit of operators, not customers:
"In 2007, I spoke at an international cellular conference in Italy. The big buzzword was ARPU—Average Revenue Per User. The seminars all had titles like, "Maximizing ARPU In a Digital Age." And yes, several attendees (cell executives) admitted to me, point-blank, that the voicemail instructions exist primarily to make you use up airtime, thereby maximizing ARPU."
Ethically questionable — but that's just hard-as-nails business-as-usual, right? Wrong. Welcome to the 21st Century:
Profit through economic harm to others results in what I've termed "thin value." Thin value is an economic illusion: profit that is economically meaningless, because it leaves others worse off, or, at best, no one better off. When you have to spend an extra 30 seconds for no reason, mobile operators win — but you lose time, money, and productivity. Mobile networks' marginal profits are simply counterbalanced by your marginal losses. That marginal profit doesn't reflect, often, the creation of authentic, meaningful value.
Thin value is what the zombieconomy creates. The healthcare industry profits, but Americans get poor healthcare. Automakers fought tooth and nail against making sustainably powered cars. Manufacturers of all stripes stay mum about environmental costs. Clothing companies can't break up with sweatshop labour. The clearest example of thin value, is, of course, banks: they invested our national wealth in assets that turned out to be literally worthless.
The fundamental challenge for 21st Century businesses — and economies — is learning to create thick value. We're seeing the endgame of a global economy built to create thin value: collapse. Why? Simple: thin value is a mirage — and like all mirages, it ultimately evaporates. In the 21st Century, we've got to reconceive value creation.
Constructive Capitalists are disrupting their rivals by creating thicker value. Thick value is sustainable, meaningful value — and a new generation of radical innovators is wielding it like a strategic superweapon. Wal-Mart is learning to create thick value: it is turning into one of the 21st Century's great Constructive Capitalists. Apple's challenge, as I've recently demonstrated, is learning to create a thicker kind of value: creating a better iPod that's worth the ~ $60 premium producing it ethically might cost.
Here's a deeper discussion of the economics of thin and thick value, for those who are interested.
For now, ask yourself: how thick is the value you're creating? Are your profits, like mobile operators, built on hidden costs, surcharges, and monopoly power — or on awesome stuff that makes people meaningfully better off?
For those whose answer is the former — there's a Constructive Capitalist out there somewhere, and your business is directly in their cross hairs.
Fire away in with questions, criticism, or comments.
My answer is: not all profit is created equal.
Consider David Pogue's recent campaign to ask mobile operators to do away with hidden and unfair charges:
"I've been ranting about one particularly blatant money-grab by American cellphone carriers: the mandatory 15-second voicemail instructions.
...These little 15-second waits add up-big time. If Verizon's 70 million customers leave or check messages twice a weekday, Verizon rakes in about $620 million a year."
Pogue then adroitly points out that these messages are strategic — they're there for the benefit of operators, not customers:
"In 2007, I spoke at an international cellular conference in Italy. The big buzzword was ARPU—Average Revenue Per User. The seminars all had titles like, "Maximizing ARPU In a Digital Age." And yes, several attendees (cell executives) admitted to me, point-blank, that the voicemail instructions exist primarily to make you use up airtime, thereby maximizing ARPU."
Ethically questionable — but that's just hard-as-nails business-as-usual, right? Wrong. Welcome to the 21st Century:
Profit through economic harm to others results in what I've termed "thin value." Thin value is an economic illusion: profit that is economically meaningless, because it leaves others worse off, or, at best, no one better off. When you have to spend an extra 30 seconds for no reason, mobile operators win — but you lose time, money, and productivity. Mobile networks' marginal profits are simply counterbalanced by your marginal losses. That marginal profit doesn't reflect, often, the creation of authentic, meaningful value.
Thin value is what the zombieconomy creates. The healthcare industry profits, but Americans get poor healthcare. Automakers fought tooth and nail against making sustainably powered cars. Manufacturers of all stripes stay mum about environmental costs. Clothing companies can't break up with sweatshop labour. The clearest example of thin value, is, of course, banks: they invested our national wealth in assets that turned out to be literally worthless.
The fundamental challenge for 21st Century businesses — and economies — is learning to create thick value. We're seeing the endgame of a global economy built to create thin value: collapse. Why? Simple: thin value is a mirage — and like all mirages, it ultimately evaporates. In the 21st Century, we've got to reconceive value creation.
Constructive Capitalists are disrupting their rivals by creating thicker value. Thick value is sustainable, meaningful value — and a new generation of radical innovators is wielding it like a strategic superweapon. Wal-Mart is learning to create thick value: it is turning into one of the 21st Century's great Constructive Capitalists. Apple's challenge, as I've recently demonstrated, is learning to create a thicker kind of value: creating a better iPod that's worth the ~ $60 premium producing it ethically might cost.
Here's a deeper discussion of the economics of thin and thick value, for those who are interested.
For now, ask yourself: how thick is the value you're creating? Are your profits, like mobile operators, built on hidden costs, surcharges, and monopoly power — or on awesome stuff that makes people meaningfully better off?
For those whose answer is the former — there's a Constructive Capitalist out there somewhere, and your business is directly in their cross hairs.
Fire away in with questions, criticism, or comments.
How to Fly Over Recessionary Obstacles
Win, my mountain biking partner, and I looked down the ten-foot drop.
"Should be fun," he said as we backed away from the edge and climbed up the hill to get some runway. I wasn't so sure. He climbed on his bike, pedaled to get a little speed, and took the plunge, effortlessly gliding over the rocks, roots, and stumps.
My turn. I felt the adrenaline rush as I clipped my feet into the pedals. My heart was beating fast. My hands were shaking. I took a few tentative pedal strokes forward and inched up. I felt my front tire go over the edge and I started to descend, checking my speed as I weaved around the obstacles.
Suddenly I hit something and my bike abruptly stopped. But I didn't. I flew over my handlebars and ended up on the ground, lying beside my bike, front wheel still spinning.
"Dude," Win laughed, "You OK?"
"Yeah." I brushed the dirt off my elbows. "What happened?"
Neither of us knew. So I picked up my bike, climbed up the chute, and did it again. Not just the chute, the whole thing: the adrenaline, the weaving around the obstacles, the abrupt stop, the flying over the handlebars.
"Dude," Win laughed again. I was officially in the movie Groundhog Day. I climbed back up the chute and did it again. And again. I must have done it five times before I figured out what was stopping me.
Me.
A mountain bike has to be going fast enough to make it over an obstacle. The bigger the obstacle, the more momentum the bike needs to get over it. There was one big unavoidable rock, and each time I came upon it I unconsciously squeezed on my brake. That slowed me down just enough to turn the rock into an insurmountable wall.
I needed more speed to keep moving. So I climbed back up and did it again. I stared at the rock and picked up speed. I kept my eyes on it right to the point where I squeezed on my brakes and flipped over my handlebars again.
I knew what I had to do but I couldn't do it. It was just too scary. As long as I was focused on the rock, I couldn't prevent myself from braking.
But I wasn't ready to give up. So I climbed back up and tried one more time. This time, I decided to focus ahead of me - ten feet in front of where I was at any point in time. So I would see the rock when it was ten feet away, but I wouldn't be looking at it when I was going over it.
It worked. I slid easily over the rock and made it down the chute without falling.
I'm a huge proponent of living in the present. If you pay attention to what's happening now, the future will take care of itself. You know: don't regret the past, don't worry about the future, just be here now and all that.
But sometimes, focusing on the present is the obstacle. Take driving a car, for example. If you didn't look ahead to see where the road was going, you'd keep driving straight and crash at the next curve. When you're driving, you never actually pay attention to where you are; you're always paying attention to what's happening in the road ahead and you change course based on what you see in the future.
It's the same with running a business. These days I see a lot of leaders who remind me of me mountain biking down that chute. They look with fear at their current numbers or at the government's current reports, and then without meaning to, they squeeze the brakes. In some cases they're still laying people off or, at least, not hiring. They've drastically reduced training or stopped it altogether. Their employees are still worried about their jobs and they, the leaders themselves, aren't reassuring them because they're worried about their jobs too.
But right now, focusing on the present business environment will cause businesses to fly over their handlebars. This is not the time to look at the present. It's the time to look ten feet, or ten months, ahead.
RIght now customers are careful about where they spend their money. More than ever, they want to be treated well. Whatever dollars they choose to spend will go towards the companies who respect them, who provide them with the kind of service they feel they deserve.
But companies filled with nervous employees each of whom, with little or no training, is doing the work of three people, cannot provide good service.
Those companies will lose customers. When the demand does come back and customers start spending more money, they'll spend it on the companies that take care of them now.
Whether or not we are in the recovery, we need to act as though we are. The companies that do so will emerge from this recession stronger than when they entered it.
Pretend it's already June 2010. What decisions will you make? Make those now. I propose three immediate ones:
"You done?" Win asked me, waiting not so patiently at the bottom of the chute.
"Yeah, I think I figured it out."
"Let's go then." With that, he was off in a blaze down the trail.
"Should be fun," he said as we backed away from the edge and climbed up the hill to get some runway. I wasn't so sure. He climbed on his bike, pedaled to get a little speed, and took the plunge, effortlessly gliding over the rocks, roots, and stumps.
My turn. I felt the adrenaline rush as I clipped my feet into the pedals. My heart was beating fast. My hands were shaking. I took a few tentative pedal strokes forward and inched up. I felt my front tire go over the edge and I started to descend, checking my speed as I weaved around the obstacles.
Suddenly I hit something and my bike abruptly stopped. But I didn't. I flew over my handlebars and ended up on the ground, lying beside my bike, front wheel still spinning.
"Dude," Win laughed, "You OK?"
"Yeah." I brushed the dirt off my elbows. "What happened?"
Neither of us knew. So I picked up my bike, climbed up the chute, and did it again. Not just the chute, the whole thing: the adrenaline, the weaving around the obstacles, the abrupt stop, the flying over the handlebars.
"Dude," Win laughed again. I was officially in the movie Groundhog Day. I climbed back up the chute and did it again. And again. I must have done it five times before I figured out what was stopping me.
Me.
A mountain bike has to be going fast enough to make it over an obstacle. The bigger the obstacle, the more momentum the bike needs to get over it. There was one big unavoidable rock, and each time I came upon it I unconsciously squeezed on my brake. That slowed me down just enough to turn the rock into an insurmountable wall.
I needed more speed to keep moving. So I climbed back up and did it again. I stared at the rock and picked up speed. I kept my eyes on it right to the point where I squeezed on my brakes and flipped over my handlebars again.
I knew what I had to do but I couldn't do it. It was just too scary. As long as I was focused on the rock, I couldn't prevent myself from braking.
But I wasn't ready to give up. So I climbed back up and tried one more time. This time, I decided to focus ahead of me - ten feet in front of where I was at any point in time. So I would see the rock when it was ten feet away, but I wouldn't be looking at it when I was going over it.
It worked. I slid easily over the rock and made it down the chute without falling.
I'm a huge proponent of living in the present. If you pay attention to what's happening now, the future will take care of itself. You know: don't regret the past, don't worry about the future, just be here now and all that.
But sometimes, focusing on the present is the obstacle. Take driving a car, for example. If you didn't look ahead to see where the road was going, you'd keep driving straight and crash at the next curve. When you're driving, you never actually pay attention to where you are; you're always paying attention to what's happening in the road ahead and you change course based on what you see in the future.
It's the same with running a business. These days I see a lot of leaders who remind me of me mountain biking down that chute. They look with fear at their current numbers or at the government's current reports, and then without meaning to, they squeeze the brakes. In some cases they're still laying people off or, at least, not hiring. They've drastically reduced training or stopped it altogether. Their employees are still worried about their jobs and they, the leaders themselves, aren't reassuring them because they're worried about their jobs too.
But right now, focusing on the present business environment will cause businesses to fly over their handlebars. This is not the time to look at the present. It's the time to look ten feet, or ten months, ahead.
RIght now customers are careful about where they spend their money. More than ever, they want to be treated well. Whatever dollars they choose to spend will go towards the companies who respect them, who provide them with the kind of service they feel they deserve.
But companies filled with nervous employees each of whom, with little or no training, is doing the work of three people, cannot provide good service.
Those companies will lose customers. When the demand does come back and customers start spending more money, they'll spend it on the companies that take care of them now.
Whether or not we are in the recovery, we need to act as though we are. The companies that do so will emerge from this recession stronger than when they entered it.
Pretend it's already June 2010. What decisions will you make? Make those now. I propose three immediate ones:
- Invest in hiring more customer-facing employees. Make sure you have a slight surplus so every customer call is answered immediately. If a customer leaves a message, return the call without delay. Hiring people who will positively impact the customer experience will bring in more business more cost-effectively than anything else you can do.
- Invest in training people who are in customer-facing roles. A satisfied customer is your best PR and marketing. Train people to connect with customers, build relationships, and provide thoughtful and expeditious service.
- Invest in the activities that give employees a sense of commitment to and security in your company. Talk to them about their careers. Recognize them for jobs well done. Share your plans for the recovery. Celebrate their successes.
"You done?" Win asked me, waiting not so patiently at the bottom of the chute.
"Yeah, I think I figured it out."
"Let's go then." With that, he was off in a blaze down the trail.
How Small Businesses Win Big in Tough Economies
Blinded by mass layoffs and the financial follies of Fortune 500 companies, we have overlooked a smaller but more important transformation: the increasing importance of small businesses in our economic recovery. After all, small businesses employ more than half of our private sector workforce. And history, as well as the Small Business Administration, readily reminds us that the ability of small businesses to create jobs is a key factor in any resurgent prosperity. That's all well and good, you might say, but what difference does any of this make when the media keeps bombarding us with reports that many small businesses are going bankrupt? Well, you can choose to wring your hands in frustration or you can look to the facts. For every small business failure, dozens more are actually thriving despite the economic panic.
What are these small businesses doing to outperform the economy? Consider the following strategic approaches:
Action. This is an entrepreneur's best weapon. Things happen fast these days and fluidity favors small businesses — you don't need to sort through the layers of bureaucracy that can slow down, or even cripple, larger companies. Small businesses can adapt to any circumstance quickly. As every thriving entrepreneur knows, speed breeds success.
Planning is important. Plans aren't. It's good to have a strategy in place, but don't succumb to analysis paralysis. With things changing almost hourly, can you afford to spend time following a bloated plan that was outdated almost as soon as it was completed? Spend your time with your ear to the ground and respond accordingly.
Innovative financing. There are a number of resources available to small businesses and innovative approaches that can have a positive impact on your bottom line. Diana Ransom touched on some of these tactics in a WSJ Smart Money column. She recommends offering upfront pricing, using seller financing, and switching from fixed to variable costs. She also recommends selectively discounting items. Although, I've gone on the record as saying discounting can damage your brand, the key word here is selective. Circumstances also come into play. If your business is based in a community that is particularly vulnerable economically (such as Detroit, let's say) or your target audience is responsive to discounts, then by all means try this approach.
Give the people what they want. People are staying home more and they're looking for value. Smart companies are tapping into that. For instance, Skinner Baking is giving people what they want: comfort food during hard times. And I'm willing to bet that the sales of that much maligned blanket with sleeves, the Snuggie, aren't going to do too badly this winter either, what with people staying home and turning down their thermostat.
Test, measure, refine, repeat. Small businesses have another added advantage these days that they didn't have in past recessions — social media and sophisticated online marketing tools. You can measure the success of your marketing and advertising and conduct all the market research you need in real-time with a click of the mouse. You can engage your customers online in a number of low-cost ways. And you can optimize your website so your customers can find you quickly and easily. Likewise, effective use of eCommerce capabilities can help keep you in the black with minimal overhead.
What tactics are you using to keep company performance up while the economy is down?
Jeffrey M. Stibel is an entrepreneur and brain scientist. He studied business and brain science at MIT Sloan and Brown University, where he was a brain and behavior fellow. Stibel has authored numerous academic and business articles on a variety of subjects and is the named inventor on the US patent for search engine interfaces. He is currently President of Web.com (NASDAQ: WWWW) and serves on academic Boards for Tufts and Brown University, as well as the Board of Directors for a number of public and private companies.
Should Entrepreneurs Sell in Today's Economy?
You may be surprised to learn that now — even in this economy — could be a great time to sell the company you've spent years building. But entrepreneurs hoping for an exit strategy could make costly tactical errors if they don't understand what's changed in the last year. In our experience advising companies, entrepreneurs in this environment are vulnerable to making three significant mistakes if they don't understand the new rules of the game.
Mistake 1: Assuming getting 100% cash-at-closing is the optimal outcome. It used to be that we'd counsel clients to get as much cash as possible at the closing of the sale and to be cautious about earn-outs, i.e. deals where portions of the sale price are contingent on the seller meeting pre-specified objectives in the future. In these types of transactions, exceeding those objectives will often greatly enhance your payout. In addition to the obvious inherent added risk, earn-outs can be tricky to negotiate and even trickier to enforce.
However, in this economy we've reversed our stance. Most companies' earnings are depressed in 2009 so earn-outs often offer the ideal mix of value, upside and security. Consider this: You decide to sell 50% of your company at the going multiple, say 6X your EBITDA and then 25% each year for the next 2 years. As the economy recovers, your earnings accelerate and you exceed your projections, reaping the reward from the recovery by multiplying those increased earnings to reach the final 2 portions of your purchase price.
Mistake 2: Assuming you know in advance who the buyer of your business will be. Many of our clients think they know who should buy their companies (they even may secretly be wishing for a particular buyer). Making this assumption is dangerous today. That's because too many prospective buyers are in no position to acquire other companies. They may already be carrying too much debt, or their own businesses may be underperforming. Usually, when a company is faced with its own challenges it will be reluctant to buy another company, no matter how good the match. The likelihood that one of a handful of buyers who you think should buy your company will actually turn out to be the buyer is lower today than it was a year ago. Approaching a smaller universe of buyers will almost surely result in disappointment. As a result, sellers should look to broaden the pool of prospective buyers, including even those they might view as long-shots.
Mistake 3: Not realizing it may be in your best interest to sell now — even if you don't have to. A popular misconception is that no one would sell their company during a downturn if they did not have to. Exit multiples (the ratio of a company's value to its earnings) are lower now and there are fewer buyers willing to be aggressive with their bidding. But, that doesn't mean that your company will sell for more next year or two years from now. Many companies and some industries are still winning premium pricing, including technological innovators and strong cash-flow performers.
In fact, there are some really good reasons not to wait for the economy to rebound before selling your company, including these scenarios:
Reed Phillips and Jessica Luterman Naeve are managing partner and managing director of DeSilva + Phillips, a boutique investment bank which specializes in traditional and digital media.
Mistake 1: Assuming getting 100% cash-at-closing is the optimal outcome. It used to be that we'd counsel clients to get as much cash as possible at the closing of the sale and to be cautious about earn-outs, i.e. deals where portions of the sale price are contingent on the seller meeting pre-specified objectives in the future. In these types of transactions, exceeding those objectives will often greatly enhance your payout. In addition to the obvious inherent added risk, earn-outs can be tricky to negotiate and even trickier to enforce.
However, in this economy we've reversed our stance. Most companies' earnings are depressed in 2009 so earn-outs often offer the ideal mix of value, upside and security. Consider this: You decide to sell 50% of your company at the going multiple, say 6X your EBITDA and then 25% each year for the next 2 years. As the economy recovers, your earnings accelerate and you exceed your projections, reaping the reward from the recovery by multiplying those increased earnings to reach the final 2 portions of your purchase price.
Mistake 2: Assuming you know in advance who the buyer of your business will be. Many of our clients think they know who should buy their companies (they even may secretly be wishing for a particular buyer). Making this assumption is dangerous today. That's because too many prospective buyers are in no position to acquire other companies. They may already be carrying too much debt, or their own businesses may be underperforming. Usually, when a company is faced with its own challenges it will be reluctant to buy another company, no matter how good the match. The likelihood that one of a handful of buyers who you think should buy your company will actually turn out to be the buyer is lower today than it was a year ago. Approaching a smaller universe of buyers will almost surely result in disappointment. As a result, sellers should look to broaden the pool of prospective buyers, including even those they might view as long-shots.
Mistake 3: Not realizing it may be in your best interest to sell now — even if you don't have to. A popular misconception is that no one would sell their company during a downturn if they did not have to. Exit multiples (the ratio of a company's value to its earnings) are lower now and there are fewer buyers willing to be aggressive with their bidding. But, that doesn't mean that your company will sell for more next year or two years from now. Many companies and some industries are still winning premium pricing, including technological innovators and strong cash-flow performers.
In fact, there are some really good reasons not to wait for the economy to rebound before selling your company, including these scenarios:
- You've had a strong year despite the down economy and can show consistent growth for the past few years. If this is the case, you'll appear to be the rose in a field of weeds and will still receive premium pricing.
- Buyers are overwhelmed with prospects in good times and it's a lot easier to get lost in the shuffle, whereas in down times, most companies will get a better review even when the fit may not be apparent at first.
- A number of strategic buyers are sitting on cash reserves. While they may have been outbid/out-finessed by financial buyers in the past, many are ready to jump in the market now that most financial buyers are sidelined.
- Too often, sellers who are waiting for the economy to turn around will wait too long. Selling now, even for a slightly lower multiple, is often a better outcome than waiting for the perfect moment and realizing you've missed the opportunity entirely.
Reed Phillips and Jessica Luterman Naeve are managing partner and managing director of DeSilva + Phillips, a boutique investment bank which specializes in traditional and digital media.
The Next Crisis: Coming in 2011
With the Dow reapproaching a five-figure level, we have felt at least some temporary economic reprieve in recent months. But I have talked to many astute people recently (both Democrats and Republicans) who question the stability of the upturn. Some of the those who believe that this might be a dead cat bounce, or what economists term a double-dip recession, are pretty damn smart. Among them is Harvard University professor Martin Feldstein, who explained in a recent interview with CNBC that the massive stimulus is supporting the upturn and that support runs out by 2010. We may be in a precarious position by 2011.
Bill Achtmeyer, my long-time partner and Chairman and Managing Partner of the Parthenon Group, agrees that macroeconomics eventually win out and we should carefully brace ourselves for what might loom ahead — the next crisis in 2011. Below I share excerpts and the footage from our video.
Give us your perspective on what we have to look forward to, or not look forward to, in the next eight quarters.
I think we have six quarters that will be very promising between now and the end of 2010, and then I think we are going to hit huge headwinds in 2011 and 2012.
Why the headwinds in 2011 and 2012?
The key reasons are the aspirations of this congress and administration, while laudable, in terms of health care and global warming, there is the reality of the cost burden. The cost of putting both of these programs in place and the necessary requirements to fund them through tax increases is going to have a very dampening effect on our recovery.
Why do the next six months appear to be stronger?
Macroeconomics are inextricable. You get the benefit of lag times, and we are going to benefit from a combination of a lot of factors which I think will let us sail through in a positive way during this period of time. But things catch up. And by the time everyone sorts out what's being contemplated here it's going to rear its head in 2011 and 2012, and it'll be very hard to get in the way of that.
You advise CEOs every day. Assuming you are CEO of a company today, what do you do?
I'd be extraordinarily focused on investments outside of this country. To the extent you have a global footprint, if you are not overinvesting in Asia and the developing countries, you are out of your mind because that's the source of growth.
I would also do everything I could within the Western countries to gain share in the next six quarters, whether through acquisitions, prices, or whatever it takes to get you in an extraordinarily strong market position. If you're not there, or don't think you can get there, then I would get out of those businesses. I think we'll find another consolidation hitting those businesses in 2011 and 2012 when we've gotten rid of the riffraff. We're definitely going to be getting rid of a lot of other things.
That perspective is great if you are in a position of strength. What about if you are someone is in the bottom half; someone who is likely to be part of the riffraff?
Great time to sell, particularly in 2010. Values are coming up. They will look to be pretty good relative to what you've had in the last 24 months. They won't look as good as they were in 2007, but they'll look pretty good, and they're not going to get much better.
And the debt availability to support that is going to return?
I think you will have debt availability during this time and then it may get tight a little later.
What about inflation?
Pretty low for now. It'll all come home to roost in 2011 and 2012.
Final thoughts?
It's comes back to relative market share. The stronger your relative market share — that is the more distance you can place between you and your nearest competitor — the better off you'll be.
Bill Achtmeyer, my long-time partner and Chairman and Managing Partner of the Parthenon Group, agrees that macroeconomics eventually win out and we should carefully brace ourselves for what might loom ahead — the next crisis in 2011. Below I share excerpts and the footage from our video.
Give us your perspective on what we have to look forward to, or not look forward to, in the next eight quarters.
I think we have six quarters that will be very promising between now and the end of 2010, and then I think we are going to hit huge headwinds in 2011 and 2012.
Why the headwinds in 2011 and 2012?
The key reasons are the aspirations of this congress and administration, while laudable, in terms of health care and global warming, there is the reality of the cost burden. The cost of putting both of these programs in place and the necessary requirements to fund them through tax increases is going to have a very dampening effect on our recovery.
Why do the next six months appear to be stronger?
Macroeconomics are inextricable. You get the benefit of lag times, and we are going to benefit from a combination of a lot of factors which I think will let us sail through in a positive way during this period of time. But things catch up. And by the time everyone sorts out what's being contemplated here it's going to rear its head in 2011 and 2012, and it'll be very hard to get in the way of that.
You advise CEOs every day. Assuming you are CEO of a company today, what do you do?
I'd be extraordinarily focused on investments outside of this country. To the extent you have a global footprint, if you are not overinvesting in Asia and the developing countries, you are out of your mind because that's the source of growth.
I would also do everything I could within the Western countries to gain share in the next six quarters, whether through acquisitions, prices, or whatever it takes to get you in an extraordinarily strong market position. If you're not there, or don't think you can get there, then I would get out of those businesses. I think we'll find another consolidation hitting those businesses in 2011 and 2012 when we've gotten rid of the riffraff. We're definitely going to be getting rid of a lot of other things.
That perspective is great if you are in a position of strength. What about if you are someone is in the bottom half; someone who is likely to be part of the riffraff?
Great time to sell, particularly in 2010. Values are coming up. They will look to be pretty good relative to what you've had in the last 24 months. They won't look as good as they were in 2007, but they'll look pretty good, and they're not going to get much better.
And the debt availability to support that is going to return?
I think you will have debt availability during this time and then it may get tight a little later.
What about inflation?
Pretty low for now. It'll all come home to roost in 2011 and 2012.
Final thoughts?
It's comes back to relative market share. The stronger your relative market share — that is the more distance you can place between you and your nearest competitor — the better off you'll be.
Is Obama a Micromanager?
On August 12, the Wall Street Journal carried a feature article entitled "A President as Micromanager: How Much Detail is Enough?" The word "micromanager" is a pejorative, one that carries a lot of baggage.
Micromanagers are, according to Webster's, people who "manage with great or excessive control, or attention to details." Nobody, but nobody, likes working for a micromanager. So is Obama is the kind of guy who just loves to live in the weeds and who insists on controlling what other people do? Or is he an especially intelligent, curious guy in a mission-critical job who has high expectations of his staff, and who is able to absorb more information than the average mortal?
In 2004, I wrote an HBR case study about a PR manager named Shelley who suffers under a micromanaging CEO named George. She's a professional who knows how to produce, but George wants her to do things his way. The boss loves to tell her how to do her job, including how to write press releases. He's driving her straight up a wall. Responding to the case, one commentator -- Jim Goodnight, CEO of SAS Institute -- noted that "the difference between setting direction and micromanagement is knowing when to get involved and when to get out of the way."
Many agree that in attempting to deal with the hundreds of problems on his plate, Obama is trying to take on too much, too fast, or that he's trying to absorb too much information at once - but that's not the same as micromanaging, which is really about the urge to control others. According to the WSJ article, Obama wants to know the fine details about economics - including details about different forms of credit relative to the risk, derivatives, and the vagaries of financial regulation. Reading the article, it sounded to me like Obama wanted to make sure his people got him the right information; that he knows the issues; that he heard opposing viewpoints; and that he is doing a pretty good job of keeping up to speed on events. Comparing this kind of behavior to that his predecessor, I feel relatively comfortable.
What do you think? Is Obama a micromanager? and if he isn't, then what kind of manager is he?
Micromanagers are, according to Webster's, people who "manage with great or excessive control, or attention to details." Nobody, but nobody, likes working for a micromanager. So is Obama is the kind of guy who just loves to live in the weeds and who insists on controlling what other people do? Or is he an especially intelligent, curious guy in a mission-critical job who has high expectations of his staff, and who is able to absorb more information than the average mortal?
In 2004, I wrote an HBR case study about a PR manager named Shelley who suffers under a micromanaging CEO named George. She's a professional who knows how to produce, but George wants her to do things his way. The boss loves to tell her how to do her job, including how to write press releases. He's driving her straight up a wall. Responding to the case, one commentator -- Jim Goodnight, CEO of SAS Institute -- noted that "the difference between setting direction and micromanagement is knowing when to get involved and when to get out of the way."
Many agree that in attempting to deal with the hundreds of problems on his plate, Obama is trying to take on too much, too fast, or that he's trying to absorb too much information at once - but that's not the same as micromanaging, which is really about the urge to control others. According to the WSJ article, Obama wants to know the fine details about economics - including details about different forms of credit relative to the risk, derivatives, and the vagaries of financial regulation. Reading the article, it sounded to me like Obama wanted to make sure his people got him the right information; that he knows the issues; that he heard opposing viewpoints; and that he is doing a pretty good job of keeping up to speed on events. Comparing this kind of behavior to that his predecessor, I feel relatively comfortable.
What do you think? Is Obama a micromanager? and if he isn't, then what kind of manager is he?
Is Obama the Financial Dubya?
"As part of its sweeping plan to purge banks of troublesome assets, the Obama administration is encouraging several large investment companies to create the financial-crisis equivalent of war bonds: bailout funds."
***
"As well as BlackRock and Pimco, Legg Mason, another big mutual fund company, and BNY Mellon Asset Management, a big asset manager, have said they are interested in starting retail investment funds to participate in the government's plan.
For the investment managers, the benefits are potentially large. These big firms can charge healthy fees to investors for taking part. They will also have the marketing prestige of being the firms the government turns to at a time of crisis to help sort out the country's financial mess."
Now, I'm pretty slow sometimes. So let me ask some stupid questions.
Is there a reason that people can't just buy equity and debt in the plan, well, directly?
Is there a reason middlemen get a guaranteed profit in a new segment?
Is there a reason that only one side of the table is represented in this deal — the sell-side?
How come the benefit to taxpayers is still not a part of the calculus?
Here's the only reason I can come up with — and it's a lot worse than America 2009 = Japan 1989.
Obama is the new Dubya. When it comes to finance at least, the parallels are way (way) too striking to ignore.
Consider:
1) Obama has discarded the advice of nearly every eminent economist in the world.
2) To go with the advice of "his" team.
3) Because access to him is apparently controlled tightly by Summers and Geithner.
4) So Obama is bubbled from the growing disbelief at his lack of economic literacy.
5) A plan that is likely to result in massive looting is blindly sailing ahead.
6) Policy is clearly biased in favour of those who can afford to buy it. Hence, banks win — again.
7) And it doesn't matter if policy works or not — so we get perverse policy after policy.
You know what? Hiring some kids to revolutionize media is how Obama won an election. But the failure to do the same across the government is going to be how he blows his presidency.
***
"As well as BlackRock and Pimco, Legg Mason, another big mutual fund company, and BNY Mellon Asset Management, a big asset manager, have said they are interested in starting retail investment funds to participate in the government's plan.
For the investment managers, the benefits are potentially large. These big firms can charge healthy fees to investors for taking part. They will also have the marketing prestige of being the firms the government turns to at a time of crisis to help sort out the country's financial mess."
Now, I'm pretty slow sometimes. So let me ask some stupid questions.
Is there a reason that people can't just buy equity and debt in the plan, well, directly?
Is there a reason middlemen get a guaranteed profit in a new segment?
Is there a reason that only one side of the table is represented in this deal — the sell-side?
How come the benefit to taxpayers is still not a part of the calculus?
Here's the only reason I can come up with — and it's a lot worse than America 2009 = Japan 1989.
Obama is the new Dubya. When it comes to finance at least, the parallels are way (way) too striking to ignore.
Consider:
1) Obama has discarded the advice of nearly every eminent economist in the world.
2) To go with the advice of "his" team.
3) Because access to him is apparently controlled tightly by Summers and Geithner.
4) So Obama is bubbled from the growing disbelief at his lack of economic literacy.
5) A plan that is likely to result in massive looting is blindly sailing ahead.
6) Policy is clearly biased in favour of those who can afford to buy it. Hence, banks win — again.
7) And it doesn't matter if policy works or not — so we get perverse policy after policy.
You know what? Hiring some kids to revolutionize media is how Obama won an election. But the failure to do the same across the government is going to be how he blows his presidency.
Obama's Taxing Transition
This post is part of our in-depth look at Obama's First 90 Days in office.
What a difference a few days can make to the trajectory of a transition. At the end of last week, I was prepared to give our new President an "A" for outstanding efforts to create positive momentum. Now I'm thinking he deserves a B-minus at best. Why the shift? In a word, taxes. Specifically the lack of payment thereof by the President's cabinet nominees.
It's not the failure to pay per se, it's what it tax issue symbolizes. Because the first few weeks of every executive transition are about symbolism, not substance. The goal is not to make deep substantive changes happen, that comes later. The goal is to make a few symbolic moves that resonate with key constituencies and signal the right intentions. Make the right moves and it boosts your credibility. But symbolism is a double-edged sword. Make some significant symbolic slips and you risk a rapid erosion of your credibility. You also give your opponents a stick with which to beat you from that point forward.
The first couple of weeks of the Obama transition really were picture perfect. From the decision to involve a respected evangelical minister in the inauguration, to announcing the decision to close the Guantanamo prison (but with a time delay to work out the details), to the lifting of the ban on Federal funding for international family planning, to the approval of a stem-cell research project, to the push to achieve a bipartisan consensus on an economic stimulus plan, the President was on a roll.
Then it emerged that his nominee for Treasury Secretary, Timothy Geithner, failed to pay taxes for benefits he received while working for an international organization. While almost certainly the result of an honest mistake, and ultimately not fatal, the picture of our new Treasury Secretary being a tax delinquent is not a pretty one. It's easy fodder for the late-night comedians.
Had that been it, the fuss would rapidly have dissipated. But then in rapid succession Obamas's nominees for Secretary of Health and Human Services Tom Daschle and Chief Performance Officer Nancy Killifer succumbed to embarrassingly large (Daschle not paying $140K) or just plain embarrassing (Killifer having a lien put on her home because she didn't pay employment taxes for household help) tax problems.
To paraphrase an old saw, "once is a coincidence, twice is a trend, three times is enemy action." Only in this case, it's friendly fire.
The tax troubles are highly corrosive of Obama's credibility on at least two levels. First, why were these issues not caught during the vetting process? Neither of the two possible explanations - stupid concealment by the nominees or incompetence by the vettors - reflect well on our new President. Then there is the potent symbolism of Democrats pushing for higher taxes even as they fail to pay them. The Republicans have already picked up this club and begun to beat the new Administration with it. "It is easy for the other side to advocate for higher taxes," Representative Eric Cantor of Virginia, the House Republican whip, told a party retreat last weekend, "because you know what? They don't pay them."
The risk is not just that this will complicate future efforts to revise the tax code. It could easily become symbolic of a broader and deeper hypocrisy on the part of the new Administration which, after all, has staked its credibility on improving ethics and increasing transparency in Washington.
While we are on the subject of symbolism, finally, I'm also quite unimpressed by the President's decision to limit the salaries of executives of companies that take "exceptional" government funds. At best, it strikes me as very bad policy. At worst, it's a cynical play to divert attention from the Administration's own emerging ethical problems - call it the Obama Political Recovery Act of 2009.
What do you think of Obama's taxing troubles? As a new leader, is his transition at risk?
This post is part of our in-depth look at Obama's First 90 Days in office.
What a difference a few days can make to the trajectory of a transition. At the end of last week, I was prepared to give our new President an "A" for outstanding efforts to create positive momentum. Now I'm thinking he deserves a B-minus at best. Why the shift? In a word, taxes. Specifically the lack of payment thereof by the President's cabinet nominees.
It's not the failure to pay per se, it's what it tax issue symbolizes. Because the first few weeks of every executive transition are about symbolism, not substance. The goal is not to make deep substantive changes happen, that comes later. The goal is to make a few symbolic moves that resonate with key constituencies and signal the right intentions. Make the right moves and it boosts your credibility. But symbolism is a double-edged sword. Make some significant symbolic slips and you risk a rapid erosion of your credibility. You also give your opponents a stick with which to beat you from that point forward.
The first couple of weeks of the Obama transition really were picture perfect. From the decision to involve a respected evangelical minister in the inauguration, to announcing the decision to close the Guantanamo prison (but with a time delay to work out the details), to the lifting of the ban on Federal funding for international family planning, to the approval of a stem-cell research project, to the push to achieve a bipartisan consensus on an economic stimulus plan, the President was on a roll.
Then it emerged that his nominee for Treasury Secretary, Timothy Geithner, failed to pay taxes for benefits he received while working for an international organization. While almost certainly the result of an honest mistake, and ultimately not fatal, the picture of our new Treasury Secretary being a tax delinquent is not a pretty one. It's easy fodder for the late-night comedians.
Had that been it, the fuss would rapidly have dissipated. But then in rapid succession Obamas's nominees for Secretary of Health and Human Services Tom Daschle and Chief Performance Officer Nancy Killifer succumbed to embarrassingly large (Daschle not paying $140K) or just plain embarrassing (Killifer having a lien put on her home because she didn't pay employment taxes for household help) tax problems.
To paraphrase an old saw, "once is a coincidence, twice is a trend, three times is enemy action." Only in this case, it's friendly fire.
The tax troubles are highly corrosive of Obama's credibility on at least two levels. First, why were these issues not caught during the vetting process? Neither of the two possible explanations - stupid concealment by the nominees or incompetence by the vettors - reflect well on our new President. Then there is the potent symbolism of Democrats pushing for higher taxes even as they fail to pay them. The Republicans have already picked up this club and begun to beat the new Administration with it. "It is easy for the other side to advocate for higher taxes," Representative Eric Cantor of Virginia, the House Republican whip, told a party retreat last weekend, "because you know what? They don't pay them."
The risk is not just that this will complicate future efforts to revise the tax code. It could easily become symbolic of a broader and deeper hypocrisy on the part of the new Administration which, after all, has staked its credibility on improving ethics and increasing transparency in Washington.
While we are on the subject of symbolism, finally, I'm also quite unimpressed by the President's decision to limit the salaries of executives of companies that take "exceptional" government funds. At best, it strikes me as very bad policy. At worst, it's a cynical play to divert attention from the Administration's own emerging ethical problems - call it the Obama Political Recovery Act of 2009.
What do you think of Obama's taxing troubles? As a new leader, is his transition at risk?
This post is part of our in-depth look at Obama's First 90 Days in office.
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