Elephant Walk

A while back in this space I was writing about some of the measures that Starbucks is using to attempt to recover the market share it is losing to other coffee providers, notably including McDonald’s highly successful “McCafe” product line. I said at the time that I didn’t believe that the Starbuck’s breakfast sandwich program would be enough to turn the tide, since most of the people who want a breakfast-on-a-bun product already eat at McDonald’s (or one of their competitors) and it’s hard to differentiate one badly-made breakfast product from another. Subsequent sales seem to have borne out that contention, and the chain has continued to tinker with their product mix, adding new beverages and experimenting with new food items. Including products from the Cheesecake Factory…

An article published last week suggests that Starbucks may be considering a corporate alliance or even a merger with the Cheesecake factory. There might be a case for doing something like this, in fact; Starbucks locations definitely sell food products that go well with coffee, including lots of cheesecakes and other desserts, and this would provide a huge number of retail channels for the Cheesecake Factory. At the same time, this would almost certainly provide a boost in business for Starbucks, particularly if they invest in enough stock (and equipment to take care of it) to sell whole cakes and pies from their existing locations. It’s debatable how many more people would go to Starbucks just to eat better cheesecake, but if the retail locations became an outlet where you could get a pie for the office party, or a cake for today’s conference, this would almost certainly draw additional business to locations in commercial areas…

What is known, and rather more unexpected, however, is the effect this speculation is having on the stock position of the Cheesecake Factory. Starbucks’ financial situation is a bit up in the air right now, as they attempt to find new growth areas (and possibly reposition themselves into a more “premium” segment of the market), but the Cheesecake Factory’s stock has risen more than 6% just on the speculation that they might be entering into a closer relationship with the giant coffee retailer. Even in a relatively stagnant time, Starbucks is so big (and an alliance with them would have so much impact) that even the rumors about a possible deal are influencing the stock price of another company, like the vibrations from an elephant’s footfalls knocking fruit off of a tree…

Of course, this is hardly a new phenomenon. Investors and investment firms spend a significant portion of their lives searching for news of events like these, and more than occasionally the price of a specific company’s stock will take a sudden increase on the rumor of some deal that never materializes. Even though the financial analysts quoted in the story all said upfront that they were only speculating, and no one has said anything about an actual deal, the rumor of a possible event is enough to send people scrambling to call their brokers…

What we can learn from all of this is that while some news stories carry more weight than they really ought to, and you can’t believe all of the wild speculation you will read in the paper (or see on the Internet), some companies can make waves just because of their behemoth size and the impact that even a minor deal with them would have on the rest of their industry. In the long run, Starbucks may not merge or ally themselves with the Cheesecake Factory, or the La Brea Bakery, or any other food-production company. But if your company is likely to be affected by such a deal, either because you’re a Starbucks competitor, a Cheesecake Factory competitor, or a supplier of anything to either firm, it probably wouldn’t hurt to pay attention to those vibrations you keep feeling underfoot…

School’s Out...

Well, actually it isn’t. The new quarter at UCLA Extension started about a week ago, and several of the other local schools have started their summer sessions as well. Meanwhile, there are self-study programs available through places like UNEX that you can start on whenever you’d like, and for-profit schools that will offer you a class on anything you are willing to pay for learning – at least, as long there are enough of you who want to pay to take it. But while school is definitely still in session, I am out – I had my last day at UNEX yesterday, and I’m off duty until my student fellowship starts up in August. Which got me thinking about the ways to end a job, and all of the things that would have been better than yesterday’s events…

To begin with, hardly anyone really took notice. Our Associate Dean, who was acting as the Department’s Director when I signed on, came down and said goodbye in person, which I think shows a lot of class. He’s one of three executives responsible for an organization of over a thousand people, and he actually found a moment in his day to come down to the fifth floor and say goodbye. My actual boss took a moment before he left for the weekend to say goodbye and thanks for my service, and a couple of my (nominal) subordinates said goodbye to me as I was leaving. But apart from a few email missives, more people noticed my departure on the average weekday than took notice of my leaving the organization forever yesterday…

I’ve been a manager myself, as you know, and I take issue with this procedure (or lack of one) on a professional basis. When one of our administrative assistants left the Department earlier this year they had a party for her that took up most of the afternoon; when my counterpart from the Entertainment Management unit left last month the only one who noticed was me. And if I hadn’t made the effort to take him out for lunch, his final day would have been as unremarkable as mine…

I’m not asking that anyone make a big fuss over my departure; I’m not asking for anything, in fact. I’m just noting that I may not have been around for more than 8 months – but I didn’t exactly get fired, leave under a cloud, or just skip out on them without giving 2 months notice first. Treating any employee as unimportant is stupid; the organization is effectively telling ALL of its people that they are less important to management than whatever momentary demands on their time have hit today’s schedule. Ignoring an employee’s departure will, in my experience, ultimately erode the organization’s relationship with everyone else, as well…

Which, I have to admit, makes me really glad that I’m going off to become a Management professor. Because, hopefully, someday in the very near future, I might be able to teach a few new managers about these events, and explain why not to let this happen in your company…

The End of the Sprawl?

There was a story this week in the New York Times about the distant suburban areas sometimes called “exurbs” because of their distance from the city they are (nominally) connected to, and how these neighborhoods are suddenly looking a lot less inviting, what with the oil crisis, the mortgage crisis, and so on. Back when gas was less than $2 a gallon it might have made sense to drive 70 miles each way to and from work, but with $5 gas fast approaching (and $10 gas expected within the next decade), it no longer does. The average American household spent $1,422 on gasoline in 2003; as of April of this year that figure had risen to $3,196, and the price of gas has risen another dollar since then. All of which leads me to ask if this is the end of the suburban sprawl – and if that is actually a bad thing…

It’s only fair to say that not all of the news during the gas crisis has been bad; the Federal Highway Administration reported that in March of 2008, Americans drive 11 billion fewer miles than in the same month in the previous year – the largest single-month drop since the FHA began keeping records. Sources here at UCLA indicate that the Vanpool program and other ride-share programs are at an all-time high, with the vans in particular reaching 96% of capacity, and an expansion in the works. Public transportation is also experiencing a boom nationwide, with some districts reporting an increase in ridership of as much as 20%. There’s even talk of reviving passenger rail between cities…

It’s also worth pointing out that sprawl is bad from an environmental standpoint; destroying wildlife habitat, eliminating wilderness areas, contributing to the greenhouse effect, and covering productive farm land with cheap houses and asphalt (which increases food prices and leads to flooding). Some people will (and have) argued that sprawl is good from an economic standpoint, in that home-building industries employ a lot of people and purchase a lot of materials, but it seems worthwhile to point out that urban renewal projects employ most of the same people and require much of the same material, but also have the added benefit of keeping our cities from decaying into slums and reducing air pollution (from cars), highway maintenance costs (from commuting cars) and fuel consumption (cars again).

As the article referenced above points out, this sort of enlightened self-interest is working out very well for Denver, where the new Downtown construction projects have brought money and commerce back to blighted areas. You can see a similar alchemy occurring in other cities, including Los Angeles, where the traffic and fuel costs are a definite factor in driving the new Downtown residential and commercial projects. If Denver goes through with its proposed commuter rail system (similar to the light rail and Metro Rail programs in LA) they may also be able to reduce traffic and congestion in outlying areas, while preventing companies from moving their operations out of the Denver Metro area (or out of the state altogether)…

The upshot is that while the current oil crisis may make remote suburban areas (and the long solo commutes to reach them) impractical, it does not have to result in the economic devastation being predicted for real estate, home building and transportation companies. These companies will have the option of retooling to produce products and services that are geared toward the changing forces driving the market, serving the needs of their customers as they are, not as we might wish them to be, and adapting to a new set of rules and conditions, or of trying to maintain a business model rendered obsolete by commercial and market forces and slowly going under. It’s going to be a rough couple of years for companies that insist on having the rest of the world conform to their demands, instead of responding to the market’s demands, but those that can adapt should do quite well for themselves…

And those that can’t will go under – and no one will miss them.

Another Bailout

Congress is expected to pass another bailout package for a stricken industry this week, and there’s enough bipartisan support for this one that the White House may not be able to prevent it, even if they really want to. It’s the sort of legislation that bring out the worst in people on both sides of the aisle– Conservatives are against all government interference in business unless it involves giving billions of dollars to large companies that will support them in the next election, while Liberals tend to be against any government support for business unless it somehow preserves the jobs of “ordinary voters” who will support them in the next election. Which means this bailout should cause awkward moments all across Washington, because this one is intended to deal with the Mortgage Crisis…

Reuters is reporting that a fund of well over $300 billion, including over $4 billion for communities hit hard by foreclosures, is likely to pass in the Senate this week and become law later this year. The basic concept is that the fund would be used to help people with “exotic” mortgage arrangements re-finance into something they can actually afford. Critics from the Right are attacking it because of the money going to things like credit counseling services and community foreclosure maintenance programs (which keep foreclosed properties from turning into crack houses, condemned structures, or worse) which will actually help people instead of lending institutions. Critics from the Left are attacking it because it will keep lending institutions and investment firms from losing more money and going under. I can’t help thinking that the truth is, as usual, getting buried in the hoopla…

There’s no question that a lot of innocent people are getting screwed during the current mortgage crisis. People who were not sophisticated about money, people who were pursuing the American dream a bit too recklessly and people who had nothing to do with these disastrous loan programs but now stand to lose their jobs because their employers were greedy idiots all fall into this category, as do all of the other people who stand to be hurt by an accelerating recession in the country. At the same time, this program constitutes efforts by the Federal Government to take money from all of the people who made good money decisions and lived within their means and give it to a bunch of reckless, unwise and oblivious home buyers as well as a small but genuine number of outright greedy real estate speculators. It hardly seems fair to the people who carefully avoided the Real Estate Crisis to make them pay for all of the people who didn’t…

As usual, I’m a pragmatist, and I have to concede that a recession is bad for the whole country (the careless and the careful alike); if we can stop it from getting any worse by nipping the real estate crisis in the bud, I’m all for it. What I would like to see in return is stronger regulation of mortgage and commercial lenders that would make predatory lending practices illegal everywhere they aren’t already, stronger enforcement of mortgage fraud laws (400+ arrests is a good start; now let’s get the other 56,600 cases per year resolved) to prevent more of those cases, and constructive programs like credit counseling and community foreclosure maintenance to lessen the impact of other people’s idiocy the next time around. We can’t keep people from doing stupid things, nor would we want to try, but we can keep them from dragging everyone else down with them when they do…

The bottom line is that it’s a new world out there, and the business models that made sense a hundred years ago are lunacy now. That’s why the banking and securities laws have changed, and that’s why banks and investment companies don’t do business in 2008 the way they did in 1908. Maybe it’s time the real estate industry was dragged kicking and screaming into the new Century…

On The Slope

There was an interesting story in the Los Angeles Times this week about a group of paparazzi who ran afoul of the local surfers in Malibu and got the crap beaten out of them. Anyone who grew up in LA should already be familiar with the concept of “Locals Only,” and in fact anyone who has spent more than a few days in the area has probably seen some form of sign, bumper sticker, or graffiti that carries this theme. For the most part, surfers just want to surf, and if someone who isn’t strictly “local” shows up and stays out of their way, minds his or her own business, and just surfs and goes home, they will leave him or her alone. A large group of non-local surfers may attract attention, but again, as long as they just want to catch a few waves and stay out of trouble, they generally won’t find any…

Problems with beach turf tend to occur when a group of tourists (and in this context, “tourist” may mean someone from five miles down the coast or three miles inland) insist on setting up an elaborate base camp taking up half the beach, creating a huge amount of mess and noise, and interfering with the local people who just want to surf. It’s true that no one owns the beach, let alone the surf, but people coming into your space and demanding that you respect their “rights” to be there while refusing to respect yours is not a scenario that is going to end well anywhere people are people. What makes this week’s case so special, and the reason it enters the purview of this blog, is that the crowd in question were not just fun-loving tourists; they were professional stalkers armed with camera equipment and out to make a fast buck…

Now, as you might imagine, I’m in favor of free speech, and of freedom of the press. Sometimes this means allowing people who you despise the chance to say their piece, and sometimes this means allowing idiots who just have to see “candid” pictures of their favorite celebrities to purchase trashy newspapers and magazines containing those images. Any law that infringes on those rights is generally a bad idea, if only because once you start limiting free speech you have stepped out onto the ultimate in slippery slopes and there can be no good that will come from it. But what can you do about people who will infringe upon your rights in order to exercise their own?

What generally happens is that when any industry begins to threaten the health, safety or standard of living of society as a whole, the government is forced to step in and pass laws regulating that industry. If the people who take pictures for the tabloid press are not willing to regulate themselves – and more to the point, are willing to risk the lives and safety of other drivers, risk the health and safety of their subjects, and totally disrupt the lives of innocent bystanders in pursuit of their business – then it becomes the duty of the relevant governments to impose regulation on them. The City of Malibu is already preparing local ordinances to deal with the situation, and the County may follow suit…

The paparazzi will undoubtedly challenge those laws on the basis of 1st Amendment rights, but I’ve read the Bill of Rights, and there isn’t anything in it about having the right to risk the lives and safety of others, risk the health and safety of photographic subjects, and totally disrupt the lives of innocent bystanders in pursuit of one’s business. The fact is that just like any other industry that has the potential to negatively impact the public good, these people (and the publications that purchase their pictures) have the simple choice of regulating themselves, or having the government do it for them. I don’t know what level of decorum should be required of this industry under the law, but just as a general rule, if something you are doing as part of your business is causing passers-by to assault you and destroy your equipment, you need to rethink your business model…

“Clean Your Plate”

There was an article posted on CNN Money this week that raises a point that should surprise absolutely no one during the current oil crisis: according to both Democratic Party and Petroleum Industry sources, the nation’s oil companies are not currently working something on the order of 77% of the lands (and offshore sites) they already control. Although the productivity of these sites is disputed, some sources are claiming that if full exploited, these idle leased drilling sites could produce an additional 5 million barrels of oil each day. For purposes of comparison, consider that the U.S. currently produces about 8 million barrels a day, and consumes about 21 million…

Now, by itself this wouldn’t mean much; many of the sites in question are deep-water drilling locations and remote land locations, all of which would be expensive and difficult to operate. In fact, it has often been estimated that the world will never really run out of petroleum; it will eventually just become so difficult to obtain that no one will be able to afford to use it for power, and human civilization will either find alternative forms of energy or descend back into a pre-industrial state. What makes the current revelation so significant (and so politically polarizing) is that it comes at a time when the president and his cronies are putting pressure on Congress to allow vast increases in drilling on public lands and off of sensitive coastlines…

I try to stay off of political topics on this space, since my expertise does not lie in those areas and there are already enough ignorant pundits spewing meaningless opinions onto the Internet on those issues. My field is business, and specifically Strategic Management (and the failure thereof), and based purely on the standards of my discipline, this situation is completely asinine…

Leaving aside just for a moment the enormous costs of cleaning up costal oil spills themselves in the short term, the incredible costs in terms of health care, loss of property value, and decline of the tourism industry in the intermediate term, and the almost unbelievable environmental damage in the long term, increased drilling licenses will take years (more likely decades) to produce any significant increase in the supply of crude oil, and longer still to make any difference in the price paid by consumers. Even assuming no mishaps of any kind occur in any of the new drilling sites (a possibility so unlikely as to be completely fantastical), such measures would still be NO HELP in lowering the current consumer crisis…

From a business standpoint, there is no conceivable chance of the new drilling rights the current administration is requesting bringing more economic benefit to our economy than the costs that would be incurred by doing so – and worse yet, the benefits would be reaped by a handful of industrial companies already achieving record profits every quarter, while the costs would be paid by ordinary citizens in costal communities and future generations trying to live on a blighted world. It’s hard to believe that the party that once stood for financial responsibility and intelligent use of resources (consider that conservative and conservation have the same root) is pushing this sort of short-sighted, arrogant, runaway greed…

However, I do see a solution to this whole problem. Somewhere in this country there is undoubtedly a politically neutral think-tank that has already calculated the costs of developing a complete set of new, alternative sources of energy. Let’s offer the petroleum industry all of the drilling rights they want – in exchange for that amount of money plus 10% for over-runs. Chances are, it won’t be any more than the cost of those drilling permits they want, anyway. Then let’s see if the industry people are still so sure that increased drilling in environmentally sensitive areas is really what’s best for the nation…

In Memoriam

I can’t think of a business connection to the passing of comedian George Carlin yesterday, but I’m going to write a post about this event anyway and I don’t really care if I’m off-topic or not. Mr. Carlin is one of the people who (unwittingly, perhaps) taught me about humor, about the way people think, about how to set up a good quip (and how to finish it off), and how just about everything in our daily lives is absurd, unnecessary or tragic – and just how funny that really is. I don’t doubt that many other people will have far more elaborate and meaningful things to say about this event, but from where I’m sitting, the world has just become a far less entertaining place – and that is a misfortune all of humanity shares in, whether they realize it or not…

Most people probably had their first encounters with George Carlin when they heard one of his comedy recordings in the 1960s, which is two or three media revolutions ago, depending on how one feels about magnetic tape. Some of these have become part of our popular culture; for example, there are people who have never heard of George Carlin and never listened to spoken-word comedy in their lives who still know the concept of the “Seven Words You Can’t Say on Television” – and can probably recite them if asked. Some of the concepts on their early albums are still just as funny today, such as a hippy weatherman, or a Native-American drill sergeant carrying on just the way a U.S. Army D.I would. And some, like “Baseball and Football” will remain relevant – and funny – for as long as either game is being played anywhere in the world…

What most people probably fail to realize is how few comedians manage to remain not just funny but also relevant for that length of time. The same material once purchased on long-playing 33 rpm records (and later on CD) is now being downloaded off the Internet for use on MP3 players by the grandchildren of people who were listening to Mr. Carlin in his early years. Meanwhile, many of his more recent concerts are being downloaded and viewed as video files and podcasts using the same technology, and it seems probable that much of his work will remain popular for decades to come…

As a student of both history and literature, I can tell you that very little comedy survives its own era – and by that I mean the 30 years or so that the primary audience remains interested in hearing it. The majority of all humor is topical, and generally does not make it out of the same decade in which it was written, let along remain popular four decades later. That we still find humor in the writings of Mark Twain or H.L. Mencken 100 years later is a testament to the brilliance of such writers – and I strongly suspect that 100 years from now, Mr. Carlin will be included on the list of American Humorists the authors wish were still around and writing…

So as you go about your business today, try not to take things quite as seriously. Remember that the fact that life is tragic doesn’t mean that it isn’t also funny, and that in the theater of the absurd in which we live, it is up to all of us to find the parts worth laughing about. And join me in saying, with the greatest fondness and the highest respect, thank you, Mr. Carlin, for making this journey a little more entertaining. Here’s to you, wherever you are…

Too Good To Fail?

It’s funny how sometimes you will see a company launch and hear everybody talking about it like it’s foolproof – as if there is nothing that could bring it down, no way it could fail. For example, when Martha Stewart launched her “Martha Stewart Living Omnimedia” (hereinafter MSLO) a few years back, the initial public offering brought in over a billion dollars, and everyone was saying that with Martha’s name recognition, visual recognition, huge television and magazine audience, and many lucrative endorsement deals, there was no way her company could possible fail…

Which makes this week’s article in Slate.com truly amazing, considering that its title is “Martha Stewart's Company is Doomed!” It turns out that most of Martha Stewart Living’s income doesn’t come from the magazine, the television show, or any of the other media it manages. Despite the name, MSLO gets most of its money from merchandising deals, and in fact the bulk of that is coming from their contact with K-Mart. Unfortunately, the K-Mart contract only guaranteed huge payments through the year ending this past January. From here on out, MSLO will only be getting its agreed-upon share of the action, not a guaranteed minimum that is not pegged to sales figures…

To make matters worse, those sales have been declining rapidly. K-Mart has not been doing well in recent years, and the merger with Sears (another stricken retailer) has really not helped. With the ongoing mortgage crisis and the decline in the economy in general, fewer and fewer people are buying new house ware products in the first place, and those who do are being drawn away by other vendors and other endorsers. In particular, Rachael Ray is drawing away a lot of Martha’s younger viewers with her more accessible projects and activities, and her much more upbeat style. Ms. Ray has her own cooking show, despite having no formal training as a chef; does interviews and exposition in a folksy, common-woman style, and generally connects well with younger professional women who may not identify so much with the 67-year-old Stewart…

So what can MSLO and its iconic founder do about the situation? Some of the obvious measures are already in place, or being finalized, such as the new merchandising deals with Macy’s, Costco and KB Home, and it may be possible for the company to explore new retail channels, as well. They could also explore new media concepts, new celebrity endorsements for Martha herself, and collaborative projects with manufacturers and food processors, much like Ms. Ray and some of the other television competitors of the Martha Steward Show have done. They can start looking for new directions to expand their operations (preferably ones in which the market is healthier than anything connected to the Real Estate industry), and even possibly introducing new media products and new media personalities – assuming Martha can handle that…

The main lesson to all of the rest of us, though, is about not putting all of our freshly-collected eggs in our hand-made baskets. The single biggest problem MSLO has is that its entire operation is based around Martha Stewart herself, and when she began to lose popularity the company had nowhere else to go. The potential for new and innovative media creations (as well as the more obvious merchandising deals) is clearly there, but the company was thinking solely about promoting Martha, not about things Martha could present, promote, and make money off of, and thus painted itself into a corner…

There’s still time for MSLO to pull out of this tailspin, and I hope they do, but it’s going to take more than just looking for a new place sell products and new stations to carry a single television show…

Mortgage Crisis Update

I know I’ve been doing a lot of “Update” posts lately, but it’s not my fault; stories break when they break, and I blog about them when I feel there’s something worth sharing with my readers. Or, you know, when I’m outraged, feel the need to express my opinions about the larger field of business to someone, am in the mood for pontificating on about some subject or other, or when I’m really bored. In this case, however, I’d be trying to find ways of telling as many people as possible about this subject even if I didn’t have a blog…

According to a story released today by the Associated Press, Federal authorities have indicted over 400 real estate industry personnel since March in a nation-wide crackdown on mortgage fraud, including dozens of them in the past two days. Leaving aside the political and law enforcement chest-thumping, the story goes that 406 people have been arrested in connection with 144 cases of mortgage fraud across the country. The total dollar amount of property involved in the case was initially put at over $1 billion, but this will probably rise as the investigations continue. It’s a good start, but considering that there were over 53,000 cases of suspected mortgage fraud reported last year (up from 37,000 the previous year), it still sounds like the tip of the iceberg to me…

Mortgage fraud is a category of crime that takes in a lot of ground, from forging a buyer’s credentials to inflating appraisals to misrepresenting the nature of the purchase (e.g. claiming that the buyer intends to live there when actually they’re just trying to flip the property and make a fast buck). In some cases the financial institutions involved have also been culpable, but for the most part these are situations where real estate developers, loan officers, sales people and the like making money by whatever means necessary and putting the screws to their employers as much as to the buyers/sellers and the American people in general. In a few cases, there’s even actual insider trading involved…

Apparently there were two Bear Stearns fund managers who were participating in this sort of fraud, and one of them had gone so far as to move his own investments out of funds and companies that are now threatened by the losses from all of the bad real estate deals, which means that he’s being charged with insider trading as well as wire fraud and securities fraud. No one really knows how many other cases of this exist, but it seems improbable that this was the only example of a fund manager making money off of fraudulent transactions, and then using the damage caused by the fraud to make more money off the stricken companies…

I don’t have a drop of sympathy for any of the idiots being caught up in this sweep; I hope the Feds refuse to send them to any of the nice, white-collar prisons and instead send them somewhere where they can meet some of the people who have been hurt by the mortgage crisis. And I don’t have much sympathy for the wildcat speculators, either; you wanted to make a huge killing in real estate without investing time, effort or money of your own; you deserve whatever financial consequences you suffer, and legal charges for fraud into the bargain. But most of those people will just declare bankruptcy and walk away unscathed, and it’s unlikely that any of the white-collar criminals being arrested in the Federal sweep will be punished (significantly) either…

Meanwhile, all of the innocent people who saw the last real estate boom as a chance to finally own their own home are going to remain completely screwed. The real estate market is going into the tank, loans are going to be much harder to come by, and the damaged caused by the artificially inflated prices (and the people who broke their finances as well as their hearts trying to pay them) will take decades to fix.

It’s days like this one that I sort of wish I had gone into law enforcement after all…

Hacker Phobia

Okay, this isn’t really a common condition yet, but if there are a few more incidents like the one reported in the Boston Herald on Monday, there might be a few more cases reported. According to the news accounts, a state Investigator who was fired for having pornography on his state-issued laptop computer turns out to have been the victim of hackers, who were able to crack into his system because his state-issued anti-virus software was corrupted. Forensic examinations conducted by the defense team (and later confirmed by the State Attorney General’s office) indicate that the offending content was downloaded into the machine’s cache without participation from the operator. Unfortunately, the department this investigator worked for has decided to stand behind its decision to fire him, and is refusing to discuss taking him back…

The immediate reaction is to call this a gross injustice and start agitating for the punitive firing of the officials making this decision, a large cash settlement for the victim, and an audit of both human resources procedures and data security for the entire state of Massachusetts. Certainly, the lawsuit that is coming will request at least one (and probably all) of these things. But as satisfying as it would be to punish the guilty, compensate the wronged, and prevent similar bureaucratic stupidity while making sure that there aren’t any other ticking bombs of this type elsewhere in the system, these measures do not address the true strategic failures of this situation – and will not really prevent the next poor computer illiterate from being caught the same way…

For openers, the agency (and really the state government) needs to examine its equipment purchase and issue protocols, and figure out how a used computer with a compromised anti-virus software package ended up in the hands of a computer illiterate. They should then institute whatever measures are necessary to make sure that all used computers are properly wiped and flushed, and that all of their anti-viral and security software is checked and updated regularly. While they’re at it, the state should probably extend its computer training programs to include everyone who is likely to be issued an official computer for work, and make sure they know how to keep an eye out for this sort of hacker attack. Assuming that measures put into place years or even months ago will still suffice to protect your agency and your people today is asinine, and must be avoided…

Then there’s the matter of the criminal charges. Taking any disciplinary action against an employee before an independent investigation that PROVES wrongdoing is complete is so stupid I can’t even think of a bad metaphor for how stupid it is. If the department’s rules, the agency’s rules, or the state laws do not require such a waiting period (or worse yet, make one impossible) they must be corrected. In the meanwhile, rules that prohibit any mention of such a situation before the investigation is complete should be instituted at once; the public’s right to know about these accusations DOES NOT supersede a suspect’s right to be considered innocent until PROVEN guilty, and whoever filed those charges or leaked word of them to the media should be fired at once…

Finally, there’s the matter of what to do about the employee now that the investigation has cleared him and the criminal case against him has been dismissed. If the measures already discussed have been implemented, there should never have been a court case or public exposure in the first place, but if there had been, what can the agency do now? It can announce that the Inspector has been cleared of all charges and is returning to his duties, that’s what – he’s an industrial accident investigator, not a teacher or a health care provider! It’s unfortunately true that some of the stupid and ignorant people he runs into will not believe in his innocence, but if the agency does (and it should) then they need to stand up for their people and do the right thing…

And if the hackers responsible are ever caught, they should be forced to apologize and make whatever restitution is possible, and then shot…

Here Comes the Chill

Back when I was teaching business plan writing, one of the techniques I would show my students was the industry analysis method known as a quadrant analysis. If you’ve never seen one, basically it’s a two-factor graph that charts the desirability of the industry on one axis (usually the X) and the company’s relative strength or dominance within the industry on the other (most often the Y). The chart is then split into four quadrants: Stars (strong position in a strong industry), Cash Cows (lesser position in a strong industry), Question Marks (strong position in a weak industry) and Dogs (weak position in a week industry). Where your company falls on the chart will drive your internal strategies; where your competitors fall will determine your market strategy, and if you should try to re-position the company.

The examples I usually gave the class were drawn from the ice cream/frozen dessert industry, because they were familiar and easy to grasp. Ben and Jerry’s was the typical “Star” when I started teaching, but by the time I came to work for Extension they were being overtaken by Cold Stone Creamery. For a cash cow, it’s hard to beat Baskin-Robbins, a firm that has never really been an industry superstar, but has been sitting there churning out revenue for over 50 years now, nearly always profitably. Question mark companies, at least at the time, were frozen yogurt places like TCBY or Penguins. Yogurt goes through cycles of popularity, and at the time they were in a down period (they have since come back up, just as I predicted they would). Finally, for a dog example I drew on the frozen tofu products, which for some reason have never caught on, despite their obvious health benefits and relatively low costs…

It was a simple, useful exercise that almost anyone could follow, and it got my students – who were mostly entrepreneurs without formal training in business or strategy thinking about the strategic picture of their new business. But now it turns out that I may not have been entirely correct when assigning the stars to our graph. A story in the Wall Street Journal indicates that a significant number of the Cold Stone franchises are either failing or struggling, and that as many as 25% of the franchise holders may be trying to sell their operations and flee the company. The Cold Stone company itself has just been acquired by a larger corporation that sells other franchises, and the new owners are trying to improve the situation, but the change has come too late for a significant number of former franchisees…

Some of the disgruntled franchise holders claim that Cold Stone misrepresented the profit margins available to them, and then lowered those margins even further by issuing reams of 2-for-1 coupons and similar specials. Other franchisees are complaining about lack of support from the corporation itself, or lack of assistance from their local business development managers, and some are claiming that Cost Stone made them purchase all of their supplies from a single-source vendor, resulting in high prices, huge “minimum order” amounts, waste, and similar problems. Cold Stone in turn claims that their critics were all franchise holders who expected too much return and were not willing to work hard enough to make a go of their operations. They also dispute charges that they were extending franchise offers to inexperienced investors (or indeed anyone with the money and credit rating they wanted), despite the obvious presence of people who fit that description among their current franchise holders…

It’s a huge mess, and a truly amazing thing to see happen to a company that was being held up, only a couple of years ago, as a rising star in their industry. Neither side disputes that the downturn in the economy, the rise in prices of dairy products, or the rise in transportation and energy costs has hurt their business, but even with all that is happened, it seems clear that Cold Stone’s business model, which once seemed so solid that anyone could make a fortune using it, turns out to have some serious flaws. I don’t know if they can turn things around or not, but it certainly supports my position that food service is the hardest business there is – and that business strategy is harder than it looks…

Flying Update

A few days back, right after word came down about American Airlines introducing a new fee for your first checked bag ($15) to go with their new second checked bag fee ($25) introduced this spring, I predicted two things: That a lot of other airlines would follow suit, and that somebody would see the opportunity offered by this and go the other direction as a promotion of their own. I make predictions like this because I think they’re obvious; in this case, I didn’t feel there was any chance that at least one other carrier wouldn’t attempt to copy American’s attempt to squeeze more money out of their customers, or that there was any chance that at least one other carrier would attempt to draw new customers from those angered by American (and the other companies that had gone the same way)…

Man, I hate it when I’m right! Today, United and U.S. Air both announced their own checked-bag fees, and the other major carriers are expected to follow suit by the end of the month. Some of them are also launching fees for beverages and other in-flight services, as well. Meanwhile, Southwest Airlines has stepped up its “Fares Don’t Fly With Us” promotion, and are now advertising no baggage fees on their website. I’m not sure what, exactly, Virgin America will do with an opening like this; it depends on how much of a priority U.S. domestic operations are being given by the parent company (and its iconic founder), but the potential is certainly there…

Meanwhile, there was a story in the news over the weekend about gasoline in one part of the UK reaching the equivalent of $17 a gallon after a trucker’s strike pinched off most of the fuel supply to that region and the local vendors began trying to conserve their stock. It’s a temporary condition, created by an artificial shortage, but can you imagine what the effect would be if someone tried that in this country? There’d be rioting in the streets, and I’d have to advise anyone who works for an oil company (even if they work in the supply chain for minimum wage) to start keeping a very low profile…

I was also saying last week that I really do believe that the current oil crisis is not going to go away; as long as emerging countries like China and India are willing to pay prices like these for oil, there is no real chance of gas prices in the U.S. going down. Even if new supplies are suddenly discovered around the globe, the sad fact is that once people discover they can get $4 or more for a gallon of gasoline, it’s going to be next to impossible to get them to go back under $1. And unless we all stop buying gas, that condition is never going to change. Like the old saying says, “You can’t get the genie back in the bottle…”

In the 19th Century the Industrial Revolution changed the way everyone in the world lived forever; in the 20th Century mass production (assembly line operations), automation (computerized operations) and the Internet changed the way everyone in the world lived, also forever. I don’t pretend to know all of the ways in which the 21st Century will change our lives, but it seems clear that the time of limitless natural resources (or at least $1 gas) are gone, and will not return. New technologies like Cheap Solar, Clean Coal, Cold Fusion and the hydrogen fuel cell may bring a return to that general lifestyle, but they are far more likely to propel us into a new age, as different from the 20th Century as that time was from the 19th or even earlier…

And if we’re really lucky, someone will invent airplanes that run on one of these alternative forms of energy, so we can all avoid being nickel-and-dimed to death with checked baggage fees…

Not Quite What They Expected

We went by Jack-in-the-Box today to get a quick bite of lunch, because we were out running errands and our daughter really wanted some J-Box food (they don't have J-Box in Atlanta, you see). I should probably explain that the kids are in town for a visit, and we've all gone to Apple Valley, California to see the in-laws. There was a Jack-in-the-Box on the way back to their house, and we pulled through the drive-through window for some take-out...

It was the first time I had been to a J-Box since they started their "We Won't Make It Until You Order It" promotion, and I had actually been wondering how it would work with the drive-through operation. Well, today we found out. Frankly, I don't think the company had thought this one all of the way through before they launched it...

After we placed our order and drove around to pay for it, they asked us to pull into the parking area in front of the building while they cooked our food. This allowed them to keep taking orders (and money) without having us blocking their driveway. We settled into the parking lot with five or six other carloads of drive-up customers and prepared to wait...

It wasn't actually all that long to wait, but it seemed like forever, what with the High Desert summer heat (102 in the shade) and the fact that they got our order wrong and we had to wait while they remade it. Which is exactly what I was worried about, in fact. The big problem with this promotion is that the heart of any fast food operation is convenience, and waiting around in the parking lot while your order is being cooked isn't what you would normally call convenient...

I'm sure it seemed like a good idea in the conference room at Headquarters when the Marketing department presented it. Jack-in-the-Box has been using a "High Quality" strategy for years; attempting to position their products as the best available by the (admitted low) standards of their industry. What could be better than shedding the most entrenched negative image of fast-food operations: pre-made food waiting in a bin under a heat lamp (often for hours at a time) before you get it? Unfortunately, marketing personnel are often a bit disconnected from the realities of the firm's operations, and in this case I have to ask if the marketing people had ever seen an actual Jack-in-the-Box restaurant before they launched this particular promotion...

The change in food preparation doesn't require any major changes to the restaurant, although I expect ripping out the warmers and adding more grill or fryer or preparation space would have been helpful, and hiring more cooks would be important on busy shifts. Nor would the customers dining in the restaurant be affected, particularly. But changing traffic control (or "customer control" as it is sometimes called) procedures for the drive-up window would require lengthening the drive-through lane, dramatically speeding up the rate at which food can be cooked, or asking people to pull out of the drive through and cool their heels in the parking lot -- only the last of which is really possible. And this is where the "We Won't Make It" promotion falls flat...

I don't have any easy answers for this problem, either. Rebuilding all of the company's retaurants seems prohibitive, and there is no way to cook food any faster than they are already doing it. But backing off from the promotion would be disasterous, costing them thousands of sales in lost prestige and giving the competition the chance for a field day. On the other hand, I think we can all learn from this example: the next time Marketing comes up with a brilliant new promotional campaign, you might want to ask the operations people if they think they can make it work. And if at all possible, ask some of the operations people based down near the pointy end what they think of the concept...

The Ethics of High Pay

Since we’ve been talking about extreme compensation issues on this space lately, I thought it might be interesting to take a closer look at the ethical issues that surround getting paid 5,000 times more than your line workers do. Americans have a long and rather ambivalent history of both dismissing and wanting to be among the super-wealthy; the stereotypes of rich people as useless drones who can’t cope with the most trivial tasks and of the self-made man (who started with nothing and is now richer than any king) are both entrenched parts of the American mythos. Many people deplore nine-figure compensation packages and rail against them as monuments to greed and examples of the rich sucking the lifeblood out of the workers, yet I feel we are justified in asking how many of these same people would refuse such wealth if it were offered to them – and if that would actually be the best course of action anyway…

Now, I’m not talking here about the people who pack their board of directors with cronies, who then vote for outrageous compensation packages for the CEO while knowing that he (or she) sits on their board in turn and will return the favor. That sort of thing IS unethical (although unfortunately very common) and requires no further examination. Neither do companies that lay off people and outsource their jobs in order to pay senior management more, companies that raid the corporate pension fund to support the lifestyle of senior executives, or companies that allow the CEO to spend millions of dollars on risqué birthday parties for his spouse. All of these are cases that have appeared in the news over the last few years, but there’s no “other side” to this discussion (e.g. no one is going to argue in favor of these things)…

Let us instead consider what you might do if the company that hires you wants to make you the CEO and pay you $100 million for your services. The first thing might be trying to earn the money. Compensation plans in that range usually involve stock options, and if you can use your industry knowledge, strategic brilliance and innovative new ideas to achieve higher sales and a stronger stock price, you probably deserve a piece of the action. Certainly, if you can achieve a $700 million increase in overall stock value, gaining a 15% share of that achievement no longer looks quite as outlandish. By the same token, if you can improve wages and working conditions for your employees, lower the company’s carbon footprint, and help to improve the country’s trade imbalance (by exporting product instead of jobs) you’re probably entitled to a nice reward, and if you can do all of that while keeping the factory open and saving the town your firm is based in, they’ll probably throw you a parade, too…

Of course, if that isn’t enough for you, you could take some of your $100 million and do good works with it. You could build the town a new health center and a new library; offer to match funds for a new high school facility and a new senior center; sponsor community college programs and endow scholarships for local kids who want to go off to college. In doing so, of course, you’ll improve the health, education and quality of living of the people who live in your town, generating huge improvements in both public relations and worker productivity, and ultimately making even more money for the company. But you could always re-invest that in the community, too…

It’s important to remember that all of this, especially the doing good works without causing even worse damage by accident part, is extremely difficult. There aren’t more than a few hundred people in the world who can do the things I’m describing successfully, and therefore they command the high price that a scarce resource always does. But even more to the point, the idea that money – even when paid to a single individual for doing a job – is somehow evil is ludicrous. Money is a tool, nothing more; it’s what you do with it that makes it (and you) truly good or evil. And if you believe yourself to be a truly good person, then it stands to reason that you could do a lot of good with a lot of money…

It’s worth thinking about.

Busted

There was a very funny story this week about a prep school principal in New York who was caught inflating his background accomplishments just a bit. It seems that this fellow was bragging to his father-in-law (who unfortunately happens to be his boss) about having been on the Canadian bicycling team that competed in the Barcelona Olympic Games. While the man in question was a competitive rider at that time, there is no indication he was ever on (or even tried out for) the Canadian Olympic Team. I suppose he figured that no one would check – Americans are notorious for paying zero attention to anyone else’s Olympic athletes, and this was years ago, anyway – but the father-in-law was so impressed he put the whole thing on the school’s biography web page…

Sure enough, someone decided to check, discovered the lie, and exposed it. Then the media got hold of it, it started spreading around the local papers and newscasts, it appeared on the Internet, and pretty soon everybody in the world knew (or could easily find out) that Mr. Durnford was unwise enough to forget that the membership of Olympic teams is a matter of public record and can easily be checked by anyone who wants to. In anyone else it might have been a minor embarrassment – the sort of thing that your in-laws keep bringing up to put you down, and your buddies rag on your for until the next embarrassing thing that one of you does distracts their attention. Unfortunately, as the Principal of a prestigious private academy, Mr. Durnford is a public figure, and is now going down in flames…

I’m sure he’ll be all right in the end; impersonating an Olympian is not a crime, and it’s not like he was under oath when he said it. A much more serious case came up when a student turned in a paper to a professor of my acquaintance in which the (20-year-old) pupil claimed to have known the (then) President of South Korea for over 35 years. The whole thing was obviously plagiarized, and the student had failed to edit out this personal comment from the veteran reporter who wrote the original essay. The fact that the professor was able to find the original essay on Google in less than three seconds (it was one of the first hits to come up) just made things worse – and prevented the Dean of the college in question from offering much mercy.

Then we have the curious case of the Food Network’s Robert Irvine, the celebrity chef who claimed to have worked on the cake for the Royal Wedding in 1981 (when he was 15) and cooked for kings and presidents (while never having done either). You could see this as the counterpoint, if you really wanted to, in that these deceptions held together long enough for Irvine to get his own series, but I must point out that they were exposed in the end, and any competent researcher could have debunked them right from the beginning using the same sort of Internet search..

My point here is that while not all puffery is going to result in public humiliation, destroy your career, get you thrown out of college (and probably disowned; the student’s parents did not get a refund on the tuition for the year that was voided off the student’s records) or have people all over the Internet (and therefore all over the world) calling you a careless dumbass, the days in which you can expect to make absurd statements of fact and have them go unchallenged is long gone. For all that the deception and fraud on the Internet has changed our world, the truth is out there, too – and it definitely cuts both ways…

Golden Coffins

According to a report in the Wall Street Journal, if Rupert Murdoch, CEO of News Corp. were to pass away this week, the company would immediately pay death benefits to his estate in the amount of $1.37 million. That’s right, folks; Mr. Murdoch’s heirs would receive an extra $1.37 million US, just because he died while still employed there. Most of us working stiffs have some sort of minor death benefit – usually just enough to cover funeral expenses, unless we want to pony up the premiums ourselves. But Rupert Murdoch, a multi-billionaire, is getting a death benefit equal to roughly 30 years of my salary. It sounds preposterous, doesn’t it? Until you realize that the President of News Corp. (57-year-old Peter Chernin) is slated to receive $5 million in company-funded life insurance and $32 million in other benefits if he passes away during this fiscal year…

Benefits of this type are generally known as “Golden Coffins,” and are justified the same way every other outrageous Executive perk is justified: as being necessary to attract and retain the best people. And to some extent this might be true; if you can get a $300 million benefit from Company A versus a $50 million benefit from Company B, for doing the same job, you’d probably go to work for Company A, wouldn’t you? The real question here is what, exactly, these executives do that is worth paying them salaries and bonuses in the hundreds of millions of dollars in the first place. Especially when you consider that said executives will be dead at the time these benefits are being paid out…

Consider the case of Brian Roberts, CEO of Comcast, whose $298 million dollar death benefits including continuing his salary and benefits for five years after his death. Or consider Disney’s Robert Iger, who will receive $62.4 million including three years of his salary. Or Charles Schwab, founder of the firm which bears his name, who will receive $3.7 million per year for 15 years for the license of his name as part of the $64.5 million he will receive after he passes away. Or, most amazing of all, consider Eugene Isenberg, CEO of Nabors Industries, who will receive $263.6 million in severance pay when he dies. No matter how good Mr. Isenberg is at his job, it’s difficult to fathom why he should be paid the equivalent of employing 186 people for 30 YEARS EACH at my current salary just for dropping dead…

The people who are advocating CEO compensation reform call these arrangements the ultimate example of not paying for performance, and in many ways they are quite correct. Some CEOs (and their apologists) excuse such arrangements as being based on the company’s stock price: since the death benefit is based on how well the company is doing, this supposedly gives the CEO an extra incentive to maximize stockholder value. Critics will quickly point out that every CEO is being paid to maximize stockholder value already, and many of them are being paid hundreds of millions of dollars to do so; if they want to leave 9-figure fortunes for their heirs they can surely afford to buy their own life insurance…

Personally, I’ve never had any issue with “pay for performance” programs; if the only change to your company was a new CEO, and your company’s performance improved by $700 million that year, I see nothing wrong with offering that individual a few percentage points of the improvement. Provided, of course, that he or she gets no bonus in a year where performance deteriorates, and is fired if that performance continues to degrade for several additional years. And personally, I would prefer to be worth more to the company (and my heirs) alive than I am dead. But as a taxpayer (and in some cases as a stockholder as well) I have to question how much these outrageous death benefits really contribute to the health of the company…

Unfriendly Skies

A friend of the family mentioned the other day that she had to wait for most of the day at the airport in Chicago for a pilot to arrive from another city and take command of their flight. Yes, you read that correctly: not an airplane, a pilot. The aircraft that they would be boarding was sitting at the gate, waiting, but the guy who would be flying it was coming in from somewhere else, and was apparently delayed by weather, missed connections, flight delays, and all of the same things that delay air travelers of any other kind…

The obvious question is why the airline didn’t find someone else who was qualified to fly this assignment somewhere in Chicago, have him take the flight, and then assign the delayed pilot to whatever flight the replacement was originally supposed to fly? No explanation was offered, but it is possible that they didn’t have a spare pilot available at the time, or that the delayed pilot lives in Los Angeles and was going home to his family at the end of the day, or that any of the 10,000 obscure FAA regulations would have prevented a simple solution like this one from working. A much bigger question, at least from the manager’s perspective, is why you would arrange things this way in the first place…

I don’t mean to suggest that scheduling flights, aircraft and personnel for a huge national airline (and this was one, but I’m going to withhold saying which one) isn't an enormous undertaking and you don't have to expect the occasional glitch. In this case, however, you have grossly inconvenienced everybody who was supposed to be on that delayed flight, as well as everyone who was waiting for them in L.A., everyone who was waiting to use the airplane for its NEXT flight, and so on. Even worse, you have done so for a reason that most business people will dismiss as scheduling incompetence, and non-managers will dismiss as being caused because your company is too cheap to have backup personnel standing by where you need them…

Now we all know that having a highly-paid professional sitting around each of the hundreds of airports to which your company flies on the off-chance that one might be needed to cover a specific flight is not a good use of company funds. The same people who are unhappy with you for delaying a flight while the pilot arrives will be much more unhappy if you have to start raising fares to cover the salaries of the hundreds of pilots assigned to hang around airports waiting until they are needed (although the creation of hundreds of high-paying jobs might be politically useful during an election year). The problem is that the customers who are forced to wait for hours on end will not see it that way, and they are all too likely to start looking for another carrier…

The fact which does not appear to have reached the upper echelons of management in the airline business is that these services are now a commodity business. With the airlines cutting all possible expenses, eliminating all amenities and special features, and cooking up new fees to apply wherever possible, the days of brand loyalty to a specific airline are almost over; the only thing that ties a customer to a specific airline now are frequent flier miles, and even those programs are not the draw they once were (with credit card companies cashing in on that market segment). Consequently, it no longer makes sense to ask passengers to sit around for hours or days on end waiting until circumstances are convenient (or profitable) to the airline…

The fact is, the airlines can do better than this. It’s possible to cancel a flight and put your passengers on earlier ones; it’s possible to handle unavailable personnel the way you handle malfunctioning equipment (bring in replacements); it’s possible to schedule operations that put the needs of your customers ahead of the needs of your employees (even really elite employees like flight crew). And the performance of some of the “upstart” airlines like Southwest and especially Virgin America certainly suggest that things don’t have to be this way. Maybe the next time the airline industry asks Congress to bail them out, we should just tell them to get better at their jobs – or perish…

The Hidden Costs

I was reading an article about the cost of school lunches going up when it occurred to me that the new energy crisis is going to change everything -- not just in car-oriented Los Angeles, but everywhere in our country. And it will hit everyone, even those people who were foresighted enough to buy fuel-efficient cars in an attempt to minimize the rising cost of gas. The sad fact is, even if you are running your personal transport off of used fry oil from the dive down the street, this one is still going to bite you...

Now, I don't mean to suggest that the school lunch story itself isn't a huge issue; worth far more attention than the few lines I'm giving it in this one obscure blog. The simple fact is that these subsidized meals have a huge place in the lives of the very poorest children in our society, in many cases making the difference between life an starvation, and even the most cold-hearted pragmatist can grasp the advantage of eliminating expensive crimes (to obtain food), expensive court costs and incarcerations (when people are tried and imprisoned for stealing food), and expensive treatments for deficiency diseases (when children do not get the right food). It’s even relatively easy to convince people that keeping these kids in school has both short-term (they stay out of trouble now) and long-term social benefits (they have a better chance of getting jobs later), and that getting fed is one of the most immediate reasons for going anywhere in the human experience…

But there’s not much point in making an argument if no one is going to take the other side, and in this case the only people who are going to argue against subsidized school lunches are a handful of neocon extremists (who hate every program that benefits anyone less fortunate than themselves – government subsidies are for giant corporations, not kids!) and a handful of delusional do-gooders who somehow feel that if school lunches were not made available, these kids would get better food (from where remains a mystery). Let me instead point out that one of the major costs cited in the article is an increase in the delivery costs of food, and that the cost of fuel is in fact driving up costs in all aspects of our food supply chain (e.g. tractor fuel costs more, delivery truck fuel costs more, energy to run food processing plants costs more, energy to run supermarkets costs more, and so on)…

And that’s just the tip of the iceberg…

Unless you purchase everything you buy direct from the factory, the cost of bringing your goods to market is going up. Unless the factory gets all of its raw material from the fields behind it, the cost of getting the raw materials to the factory is going up. Unless the factory runs directly on solar, geothermal or hydroelectric power, the cost of making your goods is going up, and so on. The fact is that for decades the U.S. economy has run on the basis of unlimited cheap energy, and now that energy is no longer unlimited (or cheap), the whole house of cards is starting to come down around our ears. And with China, India and other emerging countries likely to continue increasing their own demand for energy, this trend is unlikely to reverse itself…

This is not to suggest that we should deal with the crisis by running in circles making little shrieking noises. What I mean to suggest in this particular rant is that the world in which we live is changing before our very eyes, and like the people living in any other time of dynamic change, we must adapt to it. And in this particular case, when all of the politics and social engineering are over and done, it is going to fall to us, the business people and management professionals of the world, to find a way to make it all work again, or at least function in some acceptable new way, under these harsh new conditions. But if we can’t do this without destroying those programs (like the school lunch program) that keep our most vulnerable and fragile citizens from suffering and dying, then we have already lost…

Getting SWOT

I was saying to someone the other day that the thing I like most about the study of strategy is its simplicity; the way a progression of data will lead you through the steps you need to follow. In writing a business plan, for example, I've always suggested that my clients (or students, when I was a teacher) start with the mission statement, which explains what the company or venture is intending to do. This will, in turn, drive the explanation of why we are going to do it, and what we will need to accomplish these things. These choices will drive who our customers are, which will determine who our competition is, which will in its turn determine how we will have to advertise and what all of this is going to cost. Although if there aren’t enough customers, or if our competition is too tough to beat, then we may need to rethink the whole venture…

Which brings me to one of the basic tools used to assess the current industry situation and determine the strategies needed to direct our company; a technique so simple it can be summed up with a four-letter acronym: the SWOT analysis. The acronym stands for “Strengths, Weaknesses, Opportunities, and Threats,” and in theory all business ventures (and most other organized human endeavors) have to deal with these factors at all stages of their existence. Every group of people has strengths and weaknesses, just as the individual members of the group do; a company or agency will also have tangible assets (equipment, supplies, properties, money and so on) as well as intangible assets (intellectual properties, reputation, goodwill and so on). It may also lack things it needs – the “Weaknesses” of the title.

By the same token, nearly all of us will have to face threats and make the most of our opportunities every day of our lives – and this does not change when we gather in groups to accomplish a mission. Unserved or underserved customers are the most common opportunity businesses look for, but there are many others as well (e.g. the chance to acquire technology, property or information before they become prohibitive; the chance to corner the market on something, or the chance to expand into a new field in time to stake out a dominant position in the market). By the same token, most people believe that threats are primarily comprised of competitors, but changes in technology or the economy, new regulations or trade barriers, or even changes in customer buying habits can offer a much larger threat to your company’s operations.

The key thing to keep in mind about a SWOT analysis is that it truly offers no judgment of the company or the people in it. If we make lawn frogs (like a lawn gnome, only it’s a frog), and the current trend in lawn statuary if for lawn bunnies (like a lawn gnome, only it’s a rabbit), this does not mean that we have failed our families, our customers or our country; it just means that we have to retool our production facilities to make figurines that look more like rabbits and less like frogs. The only possible issues with a SWOT analysis are the people who refuse to do one (because they already have a “perfect” understanding of the market and the industry) and the people who refuse to act on what the SWOT analysis tells them (because they just KNOW that the public will come back to wanting lawn frogs, and it doesn’t matter that the competition can make a better one, or that the government is going to regulate them)…

Done properly, a SWOT analysis can tell you what your company should be concentrating on, what areas it needs to work on, what new products or services you will be able to offer to better serve your customers and to make more money, and what you need to watch out for in the future. Our Strengths drive the activity we should be attempting to focus on, and the Opportunities will tell us where we might be able to use those strengths. The Threats are the hazards we need to look out for, and we need to make sure that our Weaknesses do not make us vulnerable. Trust me on this one, folks: it really is that simple. If you’re willing to do it, of course…

Distopia?

The term "Utopia" did not start out as a common noun, and it certainly wasn't meant as an adjective. It began as a proper noun (a place name, in fact), in the 1516 novel of the same name by Sir Thomas Moore. The book's rather fanciful account of a fictional island in the Atlantic Ocean that serves as home to a "perfect" society repelled almost as many people as it attracted, and gave rise to the negative, opposite concept: the nightmareish "distopia."

Orwell's "1984" is probably the best known of these worlds, but hundreds of others have appeared in movies, books, and other media since the term was first coined by John Stuart Mill in 1868. Some of these are heroic fantasies where the protagonist hero really does change the world; some (like 1984 itself) end with the failure of the hero and the continued opression of the people, along whatever dimension that might take.

One of the most complex and thought-provoking works in the entire sub-genre has to be Cory Doctorow's 2003 novel "Down and Out in the Magic Kingdom," a post-scarcity world in which every person has all of the material needs met, everyone can live forever by backing up their memories and then "restoring from backup" by loading those memories into a new cloned body, and everyone is "online" all the time on computers implanted in their bodies.

I should tell you that I'm making this post from my Blackberry while I wait for a meeting to start, which is probably what brought the topic to mind...

What I can't figure out is if "Down and Out" is supposed to be a distopia or if it's just a really disturbing look at the world the way it might be if both technology and the sense of entitlement that people seem to be overdoing both continue to their logical extremes. I suppose I could email Cory and ask, but it seens rude somehow, as well as intellectually lazy...

The one thing I can tell you about the future is that it won't be anything like what we expect it to be. As evidence, I direct your attention to the little device I've written this post on, and the wireless technology to which it connects, both of which are beyond anything our grandparents (or in some cases our parents) could have imagined in their childhoods...

Not Actually All That Silly

Okay, I don’t really spend all that much time surfing the blogsphere; I really do have a day job, and contrary to popular belief, I actually DO spend most of the day working. By the same token, however, I do spend a lot of my spare time (including lunch hours, breaks, and off-duty time) reading news aggregation sites, which are quoting more and more blogs as time goes on. Which is where I get stories like this one: a boutique hotel in Nashville is offering what it calls a “Redneck Package,” which includes such Southern favorites as a six-pack of Pabst Blue Ribbon beer, a bag of pork rinds, and snacks like Moon Pies and RC Cola. The special package is timed to coincide with the CMA Music Festival being held in Nashville this summer…

Now, on the face of it this may sound like a silly idea. I mean, really, who is going to book a hotel based on less than $10 worth of consumer goods? If it’s a typical boutique hotel it probably costs two to three times as much as comparable facilities in the same area, and the owners are not promising anything that constitutes REAL added value, such as convenience, larger or better appointed rooms, transportation or even location. But when you actually stop and think about it, it’s an excellent example of a business selling something larger than just a hotel room: it’s an image, a lifestyle, and even a social identity that is on the line here…

There was a time when calling someone a “Redneck” (e.g. someone who spends much of their working life out in the sun without benefit of a hat or sunscreen, as in the case of an agricultural worker or manual laborer; an uneducated person or hick) was an unforgivable insult – unless the person doing so was also a “Redneck,” in which case it might be a simple matter of identifying with that person or even a term of endearment. The famous comedy routine by Jeff Foxworthy called “You Might Be a Redneck” is essentially both; if you see yourself in the scenarios presented you are probably part of this group, and since the comedian is presenting this as a positive (or even “glorious”) thing, it’s obviously meant in an affectionate way. As such references have become more common, more and more people have begun to self-identify as Rednecks, and seek the company of others who do the same…

Which leads us back to the “Redneck Package” referenced above. While we may reasonably question how many people would be willing to pay extra for a “True Redneck Experience,” even if they self-identify as part of that group, a boutique hotel is usually a small facility, and it will not require that many additional bookings to fill all of its rooms for any given week. I wouldn’t suggest trying this as part of a national chain’s promotional specials, let alone building hotels specifically along this theme, but for a single small business, on a specific week of the year, it’s nothing short of genius…

Which begs the question, why don’t other hotels offer similar packages designed to tie into popular events in their home cities? If there’s a science fiction convention in town, a hotel could offer geek fodder like Skittles ™ Dorritos ™ and Mountain Dew in the rooms; a Star Trek convention could be the occasion to offer Earl Grey tea (hot, of course) and other character favorites; rodeo in town could be the occasion to offer Slim Jims ™ and barbeque-flavored anything; a Monty Python convention might tie into a bucket containing almost any kind of foodstuffs except wafer-thin mints, and so on. Unless, of course, such packages are already common in the hospitality industry, and I just need to spend more time reading news aggregation sites…

It's Too Easy

You may remember a few posts back when I mentioned that some days it's just too easy to write this blog. I suppose if I were trying to write some fluffy, upbeat web log about good business decisions, strategies that work, and people who appear to be doing things the right way, I’d have fewer days like these. And in fairness, I do to try to bring you the occasional example of someone who’s doing it right, at least when I find someone I think we can all learn from. But for the most part, a business blog that attempts to be both entertaining and educational is going to be something of a Gong Show Gambit in itself, since there is next to no chance of my ever running out of weird, strange, ill-advised, crooked, or just plain stupid business concepts. Even by those standards, however, today’s story stands out…

Tuesday’s “Threat Level” column on the Wired website brings us the story of a website called “YouveBeenLeftBehind.com”. I don’t have much to add to Kevin Poulsen’s excellent reporting on the subject, but for those of you who don’t want to follow the link, the web site he’s talking about is a literal Doomsday service that will store a message for you which will automatically be sent to up to 62 heathens of your choice after the Rapture happens and you are taken bodily into Heaven. They will also “encrypt” and store all of your financial information (to be sent to the heathen of your choice the day after the Rapture) since with no body available, a probate court will take 7 years to rule you legally dead, and there will only be 7 more years left in the Universe between the Rapture and the End. And all of this for a nominal service change of only $40 per month…

It’s hard to say what would be more fantastical: if the people behind this venture are joking, or if they aren’t. If they’re having one on us (or more correctly on all of the religious types who believe the Rapture is coming in their lifetime and also believe that they will be taken during it), then this is quite literally the most brazenly cynical activity I have ever seen or heard of. Even a few thousand customers will give the company millions of dollars in revenue each year for a service that literally costs nothing to provide (even if there IS a Rapture during the life of the company), all because they are willing to exploit some people’s religious convictions (or superstitions, depending on your point of view) for money. Even more amazing, however, would be if these folks are serious…

It’s hard to imagine what purpose, exactly, a message sent to one of those unfortunates “left behind” during the Rapture is supposed to have. If you believe that it is possible for those left behind to repent and be saved before the End of the World, then it’s difficult to imagine what a message from someone who has already left would add to having the Messiah arrive (or return, depending on your point of view), the Rapture occur, and the Government of the Beast take control of the Earth. Unless, of course, you believe that the people to whom you are sending these messages are too thick to realize that the End of Days are occurring and Armageddon is imminent…

If you don’t believe in this sort of 11th-hours redemption, then the only possible use of such a message is to say goodbye to all of the people whom you like enough to spend money on but don’t expect to be seeing again in the Afterlife. I can’t help thinking that this sounds like gloating, which in turn does not sound like something you want to be doing if you want to be picked up during the Rapture…

From a business standpoint, it must be conceded that if anyone actually signs up for this service (and there is some indication that people are doing so) then the company is offering its customers a service they could not easily arrange for themselves for a relatively affordable price, and that if this service actually benefits someone (e.g. provides some peace of mind, the opportunity to gloat, or the chance to make sure that your heirs know where you left all of your financial resources) then they are in fact providing value in return for the money.

I still hope they’re kidding, however…

Four Lanes

It's hard to imagine anyone out there being surprised by the news that General Motors is going to discontinue the "Hummer" line of giant SUVs, unless you've been in some kind of weird time warp since the 1990's. Sales of large vehicles in general have been falling off for the past couple of years, and nothing currently for sale in the U.S. is bigger or more wasteful than the original Hummer. Even if we ignore the ethical (you're squandering limited resources), safety (Hummers are prone to collisions, because they're so hard to steer, unsafe to ride in and likely to cause fatalities in anything they hit), health (they also pollute like crazy), social (they're regulated and taxed as working vehicles -- e.g. not at all!), political (there's a reason we keep going to war in specific regions of the world) and moral (you're spending between 2 and 4 times more on your Hummer than you would on a more conventional ride; can't you think of anything better to do with your money?) aspects of the vehicle, the appeal of something that gets between 9 and 13 miles to the gallon (H1 model is 9; H3 gets up to 13) in a time when gas is over $4 a gallon is somewhat limited...

The part that confounds me is that GM seems to be surprised by these events. Certainly, they don't appear to have planned for this downturn in their sales, if closing 4 more North American plants is any indicator. Ford is suffering through a similar sales slump, and is also making plans to alter their production mix, while Chrysler is trying to deal with its flagging sales by offering gas at $2.99 a gallon for the next three years to anyone who buys one of their more problematic cars (an offer that could be very hard to cope with if gas crests $9 by 2011). Meanwhile, Toyota and Honda are actually reporting improvements in their sales, driven by hybrids and fuel-efficient compacts. Given that General Motors actually HAS both hybrids (including the Chevy Malibu and the Saturn Aura) and fuel-efficient conventional cars (like the Chevy Aveo and Pontiac Vibe), it's even more puzzling why they haven't made greater inroads into this critical market segment...

Of course, some of it may simply be that GM has been listening to closely to the fans of the Hummer (and big SUVs in general), like the ones quoted in the story this week in the Houston Chronicle. The market for Hummers has always been bigger than you might expect, and the margin on each one they can sell is also truly amazing. Still, if a company's entire product line is based on gasoline-powered vehicles, one might reasonably expect them to have their forward-planning shop keep at least one eye on the price (and projected future price) of that fuel. One might also expect them to spend some time, effort and advertising money to promote new products that they spent large amounts of R&D money to produce...

Now I'm not suggesting than any of you are going to be foolish enough to ignore what your strategic planning staff is telling you about future market conditions; I feel quite certain that if any of my readers are in an industry that depends on a single natural resource (like petroleum) to power its products that you would at least keep an eye on the supply of that resource. The problem is that just because people with an outside perspective on the world can see this sort of product crisis coming down four lanes of highway, that doesn't mean that the senior executives, who have lived with this product and its market conditions their whole lives will be able to see it, or that the CEO and the Board will be able to adjust their thinking to the new market conditions in time to make a difference. Rather than rip on these troubled industrial giants for failing to recognize the glacier advancing on them, maybe we should all ask ourselves "How will future conditions change OUR business model?"

It's worth thinking about...

Corporate Madness

One factor that seems to be going overlooked during the current sub-prime mortgage crisis is how badly many of the banks and mortgage companies are behaving in their own right. I’m not referring here to predatory lenders or crooked financial advisors; many of these companies extended high-interest and/or adjustable-rate loans in relatively good faith; some of them have even made a point of explaining the terms of the loan and the consequences of not living up to the requirements of the agreement. But the fact is that many of the home buyers currently facing foreclosure have been sabotaged by unrealistic rates and loans that “adjusted” upwards at a bad moment, and even the companies that have been dealing straight with their customers have generally not done much to prevent this. Unfortunately, those birds are now coming home to roost…

There’s nothing very special about a sub-prime mortgage. Some buyers are not able to qualify for the standard loan terms when buying a house, either because their credit isn’t good enough or because they can’t demonstrate that their income is high enough to guarantee that they will be able to make the payments. Rather than lose their business altogether, some lenders will offer these customers a loan at a higher rate, figuring that the increased profits to be made on the higher loan rate will compensate for the fact that more of these customers will end up defaulting on the loan…

An adjustable rate mortgage (ARM) is a loan that does not have a set (or “fixed”) rate determined at the onset. Thus, if the prime rate rises (or other factors change) the lender can “adjust” the rate of interest on the loan, and increase their profits. Loans of this type tend to start out with lower interest rates, and some people will take them in the hopes of selling the property again before the rate goes up. Unfortunately, this will only work if the real estate market continues to rise, and the prime rate doesn’t…

In the current crisis an unprecedented number of buyers have been defaulting on their loans, and an unprecedented number of houses have been foreclosed on. This is causing problems for the lenders, since as the market continues to cool, many of these houses are not selling for enough to cover the outstanding loans, and an increasing number are not selling at all. Even worse, a mortgage that gets paid off will bring in between two and three times the face value of the loan (depending on the rate and terms) over the course of 30 years, to take the obvious example. If the lender forecloses, the best they can hope for is 100% of the sale price, and if the loan was for more than the purchase price (the infamous 105% and 110% loans) there is no way to even recoup the loan through a sale.

Now, in fairness, a lot of the people being caught up in the Sub-Prime crisis are small-scale speculators; people hoping to make money on the “Bigger Idiot” principle who figured they’d just default on their loans and walk away if things didn’t work out. But a lot of those victims are ordinary people who saw the chance to buy a house they normally would never have been able to qualify for. And while it’s true that the financial institutions have a responsibility to foreclose on deadbeats, it’s also true that if they would make the effort to work with some of these marginal customers, they might be able to recoup more of their losses and keep more people from being turned out of their homes – a clear win-win situation.

Of course, this would require quite a lot of additional work on the part of the lenders. They would have to devote significant resources to working with their customers, raising loan payments only in those cases where the customer can afford the increase, and restructuring loans where necessary to prevent foreclosures. It might almost be easier to just make better loans and build better relationships with their customers in the first place…

Suspension of Disbelief

It's funny sometimes how things come full circle, or at least continue to decline. In the early days of television, some conservative commentators worried that the fact that police dramas always ended with the bad guys being caught and punished might one day convince the general public that all crimes (and indeed all problems) really could be resolved in just 46 minutes (allowing for commercials). Of course, this was garbage; most people knew the difference between television and fact, and no one really expected to have Joe Friday show up and solve real crimes. In recent times, however, the highly popular "CSI" television series really have begun to impact the prosecution of real crimes, since juries are starting to believe that crime scene investigators really have all of the cool-looking computers and bleeding-edge equipment shown on the programs. If the crime lab people on TV can use DNA evidence to know, within minutes, who the bad guy is, then the people in real life should be able to do that, too! And if they don't have such conclusive evidence, then obviously the defendant must be innocent...

It's just as bad for medical dramas and legal dramas, too, where everything is always clean, neat, and ready to go; no gray areas, no ethical dilemmas (unless that's the plot of today's show), no issues with red tape, court delays, insurance issues, stacks of paperwork or other things that don't make for good television. Why exactly people can't remember that these same media offerings also include such improbabilities as characters who never have to visit the toilet (unless that's part of the plot), parking spaces that are always open right in front of wherever the character needs to go, cell phones that always get perfect reception, restaurants that always have a table available and so on is beyond me. Granted that all acting (television, movies, stage plays, whatever) requires the audience to suspend their disbelief (you're not actually looking through a magic arch into somebody's living room, for example), no one has ever been able to explain why people fail to reinstate their disbelief once the program is over...

An article on the MSN Money site points out that this now applies to money issues, too. The fact is, people earning $86,000 per year (taking home about $5,600 a month) DO NOT live in quarters that rent for $5,000 a month, and young people on minimum wage jobs (or working as street performers, artists or whatever) do not live in quarters that cost $2,200 a month. They also don't spend 150% of their take-home pay on clothing, drive cars that cost more than my house, or eat out at $200-a-plate restaurants every night. Yet one could easily get that impression from a variety of popular television programs and movies – none of which have even a nodding acquaintance with reality.

Nor do matters improve any when we consider the portrayal of professionals. Not all doctors and lawyers earn what the senior partner of a top Wall Street firm makes, and nearly all of them have to deal with insurance and/or collections issues unknown on the small screen. Social dynamics are another area where a poor grip on reality seems to prevail: it's hard being the only poor member of a well-heeled social group, and such an individual will generally have the unappealing options of being excluded from group activities they can't afford or mooching off the better-off members of the group.

So why am I ranting on about all of this? What harm can these skewed perceptions do to our society in the real world? Well, just as CSI viewers can throw off jury trials with their unrealistic expectations, so can people with preposterous ideas about money throw off the economy. Just as sales of Dalmatian puppies shot up after “101 Dalmatians” hit theaters (despite the fact that they really don’t make good pets), and enrollments in cooking schools skyrocket every time there’s a “Next Celebrity Chef” or “Next Food Network Star” series running (despite the fact that most people can’t make it as a professional chef, and would be ill-advised to try), so to do people who actually believe in these preposterous fictional lifestyles attempt to buy houses they can’t afford, cars they will never make the payments on, and consumer goods they do not need…

Unless we can get them to re-engage their common sense, bring their disbelief back online once they leave the theater, and stop thinking that life is anything like TV…

Public Service Announcement

Let me take a moment to depart from the usually light-hearted tone of these discussions in order to call to your attention one of the fastest-growing social problems ever to strike at the United States. It's a scourge that is causing loss of life and limb, permanent impairment even among the survivors; destroying families and causing untold heartache, pain and nausea to innocent custodial staff members nationwide. I refer, of course, to juggling lit chainsaws...

Okay, not really. The simple fact is, no one who lacks the natural ability, the perfect timing, the years of practice, the skill and the specialized knowledge would dream of attempting anything as hyper-spastically dangerous as trying to juggle a bunch of roaring, snarling chainsaws, the smallest of which could kill you in the blink of an eye if you make a single bad catch. Yet, for some reason, this does not keep hundreds of thousands of people – many of them otherwise sane! – from attempting to speculate in a field far more complicated (and in some cases even more difficult) than juggling chainsaws. I refer here to real estate speculation, particularly in the sub-prime mortgage market, and this time I'm not kidding...

Obviously, there are a lot of people who manage to make quite a lot of money speculating in real estate investments on the side; it's one of the most common means of wealth creation in this country. But the people who succeed in this enterprise don't just plunk down money they don't have to purchase property they can't afford on the spur of the moment; they invest considerable amounts of time and energy in learning about various markets, study economic trends and future indicators, calculate risks and returns, and stay away from the sort of all-or-nothing, death-or-glory flings that are so beloved of movies and fiction writers. Long-term success in real estate investing is just like long-term success in any other business activity: it takes time, it requires investment of effort and energy, and it doesn't always work. It's anything but a classic get-rich-quick scheme...

Unfortunately, most people DO just want to get rich, quickly, without any of that tiresome working, learning, studying, or putting up any of their own money. People who want to believe that they are too smart to play the lottery (but want the same huge payout for no effort whatsoever) will sometimes indulge in zero-down mortgages with preposterous payments and adjustable-rate loans that are nothing more than ticking bombs, never suspecting that they'd be better off with a handful of scratchers and a Powerball ticket. There was another story in the Times this week, about a couple who came to California, liked it here, and decided to stay and buy a house. A few years later they sold at a large profit, and used the funds to buy a larger house. That one sold even faster, and they doubled their money, which they then put toward the purchase of an even larger house. With an Adjustable Rate Mortgage (ARM), and then a second mortgage...

You see this coming, don't you? Sure enough, the real estate market slowed down, they defaulted on their second mortgage, and then their ARM "adjusted," almost doubling their mortgage payments. Congress is trying to pass some new legislation to prevent people in this situation from being forced from their homes, but it won't pass in time; the folks in the story are being foreclosed on right now. It’s impressive that they aren’t being bitter or angry about the situation; the couple in question say they weren’t victimized by predatory lending or fooled by bad sales people or screwed over with poor financial advice; they just got greedy and didn’t quit the game in time. They’re young enough to start over, and they fully intend to be smarter about things this time around. But that doesn’t change the fact that they are starting over in their late 40s…

Folks, the simple fact is that if it was easy to make a fortune in real estate, everybody would do it – and during the current fad for real estate investment, just about everybody tried it, with the usual fad results – a handful of people did well, everybody else lost their shirts, and the rich get richer enabling the foolish dreams of people who should know better. Of course, the mortgage companies are indulging in their own stupidity throughout all of these events. But that’s a story for another day…