Those Darn Activists!

If I told you about a group that claims to support individual small investors against the power of large-scale Wall Street investment firms, you could be forgiven for asking what the catch was. There was a time when cynics like me were a relatively small minority in the United States, but that time seems increasingly remote these days, and regardless of your political leanings you’re probably questioning everything that people tell you. The sad part here is that if I told you that said group is a front for the very same large companies from which it claims to be protecting small investors, you’d probably just ask if I had a point…

You can imagine my complete lack of surprise, then, upon reading a piece in the New York Times this week about the organization calling itself the Main Street Investors Coalition. Ostensibly formed to protect individual investors from the effects of activist groups putting pressure on large corporations in support of environmental, social, or financial reform causes, the Coalition claims to be in favor of profit maximization above all other motivations. They insist that the fact that this allows said large corporations to continue doing business in financially, socially, or environmentally irresponsible ways (just as they have always done) is merely a happy coincidence…

What they are failing to acknowledge is that the Main Street Investors Coalition is getting its financial backing from the National Association of Manufacturers – an industrial lobby group that includes executives from companies like Exxon Mobil, Goodyear, Dow Chemical, Cargill, Toyota and Pfizer. The main thrust of their argument is that as large investment groups like BlackRock and Vanguard are supporting causes on issues like climate change, gun control and employee diversity, they are not as focused on maximizing profits, which should be the primary concern of their customers. The Coalition has been lobbying the Federal government to increase regulation of what investment groups can put their clients’ money into, in order to limit their support for more activist firms at the expense of their members…

It probably also won’t surprise any of my readers (assuming I have readers) to learn that the Securities and Exchange Commission has opened an investigation into the Coalition’s activities, or that the Coalition leadership (and that of its supporting companies) are claiming to have done nothing wrong in the first place, either. But even if we ignore the absurdity of an industry organization pretending that legislation that shields its members from having to consider the wishes of their shareholders - who, let us remember, are the actual owners of a publicly-held company - the whole idea of restricting companies to the most profitable courses of action is asinine from a strategic position as well...

Sometimes the most profitable course of action in the short term is not the best option overall, and sometimes the actions that will profit the company directly will cause it greater indirect harm in terms of community relations, customer relations, vendor relations, health and longevity of its customers, or health of the environment in which it does business. The concept of considering the Triple Bottom Line when developing a strategy isn't exactly a new one. Moreover, it's difficult to imagine how not being able to use any strategy except "make the most money you can" would benefit anyone. Strategy is primarily about gaining a competitive advantage, and anything that interferes with that would be stupid even if it wasn't already just a ploy to protect organizations that don't want to bother about any of that pesky "political correctness" they keep hearing about...

Too Easy

I’ve made a few snarky comments in this space about Gwyenth Paltrow’s “lifestyle” brand company “GOOP” – it’s hard not to, actually. When you can find online ads for stickers that are purported to enhance some aspect of your health despite having the exact medicinal properties of postage stamps, it’s really hard not to wax sarcastic about any company that would attempt to sell such a product, or about consumers who would shell out money for that product. It gets even sillier when you can find other electronic snake-oil salespersons selling almost exactly the same products but offering entirely different explanations about how they supposedly work. But despite the commonly-held belief that the people behind the “GOOP” brand are delusional, it appears there may be an even simpler explanation…

An article this week on the AV Club site reports that not only does the company make no particular effort to check or support any of the health or wellness claims made about its products, it has actively avoided any efforts to let anyone else check them. The Goop magazine was originally going to be a collaboration with Conde Nast, but the kind of unsubstantiated question and answer babbling they wanted to print did not meet the Conde Nast print standards. Goop wound up producing their own “magazine” and forgoing the boost that they could have realized by working with an established publisher just because they didn’t want anyone else to fact-check their claims either…

Now, if the Goop enterprise was just an extended, online version of the Gwyenth Paltrow Fan Club, I don’t suppose anyone would have noticed, or cared if they did. There’s a tradition going back nearly a century at this point of celebrities of various types offering their fans “lifestyle” information about lives that they (the celebrities) may or may not actually live, along with pictures, newsletters, or whatever helps to increase their popularity. If Paltrow wanted to tell her fans that she wears bits of paper with adhesive backing stuck to her skin for the health benefits they supposedly offer, that wouldn’t have any more impact on anyone else’s health than, say, bizarre and otherworldly claims about living on absurdly tiny amounts of food money each month. Unfortunately, that isn’t the case…

I could go on for hundreds of additional words here – and in the past I have – about the ethics or morals of selling worthless, high-priced crap to people who should know better, or about how if making money off of the gullible, credulous, or stupid became illegal our economy would probably collapse. The problem is, at this point in American history, it’s just too easy to do that. Like it or not, we are living in a society where the President of the United States is going on national television and telling you that the things you are seeing and hearing aren’t real, and the nasty anti-intellectual streak in our society is getting out of hand…

The real take-away from this story, and the dozens of others like it that we’ve been seeing lately, is that just as A-list celebrities can afford personal trainers, wardrobe consultants, nutritionists, publicists, and agents, they can also afford to stick their heads in the sand and just ignore fact-checking activities that might mean actually having to think about the truth (or lack thereof) in what they are saying – but the rest of us can’t. We’ve reached the point where you can either do your own due diligence, check all of the things people tell you are facts, or accept the risks involved with spending hundreds of dollars on “health stickers” and looking like an idiot…

You Don't Say

It was the kind of story that statisticians and business analysts hate. The Metro (UK) website carried it with a banner headline that proclaimed “Couples who spend more on their weddings are more likely to get divorced” in bold letters above a picture of a wedding cake. The story went on to claim that the more cash spent on wedding rings, engagement rings, or the ceremony itself, the more likely the marriage would eventually crash and burn, as illustrated by pictures of celebrity couples who had managed to do just that. It’s the kind of thing that would make anyone who couldn’t afford an elaborate wedding, anyone who thinks ostentatious displays of wealth are crass, or anybody who particularly dislike weddings feel better about themselves…

Unfortunately, the original article does not give the title of the study they are citing, the name of the journal in which it appears, or where the researchers got their information. To be fair, most people who are casually reading online news stories wouldn’t care about the statistical methods employed or the degree of empirical rigor employed by the research team; most Internet readers don’t appear to consider the source at all. The Metro (UK) site isn’t exactly the BBC, but they aren’t the Daily Mail, either, so I decided to run down the original research article…

As it turns out, the paper the Metro (UK) people were talking about is called “A DIAMOND IS FOREVER” AND OTHER FAIRY TALES: THE RELATIONSHIP BETWEEN WEDDING EXPENSES AND MARRIAGE DURATION, and it appeared in the October 2015 issue of a journal called Economic Inquiry, which is published by the Western Economic Association International. It’s the work of two economics professors from Emory University, Andrew Francis-Tan and Hugo M Mialon, and as you’d probably expect, it’s not quite as sensationalist as the Metro (UK) headline, or even its own title, would have you believe…

Basically, what the professors did was ask people to fill out a Qualtrics survey that provided basic demographic information, an approximate range of what they spent on the wedding, the rings, and such, and how long they had been/were married. They then cleaned and adjusted the data to account for as many inaccuracies as possible, and ran a number of regressions and other analyses to see if any patterns appeared. If you’ve spent any time on statistical research, you already know that there are problems with self-reported data (people lie) and correlational data (correlation does not equal causation, no matter how good your math is), but the researchers in this case weren’t looking for a causal relationship in this case…

According to the report, the researchers were attempting to determine if there was any relationship between elaborate weddings and/or rings and the length or success of the marriages, specifically because the companies that supply wedding services and supplies have claimed for most of the last seventy years or so that such expenditures are critical if you want to have a successful marriage. They specifically note in their literature review that these marketing claims are a recent development, and prior to World War II advertising of this type was highly unusual, and there does not appear to have been any corresponding popular belief…

Even more to the point, what the study found was that there was no such relationship. According to the data they collected, the researchers were unable to find any support for more expensive weddings or accessories leading to longer or more successful marriages. Although they did notice a number of other interesting results, as far as this study can determine, there is no reason to believe that spending a lot of money on your wedding will help you stay married, and no reason to believe that failing to do so will doom your relationship to divorce. If you dig down into the information, this turns out to be a moderately interesting study of changing consumer economics over the last two or three generations that debunks claims made by a specific industry about the vital importance of their products and services…

Although we should probably concede that just coming out and saying that would make it much less likely that anyone would read a news article about the findings…

Watch Your Mouth

After all of these years you’d expect me to have gotten used to the idea of people failing to value things they don’t understand, but it still annoys me as much as anything else. Writers deal with this almost constantly, given the vast numbers of people who seem to think that writing is the same thing as typing, but you can also find examples in business, government, academia, and even in the military. One particularly vexing version, of which you can find examples in the news on almost any weekday lately, is people who believe that speech writers aren’t necessary; that any idiot with a microphone and a podium can just spin out oratory off of the top of their head…

The truth is that even something as trivial as a ranting blog post can take hours to craft, at least if you don’t want to sound like the kind of blogger who wears their underpants on their head and believes that the World Health Organization is beaming vegan pastry recipes directly into the President’s false teeth. Great orators – and there are far fewer of these than people seem to think – can make it look like the awe-inspiring speech they are giving is just something off the top of their heads, but that’s showmanship and acting, not wordplay. Even for very smart people, just saying the first thing that comes to mind can get you in trouble faster than you would believe…

If the public sector examples of the last two years aren’t enough for you, consider the case of “Papa” John Schnatter, founder of the Papa John’s Pizza chain. Anybody who starts with a single pizza oven located in his father’s tavern and ends up with over 5,000 retail locations and corporate earnings in the $1.7 billion range (according to Forbes) can’t exactly be a blithering idiot, but you could be excused for thinking so if you’d encountered his remarks about the NFL player protest controversy, or his more recent attempts to justify them…

You can pick up the Forbes and CNBC stories about this if you want to, or go back and check the news broadcasts for the relevant days. I’m not going to say that the issue isn’t controversial, or that Schnatter doesn’t have a right to his own opinion, but I will suggest that making unscripted remarks about an emotionally-charged topic isn’t a great idea even if you do know what you’re talking about. In this particular case, there’s something particularly tone-deaf about a wealthy and powerful white man criticizing African-American athletes for staging a respectful and non-intrusive protest against institutionalized violence aimed at their community. But as bad as that was, attempting to justify your remarks by saying that Colonel Sanders used the “N” word may be even worse…

Now, I’m not going to suggest that everyone should run all of their public remarks past their Public Relations department before speaking them; many of us don’t have a PR department, and not everyone has a spouse or a partner who can tell them when they are about to put their foot into their mouth. But, by the same token, it doesn’t take a master’s degree in Communications with a Public Relations emphasis to realize that making uninformed or casual remarks about anything as complex and emotionally charged as race relations in America is probably not something that a career in food service management would qualify you to do…

The truth is that most of us won’t ever be important enough that our remarks will be noted by millions of people, let alone result in a multi-billion dollar loss in our stock price and get our sponsorship deals with the NFL and Major League Baseball cancelled. All I’m saying is that if you are in a position where a poorly-chosen, carelessly-worded, or badly-informed remark can have a major negative impact on a company, a country, an international treaty organization, or the stakeholders whose jobs or lives may depend on those institutions, there’s nothing wrong with hiring someone who does have expertise in those areas to help you…

One Small Step

I was reading yesterday’s BBC story about the upcoming Israeli space mission with great interest, and not just because I’ve been a huge space geek for as long as I can remember. If their mission is successful, Israel will become only the fourth country to soft-land a probe on the Moon, following the United States, the Soviet Union, and China. Even more remarkably, the Israeli probe will then use the fuel remaining onboard to take off again, soft-land again, and make observations from a second point on the lunar surface – something that none of the other countries have managed to date. Even the Apollo missions were limited to just landing and then using a separate drive system to leave…

The second flight, or “hop,” across the Lunar surface is a requirement of the X-Prize competition that this mission hopes to win, but if the probe functions correctly it will open the way for more advanced deep space surveys using remote technology at a relatively low price. So far the Israelis have spent around $88.5 million, according to the BBC, and the addition of a Falcon 9 launch vehicle will add another $60 million or so, depending on the exact launch specifications. For reference, a single Space Shuttle launch would cost between $500 million and $1.5 billion, depending on the payload and duration, and most of the equivalent unmanned missions launched by NASA ran in the $700 million to $900 million range. But then, that’s kind of the point…

I’ve written before in this space about the need to privatize spaceflight, beyond basic programs like the X-prizes and the Virgin Galactic sight-seeing flights. Well, according to a recent article in the Smithsonian’s Air and Space magazine, that is exactly what has happened now that Space-X and United Launch Alliance (ULA) are competing to offer the best value for the price. Of the two, Space-X is considerably cheaper, offering launch vehicles for one-half to one-third as much as their rival, while ULA (a joint venture of Boeing and Lockheed-Martin) has a longer track record and over 130 consecutive successful launches. Both are a far cry from the days when only a national government – and only two of them, really – could send anything other than weapons into space…

Now, I would be the first to admit that this appears to be pushing the concept of a business blog just a bit, but it really isn’t. The commercial possibilities for space flight and space-based manufacturing have been discussed for decades now, and new ones appear every time the cost-per-pound of lifting things to orbit goes down. We’re still probably a few decades away from having large-scale habitats in space, let alone passenger service to get to them, but when even conservative companies like ULA start talking about building cities in Trans-Lunar space, it’s time to start taking them seriously…

So far, things seem to be limited to Space-X’s low-cost strategy versus ULA’s differentiated strategy – cost versus quality, or a brash start-up company that has suffered a number of setbacks in recent years versus the more established firm that hasn’t had a rocket blow up on them in over a decade, depending on your point of view. But there is reason to believe that the Russian space agency, which has been the prime contractor for human-rated space launches since the end of the Shuttle program, and the European Space Agency, which never liked having to beg NASA for seats on the Shuttle in the first place, may start offering their own commercial services. And while they haven’t done it yet, I can’t see anything that would prevent the Chinese, the Japanese, or the Koreans from developing their own commercial-grade launch systems…

Let me again call the reader’s attention (assuming I have readers) to the early days of aviation, only 115 years ago. As long as airplanes were limited to Wilbur and Orville in the bike shop, or even a bunch of wood-and-canvas military biplanes, there wasn’t really a lot of commercial potential in the technology. It was only after the First World War, when companies like Boeing and Douglas started building the first airliners, when things really started to take off. I’m not sure we can compare the Falcon-9, or the new ULA launch vehicles due out in 2022, to the DC-1 or the Ford Trimotor. But unless my understanding of business, history, and aerospace are all completely out to lunch, we all just got one small step closer…

Another Try for an Old Idea

I can’t exactly say that I was disappointed when I saw a news item about a “flying car” on one of the news aggregation sites. Flying cars have become a meme over the last decade or so, and there will be at least one mention of something that might be one, or a snarky reference to some flashy (but ultimately pointless) piece of technology that ends with the question “Where’s my flying car?” in the news each month. Most of these turn out to be vague rumors about something that might happen in ten or fifteen years if a currently unproven technology turns out to have legs, or something that has already failed to catch on multiple times before. Although this week’s story may ultimately turn out to be both…

We should probably note that flying cars, or “roadable” airplanes, have been around for at least seventy years at this point, and if you actually care I could show you both contemporary accounts and advertising pieces about models actually offered for sale at various points. Most of these projects ultimately fail, either because the vehicle in question is too expensive to afford, because it is too hard to operate, or because it is too hard to get permission to operate from the applicable Federal, state, or local laws. A flying car that you can’t use without first obtaining a (very expensive) private pilot’s license, or that you can’t fly from where you live or to anywhere that you’d want to go, isn’t going to be much of a draw as a consumer product…

In this particular case, the new entry into the field isn’t a new technology or even a new concept. Fans of James Bond movies are already familiar with it, and so is anyone who has ever studied the history of experimental aircraft in or out of the movies. The PAL-V Liberty, made by a Dutch company of the same name, is actually a gyroplane, or auto gyro. If you’re not familiar with the term, imagine a small propeller-driven airplane with an unpowered rotor instead of a conventional airfoil. It can take off and land on much shorter airstrips than a conventional airplane, and a skilled pilot can actually land one like a helicopter, although the leadership at PAL-V describes it as being more like landing a parachute or paraglider…

Now, I’m not saying that the Liberty and similar craft don’t have potential, because they absolutely do. The gyroplane was a competing technology to both fixed-wing aircraft and helicopters in the early 20^th Century, and its lack of acceptance had more to do with lower top speeds and problems with its public image than with its safety or V/STOL capabilities. Advocates of the type claim, with some justification, that it is safer to operate than comparable fixed-wing aircraft, and more efficient than comparable helicopters. But anyone who wants to keep one in the garage and just fly to work is going to be disappointed to learn that gyroplanes and their pilots are regulated, certified and licensed by the FAA just like any other light airplane…

The unfortunate fact is that flying cars, or at least the kind that anybody can get into and fly around any time or place they like, are a terrible idea. The next time you’re out on the road and you see someone driving like an idiot (and you will) imagine them travelling two or three times faster and crashing into the side of somebody’s house if they take their eyes off of what they are doing – and who’s even mentioned flying while texting or flying while under the influence yet?

I’m glad to see the humble gyroplane getting a new lease on life, and I’ll be looking forward to seeing more of them in use over the next few years, at least if PAL-V is as successful as they’re hoping to be. But anybody who is looking for the mythical flying car had best keep on walking…

Get Out the List

I can’t really say that finding yet another situation in which American business interests have been running amok during this administration really came as a shock to me, although I have to admit that this one is even more despicable than usual. We’ve already seen companies getting the government to let them start dumping mine tailings (poison) into rivers and lakes, pushing to repeal even common-sense regulations on air pollution, trying to gain increasing support for failing industries like coal mining (which even our former coal customers don’t want anymore), and advocating for additional import tariffs that are now threatening several previously solid manufacturing sectors. But allowing the US-led infant formula lobby to interfere with U.N. World Health Assembly’s efforts to promote breast feeding is still a new low…

You can pick up the New York Times article here, if you really want to see things hit their worst, but don’t say I didn’t warn you. All the assembly was trying to do was pass a resolution saying that “mother’s milk is healthiest for children and countries should strive to limit the inaccurate or misleading marketing of breast milk substitutes.” This isn’t exactly a controversial statement; there are quite literally decades of evidence, from hundreds of studies, which support this position. On the other hand, it’s easy to see how the $70 billion formula industry, led by Abbot Labs here in the US, would consider such a resolution to be against their interests…

It’s hard to imagine how, exactly, the industry leadership would justify promoting their business interests over the health and welfare of millions of infants, and the HHS statement that this move was to prevent “stigmatizing” women who want/need to use formula isn’t particularly convincing. It’s even less convincing when you consider that American representatives at this same Assembly meeting were also threatening to withdraw international aide and military support from various small nations if they chose to support the resolution – starting with Ecuador, which was originally going to propose it. American delegates apparently also threatened to slash US funding for the World Health Organization…

Now, I wouldn’t want you to place all of the blame for the United States delegation behaving more like organized criminals than advocates for public health on the shoulders of a single, albeit gigantic, industry. During these same meetings, the Americans were also noted as advocating to limit the ability of countries with rising rates of obesity and diabetes to put warnings labels on sugary beverages, and opposing changes to patent laws that would make it easier for poor countries to gain access to potentially life-saving medications. It might be possible to argue that intellectual property rights and free trade without regulatory interference are good for business in every country, and therefore these other efforts are still slightly into the grey area, but those claims don’t hold up well when accompanied by threats of extortion…

There are times when it really does seem as though the people who are running this place have a checklist of completely disgusting things they want to accomplish, just to make sure that they don’t miss anything. I feel constrained to point out, however, that even if these mainly political moves made sense in a purely business-friendly context – and they really don’t – the degree of international resentment this kind of behavior is generating has potential long-term consequences that dwarf whatever immediate gratification these companies may be receiving. When things get to the point where the Russians have to step in and propose the resolution in support of breast-feeding because the Americans have been threatening everybody else you really know that the regular order of things has been upended…

In the simplest possible terms, we’re still going to have to live on this planet, and do business here, once the current administration finishes lining their own pockets and leaves office. That’s going to be really difficult to do if all of the residual goodwill we might still have had with the rest of the world gets flushed in order to sell more infant formual…

Back to Basics

Back in 2013 I brought you the story about United Airlines reconfiguring its CRJ regional aircraft to include more – but lighter and smaller – seats. At the time, I commented that travel on a CRJ is already a miserably cramped experience, and I couldn’t imagine that trying to cram more people on to one was going to help. Since then, all of the airlines have been experimenting with new seating arrangements and equipment, ranging from things that look like a saddle to a kind of standing-room-only system that provides just enough support to keep the FAA from shutting it down. It’s enough to make you wonder if anyone running an airline is even thinking about passenger comfort anymore…

Well, apparently they aren’t. Some recent interviews with the leadership at United and arch-rival American Airlines reveal that they have been working on smaller and lighter seats, and planning to fit extra rows – and possibly even an extra seat per row – onto every type of airliner currently in service. This will enable the airlines to increase their revenue per flight considerably, as I noted in the 2013 post, but it completely ignores passenger comfort and potentially safety (in the case where you’re trying to get more people off of a more cramped airplane during an emergency). Push-back from some consumer advocate groups has helped prevent the worst of these plans from going through, although we should note that the public relations and customer service staff at some of the major carriers have also complained about the concept…

Now, as I noted five years ago, the management team of any company has a responsibility to its shareholders, and to a lesser extent, all of the other stakeholders, to maximize revenue. In the case of airlines, getting more paying customers aboard every airplane is one of the only ways to do that, but the problem with doing so is that you are also making the experience less and less enjoyable, which lowers the value you are providing to the customer. Carry this process too far and you will reduce the perceived value of the service you are providing to the point where no one will be willing to buy it…

This is a perennial problem for any company utilizing a low-cost strategy. If a given product’s perceived value drops below a certain level no one is going to purchase the product, no matter how cheap it becomes. The example I use in class is the 1980s-era imported car known as a Yugo, which cost about one-quarter of most basic cars, but was so poorly regarded that no one wanted one. If you care, I can name any number of other companies that have failed for the same reason, but given that there are only three kinds of business strategy (cost leadership, differentiation, and focus), and every business school in the world teaches its graduates to watch out for a lack of parity of quality when using the cost leadership strategy, it’s hard to understand how anybody could get to be CEO of a major airline without learning this lesson…

Even worse, in some ways, it the fact that several of the same senior managers have openly admitted that the only thing driving their decisions is how much additional revenue they can create, regardless of passenger comfort, and the only thing that has prevented some of the bone-headed ideas from going into service was that the personnel who have to care for the passengers (and deal with customer complaints) kicked up a fuss. It’s enough to make you wonder if any of these CEOs were paying attention in Strategy and Policy class…

Can’t Win for Losing

It sounds like one of those riddles you hear from professors who aren’t quite as funny as they think they are: “When is a $700 million savings really a $2.3 billion loss?” Usually it’s the set-up for a problem in sunk costs, hidden costs, or multi-year depreciation that the accountants in your class love – and that remind the rest of us just how critical a good accountant is to any successful business venture. Yes, non-profits too. For a strategist, though, it’s usually an indication that there has been an unexpected consequence of what appeared to be a straightforward action. In the case of a publicly-traded company, it might not even have anything to do with the action itself, or even with anything your company did…

Consider, if you will, the case of Walgreens, CVS, Rite-Aid, Wal-Mart, Amazon, and an on-line pharmacy company called Pill Pack. If you’re not familiar with it, and I wasn’t until I read the CNBC story about this situation, Pill Pack is licensed to sell prescription drugs in 49 of the States, and booked about $100 million in sales last year. Wal-Mart has been in negotiations to buy Pill Pack for several months, but negotiations broke down when Wal-Mart balked at going over $700 million, at which point Amazon stepped in and offered $1 billion. Wal-Mart probably could have matched the offer, but they didn’t want to get into a bidding war with one of the only retailers their own size, and they didn’t believe Pill Pack was worth that much anyway…

This would probably be a non-story – Amazon has bought a lot of smaller companies, some of which panned out and some of which didn’t – if it hadn’t been for the stock market fallout. Within 24 hours after the transaction was announced Wal-Mart’s stock price dropped by $1.03, which doesn’t sound like much, until you realize that the company has almost 3 billion outstanding shares of stock, each of which is now worth a dollar less than the day before…

Not making the purchase saved Wal-Mart $700 million, but it ended up costing them $3.04 billion in market value, or a net loss of $2.3 billion. That might not seem fair, but consider what also happened to the three big drugstore chains mentioned above. According to a second CNBC story, Walgreens lost 9.9% of their stock price, Rite-Aid lost 11.1 % of theirs, and CVS lost 6.1%, for a combined loss of around $11 billion on the same day (June 28, 2018). Meanwhile, Amazon’s stock gained 2.5% on the same news, resulting in a gain of just under $20 billion…

Now, I’m not saying that we should blame the drugstore chains, or their leadership teams, for the losses in question – although I will be very surprised if at least some of their stockholders don’t start asking a few rather pointed questions at the company’s next General Meeting. I’ve got nothing to suggest that any of these companies, or even all three of them together, could expect to out-bid Amazon without bankrupting themselves, or that they would be able to recover the $1 billion if they did. I can’t even tell you for sure if Wal-Mart could do that and live. What I am saying is that the leadership of every company needs to be watching the competition, and potential competitors as well, exactly so they don’t get surprised by something like this…

Because, to paraphrase a very old joke, a few billion here, and a few hundred million there, and eventually it adds up to real money. And while I imagine Wal-Mart will survive this mistake without much difficulty, there is a limit to how many more times they can ignore the consequences of their actions…

Wagging the Elephant

Some time ago in this space I brought you the story about how many “foreign” cars were now being built in the United States, like the Toyotas being built in Ohio, and how many supposedly domestic cars were being built from parts not made in this country. An investigation team had taken all of the parts from that model year’s Ford Mustang and Toyota Camry and sourced all of the parts, only to discover that while both cars were assembled within 500 miles of where I’m sitting right now, the supposedly foreign Camry had more American-made parts than the All-American Mustang. I wish I could tell you that it comes as a surprise that no one in Washington seems to have read either the original article or my commentary on it, but I’d be lying…

An article on the CNN Money page this week reports that the proposed (or threatened) steel and aluminum tariffs are projected to drive the cost of the Camry up by about $1,800 dollars for the next model year, and possibly more thereafter, depending on how the trade wars develop. There hasn’t been any word yet on how much the cost of a Ford Mustang will go up, but since these (and several other Ford products) use even more foreign metals and parts, it seems likely that the Mustang will be hit at least as hard. Toyota hasn’t said how much of the price increase they intend to pass along to the consumer via a higher sticker price, but unless they want to eat the entire increase out of their profits they are going to have to pass at least some of it on…

It’s hard to say what the overall effect will be on the US economy, let alone the world’s economy, but the impact on anyone in this country who wants to buy a Toyota Camry is certainly clear: they will have to scrape up another $1,800 plus whatever it costs to finance the increase. If a similar increase hits all of the other companies that manufacture and sell cars in this country, including Ford, GM, Chrysler, Hyundai, Honda, Mercedes, BMW, and others, it’s going to make it much harder for ordinary Americans to buy a car, and I can’t imagine that’s going to be good for the workers who build the cars, either. And that doesn’t even consider the effect that having all of those companies losing sales, all of their suppliers losing sales, and all of their employees having less to spend on consumer goods is going to have…

In theory, if this situation was protecting a similar number of workers and consumers it might be worth considering such an action. But with metals production in the United States continuing to drop, it isn’t clear if the developing trade war is going to save any jobs, let alone enough to replace all of the ones potentially at risk if the automotive industry in this country is thrown into a crisis. And I have to point out that cars are only one of the more obvious products that are made out of steel and aluminum in the US; if a similar effect were to cascade across all of the other sectors of consumer goods, the overall effect could make the 2008 economic crisis look like a minor inconvenience…

In politics, the expression “Wag the Dog” is used to mean a stunt intended to divert attention away from an unpopular action, but the term derives from the old saying about “the tail is wagging the dog,” which is more about a minor part of something taking on more importance than the whole. I would say that in this case both expressions apply; the health of one American industrial sector that has been in decline for decades is being given priority over dozens of other sectors, and goodness knows what this fiasco is supposed to keep us from noticing. Except that, when things get to this scale, it’s really more a matter of the tail wagging the elephant…

Difference of Opinion

I regret the amount of political commentary that keeps landing on this page in recent weeks. I try to stay out of those issues because, as previously noted, I don’t usually feel I have anything to add to most political discourse. I’ve been jumping in lately in places where I feel that politics is intruding into management and/or strategy, which do lie within my area of expertise. In too many cases lately, the problems we have been seeing are coming from politicians who like to pretend that they know more about business than I do about politics – and one in particular who likes to claim that he knows more about business than anybody despite having had to declare bankruptcy on at least five different occasions. This sort of thing becomes particularly dangerous when the political leaders involved turn out to be bad at math…

Consider, if you will, the situation with Foxconn in Wisconsin. The company has promised to build a factory in Racine County, if they were given about $3 billion US in various subsidies. Foxconn initially claimed that the factory would bring 13,000 jobs to Wisconsin, although they have been scaling back that claim while raising the amount of money they want from the state and Federal governments even before the deal was signed. The most recent estimates on the project go as high as $4 billion in subsidies and as low as 3,000 jobs, depending on whom you ask. Even worse, though, is the fact that relatively low unemployment in Wisconsin means that the company will almost certainly need to relocate workers from other parts of the country or the world – and there’s no word on how much money they’re going to demand for that purpose…

Now, one could reasonably argue that increasing the population of Wisconsin by the number of employees Foxconn is going to need will increase the tax base and generally improve the economy of the state, since all of those people will need house to live in, groceries to eat, and so on. The problem is that with over $4 billion in subsidies and under 3,000 workers it would take decades for the project to break even. Independent studies cited by CNN and other sources are projecting that no one other than Foxconn itself is going to see any net benefit from this project until around 2043. All of which assumes that the factory is still in operation in twenty-five years and that the company hasn’t shifted production somewhere else…

Opponents of the deal like to point out that for the kind of money under discussion we could just pay the 3,000 people the salaries they are supposed to be getting every year for the next twenty-five years and not bother building the factory at all. Think about how much infrastructure we could rebuild with 75,000 person-years of work (that’s 156,000,000 person-hours, if you’re keeping track at home). Or, if fixing crumbling roads and bridges isn’t you issue, think about how many teachers, nurses, daycare workers, police officers, firefighters, paramedics, social workers, park rangers, and lifeguards we could employ for that kind of money…

The people who are currently running this country, and in particular the state of Wisconsin, are effectively saying that rather than spend $4 billion of public funds employing people to do things we need done, build things we need built, and take care of our own citizens, that it makes more sense to spend that money in order to enable a Chinese company to send even more money home to their own oligarchs. As reluctant as I am to comment on public-sector projects, this really is a matter of business strategy - and I have a difference of opinion about whether this is really a good idea...

The Ethics of Service Revisited

I’ve written in this space before about businesses refusing service to customers because of the owner’s beliefs – most often because the owner of the business has some bias (religious or otherwise) against a specific client. I’m on record as saying that I personally regard this practice as stupid; it violates the First Rule of Business and several aspects of civil behavior, if not (unfortunately) civil rights. The Supreme Court recently ruled that such business practices are legal, however, so that part of the discussion is now off the table (in the United States, at least). But this week there came the story of someone being asked to remove themselves from a public venue not because of their age, gender, ethnicity, religion, socioeconomic status, or sports fan affiliations, but rather because the owner loathed that customer’s politics and the political positions of the customer’s employer. I thought it was time we revisited the issue…

First off, we need to acknowledge that neither members of the far-right political groups nor White House Press Secretaries are protected classes in the United States, nor is refusing to do business with someone because you loath their politics considered a discriminatory policy as such. Despite all of the pearl-clutching indignation rising from the Right, the restaurant owner in question did not commit any crime, Federal or state, when she asked the current Press Secretary to leave her establishment. Nor can these commentators claim any moral grounds for their complaints, since they have been loudly supporting the right of business to refuse service to customers on the basis of gender orientation. But those are the legal and moral aspects of the case; what are the ethics of the situation?

On the one hand, the owner of any business has an ethical obligation to his or her employees, vendors, community members, local taxpayers, and other stakeholders to generate revenue, and hopefully profit. Refusing a paying customer can be seen as ignoring those responsibilities, in addition to being bad business practice in an absolute sense. We could also point out that in most cases the employee does not determine their employer’s policies or politics; a Press Secretary does not make national policy, she just answers questions about it, to take the current example. It is possible that the current Press Secretary, as the daughter of one far-Right politician and a senior advisor to another, might agree with the extreme conservatism that so angered the business owner, but as a general principle we can’t assume this to be the case…

On the other hand, the owner of any business has the same ethical obligation to promote their establishment by appealing to the largest number of customers as possible. Again, I have no data to suggest that most of the patrons of this specific restaurant are particularly left-of-center in their political leanings, or even that they are more liberal than the current Administration, but as a general principle, if the majority of your clientele support any specific position, whether that is the Democratic Party or the Boston Red Sox, it makes some amount of sense to appeal to those same loyalties in running your business. I’m not saying you should throw Yankees fans out of a Red Sox bar, for example, but Yankees fans are not a protected class either, and if ejecting one makes all of your other customers cheer and order another round, you could make a case for it being good for business and supporting at least your first and second bottom lines…

Which brings me to the question: Do we, as business owners or manager, have any ethical responsibility to provide service or sell products to customers whom we despise on a personal or political level? Assuming that the practice does not involve discrimination towards people from any protected class or for anything (age, gender, race, etc.) that is beyond their control, do we have the right to refuse service to such individuals? Does our answer change if doing so would be good for business? Or if serving such individuals will drive away other customers and be bad for business? Or should we just provide services or sell products to anyone who can pay for them, and let all other considerations slide?

It’s worth thinking about…