Sunday, December 28, 2008

Market Forces

We’ve been hearing a lot about “market forces” in the news lately. A lot of people, including the self proclaimed experts, don’t understand what market forces are and how they really work.

One definition of market forces is: “in economics, the forces of demand (a want backed by the ability to pay) and supply (the willingness and ability to supply)”.

That’s fine but it leaves out some critical information, such as:

1. Market forces are only clear to history.
2. Market forces only react to events, they never cause them.
3, Market forces don’t react to small leading indicators, only to big
changes or events.

You can’t manage an economy using market forces since you won’t really know what market forces think about a decision for months or years and by that time it’s too late to change anything.

You’ve got to have yet a set of tools to estimate the direction that current events will drive you.

The decision makers saw the same little changes that the workers saw but the decision makers thought “That’s too small to matter.”

Well they were wrong. They were looking at the wrong leading indicators, and drawing the wrong conclusions.

It’s not about blame, it’s about recognizing the decision makers who were wrong and those who were right (darn few) and to start listening to the ones who got it right! In a manufacturing process, when the end product doesn’t pass the quality check, you look at where in the raw materials or on the production line the product first failed to pass the quality checks. I the case of our economy it’s the end result of a lot of small decisions that turned out to be wrong.

Now companies are going to have to look at who, within their organization, was telling them “Don’t do that” and start listening! That person was right and EVERYONE who said “Yes, we should” was wrong. Who do you want to follow, the one who turned out to be right, or the one who gave you the bad advice?

Monday, December 22, 2008

The product comes first!

I just checked the Honda website and found that the 09 Civic has a 140 HP 1.8 liter engine. 1.8 liter equals about 110 cubic inches.

By that standard a 350 cubic inch engine from Chevy should pump out 445 HP. In fact the current (09) model puts out 315 HP. Gives you some idea about how much effort GM has put into improving the efficiency of their products.

I have not investigated to see if the processes used to get that much horse power from the smaller displacement will scale to give the same results in an engine three times the Honda’s size but, absent proof to the contrary, we should be able to get very close.

We could all have the performance we want with much smaller engines (and smaller fuel bills) if auto companies' focus was on building cars and not just on profit.

Yes, all business must make a profit and to get large investments they must make large profits, but as Warren Buffet said, “Take care of your business and your stock price will take care of itself”.

I suspect that most of the problems are caused by the difference between 6% profit and 6.1% and not between profit and loss.

Far too many American businesses have forgotten a fundamental principle of business - profit is a byproduct of a the product, not the sole goal of business. If you don’t believe me, explain why people are flocking to Honda, Toyota, and others when the US car makers have products at the same price point that aren’t selling nearly as well. Why is Apple computer’s share of the market growing in spite of their higher price?

Saturday, December 13, 2008

About the Bailout

I have been following the auto bailout. Without discussing the pros or cons of the bailout, frankly I can make a convincing argument for either side, I really want to know what the companies will change TOMORROW to fix the problem.

I believe that we are the sum of all the decisions we’ve made. If you find that depressing, it’s a different discussion. If I’m right, then the auto manufactures are in their current state because of the decisions they made last year, 5 years, 10 years, 20 years ago.

Ford, Chrysler, and GM all spend huge amounts of money every year on market research. The cars they developed aren’t selling well against the competition and haven’t been for years. They’ve been spending a lot of money on manufacturing that is resulting in their customer’s perception of poor quality when compared to the competition. They spend a lot of money on negotiations with their workers yet their competition, at plants in the US, have lower labor costs.

Just for the record, I drive a Chevy 1/2 ton pick up truck, but before I’d loan any of these clowns a thin dime, I’d demand a clear statement of what they plan to do differently.

Either their focus groups were talking to the wrong people or the planners weren’t listening to the answers. Either they’ve been living in a cave or they are in denial cause somebody else's cars keep getting voted “Best Car of the Year”, readers choice, and selling better! The public’s perception of Detroit’s quality has been bad since the mid-1970s, deserved or not. The Big 3 haven’t aggressively worked to correct it.

They diluted their brands by trying to have a product from each brand in the same size/price segment. Any third year marketing student could have told them that’s a recipe for disaster. Plymouth and Dodge got so close that one became redundant and Plymouth, one of the oldest brand names, is gone.

Now they want me, through my elected officials, to “loan” them my tax dollars to keep making the same kinds of mistakes that got us here!

A good friend who is in the investment business told me that the president of GM’s job has nothing to do with building cars, it’s about raising money. Well pardon me, but NONSENSE! If he did his job building cars, he wouldn’t have to rase a bloody dime. His products would make enough profit to finance any improvements he wanted to make. If he needed bridging capital, he’d have people with cash standing in line to give it to him.

If you think of the car business as an assembly line (no, I’m not trying to be funny) and look where the process failed, it’s not with the workers building the product. It’s at the planning phase. We are building the wrong product, using the wrong methods and we have got no chance to fix it until we recognize that we are doing that because the people deciding what to build and how to build it picked wrong.

I’m not sure why they picked wrong and I’m not sure it matters at this point. Cause the cure is for the leaders to either admit they were wrong and that they can’t do it that way ever again or for the senior managers to get the heck out of the way so someone who will listen to the customers can lead.

Back when I was a very young child, my mother taught me that “I’m sorry” is an incomplete sentence. The complete sentence is “I’m sorry and I won’t do it again!”

This was originally written before the Senate rejected the proposed bail out - at least the Senate understood that if they can't articulate their ideas to the senate, then they probably don't really have a new direction.

Saturday, December 6, 2008

Catching up with reality

There is an old saying “When it’s time to railroad, people will railroad”. Which I take to mean that the technology and need must coincide with people being ready to accept the new idea. So how might that work with the public efforts toward a global, or at least a more global, economy?

When movement of ideas, people, and goods between countries was slow and relatively expensive we had highly independent nation states. As transportation of goods and people between countries became much less expensive the “separations” are much less important barriers between nation states. As we are witnessing in Europe, cultural, economic, and religious differences are breaking down and, albeit slowly, a more homogeneous society is being created.

The worlds financial markets are now so closely interlinked that China, which limits it’s citizens contact with foreign visitors and news sources, is feeling the impact of the financial troubles in the United States.

Have we reached a point where we are being forced by events to let go of an outmoded idea of who “we” are? Is the current terrorism the last violent gasps of a world view that no longer accurately represents how countries interact with each other?

It seems that just to “do business” on a global scale, we will need to globalize some of the support functions, like finance. If banks in New York are financing a factory in India, that may drive a closer relationship between financial institutions in both countries that will drive more conformity in the banking laws. That in turn may drive changes in tariffs and visa regulations to allow easier movement for citizens of both countries. We already have closer financial and visitation practices between the US and Canada and the US and Mexico than anyone would have predicted even 30 years ago.

We have changed the character of the United States in my life time. I remember my shock and surprise in the early 50s when I first saw black and white restrooms and drinking fountains the Memphis, Tennessee. In 2008 we elected a president who is African American, that’s was unimaginable 50 years ago!

The reality is that manufacturing is now global, with components and products made in locations around the world dictated by cost and ability. White collar jobs depend on the availability of trained professionals and their salaries not on the workers geographic location. Nearly instant audio and video communication is allowing people anywhere in the world to meet and work without actually being in the same room.

Like Pandora’s box, once this is “out of the box” it can never be put back in! It seems that we are all ready a global society but our institutions and thinking must catch up.