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Governments all over the world are faced with challenges not seen since 1929: Dealing with a global depression whose dimensions match or even exceed those of 1929-39 (Eichengreen and O’Rourke, 2009; see Appendix), without creating mountains of debt that will threaten stability when the crisis ends and the upturn begins.
One of the fiercest dilemmas concerns taxation. As tax revenues plummet in the face of economic decline, governments debate whether to cut taxes (to stimulate spending) or raise taxes (to reduce ballooning deficits). Liberals like Nobel Laureate Paul Krugman claim:
“…people who think fiscal expansion today is bad for future generations have got it exactly wrong. The best course of action both for today’s workers and for their children is to do whatever it takes to get this economy on the road to recovery.”*
Meanwhile, national governments like that of Ireland encounter a different reality:
“…Asserting Ireland must restore international confidence in its debt-laden economy, Finance Minister Brian Lenihan announced an emergency budget plan [that included] higher taxes and lower government spending to bring the deficit in line.” **
Are there basic principles, anchored in those of management, that can guide policymakers as they grapple with hugely difficult problems (unemployment, deflation, bankruptcy, rescue of failed firms and banks)?
As a beginning to this discussion, here are 10 principles that serve as policy criteria. For each policy plan or program, each criterion should be evaluated and quantified. Weights should be provided, so that alternate programs can be compared and evaluated, and trade-offs optimized. A methodology developed at Harvard Business Review by Prof. Howard Raiffa (“even swaps”) can also be employed to this end. (Raiffa, 1998).
1. Speed. The rate at which jobs are being lost in the U.S., Europe and Asia is alarming. Programs should be evaluated on the speed with which they begin to impact jobs, income and the economy in general. For example, many infrastructure programs seem attractive but require long months to be felt, owing to requirements of planning, and authorization.
2. Employment. The global financial crisis became a global economic crisis, and now a global employment crisis, with some 250 m. unemployed expected worldwide by the end of 2009. Programs must be evaluated primarily with regard to their impact on jobs — each job created results in several more, owing to indirect ‘multiplier’ effects.
3. Asset yield: Most programs increase budget deficits, already large and alarming. This can be justified, if the program creates ‘yielding assets’ that will generate income in future that can pay for debt redemption.
4. Periphery: In the global depression, proportionally more jobs are lost in outlying areas than in cities. Programs should be judged in part on their impact on the periphery. A common failing of many programs is that they tend to benefit primarily cities and urban areas.
5. Fairness and distribution: A related criterion is that of fairness — How does the program impact lower and middle income groups, and does it appreciably benefit them and improve their wellbeing? This criterion is often crucial in building public support for such programs.
6. Experimentation and Trial & Error: A well-known management innovation principle states: Fail often to succeed faster. Innovative fiscal-stimulus experiments should be attempted, because there is no proven theory that can state in advance with certainty which programs will succeed (even though the 10 principles stated here are a rudimentary attempt to shape such a theory). Governments, as well as scientists, can and should experiment.
7. Efficiency: Programs should be evaluated on cost-benefit criteria — direct and indirect costs, relative to direct and indirect benefits, including hidden ones.
8. Long-run competitiveness: The correlation between GDP per capita and competitiveness in global markets, as measured by the IMD, is 0.6; this means that programs should in part be evaluated according to their contribution to making the nation more globally competitive, toward the day that global markets and trade recover and create new opportunities.
9. Legislative smoothness: Programs generally are part of a political process, involving governments, ministries and legislatures. Some programs are politically divisive and stall as a result. Others are inherently part of a wide consensus. This criterion is an aspect of the first criterion, speed, but is important enough to stand on its own.
10. Perception and public comprehension: Programs require public understanding and support in order to fully succeed. How will the public perceive the program? How will it be marketed, motivated and ‘sold’? When public money is used, and when taxpayers’ funds are increasingly scarce and highly sensitive, there is growing importance attached to how ordinary people perceive programs and whether they will support them.
Fiscal stimulus packages should be competitive in nature. Ministries should be asked to propose a package of such proposals. Each proposal should include a quantitative evaluation of each of the 10 criteria. The resulting fiscal stimulus package should comprise a winning set of the proposals from various ministries, evaluating objectively according to the 10 criteria, and perhaps using ‘even swap’ methodology in the evaluation. There should always be ‘second-place’ programs in readiness, in the event that the global downturn proves longer and deeper than anticipated. There should be an ongoing process for evaluating existing programs, and a continual flexible process for monitoring them.
Barry Eichengreen and Kevin O’Rourke, “A Tale of Two Depressions”, www.voxeu.org, 2009.
John Hammond, Ralph Keeney and Howard Raiffa. “Even Swaps: A Rational Method for Making Trade-Offs”, Harvard Business Review, 1998.
Appendix: “It’s A Depression, All Right”
Fig. 1. Global Industrial Production, Fig. 2. Global Stock Prices, Months
Months After Peak: 1929 and 2008 After Peak: 1929 and 2008
(Peak = 100) (Peak = 100)
Fig. 3. World Trade, Months
After Peak: 1929 and 2008
(Peak = 100)
Source: Eichengreen and O’Rourke, 2009.
*International Herald Tribune, Dec. 2, 2008, p. 9
**”Income taxes would rise under Irish budget plan”, Eamon Quinn, International Herald Tribune, April 8, 2009, p. 15
It is now official.
Berkeley economist Barry Eichengreen, a scholar who studies the Great Depression of the 1930’s, has shown that the current global downturn is steeper (measured from the peak in April 2008) than the decline during 1929-33, in terms of global industrial production, global stock prices and global trade. (See the graph below).
“It’s a Depression, all right,” he says.
Now that this ‘baby’ has been given its true name, innovators must ask: What type of innovations are appropriate for such desperate times?
Here are a few ideas:
* Don’t kill innovation to survive — when the upturn arrives it may prove fatal. McKinsey Global Institute shows that most companies are wise enough to know this — R&D spending has for the most part not been slashed.
* Rethink every single one of your business assumptions, including ones that are sacred, because during and after a Depression, all the rules of the game change, sometimes radically.
* Have a Depression mindset. Think about what people need during a Depression. In the 1930’s, movies boomed — it took people’s minds off their troubles. What will boom during the 2009-12 period? How can you amuse and divert and relax people?
* Value for money is crucial. Everyone is more price sensitive, even the billionaires. Wal-Mart and McDonald’s are doing booming business for that reason. Starbucks is not. Create value for money and make super-certain your clients realize it.
* Branding’s importance grows in a Depression. There is so much uncertainty, people seek certainty in what they buy, through brands. Build and strengthen your brand, or create one.
* Be ready to turn on a dime. This Depression may last a long time. But when it stops, the inflection point will be rapid. Be ready for a rapid change in mindset — people will welcome a return of the good times and their preferences, behavior and wants will change accordingly.
What is your profession?
Some can answer that question with pride — nurse, doctor, social worker, manager, psychologist.
Me? I’m a doctor — but not the kind that helps people. In fact, the opposite. Because, I am an economist with a Ph.D. And my profession has done the world enormous damage.
We (a majority of us) sold the world the criminally-outrageous notion that unregulated free markets makes the world wealthy. True, a handful of greedy persons in the banking and finance industry distorted and misused this principle for their own purposes. But the legitimacy for their actions, and the policies politicians embraced, came from the once-respected discipline of economics. Most of the world bought the free-market notion, and the resulting global crisis is like a fierce storm, spreading from America to all parts of the world, including Asia. IMF economists regularly adjust their global forecast downward, without embarrassment, scrapping what they predicted just weeks earlier.
But the real failure of economic science — some economics departments actually call themselves that, or did once — is not its bankrupt predictions, nor its catastrophic free-market ideology. It is the utter inability of economics to find innovative policies to lead the world out of the black hole economics has led it into.
Last year Newsweek ran an article presenting ‘crisis policy’ ideas from each of seven Nobel laureates in Economics. I found almost nothing truly creative in any of them. None of them addressed one core issue: The collapse of trust and confidence, in banks, financial markets and in one another. None of them even began to grapple with the other core issue: Though the supply of money and credit has grown rapidly, owing to Central Banks, the money is stagnating in bank accounts and is doing no-one any good, as a result.
So, when Business Week asks, in its latest issue, “Hey, Economics Geniuses! What Happened?” — I feel both anger and agreement: Anger at my profession, agreement with the mocking tone of the article.
“Seven decades after the Depression,” Economics Editor Peter Coy writes (himself, an economist), “economists still haven’t reached consensus on its lessons. The debate has only intensified in recent weeks.” Or, as George Bernard Shaw once said, line up all the economists in the world, in a straight line, and they still will not reach a conclusion.
Among Coy’s not-so-coy claims about economists, all of which are true:
• “They claim a precision that neither their raw material nor their skill warrants”;
• “Too many assume that people behave like the mythical economic man who is hyperrational and omniscient”.
And, Coy should have added,
• Economists crunch numbers in their offices, believing in their truth, rather than talk to people in offices, factories and shopping malls, which is where the real truth lies.
For 40 years, I committed all the above sins, and only now, after a decade of working with companies and managers in several countries, do I realize how little I really understood about how the world works, and how flawed were the theories I taught.
Keynes built a powerful theory that showed the world how to cure a Depression. He published it in 1936, in the midst of the Depression. But by the time it was understood and applied, the Depression was long over. I believe this was a bitter disappointment for him.
“Perhaps out of the (current) failure (of economics) will emerge a better macroeconomics profession,” Coy writes.
Sure. But by then, it will be too late for the new theories to do any good, to help anybody, to reduce unemployment or limit suffering, in the current crisis; a cynic might even claim that perhaps, those theories will simply sow the seeds of the next crisis.
Under pressure from the Obama administration, General Motors’ Board of Directors fired current CEO Rick Wagoner (who has been working for $1 a year) and appointed Fritz Henderson, a finance expert who made his career mainly at GM’s bank, General Motors Acceptance Corp. (GMAC), and who specialized in restructuring and job cuts. Henderson’s pay will be $1.2 m. a year. Previously he was GM’s CFO and COO.
His first statement was to say that GM might actually welcome bankruptcy proceedings.
For 65 years, GM was the world’s greatest, largest industrial corporation. Founded by management genius Alfred P. Sloan, who put together a random collection of car makers (Cadillac, Chevrolet, Pontiac, Buick, Oldsmobile) in the 1920’s, GM took on and defeated the incumbent, Ford, with beautiful cars, powerful engines, closed bodies and colors other than black.
For years GM was run by managers who loved, lived, ate and slept automobiles. Then it fell into the hands of the bean-counters. Its fate was inevitable. When companies are run by those who manage by P&L, rather than by design, quality, speed, horsepower and engines — in fact, when any company is run by those focused on numbers rather than on product — it deserves bankruptcy.
What is especially infuriating is that GM could have enjoyed a far better fate*. Some 24 years ago, on Jan. 8, 1985, then-GM head Roger Smith announced the founding of GM’s Saturn division. The goal? “Saturn is the key to GM’s long-term competitiveness, survival and success,” Smith said. Its mission: “to develop and produce an American-made small car that will be fully competitive with the best of the imports … [and] affirm that American ingenuity, American technology and American productivity can once again be the model and the inspiration for the rest of the world.” It was the same Roger Smith who “diversified” GM into robotics, space satellites, and data processing, buying Ross Perot’s EDS and Hughes Aircraft. Roger loved cars so much he shifted GM away from them. He and his predecessors turned GM from a visionary car company into a bank. They invested in everything but cars.
For years, GM made no money on making and selling cars, because its cars were in fact dowdy and terrible, in looks, performance and repair records, relative to Japanese imports. Instead, GM made all its money by lending money at 11 % to impatient car buyers, who wanted to drive home with their new car and yielded to “just sign here on the dotted line” to GM car loan peddlers. GMAC borrowed money at low interest, and lent it at high interest. This was GM’s real business. When the global financial crisis, rising interest rates and unfunded pension debt and health care debt lowered GMAC’s credit rating, boosting its interest costs, GM’s fate was sealed.
Saturn was to emulate Japanese quality, excellence and productivity. And it succeeded. GM’s Saturn division made great, dependable cars that rarely needed repair. It was GM’s first new brand in 70 years. People loved them. Tens of thousands of Saturn owners used their vacation days and flocked to Saturn’s plant in Spring Hill, Tennessee, 45 miles south of Nashville, to celebrate Saturn Homecoming. Ever hear of Chevrolet owners doing that? Paul Ingrasia reports:
In June 1994 more than 40,000 Saturn owners and their families trekked to Spring Hill for the first Saturn Homecoming. It was the sort of “cult car” gathering usually attended by owners of 385-horsepower Corvettes, not by people who had purchased 85-horsepower econocars. The Saturn owners were feted with factory tours, country-music concerts and barbecues with the people who actually designed and built their cars. After selling fewer than 75,000 cars in 1991, its first full year, Saturn sold more than 286,000 in 1995, and topped the respected J.D. Power Customer Satisfaction Survey.
In order to make Saturn innovative and different, GM built a fireproof impenetrable Chinese Wall between it and the other divisions. The reason? GM’s bean-counting anti-innovation dull-design bureaucracy would otherwise kill Saturn. Its cost-reduction standardization made Buicks look like Chevies, or Pontiacs, and its premium Cadillac began to look like a Hyundai. Of course Saturn had to be insulated.
Problem was, if GM could not infect Saturn, neither could Saturn teach GM to make beautiful durable cars. That Chinese Wall vaccinated Saturn from bean-counting infection, but also vaccinated GM from Saturn’s love of quality cars. Saturn is now being treated like the same toxic sub-prime mortgage assets GMAC bought.
“This is a real tragedy,” says Prof. Saul Rubinstein of the School of Management and Labor Relations at Rutgers University, who coauthored a book on Saturn. The lesson for GM and its American rivals now struggling to stay in business, he says, is that when they launch daring innovations, they need the will and a way to ensure that those ideas don’t get drowned by the corporate mainstream.
General Motors deserves bankruptcy. The CEO’s who led it there — Roger Smith, Rick Wagoner, and now Fritz Henderson — deserve infamy. They earned tens of millions of dollars, in return for ruining a great company. They betrayed the memory of Alfred P. Sloan. They betrayed the trust of many thousands of hard-working car workers, who worked with pride and honor. They do not deserve a cent of American taxpayers’ bailout money. They taught the world, and generations of MBA students, a key lesson.
If you do not love your product, if you do not innovate, if you do not manage your product and instead manage your short-term bottom line, if you cut costs instead of creating value, you may pretend you are maximizing shareholder value, but what you are doing in fact is destroying long-term shareholder value and destroying jobs. Your behavior is not only bad management, it is morally wrong. You give management everywhere a bad name, a bad taste and a bad smell.
There is no room for Saturn in GM’s future — because GM has no future at all, thanks to those who ruined a great company.
*What follows is based in part on: Saturn was Supposed To Save GM, by Paul Ingrassia, NEWSWEEK, April 13, 2009.
Last Wednesday, India’s Tata Motors delivered its revolutionary Nano car to journalists for a test drive, in Pune, India. According to Reuters journalist Nick Kurczewski, “the tiny Indian-built four-door manages to combine thrift, functionality and, shockingly, even a measure of driving enjoyment.” All this, for $2,000, or less than the cost of a stereo system on a Cadillac.
But how? What is the formula for an innovation revolution?
First, vision. Tata Chairman Ratan N. Tata dreamed of a car affordable by Indian families, with a $2,000 price tag. Second, a great team of engineers began to work, to make it happen. And third — subtraction. Take away unnecessary features that do not contribute value, but only add to cost.
The Nano has tiny dimensions. It is two feet shorter than a Mini Cooper. Its body and chassis are steel, while the bumpers are plastic. The round little car looks conventional, a bit like a turtle. Its aluminum engine has 32 horsepower, 624 cc’s, and two cylinders and is rear mounted. It goes from zero to 80 km. per hour in 16.4 seconds — not a Lamborghini, but not bad either. The Nano has a turning radius of 13 feet (4 meters) and can turn 360 degrees in its own shadow. You can fit four people into it, and even five in a pinch. The Nano weighs only 600 kgs. (about 1,300 pounds).
Exactly a century ago, Henry Ford began building Model T’s. After making 15 million of them, the price fell to (in 1927 dollars) $500. I wonder if Tata is aware that the market launch of the Nano came 100 years after Henry Ford launched the Second Industrial Revolution. I wonder if the short-sighted credit raters at Standard & Poor — the same folks who, with Moody’s, brought you the subprime mortgage crisis — who downgraded Tata to B+ (below investment grade) know what pistons or distributors or engines are. I wonder if the overpaid folks who run Ford, GM and Chrysler are just a tad envious of the visionary Mr. Tata.
An article in the Times of London On-Line website by Emily Ford provides ten key rules for fostering innovation in the workplace — not just in high-tech startups. In these difficult times, challenging workers at all levels to come up with great new ideas can boost morale and boost revenues too.
1. Make innovation a top priority. Ford points out that “companies that generate 80% of their revenue from new products typically double their market capitalization over a five-year period.” In the global downturn, a common reaction is to hide in the basement and wait for the storm to pass. A pro-active approach — for instance, asking, “what will be our new hit products when the upturn begins and consumers resume spending?” — is far better.
2. Take risks and embrace failure. The global downturn has made everyone — managers, investors, savers, ordinary people — far more risk averse. To innovate, it must be recognized that failure is possible, or even likely. Celebrate failure, as a worthy attempt to succeed, in the same way you celebrate success. Ford cites an expert: “You have to give people the freedom to fail and to fail fast… that’s a real challenge in a risk-averse culture.”
3. Keep your people’s eyes on the future. Many organizations face a bleak future, as revenues collapse and layoffs mount. An innovation focus can fight this doom-loop spiral. Ford cites the following finding: “A study of internet banking in the United States looked at chief executives’ letters to shareholders between 1991 and 1995. Those with the highest percentage of sentences about the future introduced new technology the fastest.”
4. Foster creativity at all levels. Not all great ideas occur only to senior managers. Often, those who work at the ‘coal face’ (directly serving, facing or selling to customers) are best aware of changing market conditions and hence know how best to react to them. Challenge everyone in the organization to think hard about what they do and how they do it, and how it might be done better and differently.
5. Break the rules. Innovation is breaking the rules. Challenge your workers to first state what the ‘rules of the game’ are, for your industry (nearly all of these are unwritten and unspoken assumptions), and then, second, find ways to break them, to create value for customers. This does not imply, of course, breaking laws or ethical principles. We have had enough examples of that kind of behavior to last us several centuries.
6. Collaborate across boundaries. Innovation often involves cross-boundary thinking — linking a variety of disciplines. Get your accountants, marketers, salesmen, secretaries, everyone to talk to engineers, technicians — break company boundaries, in order to build new ideas.
7. Think global. Global geopolitics are rapidly changing in this time of crisis. Innovation may involve rethinking the geographies of your business. Where can we do business, profitably, that at present we do not?
8. Act fast and keep refining. “Launch things early then get feedback,” the head of Google UK says. Or, as Guy Kawasaki has said, controversially, “ship, then test!”. You never know if an innovation will work, until you try it on a customer. Find clients willing to suffer a bit in order to try something really new.
9. Cannibalise your own products. Use innovation to destroy your own products. If you don’t, your competitors will. Intel, for instance, perfected this strategy, introducing the 286 and 386 microprocessors to replace previous versions well before competitors could do so. Sony failed at this. They delayed introducing MP3 players, in order not to hurt Walkman sales, and lost a huge market.
10. Be ambitious. Even in a massive downturn, set high goals. “When this crisis ends, our new ideas and new thinking will enable us to emerge as market leaders.” Innovation has always sought not to gain a point or two of market share, but to make competitors and their business models irrelevant, as Gary Hamel taught us. Use your innovative vision to scoop up great people laid off by companies who can see no future and therefore will not have one.
I wrote my March 1 blog about the Rocky Mountain News, a venerable 150-year-old newspaper that went bust. I suggested how it could have avoided bankruptcy, in the face of a 50 percent fall in advertising revenues. Later, I heard an expert note that subscribers to American newspapers fell from 60 million to 50 million in the past decade — but subscribers to Internet editions rose from about zero to 75 million! The newspaper industry faces bankruptcy — even though it has more clients, more subscribers! Why? Because like the music industry, it has failed to adapt to the changing times. It treated the Internet not as savior but as fierce foe. What a tragedy. And what a dumb mistake. But a small handful of newspaper managers seem to see the light.
Not far from Colorado, in the state of Washington, a newspaper understands the paradigm shift. It is the Seattle Post-Intelligencer. Here is what the International Herald Tribune wrote on March 17:
Seattle newspaper drops the ‘paper’
By William Yardley and Richard PérezPeña
Tuesday, March 17, 2009
SEATTLE: The Seattle Post-Intelligencer planned to produce its last printed edition Tuesday and become an Internet-only news source, Hearst Corp. said, making it by far the largest American newspaper to take that leap. But The P-I, as it is called, will resemble a local Huffington Post more than a traditional newspaper, with a news staff of about 20 people rather than the 165 it had, and a site with mostly commentary, advice and links to other news sites, along with some original reporting. Other newspapers have closed and many more are threatened. But the transition to an all-digital product for The P-I, announced Monday, will be especially closely watched in an industry that is fast losing revenue and is casting around for a new economic model.
And the way that The P-I is changing might hint at a path for future newspaper closings. To some extent, in shifting its business model, it will enter a new realm of competition. It will compete not just with the print-and-ink Times, but also with an established local news Web site, Crosscut.com, a much smaller nonprofit organization that focuses on the Northwest. The move shows how some newspapers, in the future, may not vanish but move the battle from print to the digital arena.
‘ Had Hearst not made this decision, the survival of The Times was unlikely,’’ said Jill Mackie, vice president for public affairs at The Times.
The P-I lost $14 million in 2008. Hearst announced in January that if it could not find a buyer, it would cease printing. Few people expected a buyer to emerge. Hearst hopes to capitalize on the healthy Web traffic The P-I already has — about 1.8 million unique visitors a month, according to Nielsen Online. It usually outranks the online readership of The Times, despite a smaller print circulation: 118,000 on weekdays last year, compared with 199,000 for The Times.
‘‘We clearly believe we are in a period of innovation and experimentation, and that’s what this new SeattlePI.com represents, said Steven R. Swartz, president of Hearst’s newspaper division. We think we’ll learn a lot, and we think the Seattle market, being so digitally focused, is a great place to try this.’’
David Brewster, the publisher of Crosscut, praised Hearst for creating new journalism, rather than completely shutting down The P-I. There’s definitely room, he said. Seattle will be quite a vital place.’’