The Right and Left Brain Blog

In 2007 I wrote:

Between the years 2001 and 2006, if you bought 100 shares each of the following large prestige leading companies : Coca-Cola, Citigroup, Dell, Exxon-Mobil, GM, GE, IBM, Disney, 3M,  Johnson & Johnson, Microsoft, Wal-Mart, Pfizer and Proctor & Gamble,  you would have invested about $50,000 and gained about $500.”

In contrast, if you invested equally a total of $50,000 in Cognizant, Ralph Lauren, Cheesecake Factory, Google, Hanes, Coach, VMware, Costco, Apple, and Amazon in 2002 or whenever they went public it would be worth about $ 200,000 or about a 30% annual return. The numbers today say you would have lost $12,000 in the large stocks and even in the market decline made $41,000 in the growth stocks.

Our financial experts, corporate leaders and government experts discuss the financial aspects of these results every day, but vastly underestimate other key impacts. In particular, they are ignoring the structural and competitive assumptions that are dooming these large companies.  The reality is the president of General Motors and a bunch of others deserve to get fired. As we are learning with the auto companies, forget the bailout money, bonus controversies, and regulation debates, etc. These companies need completely new structures and managements.

Why is this phenomenon so apparent when these large companies have so many resources to effectively compete? The obvious answer is that the economy and society are changing so quickly those major corporations lack the flexibility to respond and that:

Bigger is not Better.

I try look at the positive things that are happening in our country like Madoff going to jail, the market being up for a few days or CitiBank saying they may be profitable. However there are some really dumb things going on that I don’t understand.

• A few weeks ago, I wrote a blog about the 80-20 rule. This week Saks announces the following program: Saks Inc., which operates high-end retailer Saks Fifth Avenue, is on a campaign to get shoppers to pay full price again, working with designer brands to lower prices, boosting service at the stores and throwing more special events. It also hopes that stocking less of the items shoppers want will entice them to buy now. In other words, they are committed to having less of what the customer wants rather than figuring out people aren’t buying $1000 shoes and purses and that they should offer a little value.

• President Obama announced a new education plan to show how much change he can stimulate that focuses on teacher incentives and charter schools. However he completely ignored just expanding things that are a proven to work and don’t need new bureaucracies like Pre-K education, smaller class size and no student left behind.

• Everyone agreed last fall to reduce earmarks and then Democrats and Republicans passed a bill with over 9,000 earmarks. In addition, in order to avoid the criticism, they are reclassifying earmarks so they don’t show up as earmarks. That is simply not transparency.

• Employees at Goldman Sachs are complaining about the changes in traveling rules. They are now required to stay at The Embassy Suites instead of The Ritz-Carlton, according to an article in the March 12, Wall Street Journal. Hooray for Goldman and why aren’t these spoiled employees getting it.

What’s your take? Why is the world so topsy turvy right now?

Many operations experts have long promoted that 80% of sales are with 20% of your products. Yet, suppliers continue to proliferate styles, colors, sizes, models and features to presumably serve more customers and provide more features. There is even a book that promotes the concept of The Long Tail, which explains a theory that the internet provides a great opportunity to offer consumers almost unlimited variety and flexibility.

The flexibility rule is a myth. We are nearly drowning in a sea of choice, and it’s killing us and the economy.

The 80-20 rule rocks in business, marketing and our personal lives. A Harvard Business Review article analyzed numerous business examples and found that virtually all products seldom increased profits by increasing offerings with little real impact. We waste time, money, inventory dollars and frequently add confusion by adding complexity. Nowhere is this more evident than the opportunity to custom build a computer. You have to make 10-15 decisions with 2-6 options and usually have no clue what you are answering.

It’s not just computers. This tough economy offers a great opportunity to reduce proliferation of products that just aren’t producing. The selection of brands, products and colors in cosmetics is simply nuts and confuses the customer more than it helps. It took crises for GM to realize Pontiac sales have been declining for over 20 years and should be eliminated. However, the auto industry has still not figured out that it doesn’t need all the models, companies or dealers because it is easier to ask for government money than face the reality of making the tough decisions. Have we really lost anything in the last few months without the endless proliferation of credit card offerings that no one needed? No one wants to admit that much of the success of Wal-Mart is eliminating thousands of inefficient retailers.

The rule even applies to government. Is more or less regulation really the issue? In contrast, it may be increasing the effectiveness and integration of the regulations we have. We added Sarbanes-Oxley in accounting, which costs billions of dollars in fees and clearly did nothing to prevent the recent financial fiascos. Imagine the savings of consolidating some of the local, county, township and state government activities rather than spending more money and more taxes.

Keep reading to learn how we can simplify the process.

We continue to hear dreadful news about the economy, jobs, housing, and the auto industry and the need for change. While there is some hopeful news about the stimulus package, good deeds like the U.S. Airways miracle and continued profitability of some strong companies, there is a feeling that our country, organizations, and individuals are not responding enough.

I argue that we continue to discuss legal, political and economic solutions rather than the deep rooted philosophical issues. This is evidenced by some of the following:

• Executives are still into excess rather than change. The President and the press had to embarrass Citi into canceling the purchase of a $50 million plane and the President of Merrill Lynch remodeled his office for $1 million while the company was imploding. What is worse is they try to justify these abuses and lay workers off rather than understand the realities and needs.

• We lack a real understanding of the problems and the impact of potential solutions. For example, while there is lots of talk about cutbacks, there is little about lending, investment or innovation. For example, if every American household went out and spent an extra $500, it would generate over $50 billion of new spending, which gets multiplied throughout the economy and creates stronger companies and less unemployment.

• We tolerate the lack of respect by people like the Governors of New York and Illinois in making Senatorial appointments a mockery. This is exasperated by the press, who loves the news opportunity, rather than being embarrassed to support this trash. As an example, the press was rampant with totally unsubstantiated stories about Caroline Kennedy’s potential affairs.

• Everyone is disgusted with health care and it isn’t just money. Doctors hate the bureaucracy, patients hate being ignored, misinformed or not informed at all, and hospitals just seem lost in terms of keeping costs down and providing service. In the meantime, there seem to be no goals to improve efficiency, service and prevention, which could dramatically improve the whole system.

• Finally, we have an insane culture that creates circumstances where even kids’ sports coaches allow excess training rules where even one athlete dies or run up the score to 100-0 against a basketball team with only 8 players from a school with kids who all had some disability.

What we need are some drastic and quick philosophical and psychological changes:

• In our corporate, political, and individual decisions, we need to consider the human and cultural impacts of our society. The U.S. Airways rescue is an example of what is needed. It was successful mainly because people were trained, did their jobs, and recognized the roles of the team. They also communicated among jobs, agencies and passengers to focus on getting the rescue done. Communication and teamwork could go a long way in getting things done better.

• We need to rebel and change what we know is wrong. Don’t support companies that don’t practice constructive behavior. Repudiate the people who are raping our society and glorify all the great examples in organizations, groups and the country.

• On a personal level, fully analyze what needs to change and how it can be done. There are lots of ways to save money, be healthier, accept some realities of a less affluent society and be a better citizen, friend and family member.

I will end with a personal example of how we can change. We bought our family a Wii Fit for the holidays. I showed up as overweight and my 7 year old granddaughter offered to help me lose weight. Unfortunately one of her tactics was to do my exercises for me. However the example illustrates key components of any change process: Recognition, goal setting, action and support.

In the fast few days I have been besieged by bright, exciting people being really stressed out and somewhat paranoid about everything. They are worried about being laid off, money, the future, etc. Their bosses seem to be relentless critics and every comment is intercepted as a threat. They are in panic over adjusting their financial lifestyle. Cooperation with co-workers is at least perceived to being replaced by every man for himself. The most interesting common feeling is “I am extending myself for everyone and getting nothing in return.”

While many of these feelings may be real, they are simply not productive. We need a balance between reality, paranoia and action and positive thinking. Some suggestions for creating a better feeling are as follows:

• The easiest and most positive things we can do to create a positive culture is to say thank you, care about people and be supportive with praise and encouragement . Why do some of the same managers who are supportive with their kids and family go to work and just spend the whole day criticizing everything?

• We need to encourage open communication, realism, and problem solving. Assessing the situation, having discussions with bosses, having discussions with outside and inside colleagues can all be useful.

• Develop some small positive steps. This may require making a decision to fight for your current position or simply look for a new job. It definitely requires a new perspective and not doing anything.

In summary, we need to separate the reality from the paranoia. Many perceptions are simply a function of the times. One of the best lessons I learned about this was when I was 10 years old going to school with my father and Uncle Harry.

My mother would always complain to my father at breakfast that his tie was dirty or his shirt didn’t match or something. Every day, whatever my mother told my father, he would criticize my Uncle Harry while driving me to school. Uncle Harry would then be upset about what in fact was a random comment applied to him.

I found the same thing happens in our lives. Someone is having a bad day about work, their personal lives or home and it just filters down and across the organization for the whole day. How often do we say, “watch out for the boss, he is in a mean mood,” and then get personally upset when we are part of a more general attack. Try both understanding the comments and trying to be a little positive in this stressful period.

There is a term in economics that many of us learned but everyone virtually forget in recent years. Ignoring this term is responsible for causing much of the current crises. The term is “ceteris paribus.” If you ever took an economics course these words are in every course and spoken in the first week or so. After those words you will see problems, lectures and formulas with all kinds of complex and impressive analytical tools that ignore them.

“Ceteris parabis” means all things being equal. In other words, this phrase becomes an excuse for all the assumptions that the formulas etc. ignore or can’t analyze if the results turn out incorrect. These include political change, social conditions, weather, other changes, scientific accomplishments etc. that may have more impact on outcomes than the variables that the extensive models analyze “ad nauseum.” For example, think of the predicative uselessness of economic or political models before 9/11 or the Iraq war.

Nowhere were wrong assumptions more apparent than in the results of the housing boom in 2000-2006.

• Home owners got cheap homes with low interest.
• Rules such as face-to-face meetings with lenders and buyers and appraisals were reduced.
• Builders got to build homes, employ people and sell the homes profitably.
• Banks got to lend money with low interest and earn significant fees.
• Traders were able to bundle the mortgages and earn more fees and interest.
• The government liked the economic growth and continued to foster and guarantee cheap loans.
• Housing values would continue to increase.
• Cheaper interest, lower down payments, lower standards, inflated housing starts etc. all followed the belief that housing prices would not decline.
• Everyone was a winner and seemed to think it would last forever.

What happened? There were two critical assumptions that were ignored in the housing mess.

• Individuals were allowed to pursue individual bonuses and commissions without regard to risk or organizational goals. With the opportunity to make millions based on individual performances, the financial executives acted normally in pursuing excess risk. What was wrong was that their organizations and financial regulators allowed them to ignore long-term risk and organizational goals.

• The second mistake was simply ignoring information and risk. Everyone had information that credit requirements became too lax and that all of the growth was based on the assumption that housing prices and demand would never reduce. In addition, as the securities were packaged and retarded, the oversight became less and less. Finally , any analysis of housing prices showed that an illogical bubble occurred that was contrary to long term trends or supply and demand.

The net result was that institutions like Lehman Brothers, Merrill Lynch and Bear Stearns no longer exist and many others are severely impacted. However, simply following normal financial procedures could have avoided much of the mess.

If you love what you do, you’ll always do what you love. And if you’re doing what you love, you’re going to become very good at it. And this is a country that rewards excellence.
– Billy Joel, Syracuse University commencement speech, May 2006

One of the biggest contradictions in our current economic crisis is the need for survival versus the need for innovation, entrepreneurship, new structures and excitement about our organizations. Unfortunately many of the survival tactics are drowning the element that can produce real change: Passion.

Change or passion requires energy, personal commitment, ignoring barriers, and confidence of individuals that exemplify passion. Organizations need the confidence and curiousness of toddlers growing up to ignore obstacles, develop new exciting methods and believe that anything can be possible. Unfortunately our environment is fostering the exact opposite culture:

• First is the fear of failure, layoffs, job insecurity and rumors. Because organizations refuse to develop realistic plans and execute them, more time is spent lamenting the problems than developing solutions.

• Second, outsiders are brought in to do the dirty work or to save face for Boards, governments, banks, investment bankers or other overseeing structures. Does it really make sense to spend millions of dollars on consultants who have no clue about a business to determine who will be laid off? Why not tell the organization the truth, which they know anyway and let them develop plans to save their companies, departments and jobs.

• We ignore or hide what we know. In general, old strategies are simply warmed up rather than really encouraging new solutions or structures.

• For the most part, the same management and Boards that caused the problems take responsibility for the changes and retain their pay structure while firing the firing the people who only execute.

• We ignore the reality that passion and innovation requires a deviation from the norm, which can become difficult to understand and accept. It requires an acceptance of new methods, processes and ideas.

• Innovation also requires a focus that may leave some other requirements unattended. Thus, it frequently requires tolerance that that the end justifies the means. The key to achieving tolerance to overcome these barriers is confidence, which is currently being undermined with oversight, fear and uncertainty.

• Innovation and change also require support and success to breed success with their energy, openness, and resources to succeed. However, banks and other parties seem to be demanding immediate solutions and change plans more than the weather.

In summary, what passion and innovation require as Emerson says is “to believe your own thought, to believe that what is true for you in your private heart is true for all men - that is genius. Organizations like Wegmans, Wal-Mart and Google have are a total commitment that creates the passion. They worry more about achieving a total result and impact than developing and enforcing rules or creating rigid structures.