The Right and Left Brain Blog

The recent economic events ignore the complete obsolescence of our corporate models. Nowhere was this more evident than in the recent saga of the auto companies. Their original performance in front of Congress was insulting. However, even their second performance ignored when they will make money, how they will really change and what concessions they need from all constituents.

However this is a symptom of many big companies and not just the auto industry. Financial, furniture, retail, and conglomerates are all examples of entire industries that have simply ignored market realities and provided no returns for investors over the past 6-8 years. For example, here are some key realities that they refuse to address head on:

• The presumed advantages of bigness, such as economies of scale, spreading expertise, marketing synergies, etc. have simply shown little evidence of success in the last few years.

• Their tunnel vision. Organizational constraints ignore emerging technologies and opportunities.

• They lack the flexibility to respond to the needs of the project rather than using outdated solutions to new problems.

• The net disgrace is Boards of Directors continue to pay hundreds of millions of dollars and in salaries and bonuses to executives who have produced unacceptable results for shareholders, consumers and employees.

• Companies refuse to sell or liquidate divisions or product lines that have little long term prospect of success

• At the same time they are loathe to invest in long term needs that will adversely affect this quarters profits.

• In many cases, consulting firms’ and investment bankers’ advice about synergy and economies of scale has just been wrong.

• Companies are still following obsolete strategies such as product proliferation, extensions, etc., which are simply obsolete in a stagnant economy.

Most important, these companies have failed to realize that the rapid changes and crises of the past few years from 9/11, to Google, to then internet, to the emergence of China, to the recent financial recession are here to stay rather than being once in a lifetime events.

The net result of these issues is that many organizations are incapable of creating environments that support the qualities necessary to succeed in today’s changing and complex marketplace. In particular, professional cultures and decision makers need to replace hierarchies, which are the cornerstone of size.

Organizations are frequently focused on control, minimizing risk and treating everyone equally. Edward Demming is quoted in a great line about leadership: “It is the ability to drive fear out of the organization so that employees will feel comfortable to make decisions on their own.” Large organizations cannot focus on maximizing the energy, skills and motivation of its employees.

If you aren’t part of the solution in dealing with the recession, you are part of the problem.

This old 60’s phrase is relevant in many organizations’ reactions to the economic crisis, which is affecting most organizations today. While everyone acknowledges the recession and is worried about it, there is a lot more discussion than action. Most of the response is “it will pass soon; there is nothing we can do,” traditional responses such as cost or position reductions, etc. What is needed is a drastic rethinking of organizations’ business and financial models. Some suggestions are as follows:

• The first need is to recognize the problems and that they will be longer rather than shorter. The almost weekly changes in forecasts and plans in many organizations are evidence of the denial. A more important reality is that in the next year or less some of our competitors, suppliers and customers will probably not be in business and we need to take action to ensure it is not us.

• Our prior growth and marketing models have typically been built on differentiation and adding product extensions. This is being replaced in the short term with an almost reverse psychology of price, sale, unbranded products, Wal-Mart etc. being considered chic.

• In addition, suppliers and customers don’t need all the proliferation of products that don’t sell, take up inventory and cause excess product development expense. Rather we need to focus on winners and ensure survival rather than trying to find marginal opportunities in a difficult environment.

• We need to review entire processes and structures rather than just making marginal cuts. Unproductive product lines should be dropped, efforts to simplify and shorten operations and lead times need to be evaluated.

• We need to understand the uncertainty and fears of our organizations and be more open. In terms of communicating changes, the need-to-know approach is simply outdated by communication, gossip, interpretations etc.

• Decision making processes need to be reconsidered. The old authority or “we have always done it this way” don’t work anymore. Organizations need to use more expertise, collaboration, planning and fact gathering in their decision making.

In short it is a new world and organizations need to accept the current environment as a test for the future. Flexibility, speed, and innovation will replace yesterday’s methods.

The auto industry crisis is an example of decision making with little understanding, goals or analysis. On one hand, advocates argue that the government needs to bail out the industry in order to save jobs and related companies, and prevent more economic crises. Critics claim the companies have no plan; they will only need more money in a year or so and are not dealing with long term solutions. However, few participants are looking at the impact of various proposed solutions.

For example, American companies’ costs and dealer networks are both expensive and non-competitive. The companies have failed to develop plans to make small cars competitive while relying on gas guzzlers like big vans for their profits. They have models and dealer structures that are unwieldy and out of touch with today’s realities.

We probably need some kind of Federal bailout to keep the companies solvent and avoid bankruptcy, which seems to have more negative consequences than the country wants to risk. However, why not consider some of the following suggestions to provide long term solutions and ensure that the companies and its employees make a commitment to fix the problems:

• Ask all employees (union and management) to take a 10 % pay cut to make the companies more competitive and save lots of cash. Set up a pool to give that savings in options at 50% above the current stock price. It thus provides incentive systems for employees to earn back the lost pay.

• Eliminate unprofitable cars and marketing with little hope. In particular eliminate gas guzzlers to provide investment for more efficient cars.

• Reduce dealer incentives costs and force dealers to be competitive. This will result in an inevitable loss of 20-40% of the dealers.

• These changes should also reduce costs, enable car companies to lower prices and increase sales.

• Have the companies focus on energy efficient cars to provide long term social gains. This can be simply accomplished by expanding the taxes on cars with low gas mileage.

Discussing these or other programs forces the companies to develop long term solutions. It also forces them to take responsibility for their futures rather than just ask the Federal Government for handouts. Finally it changes the argument from political philosophy to developing integrated solutions.