The Effects of Mismanagement!

Whenever I think of mismanagement my mind goes to one of my last managers at the company I retired from. Not my last manager, Sharon, who was my favorite boss of all time, but to a previous one that really was a horrible manager. She was able to destroy the strongest management system at the facility, and replace it with a very weak one (with all due respect to those individuals who report to her now). At a larger scale, I will usually think about Enron, or maybe the big three automakers for their inability to see the future. But something I read this morning opened my eyes to just how important a balanced management strategy is in the long run. No manager is perfect and we will at times make dumb decisions in the short run, but in the long run, if the manager does not learn from the crucible of a bad decision, poor decisions are destined to destroy whatever the thing is that is being managed.

In the book The Statues That Walked the author describes the events that have shaped the island that was named Easter Island. It really is a fascinating story, and one that should be a lesson to all managers about how important management of resources really is. Easter Island is considered the most isolated location that is populated. It was first discover on Easter day in 1722. Thus its name Easter Island.

Scholars say that the island at is peak had a population of 10,000 to 15,000 people, but at its time of discovery its number of inhabitants was around 3,000. It current population is under 100 people. This 63 square mile island, which is lacking natural resources, was at one point in time, according to the current paradigm, heavily forested. “As the island’s population rose, the popular theory goes, it’s people cut down all trees for slash and burn farming and as rollers to transport statues.” These stone statues are made of up very big heads on little bodies that face away from the ocean, although there are a few that face toward the sea. The island is currently experiencing increased visitation due to the desire to research man’s destruction of an ecosystem. This belief states that Easter Island is an example of Ecocide, or “an image of what may lie ahead for us in our own future.”

The authors of The Statues That Walked actually propose a different theory on what happened. Hunt and Lipo propose that it wasn’t Ecocide that destroyed the island environmental balance, it was “the Polynesian rat, which stowed away on the boats of the first Polynesian settlers.” They go on to state that rat populations can double in 47 days. Thus, without know predators, and a great climate, a “ratpocalypse” could occur. With 2 or 3 million rats, whose favorite food was tree seeds and tree sprouts, deforestation could occur.

In either case though, instead of recognizing the critical nature of deforestation, the inhabitants of Easter Island allowed the ecosystem to be destroyed. Add to this slave raids that would occur occasionally, and you have the reason for the degradation of a paradise to what is today a study in Ecocide. This does not mean the humankind cannot cooperation with ecosystems. It is recognized that “People have done lots of environmentally destructive things, heaven knows. But there are a surprisingly few cases which societies have permanently laid waste to their own subsistence.” Easter Island just may be one of those events.

The question then is what can a manager learn from Easter Island? I think that the modern definition of sustainability is validated. When I first started studying management and leadership the term sustainability meant a business model that would create longevity. In other words, ensure that the company would be around for many years. Now the term sustainability has taken on a new meaning. Typically in my classes when we talk about longevity we look at three pillars of a successful business model. These pillars usually look at the economics of a company. In other words is our business profitable? The second pillar is the social pillar. In other words, how well does the company play with others in the sandbox. Is the company a good citizen, is the company giving back to society, etc. The social responsibility pillar is critical for the reputation of the company with consumers. The third pillar is environmental. How well is our business process treating the planet? Is the way we are making money harming or improving the environment?

The fact is, the modern manager needs to pay attention to all three of these areas of concern. If they don’t their businesses will become an Easter Island.

And that is my thought for the day!

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Why Are We So Angry?

The whole world is criticizing our government for the mishandling of the debt crisis. China slammed the U.S. yesterday about how our leaders could not come to an agreement about the debt ceiling (this is not surprising due to the fact that we owe them so much money). U.S. Corporations continue to report fantastic earnings, but we can’t lower our unemployment rate because these same business leaders aren’t hiring. The bottom line is due to mismanagement our country is in a mess. I don’t think I have seen it this bad in my lifetime.

Los Angeles is a city on a decline. It’s political leadership has taken it from a prosperous exciting place to be, to one where unemployment is stagnant at 11.4%. Current policies seem to be anti-business resulting in a reduction in the LA middle class. Sound familiar? The people in LA are angry, but so is everyone across the U.S. In an article in today’s Wall Street Journal (WSJ) Bernie Sanders describes Why Americans Are So Angry.

He begins by saying that the rich are getting richer. The effective tax rate for the rich is the lowest in modern history, while the tax rates for “nurses, teachers and firemen” are higher than some billionaires. Sanders states that “If Republicans have their way, the entire burden of deficit reduction will be placed on the elderly, sick, children, and working families.” On top of this, American Corporations, GE and Exxon, have been able use loopholes in the tax system to pay zero taxes.  Things are just not right.

I don’t think I am that much different than the rest of the people in the U.S. I want a government that is willing to make tough decisions when necessary. I want a government that is willing to debate and have an animated dialogue that will produce good decisions. I want several perspectives in government to ensure power is being dispersed and the disenfranchised have a voice. I want a political system based in free enterprise that supports innovation and high levels of employment. However, I want a system of governance that looks out for the less fortunate.

Capitalism is a great system for the distribution of goods and services, but it is a lousy system for the distribution of wealth. When FDR proposed his 2nd bill of rights the response from a couple of wealthy families in the U.S. was to approach General Butler with a proposal to overthrow FDR. The self-interest that Adam Smith said would guide the Capitalist system and allow everyone to have a better life can also lead to greed and exploitation.

I want an economic system that recognizes human shortcomings towards greed, and subsequently makes a choice to behave and provide for the people in this country. I do believe that efficiencies can be maintained if a market system is left alone, but I also believe in order for it to perform at high levels it needs to make the choices necessary to behave and take care of the people within the market system. If this occurs it will be left alone. Too bad market leaders haven’t been able to behave leading to anti-business legislation.

Some have said that America is in decline. I have been thinking about this quite a bit lately. So I Googled the length of time that ancient civilizations lasted. I actually found a study that looked at the ancient civilizations to determine was an average time fame was. The result was an average of 349.2 years, with a median time frame of 330 years.

Our country is not even 300 years old yet. After visiting Ireland this summer it became even more apparent that we are a young country. The fact is many of the characteristics of a declining civilization are in existence in the U.S., which will be a topic of a later blog.

The fact is we are in trouble. There is a huge dearth of leadership in the political realm, and our business leaders are filled with greed. We better make some different choices or we will end up a second class country with the BRICS looking at us going tsk, tsk, tsk, thinking about what could have been.

And that is my thought for the day!

Yeah, Dunkin’ Donuts

With so many bleak topics in today’s news it is exciting to come across something that is good for a changr. The Dunkin’ Donuts stock price rose 47%. There are a couple of reasons why investors are looking to Dunkin’ Donuts as an attractive investment. Although DD has a heavy debt load, they are taking the next six months to pay the debt down to a more reasonable level. DD is also planning on expanding its store base both in the US and abroad.

Realize that this is not just a donut shop. They also own Baskin-Robbins. They are also viewed as a serious threat to Starbucks on the  East coast. Who would think that DD is a threat to Starbucks? With 6,800 stores DD is about half the size of Starbucks. However DD franchises all of its stores while Starbucks licenses a good portion of theirs. This means the DD’s capital expenses are kept low with high operating margins.

If Dunkin’ Donuts gives Starbucks a run for its money who benefits? Obviously the DD investor will, but so will the consumer. Those of us that like coffee will be able to get a cheaper cup of coffee. when the consumer has a choice, quality of the choice will go up and the price will go down. That is basic economics.

So Dunkin’ Donuts grow baby grow. Starbucks needs someone to keep them humble and help us to get a decent price for a great up of coffee.

And that is my thought for the day!

Lessons From Norway

I’d like to take a break from our debt issue, even though I’d love to discuss the Iranian redistribution of wealth that was praised by the IMF, and discuss what managers can learn from the Norway tragedy. All of us are saddened by the horrible event that occurred in Norway. Our prayers go out to the families and nation impacted by this selfish and horrific situation.

In my management classes at Warner Pacific we always discuss the four functions of management. The four are planning, organizing, leading, and controlling. Every manager learns the importance of planning. This usually involves a discussion around strategic, tactical, and operational planning. In class we will discuss how at  all levels of planning there is a need to  review contingencies and ensure a minimization of what is called the escalation of commitment. This means that managers have created a poor plan, but continue to dump resources at the plan to ensure that the plan is successful. Managers will do this because it is their plan, and it just has to work. Another topic we explore during this section of the course is crisis management. If a crisis occurs, such as an earthquake, etc, how do we ensure the safety of employees and resumption of operations?

This discussion will often look for the Black Swans that could devastate the company resulting in complete failure within six months or less. An example of a Black Swan would be weirdos flying airplanes into buildings. In other words, something so crazy that it would never happen, at least on paper. Strategists will look for those events that could, out of the blue, put the company out of business. With the changing global environment this contingent planning exercise is becoming more prominent. However, I want to focus on the first part of crisis management, which is what does the company do if a crisis occurs. This would be an earthquake, or God forbid, someone comes into your facility with a gun and starts shooting.

Many companies will create plans for these events. They will make sure safety kits are strategically located, emergency personnel are always on duty, and evacuation areas identified (for an internal or external evacuation). What happens if this type of planning does not occur? The police response to the Norway tragedy demonstrates what happens when you don’t plan ahead.

The Norway police took ninety minutes to respond to the shooting on the island. The killer was shocked that it took so long for the police to arrive. He thought he had minutes, and was surprised that he had ninety of them. Why did this occur? First, why did the police have to drive forty kilometers by car to the port and take a boat to the island? There was only one flight team for the response helicopter, one team that was on vacation. Second, when they got to the port to take the boat to the Utoya Island, the boat broke down.Ninety minutes, which to the young people being assaulted was an eternity.

I am not the first to criticize the Norway police for this, and everyone knows we have had our issues with responding to tragedies (Katrina). But the  police response to the criticism coming from many different directions was very interesting.  They stated that they are professionals, but “they are also flesh and blood.” So the criticism stings. I’ll bet they will be better prepared next time (which hopefully never occurs).
It is often these first generation failures that cause change. If a company or a government is smart, they will have contingency planning sessions. These sessions will look for the Black Swans. Management needs to be ready for what is happening as well as what may happen, at least as much as they can due to uncertainty.

And that is my thought for the day!

The Laffer Curve

In 1974 Arthur Laffer drew what is now called the Laffer Curve on a napkin while in a restaurant with Dick Cheney and Donald Rumsfield. Laffer was demonstrating how lower marginal tax rates could boost tax income for the government. “With lower rates, investors would create taxpaying businesses and hire workers, providing a windfall for Uncle Sam.” This theory has been rejected by economists associated with both Democrats and Republicans. The question is what are the facts?

Over the next couple of weeks US corporations will be providing financial information about quarterly performance. According to the Wall Street Journal American business is doing great. “A third of the way through the second-quarter reporting season, earnings at companies in the Standard and Poor’s 500-stock index are the highest in four years.” These same analysts are reporting that the second half of the reports will be even stronger. Hmm, maybe Laffer curve is right. Great profits resulting in more tax revenue and the hiring of more employees.

Let’s look at the promises that the Laffer Curve makes: Greater tax revenues and more employees hired. In 1981 Reagan tax cuts lower tax revenues by about 30% below where they would have been without the cuts. The Bush tax cuts cost the US government about $1.5 Trillion over a ten year period. However, on top of the tax cuts we have had two wars and a huge recession that has devastated our economy. If I owned a company and the leadership team was losing revenue, and not controlling costs, I would find a new leadership team.

The second promise of the Laffer Curve is that as marginal tax rates go down these same companies will hire more people. The fact is our unemployment rate is stuck on the 9% range. Companies are not hiring. So what does Laffer say about this? Laffer responds to criticism by stating, “The Laffer Curve is really a pedagogic device, it’s not something to be taken too literal.” Too literal? My gosh, we are getting killed out here while our political managers are relying on a theory that is just a pedagogic device created to stimulate discussion in a fairly safe environment, the classroom.

Federal tax revenue is expected to be 14.4% of the gross domestic product in 2011. That is the lowest level in sixty-one years. We have also been on a spending spree that is the highest in decades. It doesn’t take a rocket scientist to determine that our political management system is in trouble. The lack of leadership in this situation is appalling. There was a comment made recently by Timothy Geithner identifying the fact that the whole world is watching us. The time is to stand up and lead, not degenerate into partisanship politics.

And that is my thought for the day!

Managing Education

Gates stated in a Wall Street Journal article that they met with “the same resistance that other sizable philanthropic efforts have encountered while trying to transform dysfunctional urban school systems run by powerful labor unions and a top-down government monopoly provider.” An attempt was made to change the system that provides education, but the system was resistant to the change.

The resulting waste of $100 Million dollars gives us an indication of the breadth of corruption in the overfall management system in this country. This corruption is obvious as the government displays its inability to decide what to do with the debt ceiling, but we also see this corruption in our education system and its inability to change.

I teach a course at Warner Pacific that deals with leading change and transformation within organizations. One of the articles that I like to have my students read deals with systems thinking and change. I try to get my students to realize that change is not a unilateral event. You are ultimately changing a system and you must take that into consideration when pursuing the change. I also try to get these graduate students to recognize that change can be viewed in two different modes.

Some changes are adaptive. In other words, they are superficial changes that do not attack the core beliefs or culture of the system. These are simple changes that most employees do not resist. While other changes are configurational. In other word the change attacks the core structure of the system, which is often related to the culture of the organization. Those changes are difficult to accomplish, take a lot of time, and are often unsuccessful. Usually, configurational changes will be successful when the system believes it needs to change. John Kotter in his work on “Leading Change” states that the number one reason that large scale change events fail is the lack of urgency. The system does not believe it needs to change, and when it does attempt to change leadership declares victory too soon and the cultural anchors that leadership have put in place to ensure the change stays in place are ignored and the system then goes back to the way it was, its point of comfort.

In both cases, the government and educational systems, there is an attempt at making large scale configurational changes to a system. In both cases they don’t believe they need to change. If change theory is correct, then both attempts will fail, and the system will stay as is. Maybe our leaders will surprise us and do the hard work needed to change these systems. If not, our bond ratings will slide, we’ll default on our loans, and our students will continue to fall behind the rest of the world. Also, if we don’t change the system we will continue to slide in world prominence, and maybe we’ll end up at the same level as Venezuela.

And that is my thought for the day!

Megadeals and Marx

The corporate landscape is evolving. United Airlines and Continental Airlines have moved their tails together to form one of the largest transportation providers in the world. My wife and I were flying to Honduras when this was happening. I stood in the back of the plane discussing this merger with the flight attendants of Continental and they were not too happy. The dominant partner was United and the flight attendants for United were getting all of the prime routes while the Continental Flight attendants were getting the less attractive flights, which led to their unhappiness.

Another example of how the corporate landscape has changed happened yesterday with the purchasing of Medco Health Solutions by Express Scripts. The purchase prices was $29.1 Billion. Express Sripts is a much smaller company, but due to the undervaluing of Medco related to its stock price they were vulnerable. It also appears that there is a huge change within the pharmacy-benefit business resulting in several giant competitors.

Mergers and Acquisitions are nothing new. Boeing and McDonald Douglas merged in 1998, and during the recession many banks merged to survive the catastrophe that had just occurred. Are these large corporate entities healthy for the market, or can they be viewed as problematic for the long term economic health of the US and the world? What is very interesting is the Karl Marx actually addressed this phenomenon.

Marx discussed capital accumulation in volume one of “Das Capital.” He informed the reader that as capitalism evolved the means of production would be concentrated into the hands fewer and fewer individuals. Obviously this would lead to the survival of the fittest, with the weak not surviving. The losers would disappear, and the winners would grow larger resulting in Oligopolies and Monopolies.

Marx also stated that with these larger corporations  in place exploitation of the worker would escalate. The craftsperson would disappear and be replaced with the human robot. In Marx’s time it was the factory, and in our day it is the technology that allows the worker to work faster. With higher levels of productivity due to the new technology less people are required which creates a dependent workforce, because they don’t want to get laid off, that is willing to work for subsistent wages. Marx continued to pontificate that this conflict would lead to a polarization of classes. According to Marx in a capitalist system, the aristocracy of Feudalism is replaced by the owners of production which he named the Bourgeois. This class would then struggle against the Proletariat. During this dialectic the workers throughout the world will rise up and take over the means of production and ultimately the political systems of the world leading to a worldwide Communist state.

In 1989 the Berlin wall fell. Ronald Reagan’s famous statement, “Mr. Gorbachev tear down that wall,” is taken as the victory cry of Capitalism over Communism. However, before we strut our stuff like peacocks we need to rethink our arrogance. The political system that Marx spoke of in the Communist Manifesto may have failed, but his economic thoughts are still relevant. His concept of the concentration of the means of production into the hands of a few is happening as we speak. The exploitation of workers is still happening all over the world, even in the good old US of A. Alienation of the Worker from the fruit of his/her labor is just as true today as it was in 1848, so you Bourgeois don’t tell me you won, because the game is not over yet.

The Communist Manifesto starts with a statement that is quite spooky. “A specter is haunting Europe the specter of communism.” If you are a smart manager, you will pay attention to Marx. His economic concepts are appropriate for today’s situation. We are running at a 9.2% unemployment rate. Corporations have money, but are not hiring people? Anger is running high in society. Riots are occurring all over the world. People want change. You know what, maybe we declared victory too soon. Maybe we forgot how important respect and love are in everything we do, and commoditized humanity to make more money. In the process of accomplishing this we sold our soul to the devil.

And that is my thought for the day!