Strategies for a discontinuous future.

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Tuesday, May 09, 2006

The Problems with Business

"...f the U.S. and General Motors have similar flaws and indeed symbiotic fates, they appear to be conjoined primarily by the uncompetitiveness of their existing labor cost structures and the onerous burden of their future healthcare and pension liabilities.

That is not to say that other automobile manufacturers or countries don�t share similar characteristics: they do � but GM and the U.S. are compared here because of their historical dominance and therefore the influence that they will have on investment markets as they struggle to adjust. If GM is a canary, let�s hope for the canary�s long life, but be mindful of its chirping deep in the mineshaft of future events that speak to broader implications for the U.S. economy."

Now that my edge competencies work is coming to a close (don't worry, all will be published soon), I've been thinking about something related lately.

In the quote above, Bill Gross - the guru of the fixed income world, if you don't know - argues that the flaw of American business is labor cost structure (you know, healthcare costs, etc).

I think it's very interesting that Bill Gross recognizes that there is a huge flaw in American business.

But I think it's much deeper than cost structures.

I think it has to do with a few seemingly inevitable outcomes of the interplay of microeconomics, macoreconomics, and psychology:

- Boringness (Wal Mart effect)
- Stupidity (Dilbert effect)
- Amorality (Enron effect)
- ??

I'm trying to flesh all this stuff out. I would like to hear what you guys think - what are the different categories of business evil? What is it that's sending American business into a bit of a tailspin?

-- umair // 2:17 PM //


It's fascinating to note - and hardly coincidental - that your triad of boringness, stupidity and amorality is the inverse of the triad at the heart of open source and similar open collaborative endeavours: interesting,
intelligent and ethical.
// Blogger glyn moody // 4:19 PM

i think some of it can be attributed to hypercompetitiveness, where businesses are more concerned with crushing a rival or dominating a market than with providing value.
// Anonymous mike bunnell // 6:06 PM

How about bald-faced dishonesty?

The 'cost structures' Gross refers to are promises GM / the U.S. Govt made to people.

Decisions over the past 30 years have been focused on increasing quarterly profitability with no view of supporting the people that enable the company / government to do anything. No view of health, no view of keeping people working and productive, no view of creating new enterprises to use a maturing labour force.

Now the same people want to collect on what was promised to them. It can't be a surprise that they want to collect or that they've aged. No one is surprise when the bank comes knocking for their mortgage payments, why be surprised when social debts are called in?

So let's also add a culture of collective denial to the list of problems with business.
// Anonymous James // 7:05 PM

You've done some pretty interesting thinking but the postmodern problem comes at the triad nexus: technology; horizontal production/distribution (that may need to be less linear and more circular); and vertical communication (which is being altered from top-down to listening and engaging bottom-up). imo. Maybe all or maybe none but the thinking is engaging.
// Anonymous H.A.Page // 9:27 PM

Nowism in its many forms including gaming quarterly reports, cutting taxes on the current generation, burning the gasoline candle at both ends, etc. etc in both public and private life.

If you truly believe Armageddon will come in the next twenty years as a very large minority of the US population does, it makes sense.
// Anonymous phoneranger // 10:18 PM

From my experience, FEAR seems to be the "evil" in the US workforce that isn't as prevalent elsewhere.

To understand why US business climate is different to the ROW, look at US employment contracts - this is the only country in the world where "at-will" employment is legal & the norm. The result in the US is that despite the low unemployment here, workers are more fearful of loosing their income than in any other western country because employers make no commitment to compensate you from one day to the next. Fear stifles innovation.

At-will has had a devastating impact on leadership quality in the US; the cost of forced attrition is so low as a result of at-will that improving a manager's ability to develop talent has little value in a US corporation. Poor leadership stifles innovation.

I applaud your further study into this topic in general, Umair - I'm & look forward to what you find.
// Anonymous David G // 11:40 PM

My hypothesis here is that all of those problems are outcome of the diminishing human autonomy in the current corporate economy, and indeed as the first comment here stated open collaborative endeavours (what I take as commons based peer production) are reversing this effect as it is described again in 'The Wealth of Networks'.
// Blogger zby // 9:52 AM

the stock market. it's helped to separate value creation from profit extraction, making them not as closely correlated and related as a better world would have them be.

on a related note, a question i've been thinking about lately is whether or not there a forthcoming dollar crisis, and if so, will this crisis help bring many of the flaws to greater awareness as it could conceivably change the cost structure of everything significantly.
// Anonymous kid mercury // 2:32 PM

what are the different categories of business evil?

I would add: 'addiction to growth'... If Wall St. makes a growth prediction for a stock and it is not exceeded, that stock is often devalued as a result. This kind of profit frenzy is pure madness, and but one indicator of the malaise.

Fred Charles Ikle, a former under secretary of defense in the Reagan administration, and a Scholar at the Center for Strategic and International Studies, likens the US's current obsession with perpetual growth to "a gigantic, global Ponzi scheme" and resembles a kind of Utopianism, which "is leading to "the destruction of society's conservative conscience."

// Blogger Simon Edhouse // 6:45 PM

I have to comment on this one, and play devil's advocate...

I think when you boil away all the bullshit, hyper-utopianism, idealism, etc...the problem comes down to human nature and the 'American dream'.

My personal belief is the American dream is a Chomsky-esque necessary illusion to maintain order in a society that is not only self contradicting but also inherently unstable. The dichotomy that American style economic darwinism creates is unsustainable simply because the will of the many eventually overpowers the will of the few, however powerful the few may be.

So people pursue the 'dream' because they want to be 'the few'. This is human nature, I believe it is programmed through our evolution.

The point is there are people able to achieve the American dream and there are those that are not but everybody wants it. The land of opportunity becons, and those that neither have the skills or social characteristics to become entrepreneurs or CEOs end up as the fodder for MBA status middle managers, who themselves are playing a self-serving game to advance the next step in the ladder of imagined success.

This phenomenon creates boringness, stupidity and amorality. It sucks the life out of creativity, because competition is defined by the lowest common denominator. Ie. if your boss is a crook, you have to be a better crook if you want his job.

I'll be more blunt, the reason this happens is because in general humans like to fool themselves into false security (think religion). The American dream is simply an empty promise leading people astray just as the promise of biblical armageddon can lead to bouts of destructive psychosis (think Bush).
// Blogger dhd // 9:44 PM

Actually, I think at-will employment is probably one of the best features of the American system as it makes the job market a lot more dynamic and capital deployment a lot more efficient. This ensures that talent continues to get re-deployed to where it is most productive and thereby most beneficial to the society at large.

Look at the counterfactual : the worst job markets in G7 economies are in France and Germany, countries with the most stringent job security laws. These laws do nothing to promote employment, rather they just create high exit costs for business which makes businesses very cautious and stingy about hiring new employees.

The whole notion of social contract is non-sense : nobdy, not even the mighty Uncle Sam can guarantee taht you shall have perfect economic secuirty for all your life through a steady job within 50 miles of where you went to school. Why? Simple reason : things change, economy changes, and business risks are omni[resent : there is no guarantee that your customer and/or profits are going to be around tomorrow. If you are working for a dying company like GM, you have a personal responsibility to find a better career rather than expecting to be taken care of by GM or the Guvmint. And, yes, that means moving out of a dying town like Detroit to go elsewhere where the jobs are. California and Texas are booming, take your pick according to your politican affiliation and move the hell out of Motown rather than whining about GM and "social contract".

None of this condones the stupidity and incompetence of the executives running these companies. Unfortunately, in today's corporate America, it is the rank-and-file that end up bearing the brunt of business risks and executive incompetence. However, the solution to that is for workers to vote with their feet and "fire" the company first by finding a better job before the company fires you. Or, better still, become an entrepreneur.

America is still the best country in the world for entrepreneurship, and at-will employment contributes significantly to that. The number of people who were fired and went on to create multi-million enterprises are a legion. They, in turn, benefit from low exit costs made possible by at-will employment to take risks on hiring fresh young talent.

Come to think of it, perhaps there is an entrepreneurial opportunity for someone to create a business out of offering unemployment insurance to people working in dying industries :-).
// Blogger Mahashunyam // 6:10 AM

Mahashunyam. You haven't answered the point raised by james :

"The 'cost structures' Gross refers to are promises GM / the U.S. Govt made to people."

GM workers entered into an explicit agreement with their employer who is now trying to duck out of it. Are you simply recommending "caveat emptor" here?
// Blogger phil jones // 6:09 PM


Any contract is worth only the ability/resources/competence of the counterparty to execute it. Besides, the longer the term of the contract, the higher the risk of default. How is it ever realistic to assume that any agreement would continue to be honoured inperpetuity? Even the most powerful empire of all time has defaulted on its sovereign obligations, what's a mere GM?


That's why it is always a prudent risk management practice to continuously manage any long-term contracts and renegotiate terms if there is any risk in the willingness/ability of the counterparty to execute the agreement through means such as creditworthiness assessment etc. On amny of these counts, GM has failed for a long time and if I were a GM worker I would've quit long time ago to move out of Detroit. It's not as if the auto industry itself is dying : it's just the Big 3 that are mismanging themselves into a death spiral. Ideally, the capital and people employed by Big 3 should become redeployed at more efficient companies or they should be exiting the industry. This isn't new, thousands of ex-dotcommers and telecommers have now moved on to many other industries or geographies away from California.

The other thing to note is that the more favourable a deal you negotiate, the higher is the risk of default. Classic examples are long-term hedges where the side that made a large losing bet invariably defaults or goes bankrupt. I do believe that the Big Three autoworkers are an overpaid and underproductive lot : there is no way they could get such sweet deals in non-union shops. However, there is no free lunch and that extra rent they want to seek has to come from somewhere. In the past, the source used to be from GM's fat margins, which, in turn, depended upon an uncompetitive closed market and economies of scale.

The game is different now. While Big Three have the most expensive workforce, the Japanese are far more efficient, more innovative and run low-cost operations in Canada and Southern US. Funny enough, the Japanese also seem to make cars that people actually want, and funding R&D into new areas : I just saw an ad for the 2007 hybrid Camry today which is what I'll hopefully end up buying for myself. The inexorable forces of economics will lead GM to a logical conclusion unless it can radically reduce its cost base and become more innovative. Of course, managerial incompetence and lack of vision are bigger culprits than worker costs for the Big Three's decline, but that's all the more reason for their workers to leave : why would you want to keep working for a company managed by idiots? And what is the likelihood of the same idiots delivering upon whatever fuzzy social contract you think you had with them?

The wildcard, of course, is Uncle Sam and I think the only core competenece Detroit has today is extracting money from the Uncle Sam. In that case, GM workers can continue to enjoy their sweet ride at the expense of the US taxpayer. Luckily, I am not one of those who'll be pickin' up this tab.
// Blogger Mahashunyam // 4:31 AM

M - very idealistic - your argument for at-will is flawed however - low unemployment != job market liquidity. The last stat I read said that to find a new job in the US after being laid off takes 1 month for each $10K you were earning - so, a year for most execs - that's not exactly liquid!

Either you believe that a business' primary asset is its human capital, or you don't. If you do, it's irresponsible not to develop & invest in that asset - the at-will system absolves management of this responsibility - and laziness compounds the problem. People without leadership skills get promoted here because leadership is not important to a company's financial performance - thanks to at-will employment contracts.

You need to do your research - I'm not the only person in the US that believes at-will is archaic. I'm not advocating job-for-life or becoming France but I do think companies would become better at extracting value from their employees if they were forced to hire responsibly and there were costs associated with attritting poor performers. You need to have lived this system and a "normal" employment contract to realize just how twisted the employee / employer relationship can become when there is no commitment between the two.
// Anonymous David G // 4:16 PM
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