Donald J. Patti

Archive for January, 2009|Monthly archive page

With Goliath Incentives for Others, Seven David’s Need Stimulus, Too

In Business, Finance, Politics, Small Business, Uncategorized, United States on 29 January 2009 at 12:05 pm

Last Saturday, I received call #7 from a friend or associate starting a business in one of the gloomiest climates since the Great Depression.  Never mind that these seven individuals are figuratively “spitting into the wind” (Jim Croce) by spending time and money in such difficult economic times, their efforts are a telling example of how the U.S. economy recovers time-and-again from recessions.  Despite big businesses shedding jobs and shuddering their windows until the economic climate improves, individuals like you and I come to the rescue with innovative ideas, hard work and untiring faith to renew growth in the most impressive economy the World has ever seen.

Given the repeated successes of America’s Davids (and Davidettes, ladies), I’m surprised and disappointed to see that President Obama has left sizable incentives for small businesses out of the economic stimulus package before Congress.  With mass transit and benefits extensions for the unemployed on the list, there’s definitely been some careful thought put into the plan about who needs help and where future growth should occur.  However, there’s little to nurture the efforts of the seven fledgling businesses contained in President Obama’s package.

Knowing the business models the seven David’s will use to grow, I’ve thought of 5 ways the 2009 stimulus package could be modified to help small businesses get America back on its feet.  These should be targeted at businesses under $5 million in annual revenue and owned entirely by individuals (sole proprietorship, partnerships, S corps, small LLC’s) to prevent larger businesses from launching subsidiaries just to take advantage of the situation:

1. Give a Three-year Tax Holiday on Income Increases to Small Businesses.

Description: Give a three year tax holiday at the Federal and State level for income growth when compared to 2008.  If you made $100,000 net income in 2008 and $250,000 in 2009, the additional $150,000 in income would NOT be taxable.  If you lost money in 2008, then any earnings in the next three years would be untaxed.  The same should apply to 2010 and 2011 when compared to 2008 earnings.

Reason:  This rewards small businesses for taking risks in 2009, 2010 and 2011 to invest in activities that increase growth, which will increase spending and employment throughout the economy.  The alternative is to NOT do this, not see the growth and not collect the tax revenue, anyway.

2. Reward Small Business for Going Green.

Description:  From buying energy-efficient equipment to purchasing fuel-efficient cars to reducing energy consumption to installing solar power, small businesses should be rewarded for finding ways to run lean.

Reason:  An immediate capital investment will boost the economy short term and reduce our dependence upon unstable energy sources long term.  Even better, getting small businesses to think green will encourage them to build this mindset into every avenue of future business, yielding gains decades ahead.

3. Give Incentives To Hire.  Big business is cutting back big time on head count and small businesses will likely follow suit.  Give small businesses 10% of each employee’s salary – up to $10,000 –  as incentive for bringing on new people. Decrease the incentive to 5% in 2010 and 2011.

Reason:  Small companies hiring in 2009 should be rewarded for bucking the trend.  While big businesses could potentially receive the same incentives, small businesses are far less likely to find loop holes in the law to exploit the tax benefits without truly bringing on a live body.

4. Encourage Small Business to Advertise.

Description: For every small business in America, give a 50% tax credit for $ spent on marketing and advertising in 2009 up to $25,000 in total benefits.  The money must be spent outside the business to either market or advertise the company’s products and services and must result in a bulk e-mail, a website banner ad, a radio ad, a newspaper listing, a cable TV ad or something similar that was not done in 2007 or 2008.

Reason:  If there’s one place I believe small businesses chronically under-spend, it’s on marketing and advertising.  Even worse, advertising is often a hit-or-miss endeavor and it takes a few tries to be successful before the appropriate channel is identified.  This type of advertising incentive encourages small businesses to consider how they can grow and the $50,000 investment required to gain the $25K in tax credits will have an enormous impact on the sales of a small business.  That same $50,000 would do little for a big one, which is already advertising at a level well-above $50 grand.

5. Provide Easy Access to Working Capital Loans for Small Businesses.

Description: Through the SBA, triple the number of $25,000-$50,000 loans to small businesses and ease up on the credit restrictions.  Advertise the avalable loans; guarantee the loans issued by banks; and, issue the loan directly if the banks won’t.

Reason:  Many small businesses aren’t expanding because they simply can’t get a hold of the capital necessary to run their current operations on a day-to-day basis.  Working capital enables small businesses to pay employees, cover rent and buy raw materials up front until their clients pay them for services or consumers buy their goods. Yet, banks have shut off the tap to their lines of credit and many aren’t issuing any new credit at all, even if the borrowing business has historically been successful.  Increasing the number of Working Capital Loans will prevent contraction among small businesses and can enable them to grow, once again.

———

I’m not a professional economist (though I have an Econ degree and an MBA), so I honestly can’t tell you how much money, in billions of dollars, these incentives would cost.  I don’t have access to the modeling tools economists use and my pencil isn’t that sharp.  But I can tell you that small businesses have historically led economic recoveries, that a little money goes a long way in a small business, and the seven David’s have some good ideas that will need a break if they are to succeed in 2009.

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Does “Process Improvement” Kill Creativity?

In Auto Industry, Business, Ethics and ideology, Manufacturing, Quality, Technology on 23 January 2009 at 1:58 pm

Early in my career, ISO-9000 was just coming into vogue and my employer, Manpower had earned the honor of being called ISO-9000 certified.  To say the least, the ISO-9000 concept was a little irritating to a young, creative-type:  Processes are documented, standardized, and followed without deviation because deviation yields an inconsistent outcome and inconsistent quality.  Even worse, ISO-9000 principles were being applied by Manpower not to manufacturing but to services, where the human factor was so important.  While people certainly admire the fact that a Hershey bar has the same consistently delicious taste, would the feel the same if the Service Rep at a Manpower office answered the phone in an identical manner every time, smiled at visitors in the identical manner and greeting them with the same Mr. or Ms. in the same robotic way?  Somehow, ISO-9000 seemed to be forcing the soul out of services and driving creativity out of the American worker.  This would not stand.

Fast forward nearly twenty years and I am now the devil I once cursed.  A leader of IT endeavors of all kinds, I regularly propose improvements to and then standardize processes for the company and clients I serve. To-be diagrams evolve into Standard Operating Procedures (SOPs), guidelines or end-user documentation. Similarly, systems are built with virtual guard rails that keep users from driving off the side of a digital cliff, enforcing the business rules and guidelines that are at times irritating and often restrictive, forcing workers to not only perform the same task repeatedly, but forcing them to do it in exactly the same way for sake of consistency.

Staring the enemy in the eye every time I pass a mirror, I think about what I’ve done. With such limits and constraints, how can creativity establish a foothold, much less flourish?  Have I not killed the entrepreneurial spirit of co-workers and end-users, alike?  With all these constraints, how many good ideas have been stifled, delayed or killed? Has the work I’ve done under the banner “Process Improvement” standardized our work to the point that we’re all nothing more than automatons?

A big believer in creativity and diverse thinking, I know that the World’s greatest innovations come from ignoring conventional wisdom and trying something a different way, so these questions are not trivial.  I think my answer, however, comes from two disparate figures:  Geoffrey A. Moore and Kiichiro Toyoda.

For those of you who don’t know Moore, he’s a business geek’s ultimate hero — the man behind the technology adoption lifecycle, Crossing the Chasm, and Dealing with Darwin.  It is in Dealing with Darwin that Moore introduces the concept of reallocating business resources from context to core.  Context is all that work done by employees that does NOT separate your business from its competitors.  Cores represents all work that is critical to delivering your products or services uniquely; core helps to separate you from your competitors and is the leading driver of innovation.  According to Moore, businesses spend far too much of their time (80%) in context activities and far too little in core (20%) involved in the core.

Let’s apply this to process improvement and process standardization.  These exercises provide a window for innovation, then they lock down a process so that it yields consistent results.  They also reduce a business’ emphasis on context activities by removing unnecessary steps and automating once-manual processes.  So, more time can be spent on the core, where a business can differentiate itself, developing new products or services with the creative mind.

Kiichiro Toyoda had a similar mindset nearly fifty years earlier when he developed the Kaizen philosophy of continuous improvement and the lean manufacturing concept targeting the elimination of waste.   Founder of Toyota Motor Corp, Toyoda had a keen eye that focused human efforts on eliminating waste and improving processes rather than perpetually repeating them without question.  Combined, Kaizen and lean are key reasons why Toyota leads in sales and product quality and why Toyota employees are among the happiest in the industry.

So, considering Toyoda and Moore when reflecting upon my past sins in the areas of process improvement and standardization, I’ve developed a few principles to keep in mind as we standardize:

(1) Wherever possible and cost-effective, automate.  There’s no sense in having people do work that a machine or computer can do faster and more consistently, especially when this is sure to dull the human capacity for innovation.  Instead, people should monitor repetitive processes, not do them.

(2) Involve workers and end-users in innovation.  Your best ideas often come from the line-worker, the front desk staff or a computer system’s end-users.  This also gives them an opportunity to flex their mental muscles.

(3) Focus your employees on creative efforts inside the core.  If you have people who are spending their time trying to marginally improve legacy products or services, redirect them to activities that create new products or radically transform current ones — efforts that will benefit most from the human capacity toward innovation.

(4) Leave room for creativity and individuality.  Where product quality won’t suffer and humans are involved in production, leave room for creativity and individuality.   This one is the hardest to follow, because we know that a consistent product is best created by a consistent process.  But, avoiding excessive detail in a process leaves room for grass-roots innovation and keeps the human mind engaged.

(5) Build a World that is Human-Centric.  Human beings are inherently creative and intuitive:  We move beyond patterns to think of completely different ways to solve a problem, create art or experience life.  All of the products, services and processes that we create need to remain human-centric, recognizing that they exist for the benefit of humans and to add value to the human experience.

Looking back at my list, I’m not fully satisfied that I’ve slayed the demon who kills creativity in the name of process and quality. Nor am I certain that there’s an easy way to balance the need for high quality with the need for innovation and human creativity.  But, at least I have a set of principles to follow to measure my progress.

Chrysler & Fiat — The World’s First Happy Shotgun Marriage?

In Auto Industry, Business, Trends, Uncategorized on 23 January 2009 at 10:49 am

It was not long after I posted my “10 Steps to Save Chrysler” blog that I began hearing rumors about a Fiat/Chrysler merger, which intrigued me.  Autosavant, one of the best auto-industry blogs on the ‘Net these days, scooped many of the traditional media outlets by reporting talks on the 19th in this blog entry by JS Smith that’s well worth reading:  http://www.autosavant.com/2009/01/19/chrysler-may-survive-by-fiat/.

Forced together by anemic – no, paralytic –  auto sales, the global credit crisis and some key strategic mis-steps, this engagement between two auto giants may well turn out to be one of the industry’s happiest marriages.  I decided to look back at my article from last week and see which of my “10 Steps” the Chrysler-Fiat partnership helps to address to see whether this isn’t one of the wisest merger opportunities we’ve seen this decade.

Based on a quick tally, a Chrysler-Fiat merger could effectively address these steps:

1. Original Recommendation: Stop building engines.  Analysis: Initially, I recommended that Chrysler stop building engines because of the enormous development costs associated with engine development, the uncertainty around which powerplant would drive growth in the next decade and my past experience seeing how well engine vendor relationships can work.  While a Chrysler-Fiat merger would by no means outsource engine development and production, it does enable Chrysler to share the economic burden of engine design and development, while giving Chrysler access to some of the smaller, more efficient engines that Fiat has dropped in to their European and South American products so effectively (See JS Smith Article).

2. Original Recommendation: Share platforms.  Analysis: This is also a big win for Chrysler and Fiat because the two can share platforms during design and lower overall product development costs.  Suddenly, Chrysler has access to smaller-framed vehicles at a low cost, while Fiat can eliminate some of their larger platforms and adopt similarly-sized Chrysler platforms.

4. Original Recommendation: Focus on the brand(s).  Analysis: Here’s another big success.  I mentioned in my previous blog that Chrysler lost its brand ladder when it dropped Plymouth, then diluted Dodge and weakened Chrysler.  Consider the brand ladder potentially created by a Chrysler – Fiat merger:  Fiat (small, fuel efficient cars), Dodge (mid-range, family-oriented vehicles), Jeep (off-road, rugged), Alfa Romeo (sporty, high-end, high-performance) and either Lancia or a resurrected Chrysler (luxurious, well-appointed, full-featured).  Positioned effectively, the brand ladder would be complete in a matter of 3-5 years instead of decades.

5. Original Recommendation: Dump the Dealerships, not the Dealers. Analysis:  Another big win, because it addresses the fact that Chrsyler’s dealer network is far too large given it’s product lines and likely future sales. Remember, I said that declining product sales continue to put strain on Chrysler dealerships and it’s time for Chrysler to reduce ranks so some dealers can survive the downturn.  If some Chrysler dealerships are transitioned over to the Fiat brands, this effectively reduces the number of Chrysler dealers and gives Fiat products access to an enormous U.S. Market.  I still believe it’s important for Chrysler to look at other sales channels, including shopping malls (read my original blog) and the Internet, but a merger addresses half of the problem.

Of note, I would caution Chrysler against creating “Fiat/Dodge” or “Fiat/Chrysler” dealerships.  This merely increases brand confusion and makes it difficult for the dealers to cater effectively to their customer niche.  Better to offer Dodge dealerships the opportunity to convert over to Fiat.

For the remaining six recommendations in my previous blog, a Chrysler/Fiat merger does not prevent a merged organization from addressing these issues, but does little to help them.  Chrysler would still have to address quality perceptions, needs to change the underlying philosophy of leadership and explore new channels for delivering its products to customers.  Given this, a Chrysler/Fiat merger has the potential to be a very happy marriage, but it would be unwise for  Chrysler/Fiat leadership to stop there.

As Gun-Shy Investors Turn Away from Traditional Markets, Banks Face Newest Threat

In Banking, Business, Current Events, E-Business, Finance, Peer-to-Peer Lending, Technology, Trends, United States on 16 January 2009 at 4:55 pm

Earlier today, Bank of America and Citi Group posted huge losses, then stood in line with a tin cup held out for more government loans via TARP (16 January 2009, Washington Post, “Bank of America, Citigroup Post Major Losses”).   It’s clear that, despite an injection of $350 billion, the U.S. banking industry is still reeling nearly four months into the credit crisis that has brought down some of the World’s largest banks and investment houses, leaving carnage in its wake.

Yet, at the same time these titans deal with “toxic” loans and absorbing the remains of their recently departed siblings, another threat grows beneath their giant footsteps and between their toes – Peer-to-Peer Lending.  Fueled by the sour credit market, distrust in traditional banks and fear of continued losses in the stock or bond market, once-wary investors are taking their dollars to upstarts prosper.com, lendingclub.com and even virginmoney.com where they can earn superior returns, diversify their investments and know specifically where their money is going.  Though resources in traditional banks are best directed toward immediate financial crises and folding in the business of recently acquired competitors, it’s time for traditional banks to start planning for the coming onslaught from peer-to-peer.

In only a few years, peer-to-peer lending has sprouted from the more-proven micro-lending practiced in developing countries and pioneered by Dr. Muhammed Yunus and Grameen Bank in 1983 (16 January 2009, http://en.wikipedia.org/wiki/Muhammed_Yunus).  Realizing that the loans needed by low-income individuals were far too small, uncollateralized and therefore “too risky” for traditional banks, he began making many small loans via Grameen to under-privileged entrepreneurs, who took the meager sums and made sizable profits, yielding healthy returns for Grameen.  Not specifically interested in making money, Yunus saw how the concept of pooling small sums of money from borrowers to make larger loans or taking larger sums to make many smaller loans had an enormous positive impact on the poor.  This became his business model for Grameen and other micro-lenders like it.

Operated much like the micro-lending Grameen, peer-to-peer lenders match lenders with borrowers on a relatively small scale – often no more than $25,000 for an entire loan and typically in the $5,000-$15,000 range.  Borrowers meet minimum standards for credit-worthiness and credibility, then they post information about their requested loan on line, stating how the money will be used and how much they need.  For most peer-to-peer sites, borrowers approve each lender’s loan offer and terms until the target loan amount is met.

For their part, lenders can lend out as little as $25 to a specific borrower and spread their money around as they deem fit, minimizing the risk that a single lender’s default will cause a huge personal financial loss.  Most often, payments are received on a monthly basis and doled our proportionately to each of the lenders until the fund are repaid.

Peer-to-peer lending sites like LendingClub.com and Prosper.com make their money in a few ways, though the process isn’t entirely consistent between them:  Peer-to-peer lending sites collect a 1-to-3 point service fee on the loan, much like the spread between the amount banks charge their borrowers and the Federal Funds rate at which they borrow.  They may also collect an on-going loan maintenance fee, late payment fees and collection fees if the borrower defaults.  In return, the peer-to-peer brokers screen the borrowers, process the loan, capture legal signatures and may even assist with collections if the borrowers default.

None of this sounds very threatening to traditional banks as of 2009.  The current market for peer-to-peer lending is about $100 billion (www.business-standard.com) and is dwarfed by the total U.S. market of $2.56 trillion (Federal Reserve, http://www.federalreserve.gov/releases/g19/Current/).  But, consider how the credit crisis has created a fertile environment for peer-to-peer lending:

(1)    The spread on a secured consumer loan for a car is 6.88% (7.13% as listed on Bankrate.com – 0.25% Federal Funds rate), far more than the 1 to 3% charged at peer-to-peer lenders. Though rates a higher of unsecured loans in both environments, the difference in spreads is even more dramatic.  (www.bankrate.com and http://www.federalreserve.gov.)
(2)    The yield on a 5-year government bond is 1.47% while the yield on a loan with a similar commitment, an auto loan, can yield 6-9% for the lender – a 4-to-7 point difference (http://www.bloomberg.com/markets/rates/index.html).  Certainly, risk is a partial factor in the large spread, but the other factor is likely the profit margins of banks.
(3)    Traditional lenders are turning away borrowers on all types of loans at record rates in efforts to shore up their portfolios and reduce risk.  Consumer credit dropped in December 2008 for a third straight month and automakers are citing the credit crunch as a reason car sales were off  by one-third between ’07 and ’08 (http://online.wsj.com/mdc/public/page/2_3022-autosales.html).

Traditional banks have some time to respond to the threat posed by peer-to-peer lending sites, but it can be measured in months and not decades.  They are unlikely to be able to compete with them via traditional methods, because the cost of staff, buildings and infrastructure in the brick-and-mortar is simply too high.  But it is viable

(1)    Ignore peer-to-peer lending and hope it fades away – a dangerous way to deal with a tech-savvy threat.
(2)    Acquire a peer-to-peer lending site once the process is refined and market penetration still low, reaping the largest gains by increasing market penetration.  This can be dicey, especially if the market potential is recognized early, driving up the price.
(3)    Develop their own peer-to-per lending capabilities to compete with the upstarts, keeping one of the smaller players from becoming the next “MySpace” or “YouTube” that fetches an exorbitant price on the open market.

Regardless of the path chosen by traditional banks, their spreads are likely to drop, forcing their business practices to change, as well.  A few will under-assess the threat and act too late, bringing them down in the process.  This does not bode well for the people who work for the titans of banking’ they are likely to see another assault on their jobs, just after the “credit crisis” has already dramatically cut their ranks.

U.S. Divided? A Shred of Truth in Igor’s Words

In Ethics and ideology, Igor Panarin, Politics, United States on 11 January 2009 at 9:01 pm

According to Washington Post staff writer Joel Garreau, Russian Professor and former KGB analyst Igor Panarin has been predicting the balkanization of the United States for over a decade, claiming most recently that the current economic crisis and associated debt will drive us separate ways, region by region, until there are six separate countries in North America.  Both Garreau and other members of the journalistic community have covered this subject thoroughly, so I encourage you to read these articles to see if you don’t come to the conclusion that Igor’s predictions are largely nonsense.

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/02/AR2009010202401.html

http://www.huffingtonpost.com/2008/11/25/igor-panarin-us-will-brea_n_146427.html

To paraphrase Garreau, Panarin is off base mainly because he has cleaved the country in odd places, forming unions with other countries that make little sense. Portland, Oregon and Utah in the hands of China; Tennessee in the European Union; Ohio to Canada (“A Disintegrating U.S.? Critics come Unglued”, Joel Garreau, Washington Post, 3 January 2009).  After reading the article, many long-time American citizens will also doubt Panarin and likely agree with his critics.

But there is a shred of truth in Igor’s words that Americans will find difficult to deny.  While the U.S. is obviously not dividing along the lines proposed by Panarin, an ideological divide is clearly forming in the U.S. — the “Red State/Blue State” phenomena.  Like Panarin argues, this divide is bad for America and even threatens to break the country apart – functionally, though not physically.

For starters, it’s hard to deny that “red” states and “blue” states now exist, as one only need look at recent elections to see that many states consistently vote for Republican or Democrats.  Sure, occasionally a state switches colors and there are definitely battleground states that are “in play” every election.  But forty of fifty states now consistently vote either blue or red.

But, consider how this is bad for America.  In those forty of fifty states,

(1) citizens rarely (if ever) hear an opposing view point from news outlets, who prefer to mirror the viewpoints of their viewers, readers and listeners instead of challenging them. People don’t pay to be told they might be wrong, nor do they watch programs that contradict their views.

(2) rarely hear an opposing opinion from their neighbors.  Instead, neighbors with dissenting options stay silent to avoid alienation, or they move to a state that more closely matches their own.

(3) No longer hear opposing ideas from political campaigns, which spend their advertising dollars in places where they have a potential to sway the results, not where one side or another is firmly entrenched.

Many of you, I’m sure, are happily “red” or “blue” and prefer living in a state with like minds.  But your red or blue bliss implies that one side has a monopoly on the best ideas; that these ideas are not improved by the crucible of criticism; and, that it’s not important to understand the opposing viewpoint, regardless of whether you agree.

As a country, we’ve succeeded for over two centuries because the debate over ideas has been vigorous and the competition of ideas in the political marketplace has equaled the competition in industry.  In just two decades, we’re eliminating that debate and instead promoting a “divide and conquer” strategy for the political landscape – one that will make it harder for us to work together in the future.  While it’s unlikely that this will result in secession or disintegration a la Igor Panarin, it is likely to result in more gridlock at the national level.  And, unless it’s addressed, it will eventually bring political and economic irrelevance.

What do you think?  Am I off base?  Is the problem as bad as I say it is, or is it my imagination? If so, what’s the solution?

Ten Steps to Save Chrysler (Again)

In Auto Industry, Editorials, Uncategorized on 4 January 2009 at 12:49 pm

It’s been nearly thirty years since Chrysler received its last government bailout in 1979 and Lee Iacocca engineered a comeback for the third-player in Detroit’s “Big Three”, but it appears we’re back at the point where investors and citizens have to decide whether to fish or cut bait once again.  Hammered by high oil prices, hurt by the credit crunch and crippled by marginal quality, Chrysler is well on it’s way to the junkyard, not only if the federal government fails to act, but also if the company’s leadership fails to make fundamental changes to the way Chrysler does business.  Never afraid to jump into the foray, here are the key changes I recommend that Chrysler make to survive and even thrive.

1. Stop building engines. It’s paragraph two, but I think I’ve already caused some heart attacks, so I’ll repeat – in all but specialized products, Chrysler should stop building engines and outsource their design and manufacture to competent suppliers.  Give the vendors the product requirements (minimum horsepower, minimum fuel economy, quality/reliability, and needed interface points, such as the transmission coupling), give them a deadline and let them build. A few engines, such as the Viper V10, may need to be kept in-house, but otherwise, engine development should be outsourced and the engine-manufacturer portion of the business spun-off.

There are a few reasons why:  (1) Chrysler isn’t known for building great engines, so it’s not like brand value is being lost by making the move. Sure, they’re engines are good, but I don’t think I’ve ever heard anyone say, “Boy, that Chrysler/Dodge/Plymouth engine ran forever…” (2) The cost of building and designing engines is very high and capital intensive, so both design and manufacturing costs can be lowered by moving this over to another business that already does this well. (3) There’s a great deal of uncertainty about which power plants will move autos in the next few decades, whether it be hybrid or electric or fuel cell, and this transfers the “bet” on technologies to companies that can better manage the risk, and (4) There will be more choices for consumers, who can choose the smaller, lighter Mitsubishi engine with their Chrysler or the higher-revving, more powerful Saab.  Sure, not all auto manufacturers will build engines for Chrysler, but enough will jump in to make for better engines at lower cost.

2. Share platforms. Like chassis, platforms are the foundation for cars used to build the overall vehicle.  Platforms are extremely expensive to design and develop, so auto manufacturers often develop a platform for use in multiple car models over multiple years, up to a decade.  For example, both the Chrysler Sebring and Dodge Avenger are built on the Chrysler JS platform, so are similar, but not identical cars.

Similar to the move away from building engines, Chrysler should share the design & development of some platforms with competing carmakers (like GM) in those areas where competition is more about styling, such as the basic sedan.  Just like engine manufacturing, platform design and development is extremely costly, so sharing these costs across multiple businesses makes sense.  This also neutralizes a competitive disadvantage caused by Chrysler’s lower production volumes – the need to produce cars on a dying platform for more years than competitors, making their products less innovative and less appealing.  It also enables Chrysler to shift its focus to the areas where it really belongs – quality, brand and the distribution chain.

3. Emphasize quality, not quantity. I make these statements without any inside information, so try not to read too much into this: Quality and the perception of quality have not taken hold at Chrysler as it has at other automakers during the past three decades, indicating that the processes necessary to prevent defects before they occur, the mechanisms to reward quality over quantity during production, and the emphasis on automation wherever are possible are not in place at Chrysler to the degree necessary.  One need only look at JD Power & Associates Brand Rankings for initial quality at http://www.jdpower.com/autos/ratings/quality-ratings-by-brand/sortcolumn-1/ascending/page-#page-anchor, which show all three Chrysler brands in the lower third of the auto industry.  If Chrysler as a business is going to survive into the third decade of this century, this must improve.

4. Focus on the brand(s). Currently, the Chrysler group has three brands – Chrysler, Dodge and Jeep – having eliminated the Plymouth brand earlier in the decade.  Though this is subjective, the Jeep brand has the strongest identity and highest brand equity; Chrysler is second, while Dodge is struggling to shed the “Detroit rust-belt automaker” image it garnered in the 1970’s and 80’s.  As Madison Avenue knows, selling products is more about image and perception than about fact, so Chrysler needs to changes it’s brands by:

(a) Re-establishing a brand ladder like the one it had in the past.  A new brand is needed for the entry-level buyer to replace the old Plymouth nameplate.  Modeled after Toyota’s Scion, this brand should build smaller, lower-cost cars that continually update styling based on recent trends.
(b) Ditch Dodge. Though a well-known brand, Dodge needs to be replaced with a more positive brand name in the middle-market, or at least overhauled. Currently, the brand is far too muddled by the presence of sports cars, minivans, mid-market sedans and burly trucks all side-by-side in the same dealership with the same nameplate. Dodge could transitioned into a boutique sports car brand, retaining the Viper and Charger, then adding a convertible and a coupe to the brand to cement the “fast and furious” image. Dodge trucks should be moved under the Jeep brand, where durability and reliability are already well established, while the Caravan and sedans should be moved to the new brand.
(c) Chrysler can remain at the top-end of the market, but some significant effort and marketing dollars will need to be spent to re-establish Chrysler as a luxury brand.  Right now, the top end of the market is very crowded and very competitive, given the presence of Lexus, Infiniti, Acura, BMW and Mercedes to join domestics Lincoln and Cadillac.  The best move may be to shutter the brand until a concerted effort can be made to re-enter the luxury market.
(d) Letting style drive design.  Product development should start in places like Madison Avenue, the Wilshire District, and ?????? not just end there.  And, while, Chrysler has had some innovative product designs in the past two decades, few people put individual Chrysler products at or near the top of their categories for styling.  Plus, with most engine and some platform design moved out-of-house, certain constraints on the product design will push style to the forefront.

5. Dump the dealerships, not the dealers. There’s something about a dealership that is enormously wasteful.  It’s the size, the space, the number of employees and the sheer number of cars sitting idle for months waiting to be purchased.  Sure, in the good times, inventory turnover is sufficient to justify having 30 different vehicles of the same model at once sitting on a lot, but in the bad times, it’s downright debilitating.

Chrysler still needs dealers to sell its cars and it still needs repair centers to repair them, but it certainly doesn’t need the enormous dealer network it has to effectively sell automobiles.  The first step is to pare the number of dealers by 1/3 and convert another 1/3 into authorized repair centers that retain the profit-rich repair business while dumping the profit-poor sales side of the house.  The remaining third become repair, distribution and sales centers for those buyers who can’t adjust to the new distribution model I’ll describe next.

6. Build to spec. It’s not a new concept in the car business, but the last time it was attempted, it was successful.  Some of us remember how successful Saturn was with this model, which dramatically reduced inventory costs while personalizing each vehicle.  A customer drives one of a few demo models, goes back to the showroom, then chooses the features on their car from the ground up – heated seats, fog lights, faux chrome.  If they need a car right there and then, they drive off with a dealer loaner that’s standard-equipped, but they return in three-four weeks to pick up the car that fits them perfectly. One can only wonder why GM insisted upon “absorbing” Saturn into it’s primary business, killing all of the wonderful innovations Saturn brought to the market, but I suppose that’s an entirely different subject for a blog.

7. Sell cars at shopping malls. This may be my most radical idea since the recommendation that Chrysler stop building engines, but let’s see if I can convince you, nonetheless, that the mall can be a better place to sell cars.  Every weekend, our nation’s largest shopping malls represent one of the highest areas of foot traffic in their local area, and those with auto sales experience know that foot traffic matters.  Certainly, these people did not come to the mall to buy a car, but have you ever stopped in the center of a mall to look at one of the three or four cars parked there by a local dealership?  If a new car model showed up at the mall and you had a chance to drive it while you were there, wouldn’t you give it a try?  Months later, when you actually needed a car, would you insist upon going to a dealership, or would a stop by a small retail center at the mall suffice?  This is just a hunch, but you’re probably more open to buying a car at the shopping mall than you think.

Let’s describe the “shopping mall” model, then.  Chrysler signs contracts with regional mall operators, such as Westfield’s, which allow them to display three to four vehicles in the center of the mall.  Chrysler then assigns a dealer from its current pool to run their mall center, and the dealer places a sales person at each of the four cars.  The sales person invites people to sit in the car, shows them the latest features, and if appropriate, takes them on a test drive of a similar car parked out in the mall’s parking lot.  If the person likes the car and is ready to buy, they work with the sales person at a kiosk to build their car from the ground up (see build to spec), answering a few financial and credit-related questions and making a down-payment electronically. At that point, the buyer can leave with one of three or four standard-issue models in the shopping mall lot to drive until their new car arrives at their home, paying a week-to-week lease in the process.  Or, the buyer can wait for their custom car to arrive before starting payments.  Trade-ins are either accepted at the mall or handled by a third party wholesaler who works in conjunction with the dealer. Either way, a shopping mall dealer should only need fifteen or twenty cars at the mall, instead of the hundred-plus needed at a typical dealership.  Supply is replenished on a weekly basis by the regional service, repair and distribution centers.

8. Strengthen the core. Well-structured, modern U.S. businesses have learned that the best way to maintain business stability, accommodate rapid growth and hedge against potential downturn is a core-contractor staffing model.  In most of these businesses, the core represents 1/3 to 1/2 of all workers – those who have specialized skills, difficult-to-find expertise, and long-term organizational knowledge to grow the business across decades.  The remaining 1/2 to 2/3 of workers, though certainly important, work in jobs that are either redundant or do not require specialized knowledge.  These can be outsourced, contracted or trimmed if economic conditions require it, allowing the company to remain agile in a competitive market.  Chrysler needs to adopt the same approach with it’s staffing, making a strong commitment to 1/3 of its union staff, investing in their success with continued training and opportunities at advancement in to leadership and management.  In exchange for commitment to the first third, the union agrees that the second 1/3 of staff are union temps who pay union dues, can be laid off quickly and can also move in to the first third if turnover allows.  The final third is 100% contractor – either on-site or off-site – and is officially employed by another company free to adopt its own staffing model.

Though to some, the core-contractor staffing model seems like a major concession on the part of unions, this change is necessary if Chrysler and its union worker system are to survive into the next decade.  It will also strengthen the bond between union and management, as the ability to honor the commitment and work together long term increases.

9. Make the workers own. This concept is far less radical than some of my previous ones, but it’s equally important.  Every member of Chrysler’s core work force – union and management – needs to benefit from the success of the business via slowly-vested stock ownership.  It’s important that union members, as well as management, consider the question, “If we don’t make this change, what will my stock be worth?” while building it’s value through hard work and innovation.  The ownership percentage needs to be sizable – not ten or twenty shares per worker amounting to a couple hundred dollars, but thousands of shares worth tens-of-thousands of dollars for the most-tenured rank-and-file.  In my humble opinion, this is the best way to encourage the rank-and-file to think holistically about the success of Chrysler from decade-to-decade and not solely about their compensation from month-to-month.  We’ll address management, next.

10. Make the leaders work. In my limited experience in the manufacturing industry, I was surprised to find out how little the desk-jockeys in many manufacturing businesses actually know about the work being done on the plant floor.  Many have never even visited the assembly line, much less spent time working on the line before moving in to a support role or management.  This lack of experience fosters a lack of understanding about the work and a lack of empathy about the people who make the products.

To ensure that this does not happen at Chrysler, the company’s leadership and support staff should be required to visit the assembly facility at least once per month and actually perform work on the line wherever possible, observing in many cases and helping in others.  One area where leaders could work and be relatively innocuous is quality assurance.  Certainly, leadership should not to replace the current QA staff, but instead would add a second set of eyes who review the QA checklists, see actual product quality with their own eyes, and learn about what people look for when they determine the quality of a product.  There are also other areas where the leaders can work productively and safely, but I’ll leave that to tacticians to determine.

….

After reading this far, you’ve probably come to the conclusion that the ten steps I’ve outlined are not over-night cures of the organization, They are long term strategic moves to build a successful business; hey will take years to implement, so there are quick fixes ahead.  But, this is the fundamental way that Chrysler’s leadership and investors should think about the company.  Forget about whether this quarters profits are 2% higher than last quarters or 5% higher than estimates; concentrate on whether Chrysler has a business model that can thrive in 2010, 2020, 2030 and beyond, because this will yield the biggest gains to share-holders and to society.

Why I dumped Bill for Steve (first betrayal, then new love)

In Technology on 2 January 2009 at 6:48 pm

There are a few times in your life you have to make big decisions that you KNOW will dramatically affect the rest of your life. You make them with some trepidation, you make them with the promise of a brighter future, but you make them anyway.  One was the decision to pack everything I owned into my Jeep Wrangler and head East to a new life in Maryland back in 1994 (good decision). Another was asking my wife to marry me in ’95 (great decision, don’t anybody remind her I got the better end of the deal), and yet another was to move the family for a promising job thousands of miles away (good decision, bad outcome).  Though not quite as significant in my life as those three other decisions, I made another monumental decision two months ago that may well have just as much impact.

[For those of you looking for juicy gossip on gay love, I’d suggest visiting another blog.  As much as the title might be mis-leading, this blog entry isn’t about a romantic relationship, sorry.  If, however, you’re considering a switch from Microsoft to Apple, or your an Apple-head, read on.]

Okay, back to the story and the big decision. [I did tell you this blog is called “Nash Ramblings”, didn’t I? You didn’t expect something short and to-the-point, did you?]

I was just starting a new job and getting settled into my position, when my employer asked me a simple question – “Bill [Gates] or Steve [Jobs]? PC or Apple?” Now, this may seem like a trivial question, much like “McDonald’s or Burger King?”, “coffee or tea?”, “thumb tacks or push pins?”.  And sure, I can hear your snickers traveling over the wire right now, vibrating my keypad and jiggling the power cord so much the pretty little power indicator is blinking like Rudolph’s nose.  “Who cares what kind of computer you use” and “how pathetic is your life that this decision could be life-changing?”, you chuckle.  But for me, a thirty-year veteran of computing with over two decades of heavy desk time with IBM/HP/Toshiba PC’s and Microsoft operating systems, this question held the potential to rock the very foundation of my World.  Would I, a Microsoft devotee, actually consider a move to Apple? Why was I hesitating to blurt out “I’ll take the PC” to continue in my comfortable, cozy computing cocoon and instead thinking, “I’d like the Apple”?

Here’s why…

  1. Vista. I know this is already a public relations disaster for Microsoft, but I’d like to echo my hatred of this operating system so that the folks at Microsoft can realize how badly they messed this one up. Let’s start with those stupid “permit or deny” messages that keep me from moving a file from one folder to another – my own files, mind you, not another users – without saying, “permit”.  Then, let’s try to figure out why you had to re-label control panel utilities, printer configurations and modify application navigation.  Was there anything wrong with the phrase “Add/Remove Programs” that existed since Windows 95, if not earlier?  Did any of your focus groups include a single, solitary experienced user?  Did you really have to scrap 90% of my historic knowledge for a UI that benefited the 5% of your user base who is completely unfamiliar with Windows XP?  As you can see, I hate Vista, so a switch to another OS – any other OS, was possible.
  2. Office 2007 for Windows. Preferring to create a two-headed hydra, Microsoft not only introduced Vista, they published the drivel known as Office 2007.   Gone are the pleasant menu and toolbars that I memorized from Word 6.0 from the early 90’s and in its place is a series of cryptic icons that fail to categorize tools in any logical fashion.  What I could once do in a couple of keystrokes or a few mouse clicks took me up to 5 minutes to do in Word 2007 as I looked up how to add a page break, adjust a section heading, insert a table of contents or insert a table. No longer could I hit “Alt-F-S” to save a file or “Alt-T-O” to show the options menu.  Again, I must ask Microsoft, where was the logic in stripping your product of it’s most elegant feature – the Microsoft menu bar?  Didn’t any experienced users complain that this was madness before the product was shipped?
  3. Apple’s move to Intel chips. A few years back, Apple made the bold step of abandoning their Motorola chips for Intel.  To non-techies, this was not a big deal and made little sense, because Motorola is a brand name that we all know and respect.  But to Apple, the Motorola chip’s design was limiting their ability to make software compatible with PC’s, not to mention having a similar affect on their software developing partners.  With the move to Intel chips, it’s much easier to build operating systems and applications that can port to other platforms while using suppliers partial to Intel-oriented technology, making the costs of building and supporting the Apple product lines much lower for Apple and the vendors who work with them.  It also signaled Apple’s willingness to go head to head with IBM, HP and Dell rather than operate on the fringes of the computing World.
  4. Compatible files and compatible applications. In the past five years, since the move to Intel chips and OS X (version 10, a Unix-like operating system), file compatibility and application compatibility have improved dramatically.  I can now open my MS Word files on my Mac, edit them using iWork Pages or Open Office and send them back to a friend using a PC to read and update. I no longer have to wonder if they’ll be able to read my files or edit them, because software vendors have worked hard to make them compatible. 90% of the files I create can smoothly transition back and forth, and 90% of the features I cared about in Microsoft Office are available from one product or another on the Mac.
  5. Virtual Machines. About ten years ago, software developers created a virtual machine software for running Microsoft Windows on the old Mac OS that was slow, clunky and poorly integrated with peripheral devices like printers and external drives.  I can’t remember the name, but I tried it once on my Mom’s Macintosh and declared it inadequate.  Since the advent of VMWare’s Fusion and similar products, the virtual machine on the Mac has come of age and it’s now possible for me to run the half-dozen Windows-only applications essential for my job.  Microsoft Project not available on the Mac? No problem – boot Windows XP (yes, it’s licensed and legitimate) from VMWare, open the file stored on my Mac, update it, print it as a PDF and distribute it to the project team.  Too cheap to buy a new version of Adobe Photoshop that I bought four years ago for my PC?  No problem – boot Windows XP, update the graphic I need for a family greeting card, save it as a jpeg and use it in Mac OS.  Though they’re far from secure and Mac purists are probably upset that I still need to use Windows on occasion, virtual machines make it possible for me to switch to Apple, use the tools required for my job and keep my library of old software products that still work just fine.
  6. Changing work responsibilities. A half-decade ago, I was managing people and leading projects, but I was also still coding.  Back then, it was important to know that the code I wrote would work smoothly on 90% of the desktop machines on the planet – the Microsoft population.  For those of you who still code, the prospect of testing and re-testing on multiple platforms is almost as irritating as testing in multiple browsers, so the thought of adding yet another complication to the software development process was unappealing.  Now, I’m older and I don’t code any more, so I simply don’t worry about whether my code will port from one machine to another seamlessly.  And, with the addition of Java to the Mac environment along with the embracing of W3C standards in web browsers, I’d worry a heck of a lot less if I still did code.
  7. Helpful people. I’d be lying if I implied in this article that my transition to Mac as entirely trouble-free, because it took me about two weeks to become competent enough with the Apple to rival my abilities in Windows.  Along the way, my boss tolerated the “how the heck do I…on the Mac” questions while he patiently helped me to adjust.  He easily could’ve thought me incompetent and fired me. Similarly, a friend of mine who works at Apple (oooooh, how convenient), Scott H, helped me to map Windows applications to their Mac-based counterparts (“Windows Explorer” is now “Finder”, “The Dock” replaces the “Start” menu, “Preview” can open Acrobat PDFs, etc.).  Without their help and patience, I’m sure I would have made the move, but it probably would’ve taken a week or two more.  Thanks, gents.
  8. The Intuitive UI. Thus far, most of my reasons for the switch to Mac have been anti-Microsoft, but there’s one BIG reason to make the switch to Mac rather than the switch from Microsoft – the easy-to-understand user interface (UI).  Apple did something that Microsoft failed to do with Vista and Office ’07 – it created and maintained the intuitive user interface that’s existed on the Apple since the first box-shaped Macintosh rolled out in the early 1980’s.  Sure, enhancements have been made, but they’re additions more than radical changes.  The apple menu option still appears in the top left corner of applications to navigate the entire system, and the main desktop can still be just as cluttered or organized as the first hard-drive equipped Mac’s of years past.

So, it’s now been two + months and I’m a happy Mac user.  There are a few features I miss from Windows, but not many, and while it’s possible I’ll make a jump back to the Windows OS some day, the seas of change will have to be equally stormy to push me off of the Apple and on to another.  To Microsoft and their founder, Bill Gates, I close with the message, “You started well, but handed the keys off to the wrong driver(s).  Fix your mess, or we users will fix it for you.”  To Apple and their founder, Steve Jobs, I say, “nice operating system, beautiful computer.  And, Steve – don’t even THINK about dying.  Who in the World will lead Apple, but you?”