Oren's blog

"A Slippery Slope in 2009" by Oren Harari. January 6, 2009

Happy New Year and let’s hope the economic news in 2009 (far) exceeds that of 2008. Towards that end, the politicians are already preparing a trillion dollar New Year’s gift—a.k.a. stimulus package—for a January 20 inaugural unveiling. To the corporate leaders who are salivating to get a piece of the action, let me wish you luck and simultaneously wish you a wee bit of caution.

Back in 1988 I led a two-day seminar with members of the sub cabinet of the Mexican government representing telecommunications and transportation. I spoke about the inevitabilities of open markets, the potentials of a then-proposed North American Free Trade Agreement, the dangers to those who ignore them, and the opportunities for leaders who take advantage of new technologies and market trends. The men (they were all men) reacted with blatant complacency. Their implicit message to me was, Gringo, you don’t know Mexico. We’re buffered by government handouts, protectionism, and cronyism, so none of this free-market pap is relevant for us.

Within two years, most of these men were gone, their organizations completely revamped, as the protective blanket of government began to lift in the face of intensifying global competition.

Here’s my point: Leaning on government handouts and protectionism is an illusory strategy because the “victories” never last. Eventually, the gravy train stops even as competitive markets flourish. Worse, any strategy that relies heavily on government keeps companies stuck, because it drains a company of the vision, urgency and discipline necessary to challenge and reinvent itself.

Those of you who have read my December 3 and December 20, 2008 blogs (see www.harari.com/blog) know that on a national policy level, I fear some serious unintended negative consequences of bailouts to large, faltering companies. My concerns have intensified as I read about organizations in industries as diverse as autos, credit cards, commercial real estate, construction, steel—not to mention a host of state and local governments—all ginning up to lobby for the big federal bucks, often in the name of “jobs”.

Indeed, U.S. Senator James Imhofe wrote his colleagues back in November 2008 that he was concerned that Secretary of Treasury Henry Paulson’s TARP Capital Purchase Plan “…would lead to increased lobbying for handouts and bailouts by any industry facing financial trouble.”

And sure enough, Democrat Joe Donnelly and Republican Mark Souder, both Indiana representatives in Congress, recently sent letters to Paulson and Fed Chairman Ben Bernanke asking them to help subsidize buyers and sellers of—are you ready?—RV’s. Yes, it turns out that, according to Donnelly and Souder, “the recreational vehicle industry employs thousands of hardworking Hoosiers in our area and is a key component of our local economy.”

Well, there you go. Enough said. Bipartisan pork. The same argument can be applied to Oregon’s timber and logging industry. And the wine industry in California. The “Predictify” website of the Washington Post asked readers, in all seriousness, to predict who will be the next to request a bailout before the end of March, 2009: A major U.S. airline, a U.S. oil company, Microsoft, or U.S. farmers. I suppose anything is fair game these days regardless of whether it makes long-term economic sense.

But the point of today’s blog is more micro-oriented. It’s aimed at you, the leader, and the kinds of decisions you will make as you navigate your organization through turbulent waters over the next couple years. Sure, if you can readily grab a piece of the pork pie, why not? Go for it. I would.

But that’s not where I’d focus most of my energy and resources. I’m currently working with clients who understand that now is the time to clean house and build a leaner, more forward-looking ship. They’re simplifying business models, financial metrics and their organizations—radically. They’re putting together new technologies and partnerships for turbo-increases in efficiencies, speed, transparency, and networks. They’re ruthlessly dumping toxic assets in their own balance sheets while refocusing their strategic plans on future growth arenas. They’re building a sense of urgency and common cause among their employees. All that takes time, courage and commitment, the kinds of time, courage and commitment you might not have if you wind up chasing federal dollars for salvation.

All that money out there—a trillion here, a trillion there—is sure enticing. But for a leader who is concerned with sustained competitive advantage for his or her organization, it’s a slippery slope indeed.

"Bailing Out Billionaires" by Oren Harari. December 20, 2008.

I don’t know what gifts you or I are going to get over this holiday season, but I’ll bet they are nowhere near the value of the gift that you and I just gave Stephen Feinberg.

See, Feinberg runs Cerberus, the colossal $27 billion private equity firm that owns Chrysler. Mind you, Feinberg and his crew bought Chrysler from Daimler for $7.4 billion in 2007, not because of some noble mission to “save American manufacturing” or “save American jobs”, but because it was an undervalued asset that they could somehow patch up to make money for Cerberus partners (first and foremost) and the firm’s well-heeled investors. There’s nothing wrong with any value investor looking for growth opportunities, but, well, things didn’t work out according to plan, and the multi-billionaires who run the firm started to get a wee bit desperate.

And now—hooray!—George Bush just came to their rescue! He allocated $17.4 billion of our taxpayer money to GM and Chrysler. I don’t know how GM and Chrysler will divvy the prize up, but I for one am reassured that Feinberg and his partners will enjoy a restful holiday, free from worries that their private investment might go bust.

Just in case you still have delusions that the current federal lifeline will grow Chrysler and its jobs, I’d like you to consider this passage from an article in the December 8 issue of BusinessWeek. The article described how Cerberus and a couple other financial firms bought the venerable but vulnerable retailer Mervyns in 2004 and then proceeded to systematically gut it. While Mervyns managers did an admirable job in stabilizing the balance sheets and slowly restoring the brand, Cerberus whiz-kids attempted to extract every ounce of financial blood from the firm for short term gains. The chain is now being liquidated, and nearly 20,000 people will lose their jobs.

Quoth Business Week:

“When (Cerberus and partners) bought Mervyns from
Target for $1.2 billion in 2004, they promised to revive the limping retailer. Then they stripped it of real estate assets, nearly doubled its rent, and saddled it with $800 million in debt while sucking out more than $400 million in cash for themselves…The moves left Mervyns so weak it couldn’t survive…Mervyns’ collapse shows how investors with risky business plans, unrealistic financial assumptions, and competing agendas can deliver a death blow to companies that otherwise could have survived. And it offers a glimpse into the human suffering wrought by owners looking to turn a quick profit above all else.”

Those of you who are hearty advocates of the bailout: Does this reassure you? Consider some other tidbits:

• Chrysler’s CEO is Robert Nardelli, the same guy who stripped Home Depot of customer service, front line floor staff, and stock value, until he was forced out by the board with more than a $100 million “punishment” severance. I wonder what his severance package will be when he exits Chrysler?

• Chrysler eliminated 11,000 hourly and salaried jobs in the U.S. in November, and the potential merger with GM will eliminate half of Chrysler’s 66,000 jobs. So much for commitment to jobs.

• The consensus among industry observers is that this federal injection is just a “down payment”. I love that term. It suggests that you and I will actually own something that will appreciate in value and make us wealthier. Actually, all it means that in March the billionaires will be coming to us again for more. And then more. And then some more. Why am I sure? Well, apart from the basic costly, bloated structural inefficiencies and legacies that will still plague Chrysler even after all the current (nonbinding) “concessions” to the feds, see the next bullet.

• According to Jalopnik.com, a Web site that tracks the car industry, Chrysler doesn’t have any fresh, compelling ideas for the future. In fact, the company “is mired in the last decade, and not ready for the next one.” And even today, warn Chrysler car dealers themselves, the bailout will do little to spur sales.

• Finally, there’s a philosophical note. Writes Mark Lange, a former private equity executive: “Over the decades, we’ve learned that government has a terrible track record picking winners with public money…the Soviets tried industrial policy. Japan tried it. We tried it. It didn’t work.” (In that spirit, I must give kudos to Ford for refusing the straightjacket of federal largesse and its resultant political micromanaging).

So there we are. Recently, Cerberus has very reluctantly transferred $2 billion from Chrysler Financial to keep the company alive, but Feinberg and his cronies have made it clear: No more! They’re counting on us from now on.

So are you ready to say Happy holidays Steve! Or are you ready to say—hmm, you know, maybe in 2009 we ought to consider some other alternatives to building jobs and economy here in the U.S.

"Don’t Confuse Your Product With Your Business" by Oren Harari. December 13, 2008

How do you revive a business model that’s literally dying? This was the question as I faced a group of newspaper executives who are experiencing relentless plunges in both circulation and revenues. I use the word “literally dying” because the odds are that if you’re over 50 years of age you probably subscribe to a newspaper and if you’re under 30 you probably don’t, and won’t. I asked my 18 MBA students, all of whom are under 35, how many of them receive a daily paper. It’s not merely that none of them did, it’s that their expressions indicated that they were puzzled by the question—like, who would want to?

Good question. If you're in the business, the trends are alarming. Newspaper circulation goes down 3-4% annually as more and more people, including post-50 oldsters, gravitate to the Web, where they can skim reports from an infinite array of sources real time any time, follow links, post comments and videos, and interact with others. Advertising revenue, the lifeblood of the business, sinks as destinations like craigslist, monster, eBay, and vendors’ own websites offer more flexibility at lower prices. The most venerable brand names—New York Times, Chicago Tribune, Los Angeles Times, Miami Herald, Christian Science Monitor, etc. etc.—are in a world of financial hurt.

Some in the industry think this is temporary, like—interestingly—Sue Gardner, the executive director of Wikepedia, who says: “Everybody is grappling with what to do about the decline in the newspaper industry. When I was in the conventional media, we all spent a lot of time wondering what we were doing wrong. I don’t see it that way at all. There’s amazing journalism going on at newspapers and at NPR. To me, it’s a market shakeout, or a market correction.”

Shakeout? Correction? Dream on. It’s a slow death spiral. Ask the folks at Kodak when they think film products will come back big time. Ask the folks at Warner Music when CD sales will start spiking up again. As customers, we’re taking more photos than ever before, and we’re listening to more music than ever before—but we have long since moved on to different technologies, products, and distribution channels. The original vendors, once powerhouses, have been left behind, trying to catch up with a world they don’t fully grasp or respect.

With newspapers, I think the situation is even more dire. Think about the guy or gal who throws your daily dose of newsprint on your lawn every morning. Now think about those old black and white films with Joe the milkman or Herb the iceman delivering their products to their customers’ doors. Don’t you get the sense that those days aren’t coming back? Why should it be any different with newspapers, especially since news and information have been commoditized and made available in a vast array of more immediate and comprehensive digital formats?

So what could I tell those newspaper executives that they didn’t know already? Well, we looked at clues from vendors that seem to be succeeding. It appears that high-quality, targeted, niche-based business models are more successful than a smorgasbord of all-things-to-all-readers efforts. (Parenthetical hint: this is true in all industries). The London Financial Times is actually growing its circulation globally, and over the past few years its ad revenues have averaged an increase of 9% annually—a stunning number. The Baltimore-based Afro American News is humming profitably—combining a precise demographic niche with a local (Baltimore-DC) news thrust.

Other possible role models: The MediaNews Group (55 newspapers), which focuses on local reporting and ruthless cost cutting—from offshoring major production functions to consolidating operations across multiple sites. Or how about the Wall St. Journal, recently added to Murdoch’s News Corp empire? It’s a distinct niche brand (there’s no doubt about what it does or what it stands for) coupled with both a “deep” and “wide” presentation of daily business news and analysis—and simultaneously drawing on the resources of the vast parent corporation and the potential synergies with the TV assets of News Corp.

This is all very nice, but I’m not sure that even these companies can sustain profitable growth. At this point, print represents 40% of costs but 90% of revenues. But from both a cost reduction and revenue enhancement perspective, the future is clearly online, or maybe some sort of imaginative, tightly integrated multimedia mix. I don’t know what it’ll look like, but I do know that the victors will be able to re-imagine and create that future by fully exploiting—and monetizing—the Web as a key part of the value equation. So far, only the Wall St. Journal seems to be able to charge major bucks for its online publication., so maybe that’s a start for benchmarking. But if the history in every other industry holds true, the new “imaginators” will mostly be new players that are currently unknown. They’ll approach the business not with the goal of incrementally improving today’s products, but by completely disrupting them. Ask Kodak. Ask Warner.

That’s the moral for all of you in the non-newspaper world: Don’t confuse your current product with your future business. People want news, information, entertainment, music, photos, milk, ice, what have you. That doesn’t mean they will want your current products or services, even if those products and services have been successful in the past. Stay wedded to your business, stay tuned to where your business is heading tomorrow, innovate accordingly, and don’t cling to what made you great yesterday.

"Give the $34 Billion to Tesla" by Oren Harari. December 3, 2008

The first time I saw a Tesla convertible sports car, I was with my wife and I stopped dead in my tracks. It was parked, and I was stoked. I didn’t know what it was at first. “It looks like a Porsche, but it’s not”, I murmured as I walked around it. “It looks like a Ferrari; no, that’s not right either.” Whatever it was, it looked hot.

Oh, did I mention that the Tesla Roadster is 100% electric, goes from 0 to 60 miles per hour in 3.9 seconds, burns no oil, and gets over 200 miles per charge? Did I also mention that even though Tesla Motors is suffering in today’s economic crisis (it postponed an IPO, it downsized 25% of its workforce), it still boasts passionate customers and committed investors-- and was recently able to raise $40 million in convertible debt to beef up its cash position?

I ask these questions because it seems to me that instead of giving the Big Three automakers the $34 billion that they have asked for, the government ought to give that money to Tesla and any other promising electric vehicle startup companies. That capital infusion will help Tesla smooth over operations glitches, lower the price from the current $100,000 a car, and ramp up production and marketing to not just meet, but accelerate, demand—all of which would stimulate even more entrepreneurial excitement into building a revolutionary new vehicle industry, one with a minimal carbon footprint and reliance on foreign oil. By the way, isn’t that picture consistent with Obama’s campaign pitch?

When I say give the money to Tesla, I’m speaking tongue in cheek—sort of. I don’t think that government should be in the business of picking winners and losers. That’s what capital markets are for. But I do know this: When politicians do make these decisions, the federal largesse doesn’t go to the Teslas. It inevitably flows to the biggest and best connected companies, many of whom are inefficient, fading dinosaurs seeking protectionism for old technologies, old legacies, and old management styles. The companies whose assets are mainly intangible—foresight, innovation, speed, passion, collaboration—are often too small to compete for bailouts, even though they represent the future. They get trumped by the behemoths who have huge PR and lobbying budgets.

As a professor of management, I’ve found GM, Ford, and Chrysler to be curiously weird case studies inasmuch as they are Bizarro exemplars of what shouldn’t be done. That is, most of what their executives have done over the past four decades—in terms of planning, operations, capital investment, budgeting, mergers and acquisitions, human resource management, labor relations, pension funding, leadership behavior, et al—is so awfully bad that the best advice one can give MBA students is: “See what they did? Do the opposite.”

The results are predictable. The stock value of GM and Ford (Chrysler is private) has totally collapsed, flirting at a whopping $1 a share (for goodness sakes, a few months ago GM’s market cap was lower than the amount of cash it had!). While foreign car manufacturers like Toyota, Honda, and BMW continue to sell cars, build plants, and hire workers in the U.S., the Big Three’s status on payroll, sales, market share and profitability continue to plummet. GM alone has been burning through a billion or two bucks a month for a while now, and the company now says it needs $4 billion just to survive over the next three weeks! Remember that $40 million that Tesla just picked up? Megan Barnett at Portfolio.com has noted that “a $40 million loan to GM would likely be gone after one week’s worth of health-insurance payments.” How long do you think it will be before the $34 billion is gone and next handout request pops up?

From that perspective, isn’t this entire discussion—should we provide losers with billions in taxpayer dollars—somewhat ludicrous, somewhat scandalous? Investors obviously have no confidence in future earnings and cash flow from these three companies, so why should taxpayers be the ones to flush money down a toilet? Yes, I know we’ve bailed out losers in the financial services sector, and I don’t like it either. I think it’s a knee-jerk, strategically incoherent response to a crisis. I think it will come back to haunt us. I’m not surprised that Treasury secretary Paulsen has already begun to rethink and even suspend big segments of his original scheme. And like you, I am repulsed by the continued arrogance of big bonuses and lavish executive retreats in these firms.

But here’s the difference: Finance is the lifeblood of an economy. It impacts every business, every product, every step of commerce. No government can allow the freezing up of its flow of lifeblood unless it wants an economic heart attack. So while I can disagree with the specifics of what our government has done, I can understand the rationale for its getting involved.

But cars? If we rescue GM, Ford, and Chrysler, why not rescue every large, well-connected, mismanaged, poorly performing company that has a well-spun message? If we as a society go down that road, in the name of pseudo compassion and myopic expediency, do you honestly believe the U.S. will remain an economic powerhouse?

How to “save” the Big Three is the subject for another discussion (I happen to believe in some government assistance in a Chapter 11 restructuring with entirely new management) but the taxpayer shouldn’t be the one to “save” them.

As a retired business executive recently wrote me: “These companies (Ford, GM, Chrysler) are asking for astounding sums of money from taxpayers. Refusal to grant them more money to expend, aka dissipate, as they have for 50 years is not punishment. We the taxpayers are not overtly doing anything to them. We simply don't need to endorse their organizational misdeeds.”

I’d rather endorse entrepreneurs who seek to radically improve or totally reinvent the entire vehicle business. The beauty of free markets is that taxpayers won’t have to do that. Investors will. The Tesla companies of the world will rise or fall on their own merits. So should GM, Ford, and Chrysler.

"Leadership Secrets for Barack Obama" by Oren Harari. November 17, 2008

Because I wrote a best-seller called The Leadership Secrets of Colin Powell a few years ago, I’ve already been approached to write a similar book on Barack Obama.

Wait a minute! I replied. He’s not even President yet. How can I, or anyone else, write such a book until he demonstrates some great leadership as a functioning President?

I suggested an alternative: Can I offer some leadership secrets to President-Elect Obama? I think I can. If I were advising Obama (or, for that matter, anyone in any organization taking on a new leadership position), here’s what I’d say to him:

• As the new kid, you can’t be passive. You can’t appear to be indecisive. You can’t shirk or postpone tough decisions. True, don’t be reckless and don’t shoot from the hip. But remember that the nation is in crisis, and people expect to see movement quickly-- either results, or some deliberate actions based on a defensible coherent plan that will yield results in the near future. Leon Panetta, former White House chief of staff, has advised you to “put your arm around chaos….You’d better damn well do the tough stuff up front because if you think you can delay the tough decisions and tiptoe past the graveyard, you’re in for a lot of trouble….Make the decisions that involve pain and sacrifice up front.”

• At the same time you’re moving towards goals, you’ve got to heal us. You’ve got to reassure us, to calm us down, to try to bring as many of us together. Michael Beschloss, presidential historian, has noted that “It’s been a very rough 10 years, beginning with a very controversial impeachment, the recount, 9/11, the wars in Afghanistan and Iraq, Katrina, and now the financial crisis. If you think of the shock in the system these things have had over a 10 year period, I think Obama recognizes he needs to really settle our nerves.”

• My research, and that of others, suggests that the first 100 days after a leader takes over is critical. If little of significance happens during that time—either in terms of performance or reassurance--then the odds of anything significant happening afterwards plummet. General Douglas MacArthur once said that every military defeat can be explained by two words: "Too late." Too late in anticipating danger, too late in preparing for it, too late in taking action. This is a good lesson for the entire four years of your (first?) term, but it’s a particularly important lesson for the first hundred days.

• Of course it will take courage. No courage, no leadership. In a recent cover article in Christianity Today, professors Daniel Taylor and Mark McCloskey noted that "In premodern times, the courage of a leader often had to be physical. In the last 500 years it is more often moral. Moral courage is the ability to do what's right even when it is deeply unpopular, even dangerous. Courage is only found where there is the genuine possibility of loss -- loss of friends, reputation, status, power, possessions or, at the extremes, freedom or life."

This doesn’t mean that you should ignore counsel or due diligence. It doesn’t mean you should say that you don’t care what others think. On the contrary—seek advice, even from intelligent, thoughtful contrarians—in your own party and among Republicans. But at the end of the day, as Colin Powell has noted: “Command is lonely.” No matter how much counsel you’ve received, no matter how participatory the process has been, no matter how much you've vetted, you’ll be the one making the final bold choices, and taking full responsibility for them. That requires courage.

• It won’t be easy, no matter how popular you are now. As William Shakespeare once wrote: “Uneasy rests the head that wears a crown.” The work of transformation is glutted with the daily grubby and painful details of execution. Leaders must convey this reality to followers, and stay visibly engaged in the gritty process of implementation. Otherwise, popularity and adoration will be short lived.

Echoes Washington Post columnist Howard Kurtz: “What happens when adulation gives way to the messy, incremental process of governing? When Obama has to confront a deep-rooted financial crisis, two wars and a political system whose default setting is gridlock? When he makes decisions that inevitably disappoint some of his boosters? Obama's days of walking on water won't last indefinitely. His chroniclers will need a new story line. And sometime after Jan. 20, they will wade back into reality.” You should warn Americans that they’ll be wading through swamp even as you continues to inspire them with the possibilities of transformation at the end of the line.

• But think of the opportunity you have! Harvard political philosopher Michael Sandel has observed that “taking office at a time of crisis doesn’t guarantee greatness, but it can be an occasion for it. That was certainly the case with Lincoln, F.D.R. and Truman.” Syndicated columnist Thomas Friedman echoed this sentiment as follows: “Our greatest presidents are those who assumed the office at some of our darkest hours and at the bottom of some of our deepest holes.”

• You have to be optimistic, you have to exude optimism, you have to inspire hope and confidence among us. “Optimism is a force multiplier” declared Colin Powell. Not la-de-da Pollyana optimism, but grounded optimism. Optimism that pinpoints the challenges and faces them head on. Optimism that galvanizes people to overcome challenges and achieve extraordinary goals. You are a great speaker, but being a polished speaker isn’t enough. People have to be inspired to move, to act, to “do”. Back in the ‘50’s, Senator Adlai Stevenson reminded us that “In classical times when Cicero had finished speaking, the people said ‘How well he spoke’, but when Demosthenes had finished speaking, they said ‘Let Us March!!’

Do all this, Mr. President-Elect, and I have no doubt that somebody will be writing a “Leadership Secrets” of you some day in the near future. Best of luck.

"Up the Global Food Chain: A Competitive Necessity" by Oren Harari. November 4, 2008

Today is election day in the United States, and I just read an online article describing that people around the world are watching us closely. In the business world, the same thing happens—daily. The results can be disconcerting for American firms. For example….

Ten years ago, Columbia Forest Products owned the North American market for hardwood plywood, veneer, and laminated products. Within the subsequent five years, Chinese firms shockingly grabbed close to 50% of the market. How? With lower prices and good quality. (And by the way, the lower prices were not simply due to lower labor costs. Chinese firms have capitalized on state of the art logistics, information technology, and global alliances to manufacture and deliver product in a timely, cost-effective way).

In effect, Columbia’s traditional products had become imitated and commoditized. This evolution is a common feature in what I call the Copycat Economy.

What should Columbia have done? One response would have been to reflexively slash prices (thereby destroying margins and organic growth opportunities) in order to maintain fragile market share. This response—similar to how GM has handled foreign competition-- would have bought Columbia a little time before the next wave of inevitable price cuts, and would have propelled the firm into a slow death spiral.

The other path is what Columbia did do: go up the food chain. Elevate the value proposition. Don’t compete ferociously for a commodity market. Create a new one.

First of all, the company converted all of its hardwood plywood and particleboard facilities to a proprietary formaldehyde-free manufacturing system called PureBond. That means that workers and customers no longer handle poison (yes, the lovely hardwood floors in our homes were processed with formaldehyde, a.k.a. carcinogenic poison, which has been the industry standard for years).

The firm didn’t tip-toe around this strategic revolution. It committed itself to it. In fact, Columbia--after three years of keeping its “hot” technology a secret—now sees the virtue in making formaldehyde-free product the industry standard—which, of course, Columbia will dominate. Very shrewd, particularly since Columbia is positioning itself as the market leader in fast-growing “green” processing technologies. The company is beginning to sell its products to domestic competitors, and is creating virtual communities that will bind interested end-users to providers, Columbia or otherwise.

Going further up the food chain, Columbia used the new technology in launching a wide array of high-end decorative panel products specifically created in collaboration with architecture and design communities. The company also moved into high-end customized services, working with its B2B customers (cabinetmakers, home builders, original equipment manufacturers, distributors) on “green” technologies, hardwood management, product design, and such.

You get the drift. Yes, the housing slump has hurt Columbia’s business in the short run, but the company has righted itself successfully by moving up the food chain and dominating a higher-growth, higher-margin non-commodity market.

That’s the good news. The bad news is that those pesky Chinese firms—and Russian and Malaysian ones too-- are going to start moving up the food chain in their own ways, and if Columbia Forest Products doesn’t stay aggressively innovative, it will find itself in the same position that it did a few years ago.

I’m not exaggerating. IBM is confronting its own Columbia story. Several years ago IBM ruefully noted that some of its information technology services were slowly becoming commoditized. Indian companies like Wipro, Tata and Infosys began to replicate some of IBM’s basic consultative offerings at lower prices. Then these upstarts became more sophisticated and began to compete in more complex, higher-end services in consulting, applications, program management, systems integration and product engineering—still at lower prices—and siphoning off some brand name clients like Louis Vuitton and Target.

Infosys CEO S. Gopalakrishnan is quite blunt about his vision: “We are adding new services and expanding into a full-service company. Every single service we provide to our clients, we are moving up the value chain” and they’re doing it around the world (the company has hired 3,000 employees in the U.S. alone).

Recently, I led a strategic alliance meeting among the top executives of Infocrossing, a division of Wipro, and some CIO’s of major client companies—the purpose being to create strategic alliance projects that would further elevate up-the-chain project collaborations.

You see where this is going. The need to go up the food chain is relentless—and global. That means no one is safe regardless of current size. To avoid the ravages of the Copycat Economy, companies like Columbia and IBM must move up the chain faster and more innovatively. American firms can no longer assume that they can perpetually enjoy the high-margin view from the top while global competitors stay satisfied with the low-end work in the basement. Remember, as I said in the beginning, they're watching...

"Two Mergers--One is Insane" by Oren Harari. October 21, 2008

There are two high-profile mergers in the works right now: Wells Fargo-Wachovia and GM-Chrysler. So here’s a little quiz question. Which merger has a pretty good chance to create value for investors and customers, and which one is so destructively insane that the executives shilling for it should be publicly outed as self-serving incompetents and then summarily ousted?

There should be no doubt as to the correct answer. Yes, integrating the cultures, systems, personnel, services, et al of Wells Fargo and Wachovia will be a big challenge, particularly in today’s volatile, distressed financial markets. But it’s do-able, and it makes some sense. Why? Because, first, Wells has built its growth and reputation not via serial acquisition like Citigroup did, but by pursuing fiscal discipline (WF has maintained its profitability because it did not drink the Kool Aid of mortgage-backed securities) and by maintaining a consistent focus on “boring” fundamentals like lending, customer service and cross-selling. Second, while most of Wells Fargo’s growth has been organic, its historical forays in acquisitions (like the Norwest deal ten years ago) have been carefully vetted and methodically implemented. Third, CEO Dick Kovacevich is not a “I’ve gotta be the biggest” megalomaniac. He seems to be more concerned with performance excellence in the grubby details of banking than with deal making and growth for growth’s sake. In fact, he has a healthy wariness of size, noting that often, “you don’t get better by being bigger. You get worse.”

Anyway, the price was good--Wachovia, sinking in rotten subprime-based assets, was not in a great bargaining position (though I’m still perplexed as to why Wells offered $15 billion when Citi, the original suitor, was prepared to pay $2 billion). So now Wells Fargo will post big gains in brokerage and asset management businesses from Wachovia. Even more important, Wells will expand its retail presence east of the Mississippi. So this is a fairly clean, reasonably non-redundant additive process. At the end of the day, Wells Fargo will boast a coast-to-coast franchise with the largest deposit base in the country. Kovacevich better get used to managing size, but he’s shown that he’s one of the few banking leaders today who can conceivably pull it off. Most mega-mergers wind up ultimately destroying shareholder value (did you know that?), but given today’s unique market context and Wells Fargo’s history, this deal has a higher-than-average likelihood of succeeding.

On the other hand, the GM-Chrysler merger is a delusional disgrace. Both companies are hemorrhaging sales, cash flow, and market cap. Does any sane individual honestly believe that if these two colossal, limping dinosaurs mate, they will suddenly give birth to a wave of cool products, fat margins, and sizzling buzz? GM, the buyer, is already burning through more than a billion dollars in cash every month. The financial health of both these firms is so bad that GM can’t even secure financing for the deal. On top of that, Chrysler just got out of a miserable ten year marriage with Daimler—and now it wants to promiscuously jump in bed with another loser—with the same seedy rationale: economies of scale, reducing cost redundancies, blah blah blah.

Taxpayers ought to be outraged. We just gave the Big 3 carmakers $25 billion in guaranteed loans, and right now as you read this, GM and Chrysler executives are lobbying the government for more financial assistance to clinch the deal.

Investors ought to be outraged. Their stock will go into a death spiral as the new company drowns in costly bureaucracy, political in-fighting, and debt. The only happy campers will be the executives who can quickly get out of Dodge (no pun intended) after pocketing their millions. Chrysler CEO Robert Nardelli, having walked away with $200 million after screwing up Home Depot, is well positioned to do an obscene encore if this deal goes through.

Let me revisit something I wrote in my book Break From the Pack, which I think is germane to this discussion:

“Perhaps the greatest delusion executives have about mergers is the belief that somehow two bureaucratic, backward-looking corporations will join forces and spawn an impregnable giant. The underlying assumption is that two companies that have individually managed to generate flat earnings and declining share will be able to magically continue their comfort-zone strategies by jumping into bed together….Ultimately, a merger might temporarily prop up any two beasts by providing them better scale and marketing, but the end result is still extreme vulnerability, if not extinction.”

GM and Chrysler may indeed become extinct, especially if they create a complex, bloated monster that will inevitably return to the government trough for further bailout. Ford might too, having just achieved a CCC bond rating, the lowest junk status available.

I feel bad for many of the employees in these companies. But while Toyota, Honda and BMW continue to create jobs in the U.S., the Big Three have cut more than 100,000 jobs since 2005. And if this GM-Chrysler deal goes through, more than half of Chrysler’s 66,000 employees will lose their jobs—because GM plans to use Chrysler’s $11.7 billion cash hoard to shut down most of Chrysler’s operations while keeping its brands!

In short, don’t let the architects of this deal sell it by appealing to the hoary “American jobs” arguments. It’s a bogus argument. It’s an insane deal. If you’re going to support a merger with your investment dollars, go for Wells Fargo.

"Finally—Resolving the Corporate Social Responsibility Dilemma" by Oren Harari. October 16, 2008

Thank you, Scott MacLellan. You’ve just resolved a dilemma I’ve pondered for years.

Scott is CEO of $2 billion Morrison Healthcare Food Services, which provides meals to retirement centers and acute care facilities. During my last conversation with him, he said that “corporate social responsibility is a big deal for me”, so much so, in fact, that he was planning to spend a fair amount of time on this issue during Morrison’s upcoming annual management meeting.

I asked him a simple question: “Why?”

You see, I’ve always grappled uncomfortably with the whole notion of corporate social responsibility (CSR). On one hand, I can understand the rationale for corporations’ pursuing good deeds and contributing to social causes. Organizations are social bodies. They don’t exist in isolation from communities—or the planet—around them. They draw vital resources from independent sources. After all, where did their talent get educated? Who builds the roads their people travel on to get to work? Where does the water that’s used in the workplace come from? You get the picture. Organizations, whether they admit it or not, are very tightly weaved into the social fabric around them. On a deeper level, sociologist Amitai Etzioni once posited that “individual and community make each other and require each other.” If that is true for individuals, it certainly must be true for social bodies of individuals called corporations.

In fact, back in 1947, Robert Wood Johnson, chairman of Johnson and Johnson, expressed the following: “The day has passed when business is a private matter—if it ever really was. In a business society, every act of business has social consequences and may around public interest. Every time business hires, builds, sells, or buys, it is acting for the….people as well as for itself, and it must be prepared to accept full responsibility for its act.”

Given all the above, one could argue that it makes moral sense, public relations sense, and perhaps even long-term financial sense for companies to give back something, and to acknowledge their intimate relationship with the world outside.

Yet, on the other hand, I can also understand the view espoused by the late Nobel Laureate Milton Friedman, who argued rather eloquently that the social responsibility of the corporation is to grow profit and build shareholder value. By doing so, corporations create wealth, jobs, better products, tax revenues for government, and greater vitality for the economy and society in general.

Profit and growth, according to the Friedman argument, is the legal and fiduciary role of the corporation. Any other goal may make leaders feel good about themselves, but it distracts management attention and diverts precious resources from the corporation’s primary responsibility. (And indeed, over the years I have reviewed a fairly large number of organizations that performed admirably on social responsibility initiatives, but did a lousy job in terms of products, customers, and financial returns. Many of them performed weakly in competitive markets, and a number of them actually failed.)

One further corollary of the Friedman approach, ably articulated by the Economist magazine, is that executives who funnel corporate largesse into social responsibility projects are using other peoples’ (i.e., shareholders’) money, not their own. According to the Economist, if managers want to allocate money to good social responsibility works, that’s great—as long as they do it on their own time with their own money. It is not at all clear that social responsibility initiatives are the best use of corporate resources, nor is it clear that these initiatives are how owners, i.e., shareholders, would like to see their investments spent.

So you see, I’ve been torn by this CSR dilemma. Since I respect Scott MacLellan and his track record, I was quite curious to hear his response to my simple “Why?” query when he told me that he considers CSR very important.

In response, he began with the issue of authenticity. He quoted my own book Break From the Pack to me, citing the passages where I had spoken about the importance of authenticity in mission. He talked with passion about his feelings towards Morrison’s end-user customers—the elderly, the infirm—and why he felt a need for Morrison to do something more than simply provide a good meal at a fair price.

While I was emotionally moved by Scott’s sincerity, it wasn’t until he described Morrison’s actual CSR initiatives that I got hit with my “Aha!” moment. I expected him to tell me about donations and activities revolving around things like Darfur, AIDS, rainforest conservation, homelessness, and such. Nope. Here, instead, are a few of Morrison’s CSR initiatives:

• Buying eggs from farms with cage-free poultry
• Eliminating antibiotics from proteins (meat, pork).
• Adhering to the Monterrey Bay Aquarium’s “sustainable seafood” criteria and supporting its Seafood Watch program.
• Reducing transfats.
• Supporting Weight Watchers and other health and wellness organizations.

Bingo. There it is. The solution to the dilemma: Social responsibility programs that actually support and enhance the company’s mission. Unlike Whole Foods Markets, which builds and monetizes these kinds of initiatives into the company’s very business model, Scott launched these initiatives primarily on faith, because they were “the right things to do.” In fact, he told me that at first, five years ago, neither his institutional customers nor his own employees particularly cared about these issues. But he and his top team persevered. And now, he says, these CSR initiatives have (and he can document this) differentiated and enhanced the Morrison brand, yielded more customer loyalty, and allowed Morrison to price with higher margins.

Once again, remember that Scott MacLellan didn’t initially do this CSR “stuff” to make money; he did it because he felt that it was the right thing to do for his customers and the right thing to build a "higher purpose" for the business. Today, these initiatives are helping to generate profitable growth, and they have been bundled into Morrison’s strategic push to create higher quality meals embedded in a higher quality experience for the customer. In this case, CSR has worked in a way that even Milton Friedman would support.