The Get Along Gang

I am reading Bob Lutz's latest book..."Car Guys vs. Bean Counters: The Battle for the Soul of America." For car guys and business people, the book is a candid assessment of what happened to the once mighty General Motors...from the perspective of a high ranking insider.

Lutz shares his insights about what went wrong with the American automobile industry based on his nearly five decades in leadership positions with GM, Ford and Chrysler. I know some of his comments will resonate with a few of my TEC members who sell products to the auto industry.

For example, Lutz states the operations component of the automobile business has been "thoroughly optimized" and doesn't vary much from one company to the next. He believes all car companies accomplish manufacturing and supply chain management reasonably well, with no significant competitive advantage accruing to the one who can beat the snot out of suppliers more effectively.

Lutz does toss around plenty of blame for the failure of the American automobile industry. Legacy costs. The UAW. Government imposed fuel efficiency standards. Japanese transplants in lower wage, non-union southern states with young, healthy workers. He takes personal credit for significantly improving product development during his return engagement with GM. The Chevrolet Volt is at the top of his personal innovations list. It is his book, after all.

Lutz reserves most of his ire, however, for two main culprits. First, he takes on the really smart MBAs and finance people whose mission it was to maintain orderly processes at all costs and see "how much they could cut before the customer started to complain." Second, he cites a culture of "corporate infallibility and self-worship" that discouraged honest disagreement. The really smart MBAs and finance people had the data. No need to create any unnecessary friction. Go along. Get along.

Lutz blamed the final decision to seek a government bail out and then Chapter 11 bankruptcy protection on their GMAC finance unit and the unforeseen doubling of gas prices in 2008. Oddly, the same screw up that took down the M&I Bank, was largely responsible for GM's eventual demise. GMAC was making so much money through its residential mortgage unit in the sub prime housing market that they just couldn't quit. Then, the really smart MBAs and finance people didn't plan for the run up in gas prices. GM was left with big cars and bigger trucks and a five billion dollar quarterly drain on cash.

All corporations have a culture. The title of Lutz's book implies the Bean Counters caused the demise of the American automobile industry. The dysfunctional culture created over many decades and many CEOs and other insiders certainly contributed mightily to the devastation.

The Entrepreneur Is Dead. Long Live the Entrepreneur

I work with CEOs for a living. For the most part, they maintain a positive mental attitude, even in the face of adversity. Many are visionaries. Most are entrepreneurs. They see opportunities where others see problems.

When I get outside my work with TEC, I sometimes meet a different mindset. I meet people living in a recession that ended two years ago. I meet people complaining about the lack of jobs and opportunity. The entrepreneur is somehow wired to look at the situation through a different lens....a lens of possibility.

Take real estate, for example. We all know that real estate is in a depression. Residential housing prices are at levels not seen since 2002. Commercial real estate is even worse. It has yet to find the bottom, we are told.

It is interesting to note that I have several TEC members who are aggressively investing in real estate - both commercial and residential. The real estate opportunity goes something like this.

The bank gets a piece of real estate back through foreclosure or "jingle mail." The bank doesn't want the real estate and is able to make a deal at a very low purchase price, assuming the buyer can come to the table with "hard money." The hard money buyer gets the property at a price that allows him or her to spend a bit more repairing and remodeling. The low purchase price and reasonable remodeling costs allow the buyer to sell the property at a profit or cash flow a future mortgage out of rental income.

Entrepreneurs see these opportunities and take action on their individual assessment of risk and reward. They reason that real estate deals like these may never come around again. They seize the opportunity where others are afraid. Sometimes they win. Sometimes they don't. But our entrepreneurs will carry the day. The entrepreneurial spirit is alive and well. It is two people looking at the same situation and choosing different interpretation of the opportunity.

Don't be mislead. The entrepreneur is dead. Long live the entrepreneur.

Apples To Apples

When I met with TEC 44 member, Jeremy Cherny, for our regularly scheduled One On One last month, Jeremy was working diligently on an "apples to apples" comparison between his firm and a competitor's offering. Jeremy is president of Tobin Solutions. Tobin Solutions is an IT consulting firm.

Jeremy's apples to apples outline contained the usual laundry list of things that IT consulting firms do. Network support. Remote support. On-site repair. Training. Preservation. Consulting. On and on went the list attempting to prove that even though Tobin Solutions solution appeared to be more expensive than the competitor's proposal, the client would be better off because they would get more IT stuff.

As with most TEC members, Jeremy was open to some feedback. I remembered a newsletter that was produced by the Grunau Company, another TEC member company. Their position was that apples to apples comparisons actually commoditized the work they did, playing into a low bidder industry mentality.

The Grunau Company reasoned that no two apples were actually alike. And, you generally couldn't tell much of a difference until you ate both and tasted the difference. They wanted their people to understand that it is the intangibles that created value for the customer and sustainable differentiation for the company.

In the end, Jeremy reworked his proposal eliminating the apples to apples comparison. Instead, he focused on the intangibles that created value in the mind of his client. Time will tell if Jeremy is successful in securing the new business. We know now, however, that if he wins it won't be because he was the low bidder.

If you would like a copy of The Grunau Company newsletter containing their thoughts on the folly of apples to apples comparisons, please feel free to contact me.

Civil Unrest

Most TEC groups have participated in a process we call The New Normal. The New Normal exercise is a facilitated brainstorming process where TEC members identify things we know now that will be different in the future. Some of the bullet points typically include:

- Inflation

- Higher interest rates

- Higher taxes

- Smaller cars, houses and buildings

- Social media increasing role

- Globalization

- Energy costs more

- Health care costs more

- Green is good

Only a partial list, but you get the idea. The intent of the exercise is to give TEC members a little better visibility of the future. And, then, allow them the opportunity to prepare contingency plans in anticipation of "the new normal."

The most unusual item that makes the list of most of the TEC groups that run the exercise is "civil/social unrest." We started doing this exercise in June of 2009. Well in advance of the protests in Greece, Tunisia, Egypt, Libya and Madison, Wisconsin.

As a result of The New Normal exercise, most members prepared plans for higher raw material costs. Some members locked in low, long term interest rates. A few members actually paid taxes in advance rather than following the deferral strategy that has been in vogue for years. A handful heeded the civil unrest warning and prepared contingency plans - both professionally and personally.

We have now seen several businesses targeted with boycotts, union intimidation and previously unimaginable threats against some of the most respected companies in Wisconsin. Did they have a contingency plan for "civil/social unrest?" Does your firm have a plan for The New Normal?

If you would like a summary list of the bullet points that turned up on TEC's The New Normal list, please contact me.

The Intolerables

Recently, a TEC member of mine promoted a bright young man to the position of General Sales Manager. The bright young man had performed well in a series of increasingly responsible positions within the company. The promotion gave him a significant opportunity in prime time.

Within one month, under the direction of the new General Sales Manager, sales increased and margins improved. The second month was even better. During the third month the company achieved record sales and profits. Truth be told, after surviving the downturn in the business cycle, the company and the CEO needed a big time boost in top line revenue and Gross Profit.

Unfortunately, the management style of the bright young man appeared to change after he was afforded more authority. His leadership style became directive. He created inter-department animosity with his new found command and control persona. In short, he became a bully.

My TEC member had experienced bullies before. When he was about 8 years old, he recalled having to punch the neighborhood bully in the mouth to get him to go away. The bully never bothered him again.

He also knew that the management style of the new General Sales Manager flew directly in the face of the team building effort on which he had been working for the past several years. The question was more sales, more margin and more money now or declaring "an intolerable."

My member chose the intolerable. He told the bright young man the negative effect the intolerable behavior was having on the organization. He also told the story of the bully from his childhood. He made it clear....real clear....that this type of behavior would not be tolerated regardless of the short term gain. It was "an intolerable."

The bright young man took it in stride. He said he understood. He would change his behavior. He was sure he could get the job done without the intolerable. Time will tell.

TEC Resource Specialist, Pat Murray, describes the concept of intolerables in his presentation titled "Leadership...The Inside Moves." If you would like a CD copy of the presentation, please let me know.

Do your people know The Intolerables?

All Businesses Are Worth $1 Million

When my partner and I were attempting to buy our first small business, we quickly learned a very important lesson about buying small privately held companies. All small businesses are worth $1 million. More accurately, every small privately held company is worth $1 million....per owner.

This small business owner valuation principle had a tendency to price our target companies out of the ballpark. An unrealistic opinion of value based on the seller's objectives rather than an objective review of earnings and, perhaps more importantly, future earnings forced us to disqualify some interesting acquisition prospects. It also may have cost some small business owners the opportunity reap some of the rewards of a lifetime of work.

A TEC member of mine is currently negotiating to buy a competitor. There are three owners of the target company. They are all in their late 60's. The owners have not kept up with technology in this capital intensive business. The management team is weak, at best. The company has not made money in three years. The owners want to "get out." Asking price? $3 million.

My member doesn't want the outdated equipment. He doesn't want the people. He doesn't even want some nicely located real estate, owned personally by the sellers. He is willing to buy the customer list. Fair market value? To be determined.

There is a better way. Kraig Kramers, a TEC Resource Specialist, has been instructing TEC members on the use of a relatively straightforward process for valuing companies that turns out to be remarkably accurate. Many members run the formula every year to get a realistic picture of how their companies are doing and how they are doing as CEOs.

The Kramers' estimate of fair market value can also save small business owners from pricing themselves out of the market. All business are not actually worth $1 million.

If you would like a copy of the Kraig Kramers formula, please e-mail me at dennis@globenational.com.

Price Fixing 101

I was having lunch the other day at one of the trendy downtown hotel/restaurants. I was alone, sitting at the bar. A young man, probably born between 1965 and 1984, came in and asked to see the manager. The manager appeared. The two young men talked for a couple of minutes. I wasn’t intentionally eavesdropping, but I did overhear that the Xer who requested to see the manager was representing another trendy downtown hotel/restaurant.

The manager, also probably born between 1965 and 1984, brought the bartender into the conversation and finished by saying something like “give him all the information he wants.”

Next, the bartender, probably born after 1985, starts poking the touch screen on a near-by cash register. The Xer from the competing hotel was working from a list and asking the prices charged by drink by the trendy downtown hotel/restaurant. Grey Goose? $11.00. Check. Johnny Walker Red? $9.00. Check. Glenlivet? $13.00. Check. And on and on and on they went until they ran through the entire drink list of the trendy hotel/restaurant. Check.

The 111th Congress was still seated at the time, but I doubt it repealed the Sherman Act of 1890. This was horizontal price fixing, right there in front of my Caesar Salad. Simply exchanging prices with or without intent could have been a criminal offense if the exchange of pricing information affected the prices these two competitors set. Will the Xer manager who authorized the exchange, receive pricing feedback from his trendy downtown hotel/restaurant competitor? Check.

Generation X has been maligned for everything from an inability to consume enough to an arrogance that comes naturally to really smart, highly educated people. But somewhere behind these Xers was another trendy hotel/restaurant manager – a Boomer…who should have known better.

Rule of thumb. It is okay to talk to your competitors. Glean as much competitive information as you are able. But never talk about prices.