A Worthwhile Management Book

Thomas E. Ricks’ book, “The Generals”, is the history and essentially a performance evaluation of more than a dozen US Army Generals from World War II through 2012. It is not very flattering for some generals.

It is a well-written management and leadership book. Although not intended to be a textbook its examples of what led to successes and failures may be helpful for civilian business managers - including members of Boards of Directors and Chief Executive Officers.

Although the entire book is interesting, its reading can be limited to the first chapter. It covers General George C. Marshall, Army Chief of Staff, and describes how he built the Army into an effective fighting force in World War II. Marshall was faced with two equally daunting issues – people and equipment.

In 1939 the Army was too small in the total number of officers and enlisted personnel. Its leadership was poor and needed to be overhauled. There was not enough equipment and what was available was too antiquated to be effective - most of it dated from World War I. He started in 1939 with an unqualified for battle 197,000 soldiers led largely by inept senior officers and ended in 1945 with 8.3 million and victory.

General Marshall’s leadership and management tenets included a “brutally” straightforward style with everyone including President Roosevelt – he practiced “speak truth to power”. He employed the management practice of “removal” of any senior officer with substandard performance – he fired hundreds to build a successful organization. He was a "tough taskmaster" - but consistent, rational and respected throughout the Army's ranks.

For a more complete summary of the book click on this link: “The Generals: American Military Command from World War II to Today” by Thomas E. Ricks.

My Leadership Excellence magazine article “Seven lessons from a turnaround CEO”

Leadership Excellence magazine published my article: "Mastering Leadership - Seven lessons from a turnaround CEO"

By Robert F. Amter

There are many theories about what it takes to be an effective Chief Executive Officer.  Most are based on observation and research.  They lack the hands-on, in the trenches experience of what it really takes to lead a company – especially one that is experiencing bad times.

When I enter a company that is severely distressed and losing money I find that the previous CEO whom is usually a decent, hard working executive, has failed because he or she simply did not know how to be a leader.

Having worked 22 years as a turnaround CEO, I’ve learned seven key practices that have worked for me in restructuring distressed companies.

1. Understand the True Meaning of CEO

Naturally born leaders are very rare.  It takes hard work to learn how to lead effectively.  You must be a serious, passionate, and accessible student, to develop into a capable CEO.

Focusing on the true definition of the Chief Executive Officer is central to illustrating the basis for sound leadership.  Common dictionary descriptions may be simplistic, but they accurately define the position:

Chief: The person with the most authority, who ultimately controls or commands all the others.

Executive:  A person having administrative or supervisory authority in an organization with the power to put plans into effect. To execute.

Officer:  One who holds an office of trust, authority, or command.

Yes, the Chief is the highest in rank; however, the ability to execute is key. Anyone can write a plan, but few can execute it - implement it. Having a team carry out a focused plan is vital.  To guide all to remain disciplined in the executing a strategy can be difficult.  Providing clear-cut direction only grows more problematic, while facing competing forces, considerable distractions, and intense challenges.

The word Officer is also significant. A person appointed to this elevated position is held in trust with genuine fiduciary accountability. They are entrusted with the management of the property, with the power to act on behalf of the owners. Fiduciary is a solemn responsibility – take it seriously.

2. Learn To Whisper 

A CEO’s primary focus is people.  A CEO gets the job done by working through others.  People greatly appreciate a CEO who can command authority without condescension.  Moreover, there is no room for hubris.

Some leaders believe a tormenting style can motivate, but the mistreatment of people eventually leads to loss for all.  At no time should a CEO bully employees.  If an officer yells at an employee, the news will spread and reduce the CEO’s effectiveness.  Even high-ranking officers, will become timid, wary, fearful, and suspicious.  Many will wonder if they will be next to receive ugly treatment.  Trust is lost, eroding confidence and efficiency.

When I joined General Electric, this training precept was passed on to me:  “When you become a CEO remember that people are your most important resource.  Successful leaders motivate.  They do not intimidate.  They whisper to get results and remain calm.  They are viewed as having high integrity and being distinctly competent.  Leadership is learned.  Respect is earned.”

3. Interact With Employees at All Levels

Whether newly appointed or a 10-year veteran, a CEO only knows 10 percent of what is actually going on in the company – particularly the key issues and problems.  To be successful, CEOs must submerge themselves into all levels to learn the status of the company’s vital issues – to get the facts. 

Effective Chief Executive Officers are not office bound, nor isolated from employees. They are seen walking the halls, the floors of the manufacturing plants and distribution facilities.  People are curious about you.  I’ve had employees touch me and remark in an excited voice “I’ve never touched a CEO”. That’s a humbling experience.  Remember how much influence you can have on people.

When walking around, be approachable.  Today, many company dress codes are business casual. If there is a formal dress code, do not wear a suit coat – be more informal. Interact with people. Stop to answer questions and ask what the employee is working on. Do not be aloof. You are the ultimate boss and people will be nervous around you. Display a likeable personality, a sense of humor – don’t be judged a stiff. Do not answer requests for improvements in work rules, bonuses or wages by saying “I’ll check and get back to you.” Be decisive and say no – if the ultimate answer is no – but explain why the answer is no.

4. Demand Excellence

It is perfectly acceptable for a CEO to demand excellent performance.  Expectations for above average results can motivate a team.  Intense encouragement for quality will inspire all to work harder. 

This winning style can grow capabilities.  People will stretch and can reach higher performance. Success foments self-confidence.  It builds a gung ho team – the enthusiastic and dedicated attitude of working together.

Always use a constructive tone.  Never intimidate anyone with bullying.  Again, instead of raising your voice, remember to whisper in a productive manner.

5. Consider Failure

Managers often require that rigorous, in-depth and detailed analyses be completed prior to implementing priorities, initiatives and capital investments. Management wants to know what positive incremental profitability and free cash flow will result from executing the project or making an acquisition.  But the analysis should also analyze the impact on the company if the initiative fails. What will the effect of the capital expenditure be on the capital structure and the cash flow?  If it’s a new product introduction, what will the reaction be in the channel segment, with customers and competitors?  If an acquisition, are we ready to handle integrating the new operation into existing operations?  Does management have the time for an acquisition, or will they be overwhelmed with other priorities?  What are the short and long-term consequences on the businesses that may result by an overwhelmed management? 

Once a management team decides on its priorities, a project tends to get a life of its own, to not be killed once work has started on it.  Still you need to periodically judge its viability. 

6. Foster Communication

Well-run companies have candid cross-functional communication.  It is essential for the new CEO to maintain open exchanges of information.  Meetings should include everyone involved with the initiative, issue, or problem including those from the third and fourth tiers of the company.  For example, do not invite only the VP of sales and his team, while investigating a problem with sales.  Include marketing, manufacturing, supply chain, product and accounting in the meeting, since each of these functions affect sales.

Cross-functional communication is almost always lacking in distressed companies, because it takes the direction, energy, and patience of management to maintain it. Silo management with top-down decision making is easier but always results in a failing business.  Mistakes are easily hidden and multiply when information isn’t shared.  When internal functions do not discuss vital issues, a business becomes uncoordinated and produces negative surprises.

I encourage leaders to meet face-to-face.  Avoid depending on email, telephones or video conferencing. Judging performance and initiatives is best evaluated first hand, in the same room with the people orchestrating the endeavor.  Seeing body language, facial expressions, and sensing a person’s passion, provides signals often missed when using various technologies.

7. Empower The Team

Ownership of the strategic plan to fix or run a company must be held by the people on all the levels who contribute to creating the plan and are crucial to its being implemented.  It cannot be only the CEO’s action plan.  It will never get implemented.  Do not legislate the strategies and tactics.  Do not dominate the process.  Persuade your subordinates and remember to listen to their input.

While it’s important to have consensus and ownership of decisions by the officers and managers, in the end the CEO is the final decision maker.  Don’t abdicate the role or decide based on since we all agree.  If, as CEO you do not agree, don’t approve a group decision.  You may decide on an alternative solution and not implement the consensus solution. 

As the CEO, you have fiduciary responsibilities.  Take them seriously.

Being a CEO is a position of great power, but not an easy one.  If you follow the steps, you and the company you lead will thrive.

My AMA article: “Hard-Won Lessons from a Turnaround CEO”

The American Management Association published my article “Anticipate, Focus, Execute - Hard-Won Lessons from a Turnaround CEO”.

An excerpt from the article is as follows:

“After 15 years at Emerson Electric Co, I have spent more than 20 years as a turnaround CEO.  During this time, I have discovered that companies get themselves into trouble, not because of technological advances in the marketplace, new competition, or other external factors, but because they have been mismanaged. Here are eight characteristics that separate successful businesses from those that are headed for trouble.”

Click on this link to read the total article.

General Motors versus Toyota – who will win?

-->

General Motors just reported a 41% reduction in its second quarter Net Income to $1.5 billion with a $1.8 billion decrease in Sales.

The main source of the GM decline was its European operations. Its future results are questionable as USA sales forecast predicts declines. Both of which are understandable in this difficult economic environment.

But, Toyota reported a huge increase for the same time period. Its Net Income was $3.17 billion on robust sales growth – profit was 111% greater than GM’s. Its sales forecast expects substantial increases.

Can GM be successful up against Toyota and other Asian manufacturers?

Toyota’s USA based operations have lower product costs compared to GM because their hourly factory labor wages are lower – further compounded by lower health care and retirement costs. Toyota has a leaner salaried organization and thus lower overhead costs. These significant issues were not dealt with during GM’s bankruptcy.

GM is not the best cost producer in its industry and, as a result, will decline. Its profit margins and free cash flow will be squeezed resulting in less capital available to develop new products and productive manufacturing systems and equipment.

Will this bring GM to its knees again?

Most likely.

Click on the following links to read my earlier posts with greater details of GM’s issues:

General Motors - Industry Leader? 

GM & Chrysler Bankruptcies

UPDATES:  

On August 15^th Forbes published a thorough analysis of General Motor’s declining performance entitled GeneralMotors Is Headed For Bankruptcy – Again -  a worthwhile read.

A September 10^th Reuters’ article, Insight: GM Volt: the ugly math of low sales, high costs,  details General Motors costly failure with the Chevrolet Volt – a loss of $49,000 on each car. Couple this failure with the Chevy Malibu being rated dead last versus five competitive vehicles in Car and Driver magazine’s comparison tests raises two questions: Is GM well managed? Can it succeed?

These product failures signal the absence of coordination and cross-functional communication among GM’s operating functions. In particular, for these two product failures, are product engineering, marketing, manufacturing engineering and cost accounting working in sync?

In my experience there is an absence of open and candid communication through all levels of distressed, troubled companies. Cross-functional communication is always missing. Consequently mistakes mount, problems fester.

Cross-functional communication requires that the CEO uses it and demonstrates that it is an integral part of the company’s culture. Absent that it is difficult for functional officers and mangers to use it – the negative politics of some human beings results in certain people being unwilling to participate in this style of management. Need a fully competent and self-confident CEO - highly knowledgable of what goes on in the bowels of a manufacturing company.

If its faults are not corrected, the prediction that GM will reenter bankruptcy may come true.

October 31 and November 5. Toyota’s net income tripled and market share increased while General Motor’s net income declined12%.
 

Miyamoto Musashi, “The Book of Five Rings”

There are several revered authorities whose management principles result in businesses becoming and continuing to be successful. Two of the most famous: Peter Drucker and the legendary Sun Tzu.

Peter Drucker is the eminent author of 39 management books and is considered the “father of modern management”. Sun Tzu is the author of “The Art of War”. He was China’s first professional General. Prior to Sun Tzu's leadership, armies in China were largely disorganized, impotent, failures.

Surprisingly Peter Drucker’s and Sun Tzu’s advice is quite similar. Both list almost identical characteristics needed for effective leadership. Each focus on developing and executing strategic and operating plans. They also stress the importance of innovation to achieve success, or in Sun Tzu’s words, “do the unexpected”.

Another source frequently referenced when effective management and leadership is discussed is the famed Miyamoto Musashi, the author of “The Book of Five Rings”. This work is described as a classic guide to strategy. He was one of the most accomplished Japanese Samurai warriors of the 17th century.

While Miyamoto Musashi’s book is a worthy and interesting read, it is not truly a guide for effective management and strategy development. It is a manual more specifically focused on the Samurai, especially offering proven tactics for prevailing in battle. Topics include insight on combat expertise needed to excel, such as swordsmanship, weapons, technique, intimidation, etc. There is even teachings on Machiavellian concepts designed to distract and demoralize an opponent.

The value of his book is the healthy guidance it gives for leadership. There are very interesting portions of the book, which include a sound philosophy of life helpful for anyone seeking a successful leadership role. Here are a few quotations to be remembered:

“A truly confident person never loses self-control in whatever situation he is forced into.”

"One’s state of mind must be like a shiny blue sky without clouds – free from doubt and confusion."

“If a person is determined to accomplish something without fear of the outcome, nothing is impossible.”

Miyamoto Musashi, “The Book of Five Rings”.

Click on the following links for the earlier Peter Drucker and Sun Tzu posts:

Peter Drucker

Sun Tzu 

What Leads to Business Failure?

Donald Keough’s book “The Ten Commandments for Business Failure” is an interesting, creditable book useful to Chief Executive Officers with a company culture that needs improvement. Donald Keough is the former President of The Coca-Cola Company.

The book is a short, easy read that covers all the elements of a positive culture. Some of it is self-evident. But if officers, second and third tier managers all read it, it would contribute to a re-focused culture. It would put everyone on the same page.

Commandments that lead to business failure:

One:
Quit Taking Risks

Two:
Be Inflexible

Three:
Isolate Yourself

Four:
Assume Infallibility

Five:
Play the Game Close to the Foul Line. (i.e., a culture of self-dealing and corruption.)

Six:
Don’t Take time to Think

Seven:
Put All Your Faith in Experts and Outside Consultants

Eight:
Love Your Bureaucracy

Nine:
Send Mixed Messages

Ten:
Be Afraid of the Future

Eleven*:
Lose Your Passion for Work – for Life

(*The title of the book is “Ten Commandments…”. Mr. Keough has included an Eleventh as “a little added bonus”.)

Outsourcing from China – Avoiding this Horror Story

A recent article in Manufacturing News described the outsourcing horror story that has engulfed Fellowes Inc.  The large paper shredder manufacturer has suffered a significant loss in China.

A Chinese joint venture partner stole Fellowes Inc.'s proprietary assets and forced the operation into bankruptcy. The estimated cost is valued at a $100 million. Now the former Chinese partner is planning on entering the shredder business independently, in direct competition using Fellowes' seized assets.

While I am sympathetic with the impossible position encountered by Fellowes, this is largely the result of not employing a quality China based law firm to prepare and execute the initial contract. China is a country of rules, not laws.  Success depends on highly skilled, tough attorneys completely knowledgeable of China; Chinese culture, mores, dangers. One cannot be naive, for any investment in foreign environments requires extreme caution, due diligence, and a fundamental acceptance of the risk involved.

There are other examples of similar problems of doing business in China.  Often, the main source of the problem usually has occurred because a USA manufacturer has relied on a USA based law firm to develop legal agreements. Also, some difficulties have been encountered employing a China based expatriate law firm staffed with British or American lawyers. Again, it is essential to retain a law firm staffed and managed by China born and raised attorneys.

Unfortunately, once a Chinese company takes hostile action, similar to the one detrimental to Fellowes Inc., it is almost impossible to reverse the outcome because of the challenging Chinese legal system.  

To avoid such devastating potential pitfalls, do not enter into a joint venture to manufacture products in China. It is best, to construct a 100% owned and operated manufacturing plant in China. Ironically, it is nearly as easy to build an operating plant in China as it is to build one in the USA.  But the end product is far more secure, providing complete control of the operation, particularly the essential proprietary and confidential factors.

See the original Manufacturing News’ article  by Mr. McCormack here:

A Cautionary Tale Of Outsourcing To China: There Is No Recourse, You Could Lose Everything                        

by Richard McCormack                     April 15, 2011

Thousands of American companies that have moved production to China to take advantage of cheap labor might want to consider a case study that is unfolding for a U.S. manufacturing company. Fellowes Inc., one of the world's largest makers of office and personal paper shredders, is witnessing the destruction of its business, as its large Chinese manufacturing plant has been shut down by its joint venture manufacturing partner.

Can Manufacturing Return to the USA?

The need to move USA manufacturing operations to competitive economic climates, has been essential for a Company's survival.  This exodus to a number of foreign countries, mainly to China and Mexico, has had a negative impact on the USA – its economy, median incomes, standards of living.

Today, New Balance Inc. is a rather unique exception to the migration trend.  For more than twenty years, this successful Boston manufacturer of athletic shoes, annually produces 7 million pairs of its shoes in the USA.

New Balance CEO, Rob Demartini, admits it's a challenge to stay competitive in the world market but says the company's commitment to domestic manufacturing is firm. It's really part of the fabric of the company. we've been manufacturing athletic shoes since 1938," said DeMartini. "We think in an industry where there a lot of shared manufacturing, knowing how to make the product, helps us. It also gets us a lot closer to the consumer."

This piece, titled “New Balance: U.S. Manufacturing Commitment” lists many of the principal reasons for the impressive ability.  New Balance credits a productive employee base and the use of lean manufacturing protocols.  The New Balance story is admirable, especially in relation to the many challenges faced with US Manufacturing.

There were many understandable reasons for the shift to foreign environments, but in my opinion, a great deal of the losses in US Manufacturing could have been avoided with superior, A-level Management - particularly at the Chief Executive Officer level.

Regrettably, poor Executive Leadership, bad decisions, deficient strategy, etc., impelled much of the manufacturing exodus.  Reducing labor costs became an easy convenience.  Admittedly, a number of  relocations were necessary, even critical for survival.

However, if a larger number of the CEO's within the USA had greater experience, better insight, the reality would be different.  With more "A-level" Executives in charge, plant operations would probably not have required this level of relocation.

Regardless, the USA can regain a portion of its manufacturing capacity in the next several years, if we see a number of positive developments.

Here are some important factors for success:

• Quality management down through the 3^rd organization tier;
• Disciplined strategic focus – with an honest and periodically updated situation analysis;
• Superior culture with the absence of hubris and politics;
• Best cost manufacturer – utilizing lean, kanban and kaizen protocols;
• Productive, lean salaried employee organization – not just lean for manufacturing;
• Regular Value Analysis of the product lines;
• Effective application of capital spending – which is essential.

Certainly, a growth in a number of negatives encountered in other environments, within China and Mexico for example, will contribute to the desire to return some foreign based operations to the USA.  However,  relocating manufacturing back to this country will remain a very difficult challenge.

In relation to overseas manufacturing competition, see: 

“China to Surpass the USA as World Leader in Manufacturing?”

Neuberger Berman's Recent Outlook

The following is Neuberger Berman’s (NB) 2^nd quarter 2010 economic outlook.  It is very thorough and well conceived.  In these challenging economic times, it is worth a review:

Neuberger Berman’s MLG Group’s Current Outlook 

THE WORLD IS STILL UPSIDE DOWN

August 18, 2010

Over the last decade, so much has structurally changed on Planet Earth that we believe the only informative perspective from which to view the world is…“upside down.” We first introduced this concept in our third quarter 2009 client letter and, as we think about the investment landscape currently, we believe this “paradigm shift” is underappreciated by investors.

Our team spent much of the second quarter 2010 pursuing an extensive global research effort to determine if this view of the world is still relevant. As you might expect from the title of this letter, our answer is yes!  Our research travels took us to China, Singapore, Indonesia, Mongolia, Australia and Brazil. Below, we share our takeaways from this research, some investable themes we have identified and how we are navigating this volatile and challenging investment environment...

Peter Drucker's Tenets

Peter Drucker, a writer of 39 books and a management consultant, was considered the “father of modern management”. An avid student of managing complex businesses, he was the advisor who helped mold many corporations into industry leaders which forged this country’s ability to become an economic super power.

A Sampling of Mr. Drucker's Tenets:

“In most business failures, the board was the last to realize that things were going wrong.”

“Managers should make a decision no later than you need it, but as late as possible, because you always have more information.”

“Do reported profits exceed the cost of capital? Review and audit capital allocation decisions of the past year.”

(I suggest random sampling of capital expenditures for prior years and reviewing several to determine if the forecasted return on investment was achieved.)

“Above all management is responsible for producing results. Profit is a requirement for a company…profitability is not the purpose but rather the test of their validity.”

“Management is about human beings. Create an atmosphere where people are permitted to make mistakes.”

(His simple advice to clients: “It’s all about the people.” He was concerned with retaining “knowledge workers” which today most companies describe as the “A” level employees.)

“Never promote an employee on the basis of his or her potential, but based only on performance.”

“Picking a leader: would I want my son or daughter to work under that person?”

Source: “The Daily Drucker” by Peter Drucker, 2004

Why William Clay Ford, Jr. Failed

In October 2006, the Ford Motor Company replaced William Clay Ford, Jr. as its Chief Executive Officer.

Why did Mr. Ford fail?

His own words, reported by Micheline Maynard of the New York Times on July 16, 2006, titled "Is Ford Running On Empty" revealed the answer.

"I bowed to managers on what I knew were product development mistakes”. “I can’t delegate to anybody…dealing with unyielding managers that stymie and condescend to me.” “… would have performed better if not faced with people obstacles”. - William Clay Ford, Jr.

Mr. Ford cited as one of his victories his environmentally friendly new River Rouge assembly plant. He believed this to be a victory because “…I did it over the objections of company executives.”

He brought in a new Chief of Staff and Gatekeeper, who is his best friend and brother-in-law, whose prior experience was as manager of the Henry Ford Museum. “He helps me decide which meetings and projects deserve my attention.”

One of his priorities was examining “…everything from how we’re going to treat each other in meetings to the trappings of our job.”

All of the priorities he listed in the article were essentially 'trivial many' when he had vital priorities that need attention. His “River Rouge” victory was quite minor with the intractable problems Ford is facing. Crowing about it publicly was a polarizing mistake. His new Chief of Staff, his brother in-law, further undermined him.

He made the fundamental CEO error, not persuading his managers to change their position on vital priorities. If he couldn’t persuade them, he should have made the correct strategic decision. He was not leading the company. He was not in command.

One example of Ford’s bloated overhead is its executive dining room replete with waitresses, multi-course menu, and silver finger bowls. Mr. Ford would have been more successful if he had executed an operational restructuring that significantly reduced salaried headcount in 2006 – not phased in over 3 years.

Better yet, he would have been well served to adopt Toyota’s performance target of 10% improvements in salaried productivity every year. If he adopted these principals, Mr. Ford, Jr. might then have been in a position to encourage unions to voluntarily modify contracts, base wage rates, pensions, and retiree medical care.

Leadership is learned. Taking command is learned. Mr. Ford held the CEO position for five years. He did not learn.

His lack of leadership and lack of prioritized focus, as demonstrated by his poor relationship with his managers, turned into poor performance at Ford. Only increasing Ford's low quality ratings, unimpressive new models, lack of worldwide integration in sourcing - product development, and the negative financial performance.

Alan Mulally, Ford’s new CEO, would be well served if he followed the practice of Neville Isdell when he was first named CEO of Coca-Cola. He was asked what are his plans for the company. Mr. Isdell's memorable response: "I plan to spend the first 120 days visiting employees and managers around Coke finding out what the state of the business really is."

Certainly the correct approach.

It is just that simple to get a company focused. Establish a rough-cut strategy, lead and motivate the team.

Mitt Romney Advises: “Let Detroit Go Bankrupt”

Governor Mitt Romney offers some interesting advice regarding the Big Three in his November 18, 2008 New York Times Op-Ed “Let Detroit Go Bankrupt” summarized as follows:

“If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

That extra burden is estimated to be more than $2,000 per car…But if this cost penalty persists, any bailout will only delay the inevitable.

Second, management as is must go. New faces should be recruited from unrelated industries…

In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.”

Governor Romney is correct.

In a July post on my blog I opined that running out of cash may be the trigger that puts them into bankruptcy, but it will be a blessing in disguise. My reasoning is that the Big Three’s hourly labor costs are reportedly $20 to $30 higher than their USA based Japanese competitors. In my experience as a Turnaround CEO, this will not be reduced in a voluntary agreement with their union. If it is not corrected, they will continue to decline and probably will not survive.

Chapter 11 Bankruptcy protection does not mean the end. The companies will continue to operate. While it will be a severe shock to the USA, it is not liquidation. It will allow modification of the factors contributing to losing money - including the high cost labor contracts.

Click here to review my July 28, 2008 post: “Bankruptcy – The Fate of General Motors, Ford and Chrysler?”

Bankruptcy - The Fate of General Motors, Ford and Chrysler?

General Motors, Ford and Chrysler may have to enter into Bankruptcy to reduce their hourly cost of labor. Running out of cash may be the trigger that puts one or all of them into bankruptcy, but it will be a blessing in disguise.

One of their most significant problems is that their hourly labor costs are reportedly $20 to $30 per hour higher than their Japanese competitors. Some of the differential will be reduced with the UAW’s assumption of retiree health care with VEBA -- Voluntary Employee Beneficiary Association – beginning in 2010. This could reduce employee health insurance costs by one-third but will only produce a relatively small reduction in hourly labor costs. This won’t be enough - including consideration of the two-tier wage structure.

Most of the Japanese competitors have non-union hourly labor in their USA manufacturing operations. As such, their labor costs will not significantly increase over time. In fact, they will probably decrease because of higher capital investments with more effective productivity improvements.

By comparison, GM, Ford and Chrysler are at a distinct disadvantage. They are strapped for cash which severely limits their ability to invest capital for operating improvements. Recent plant closings and operational restructuring have reduced their overall costs by billions of dollars, as well as their hourly headcounts by the thousands. However, the overall impact is somewhat misleading. The hourly cost for direct labor employees has not been reduced. While the number of automobiles manufactured by the Big Three have declined in dramatic fashion, the actual cost of each automobile continues to be higher than its Japanese competition.

Will they be able to negotiate “voluntary” hourly labor cost reductions with the UAW?

One negative example from my turnaround experiences:

I was CEO of a legally insolvent, severely distressed manufacturing company. We asked the local union members to accept minor “voluntary” changes in the union labor contract. Specifically, we needed a delay in the contracted 3% increase in the base wage rate and an increase in the co-pay percentage for health insurance. These proposals were rejected by the local union leaders, although we had the International’s support for the changes. The local labor leaders proved indifferent to the company’s condition and were hostile to essential requests needed for the restructuring required to help save the company.

Admittedly this distressed company was not the size of GM, Ford or Chrysler. However experience suggests the UAW will not “voluntarily” agree to the significant reductions needed in hourly labor costs. (Which may require cuts as large as $10 per hour or more). Thus, the Big Three will be forced to attempt to terminate the labor agreement in Bankruptcy Court. If they fail to do so, they will continue to decline. And their future will offer even more desperate operating and financial conditions.

A Helpful History Book For CEOs

I came across an impressive book, which would be very helpful to any CEO. It is an interesting historical effort and was referenced in a footnote of a best selling business book “Good to Great”. It proved to be a better book on management in my opinion, than the popular business publication.

Barbara Tuchman wrote “The March of Folly”. In the work, she reviews four historical debacles. The reasons for these past failures, was primarily due to “wooden-headedness and cognitive dissonance”.

Ms. Tuchman's essential definitions:

“Wooden-Headedness”: the source of self deception, assessing a situation in terms of preconceived fixed notions while ignoring or rejecting any contrary signs – acting according to wish while not allowing oneself to be deflected by the facts, the refusal to benefit from experience.

“Cognitive Dissonance”: reject objective evidence and rigidly hold on to strongly held beliefs regardless of rationality of disproof.

“Folly”: the obstinate attachment to a disserviceable goal.

This book gives meaningful perspectives on:

• How to manage,
• Why open and cross-functional communication is important,
• Hubris,
• The true meaning and benefits of “hard-work, homework, hands-on”.

The most interesting of the debacles is the British handling of the American Colonies prior to the Revolutionary War. Not one member of the British Parliament, their staff and the King’s staff had ever been in the Colonies. They did not send anyone to evaluate it.

The British Generals who had been in the Colonies were essentially opposed to a land war, but there was no “cross functional” type communication and their advice was not heard.

The King and the Parliament believed America was small, populated with criminals and other worthless people. In fact it had a population of 2.5 million, was an economic locomotive populated with many well-educated and independent people.

The taxes the British levied totaled only 50,000 pounds sterling annually. Imports from Britain into the Colonies totaled 3 million pounds sterling annually, one-half of which were lost when Americans boycotted British goods.

Completing their homework in a hands-on manner would probably have caused Britain to handle the situation differently and retain America as one of its Colonies.

“Good to Great” by James Collins is the book that referenced “The March of Folly”. Worthwhile reading, it studies how companies built themselves into great companies.

Characteristics of successful companies:

• Disciplined focus,
• No hubris,
• Openness in that everything is discussed,
• A self-effacing CEO only interested in the company’s success - who is not a tyrant,
• Accountability for tangible results,
• Staff the right people – wrong people get fired,
• Only deal in brutal facts and truth, simplicity,
• A culture of freedom and responsibility,
• Have defined what the company is “best” at.