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 

The Netflix Culture & Mistake

Netflix’s culture was described in a recent edition of the Business Insider. It makes an interesting read. At more than one hundred pages, it is quite long and detailed – but worthwhile.

While it is described as a statement of its company culture, it is more of a guide and blueprint for its employees on how the company operates or, perhaps more accurately what is expected of its employees.

Netflix’s culture document has three principal themes – Performance, Freedom, Responsibility - and expands into seven specific requirements which are listed below:

Values are what we value.

High Performance.

Freedom & Responsibility.

Context, not Control.

Highly Aligned, Loosely Coupled.

Pay Top of Market.

Promotions & Development.

 The several factors frequently emphasized:

“Performance” is the most important variable leading to success – it is cited repeatedly throughout the statement. It will overcome context and control failures, responsibility issues and success with hiring and promotions.

An indication of Performance’s importance are two warnings to employees: “Accomplish amazing amounts of important work.” “Adequate performance gets a generous severance package.”

“Think strategically.” “Focus on strategy & goals.”

“Minimize written rules.”

“Communication.” “Frequent department meetings.” “Honest, candid, non-political communication.” “Challenge prevailing assumptions.” “Courage to say what you think.” “Quick to admit mistakes.”

“Open internally about strategy and results.” (i.e., the company makes sure all employees are thoroughly familiar with its strategy and results)

“Judgment.” Largely refers to how decisions are made: Identify root causes, not symptoms. Think strategically, not tactically. Make good decisions regardless of uncertainties – i.e., do your homework.

“No toleration for brilliant jerks” Smart but difficult to work for managers are not retained.

In the first few pages they surprisingly go out of their way to harpoon Enron’s value statement that was displayed in Enron’s lobby: Integrity, Communication, Respect, Excellence.

It is unusual for a company’s culture to be a written document. Although one of the world’s most successful companies – Wal-Mart – publishes a statement of culture.

By comparison, in my fifteen years at Emerson Electric Co. there was none and one was never discussed. We all understood the culture and the company’s values. It was exactly the same as Netflix’s emphasis throughout its culture statement: “Performance” and “Strategic Focus”.

Netflix acknowledges that they know they are not perfect but continue to work toward achieving their goals by stating in the culture document: “We are getting better” “We keep improving our culture as we grow. We get better at seeking excellence.” This certainly gives credibility to the constructive perspective that supports Netflix’s statement of culture are.

However, Netflix does make mistakes. One major error was this year’s decision to separate its DVD service from its Internet streaming service. Three weeks after the spin off decision was announced, Netflix reversed itself and decided to not spin off its DVD service. It decided to keep both services under one name and one Web site.

The positives:

● The quick realization of a mistake with the reversal decision being made just three weeks after it was announced. (It took Coca Cola three months to reverse its New Coke decision.)

● A candid admission that a mistake was made and that hubris was a factor.

● The 60% price increase. It may make the mistake fade quickly, if it sticks, as it will have a significantly favorable impact on profitability.

The negatives:

● Contrary to its culture statement on Judgment, thorough homework for this decision was not completed.

● The admission that hubris played a big role.

● Can the company recover? Will competition capitalize on the error? Will customers accept the 60% price increase? Will Netflix record Net Losses in 2012?

Click on this link for Netflix's culture document.

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”.)

General Motors – Industry Leader?

Regardless of various company officials and politicians assurances that General Motors Company’s rescue is a success, several facts cast a cloud over its viability:

● Its products are not cost competitive.

Hourly union labor costs are too high at approximately $58 per hour. Its USA based Asian competitors have lower labor costs. Two are at $40 per hour – a significant 31% difference.

In this recessionary economic climate the recent union contract settlement seems to be a continuation of GM’s past practices of agreeing to a high cost settlement. Did it increase GM’s labor costs?

High labor costs have been and continue to be GM’s Achilles’ heel and needed to be corrected during its bankruptcy process.

● The Chevrolet Volt does not appear to be a viable product. High price at $40,000. Limited performance and cost disadvantage. Not competitive versus alternatives.

● Its Chief Executive Officer does not have in-depth experience in a manufacturing company – his experience is largely in service companies. This is a negative. In comparison, Ford Motor Company’s CEO has the in-depth background and experience operating inside a manufacturing company that bodes well for Ford’s success.

Mr. Jack Welch is an example of a highly successful chief executive officer of a manufacturing company. He started at a relatively low, entry level position at General Electric Company. As he progressed upward, he gained knowledge of all the functions in manufacturing which gave him the experience and instincts to develop GE into a successful company.

Can GM return to its leadership position with a number one USA market share in the next several years? With its high labor costs and questionable product line-up it is doubtful that GM can be successful competing with lower cost, well-run Asian competitors.

Sources:

The Daily, May 2011

The New York Times, September 2011

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...