Category Archives: Economics

Who’s Imitating Whom

 

In previous posts, I have made the case that sometimes life or politics imitates art, sports and too frequently movies.  And on a couple of rare occasions, I have suggested politics imitates business.  However, my current assignment teaching entrepreneurship in Milan has reminded me the relationship between leader and follower can be a two-way street.

In 2011, I researched and wrote a teaching case, I used to demonstrate how entrepreneurial behavior could be applied to virtually any discipline.  The case involved a decision by Bob Ortega, the owner of a regional Mexican food manufacturer, to expand his business nationally, competing against the two major players in the market.  The choice depended on several factors: product differentiation, raising the necessary capital to build the necessary national marketing and distribution infrastructure and whether he had the a support system willing to back his ambition.

The case opens with the following quote attributed to E. J. Dionne without identifying him as an opinion writer for the Washington Post.

A good entrepreneur triumphs by adapting to the times and taking advantage of opportunities as they come. A great entrepreneur anticipates openings others don’t see and creates possibilities that were not there before.

Once students finish discussing the case, I share my dirty, little secret.  There is no Bob Ortega.  The case is about Barack Obama’s decision to challenge Hillary Clinton for the 2008 Democratic nomination for president.  Dionne’s actual quote referred to politicians, not entrepreneurs.  Instead of market share expressed in dollars, the currency in the case is votes.

Related imageThis nexus between entrepreneurial and political decision making resurfaced last week while teaching a Harvard Business School case titled, “Starbucks Customer Service.”  The decision facing CEO Howard Shultz (yes, the same Howard Shultz of short-lived presidential ambition) is whether to invest up to $40 million in additional labor to address increasing consumer dissatisfaction.  The decline in customer gratification was the result of the company’s own success.  As a broader client base emerged, Starbucks faced competing needs between their original “sit and sip” patrons and the growing “grab and go” crowd.

The supporting documents which accompany this teaching case are data-heavy from which we can ascertain several facts.

  • Highly satisfied customers are more likely to drop in three more times per month than other customers.
  • Highly satisfied customers spend more per visit than other customers.
  • The increased revenue from highly satisfied customers over time more than justifies the additional investment in labor.

But that raised the most important question.  How many customers would you have to move from the “so-so” category to “highly satisfied” category to break even (i.e. cover the additional labor cost)?  The answer was 67 per store or just less than three percent of the  average annual per store clientele.  As Obama once said about calling out neo-Nazis as bad people, “How hard can that be?”

Which, as all things eventually do, brings us to the 2020 election.  Think of Wisconsin, Michigan and Pennsylvania as Starbucks.  Democratic voters became increasingly disappointed with the level of customer service and decided to buy their coffee somewhere else.  Unfortunately, the new brewer-in-chief had no knowledge of what it takes to run a roastery.  So, as we approach 2020, the Democratic Party faces the exact same situation as Starbucks in 2002.  They have two very different customer categories.  Instead of “sit and sip” versus “grab and go,” they have left of center moderates and progressives wanting to lead a political revolution.

Shultz’ targeted investment in labor solved his business’ problem.   The extra person behind the counter meant baristas could still spend time schmoozing with the lingerers without holding up those who wanted their java NOW.  After laying out the numbers, here’s the bottom-line question I ask students.  “Is influencing 67 people doable?”  And the answer is, “Of course it’s doable.”

Folks, we’re not talking about three percent in these three battleground states.  In Michigan, we’re talking about 0.3 percent.  Pennsylvania, 1.2 percent.  And Wisconsin, 1.0 percent.  “How hard can that be?”  If the Democratic Party, in the age of Trump, regardless of the nominee cannot find a way to move such a small percentage of voters from the Republican to Democratic column, they have a bigger problem than voter suppression, foreign interference and social media.

Take a lesson from Starbucks.  Find solutions that address the legitimate customer service needs of both factions within the party.  When it comes to health care, talk about a public option which mirrors Medicare while allowing those who want to stay with their employer based coverage or private insurer to do so.  On gun control, you have a consensus on two issues, universal background checks and red flag laws.  The NRA will bitch and moan, but their own members overwhelming support these initiatives.  And you don’t have to promise free everything.  You just need to make a limited number of strategic investments.  For example, do you think climate change advocates would oppose investments to retrain coal workers to build solar panels and wind generators?

Maybe, instead of debating each other, the remaining Democratic candidates could sit down over a cup of coffee and figure this out.

A VETERANS DAY POSTSCRIPT: 

The sacrifice our men and women make every day to keep us safe in an uncertain and dangerous world is normally something I would not joke about.  But this Veterans Day, I cannot pass up the chance to point out a synchronistic moment that could only occur in Trump World.  It began with release of an excerpt for Junior’s book Triggered, in which he shares his thoughts while watching his father lay a wreath at the Tomb of the Unknown Soldier.

In that moment, I also thought of all the attacks we’d already suffered as a family, and about all the sacrifices we’d have to make to help my father succeed — voluntarily giving up a huge chunk of our business and all international deals to avoid the appearance that we were ‘profiting off the office.

Junior much be taking Yiddish lessons from Jared because he certainly seems to know the meaning of the word CHUTZPAH.

Image result for baby trump balloon knifedBut then we had an angry Trumpster attack the inflated Baby Trump balloon with a knife at the Alabama-LSU football game Saturday.  When I saw this picture of the deflated caricature, I could not help but think, “Junior, now that’s what I call sacrifice.”  Baby Trump gave his life for the resistance.  And is more deserving of a purple heart than Junior’s father who accepted one from a veteran at a campaign rally without even stubbing a bone spur.

For what it’s worth.
Dr. ESP

 

Another Bankruptcy

 

There is a indisputable tenet which guides successful commercial ventures, preached in every business school worth its weight. Make a customer, not just a sale.  One can argue this maxim is based solely on common sense. But activities that are dependent on a bottom line must be justified by empirical evidence.  In this case, the customer versus sale prerogative is backed up by two data points.

First, profit margins are not a simple matter of subtracting the wholesale cost from the retail price of a given item.  Each sale also carries the financial burdens of customer acquisition.  These cover everything the seller must do to convince a potential buyer to want the product and more importantly to purchase it from a particular establishment.  These costs include marketing to inform the customer of the product’s existence and its availability on-line or at a physical location.  For many new products, it also includes outlays to educate the customer about the product’s value or its ease of use.

For every new potential customer you incur those expenses again and again. But these costs are dramatically reduced when dealing with a repeat buyer or a new customer referred by an existing one.  In Malcolm Gladwell’s book “The Tipping Point,” he encourages businesses to nurture a category of customer he refers to as “evangelists,” those people who love to talk about their commercial experiences.  Think of them as pro bono marketing reps.  At no cost, they are talking you up among family, friends and associates with the  advantage of already being viewed as a trustworthy source of information.

Image result for loyalty programsThe second data point is the proliferation of loyalty programs.  They are the best example that relationships travel on two-way streets.  Why would a hotel chain or airline give you a free room or flight which it could otherwise offer paying customers to increase its bottom line?  Because the numbers show you are more likely to patronize that company even when a competitor offers a lower price or is more convenient.

More importantly, the relationship is not based solely on “what have you done for me lately.”  Everyone screws up.  However, a loyal customer is more likely to overlook that occasional bump in the road when stacked up against months and years of preferential treatment or appreciation.

Though many do not want to admit it, politics is a business. What differentiates the two is not organizational structure or procedures, it is nomenclature.  The CEO is the CIC, commander-in-chief.  Corporate divisions are cabinet departments.  The currency is votes, not dollars.  Bankruptcies are failed legislation, lost elections, resignations and impeachments.

Over the past four days, Donald Trump, the self-proclaimed “duke of debt” reminded us he is also the “baron of bankruptcies.” And the enterprise known as the Trump administration is about to learn what every successful for-profit entity already knows.  Benjamin Franklin’s adage, “A penny saved is a penny earned,” may apply to the customer, but not the vendor.  To the contrary, a penny spent on nurturing and sustaining a customer relationship is a future stream of many pennies.

The term quid pro quo has been tossed around a lot since news of the intelligence community whistleblower’s complaint surfaced in the Washington Post.  Yet, the fact is every transaction is a quid pro quo.  You exchange money for a good or service. You go to a play or movie and you are entertained.  Donald Trump is the quintessential transactional chief executive.  Everything he does is a quid pro quo.  He deprives military families of better schools for their children so he can tell his most rabid supporters he kept a promise thus alienating a voter bloc which was with him in 2016.  He gets Rudy Giulliani to manufacture alibis and false accusations to protect him in exchange for an opportunity to be relevant again.  Yet, Giulliani’s manic behavior makes Trumpist congresspersons’ task to defend the indefensible that much harder.

There is another problem with these efforts at immediate gratification.  Immediate also means they are seldom based on a solid foundation, especially one of loyalty.  That is why when Trump needs them most, Bill Barr is hiding out in Italy.  Kurt Volcker resigns and tells the House Intelligence Committee he is ready to cooperate.  A whistleblower remembers when the commander-in-chief stood in front of the CIA’s Wall of Honor and used the occasion to honor himself or chose the word of Vladimir Putin over the men and women who protect America from the next 9/11.

Do not be surprised when a line of “creditors” forms outside the House Intelligence Committee room next week when the Trump organization once again finds itself in bankruptcy court.

For what it’s worth.
Dr. ESP

Union Queens

 

Image result for labor day mattress salesIn case you’ve not been watching mattress commercials on television or similar advertisements in newspapers, you probably did not notice we are supposed to be celebrating Labor Day.  And as is his habit, the narcissist-in-chief spent the morning patting himself on the back for not screwing up the economy in his first two years in office.   Though he is certainly making a valiant effort recently with non-existent trade deals and tariffs.  He followed this ego trip with a round of golf at his his Virginia resort (and I use HIS reluctantly since there is a good chance the majority owner is Deutsche Bank or the Kremlin).  I am so glad he cancelled his Poland trip to stay in the White House and monitor the situation associated with Hurricane Dorian.  Better to embarrass himself in the USA than in front of a worldwide audience.

But that’s not what I came here to talk about.  As we pay tribute to American workers let’s make sure we give credit where credit is due.  For far too many years Republicans and conservative economists have questioned the value of the social safety net by pointing out some beneficiaries abuse the system.  The targets of these accusations are called “welfare queens.”  According to Wikipedia, “‘Welfare queen’ is a derogatory term used in the United States to refer to women who allegedly misuse or collect excessive welfare payments through fraud.”

However, individuals on public assistance are not the only ones with a safety net.  The overwhelming majority of workers in America today are the beneficiaries of:

  • better wages,
  • reasonable hours
  • safer working conditions
  • health benefits
  • retirement programs
  • unemployment payments, and
  • aid if injured on the job.

EVERY single one of these worker gains were introduced and fought for by dues paying members of unions and labor organizers.

Yet more and more states are authorizing open shops (places of employment where workers are not required to join a union) and fewer workers are contributing to the cause for even better working conditions, higher pay and corporate accountability.  I ask you, do non-union workers getting the above perks sound like a class of individuals who are collecting payments and in-kind benefits through fraud?  I have yet to hear one corporate executive or open shop employee give credit to the likes of Samuel Gompers and other giants of the labor movement.

I am not quite sure when “union” became such a dirty word but it seems to coincide with economic downturns.  Organized workers often are portrayed as the reason American business cannot compete in a global marketplace.  If that were true, the decline of unions should have resulted in a massive increase in U.S. manufacturing.  Or the wages and benefits in non-union firms would be significantly lower than their organized counterparts.  But neither is the case.  So now the excuses de jour are health and safety regulations and immigrants.

So, this Labor Day, take a moment and thank the union workers and organizers who are responsible for many of the workplace advantages so many non-union workers take for granted.  And if you see one of these union queens driving the BMW or Mercedes Benz they built in an open shop, refrain from confronting them with the fact they are living off the teat of hard-working, dues paying union members.  Even though it is the truth.

For what it’s worth.
Dr. ESP

 

The Upside of Cheating

Based on the positive feedback to Sunday’s post about noise versus signals, I thought I would further explore the value of clear signals.  The operative word in the previous sentence is “clear.”  So much of what we see and hear is often internally inconsistent.  Just ask comedian Steven Wright.

My teacher told me, “Practice makes perfect.”  My mother told me, “Nobody’s perfect.”  So I quit practicing.

What does that have to do with the non-nonsensical, counter-intuitive title of today’s post?  Is there really an upside to cheating?  Is Dr. ESP suggesting cheating is a good thing?  YES and YES.

Cheating is the clearest and most non-transparent signal any individual or organization can transmit.  No one wants to cheat.  Yet it happens.  Not by choice, but by necessity.  During my nine years as a member of the faculty at Miami University, incidents of cheating was the single best indicator of student achievement.  Not because the perpetrator was dishonest.  In the most illuminating sense possible, students self-identified themselves as underachievers.  I did not have to give them a grade, they graded themselves. If they knew the content or adequately prepared, there was no possible reason to cheat.

Image result for bait and switchThe true value of cheating comes from the signal received by the person a deceiver hopes to fool.  A few examples from the world of commerce.  Consider the time honored scheme referred to as “bait and switch.”  Based on an offer in a circular or on-line, you go to a store to purchase the “deal.”  When the sales representative suggests you will not be as satisfied with the advertised product versus the higher priced upgrade, what is he or she actually saying?  The fact they carry inferior merchandise?  Or maybe they do not even stock the advertised model?  Even if you participate this time in the “bait and switch” transaction, what are the chances you patronize that store again?  Or is it more likely you will share your experience with friends and family?  As we always tell our students in business classes, the ultimate goal is NOT to make a SALE but to make a CUSTOMER.

The second example demonstrates the value of cheating in commerce at an industry level.  We hear a lot about how the Chinese do not play fair.  They steal intellectual property.  Chinese companies use inferior materials and underpay their labor.  The government manipulates their currency to make products made in China more price competitive and foreign imports more expensive.  Read between the lines and you cannot miss the signals.

If we were as innovative as the United States firms, we would not need to loot their intellectual assets.  If our products were superior, price would not be as important a variable.

The true danger will come when China realizes its investment in industrial espionage and market manipulation is better spent on creating more innovative, higher-value products on its own.  Some of us remember when Japanese cars and Korean electronics were cheap knock-offs of American-based technology.  Today they are worthy international competitors for the right reasons–innovation and product quality.

Dr. ESP, are you suggesting we just let them cheat?  Not quite.  But I do question the allocation of resources.  Let’s return to the above example of the electronics industry.  A plethora of intellectual property (IP) infringement suits have centered on the design and functionality of smartphones.  Samsung sues Apple.  Apple sues Google. Google sues Samsung.  And who benefits?  The legal profession, which instead of chasing ambulances now tails Geek Squad vans.  As Willie Sutton would say, “That’s where the money is.” The more important question is how do these mega-corporations actually hold on to their markets.

Court battles have not crippled Google, Samsung or Apple despite the tens, if not hundreds, of millions of dollars spent on litigation.

  • First, they keep innovating.  Let competitors copy the iPhone 9.  By the time their knock-offs hit the market, Apple will release the iPhone 10 with new and better features and functionality.
  • Second, deliver what you promise.  Create real value.  Separate yourself from your competitors who can only offer inferior products.  Give the customer what they need and want at a reasonable price.
  • Third, create a community customers are proud to be part of and a support system where consumers know you care after the sale.

To prove this point, look at the reviews for anything offered on Amazon.  Consider individuals who bought “Hydro Mousse Liquid Lawn Kit.”  (The product is not worth explaining.)  Seventy-five percent of reviewers gave the product a one-star review with comments such as:

Complete waste of time and money. Was not even close to as advertised.

Wow. I don’t know what they do in the infomercials to make it look like it works but this is absolute garbage.

Comes with this “Mousse” conditioner that’s sealed in the plastic bag filled to the brim. It exploded on me when I opened it up and got green stuff all over my hands face, clothes, driveway etc.

Returned and have not received refund.

I world Not Recommend This to Anybody Not even My Worse Enemy!

Americans know a bad product when they see one, especially when they make a mistake and purchase it one time.  They are fast learners.  They quickly differentiate the perception in a staged infomercial and reality.  They understand “bait and switch.”   And they don’t like being conned.

So, do not waste your time and resources telling people what they already know.  Next time, they will look for a better product.  They want to feel like you really care, not just at the time of the sale, but all the time.  They want to be part of a consumer community they can be proud of.

Are you listening Democratic candidates for president?  (Oops, I think I just created my own “bait and switch” scheme. Sorry!)

For what it’s worth.
Dr. ESP

 

The Spy Who Loathed Me

Image result for the spy who loved meThe title of this morning’s entry is a clear reference to the 10th James Bond film The Spy Who Loved Me, starring Roger Moore as the fictional secret agent.  At the heart of the story (based on the 10th Ian Fleming 007 novel) is an attempt by a “man without a country” Karl Stromberg to destroy the world order to be replaced by an alternative of his own creation.  Today, the post-World War II geopolitical standard is the target of a real-life operative who, like Stromberg, sees success not by defeating his enemies, but setting the stage for his enemies to destroy each other.

The title came to me as I listened to several pundits question why Iran would risk overplaying its hand, seizing an British oil tanker in the Straits of Hormuz. [NOTE: Although bound for England, the ship is registered in Sweden.] The consensus opinion boiled down to, “if the U.S. sanctions cause Iran economic pain, the Iranians have decided to also cause some pain.”  However, that answer still begs the question, “Who benefits in the end?”

What if, in the style of Karl Stromberg (played by Kurt Jurgen), there is a third party manipulating the situation and who might that be?  To understand the situation, you first need to determine if this is an isolated event or view it in the context of a larger strategy.  And in the latter case are there “dots” that are not yet connected.  Like the detectives in any television or film crime story, you put a lot of pictures and notes on a bulletin board to build a case against the prime suspect, someone with the most obvious motive for committing the offense.  And then you draw the lines where the data points intersect.

At the center of my board is former KGB  director Vladimir Putin, the spy who has devoted his life to avenging the demise of the Soviet Union.  And how do you do that?   Disrupt the liberal democratic order which has dominated global politics since 1945.  Knowing he lacks the resources and military advantage to take on the Western alliance directly, he foments discontent between members of coalition and within each of the sovereign participants.  All you have to do is ask yourself, “If I were Putin, what would I do to energize disruptive forces among my enemies?”

  • Support Syrian president Bashar al-Assad’s response to civil protests creating millions of refugees.
  • Conduct a disinformation campaign in support of populist candidates in several European elections.
  • Manipulate public opinion in favor of Brexit.
  • Assist in the election of a U.S. president who games the electoral college to capture the White House despite losing the popular vote.
  • Have that president withdraw from an international treaty which pits the U.S. against NATO.

What do all these have in common?  Putin’s surrogates represent an activist minority of the population in each of the target nations.  Bashar al-Assad is a member of the Alawhite sect of Islam which makes up just 12 percent of the Syrian population.  In the latest United Kingdom public opinion poll, only 44 percent of respondents still support Brexit while 51 percent prefer to remain in the European Union.  According to the FiveThirtyEight average of polls, only 42.7 percent approve of Donald Trump’s performance since taking office.   A CNN poll just prior to U.S. withdrawal from the Iran nuclear agreement showed 63 percent of Americans preferred staying in the compact.  Disinformation results in confusion.  Confusion causes apathy.  Apathy assures minority rule.  Minority rule spurs majority dissatisfaction and political unrest.

Putin tapped into the anger of the Russian people as the West celebrated its Cold War victory.  American prosperity increased fueled partly by what became known as “the peace dividend.”   In contrast, the Russian economy struggled as the central government lost control of many of the resources in its satellites in the Soviet sphere.  The rise of Vladimir Putin was largely due to these factors.

Related imageThis post began with a movie reference and will end with one.  In The Mouse That Roared, the Duchy of Grand Fenwick, on the verge of bankruptcy, devises a plan to garner American economic relief.  They declare war on the U.S. with the intent of immediately surrendering upon launching an invasion of New York expecting the American government to provide assistance similar to that offered Germany through the Marshall Plan.

The plot of this film was not unlike the situation in the Soviet Union at the end of the Cold War.  Having been in Moscow in November 1994, two personal experiences provided insight into Russia’s future.  The first was visiting a flea market in Gorky Park.  Several acres were covered with tables at which Russians, desperate for any source of income, were selling everything from Soviet army uniforms to kittens.  The second was lunch with governor of the Moscow Oblast (region) Anatole Tshelov.  He told us the greatest challenge was to figure out how to transform an economy where the government took responsibility for providing basic necessities throughout one’s life to one where individuals were now expected to provide for their own well-being.

In other words, although not physically decimated, like Germany in 1945, Russia needed help to rebuild.  In addition, people needed income.  That meant they needed work.  And without a majority employer like the Soviet military/industrial complex and government purchase of many commodities, jobs were scarce.  One possible response, a second Marshall Plan.  International investment to upgrade Russian infrastructure and financial capacity.  It never materialized.

The lesson?  It is one thing to win a war, whether hot or cold.  It is quite another to win the peace.

For what it’s worth.
Dr. ESP