Klarinet Archive - Posting 000521.txt from 1999/11

From: Neil Leupold <leupold_1@-----.com>
Subj: [kl] Re: Plastic Horns
Date: Sat, 13 Nov 1999 18:47:19 -0500

--- "Edwin V. Lacy" <el2@-----.edu> wrote:

> When a company shuts down or moves due to their inability to success-
> fully deal with labor negotiations, there is always at least a little
> of the vindictiveness factor involved. ("We'll show those bums that
> we were serious when we told them we couldn't afford to pay them what
> they thought they deserved.")

Or...management simply has the balls to make the tough business de-
cisions that are necessary for the continued viability of the company.
This need not involve vitriol. What makes the decision a tough one
is often precisely the consideration for the after-effects on the
people involved. Employees are not just union members -- they are
often friends and associates with whom management shares enriching
personal relationships. If a company has a history of generally
good relations with its associated unions, its managers are still
beholden (as you mentioned later) to maximize shareholder value.
When union reps and management reach an irreconcilable difference,
the outcome is not necessarily supported by the local union employ-
ees who are ultimately affected. The strength of the relationship
between management and employees is sometimes not strong enough to
outweigh the need to keep expenses below a certain point. If a
company is forced to pay variable costs (including wages) which
exceed marginal revenues, its only choices are to continue oper-
ating at a loss (not a real option), shut down until market condi-
tions are able to support its variable costs, or figure out some
way to lower variable costs. This last option includes consider-
ing relocation to a non-union area. If the company has explored
all other options for lowering its variable costs, sometimes the
workers are the last resort. Then it becomes a matter of opera-
ting at a loss until the company goes bankrupt -- which puts every-
body out of a job anyway -- or relocating in order to save the
company. It's unfortunate that the workers are let go, but who
benefits if management allows the company to go down with them?
Surely nobody, because then shareholders are also hurt, in addi-
tion to the employees. And of course, management is out of a job
as well.

> In no case does a concern for making better quality musical
> instrument come into the formula.

That's a pretty specific statement, and certainly does not
apply in all situations. If an instrument company's business
strategy is to be a low-cost leader and a majority owner of
market share, then clearly it will have to sacrifice quality
for quantity in order to achieve its goal. Market share, how-
ever, is not the only consideration, because it does not nece-
ssarily lead to higher revenues, much less an increase share-
holder value. If you subscribe to a view of the music instru-
ment industry as simply a subset of all other types of busines-
ses, then you must accept as well that there are instrument
makers whose entire strategy is product differentiation based
on quality. Price is not the issue, and those who realize
their vision are able to carve a specialized niche for them-
selves in the higher priced, top quality instrument market.
Rossi is a good example. There are others. Making a "better
quality musical instrument" is their paramount concern, be-
cause their entire strategy revolves around it. Price is
secondary, because their market is specialized.

> Given the fact that we can observe and assess the experience of Conn, I
> think we can ask a few pertinent questions. The basic question is, did it
> work? Is Conn more profitable or less profitable than it was before the
> move? (I don't know the answer to that one, but I suspect that it is less
> profitable. Certainly the reputation of the company and their product has
> suffered.)

All of this depends on the capabilities and competency of management and the
board of directors.

> > Whereas the "bottom line" is always a major consideration for all
> > manufacturers, I do believe that the quality of their product comes in
> > a very close second.
>
> I'm sorry to say that my observations over the years have made me more of
> a cynic on this one. As far as I am able to observe, the almighty dollar
> is the major consideration, the minor consideration, and the only
> consideration for most businesses. That's the nature of the business
> world. These are the requirements that are imposed on them by their
> investors.

There seems to be a propensity for putting things in absolute terms,
which is certainly not how the business world operates. Granted,
we are a capitalist society, and the aim of for-profit enterprise
is to do just that: make a profit. How each business goes about
doing this, however, is a broad and varied topic. The Yugo car
company didn't give any consideration to quality, and that com-
pany no longer exists. They figured they could capture market
share by being a low cost leader, but production was so ineffi-
cient, and quality so poor, that their business strategy failed.
The opposite thing almost happened with Jaguar, which the pres-
ident of the company himself admits was a car as badly made as
the Yugo until Ford acquired Jaguar in the late 80's. Jaguar's
strategy was not to be a low cost leader, but their quality was
so poor that the company began to flounder in the luxury car
market. Again, production was extremely inefficient, quality
suffered, and it took Ford Motor Company to turn them around.
Clearly, quality plays a major role for firms that aspire to
capture a certain segment of their relative consumer market.

> I think that there is another assumption implicit in the position which
> you espouse, and which is held by very many people. That is that the
> decisions made by leaders of business and industry are somehow more likely
> to carry the weight of rectitude, just on the basis of the fact that they
> have the power to control the actions of their companies, as well as the
> lives of their employees. This tacit acceptance of any decision being
> correct if it is in the best interest of the "bottom line" is probably as
> far from the truth as we could get.

I'll concede this part of the paragraph -- being a competent business leader
does not predispose somebody to make decisions that are for the good of the
human beings most directly involved. Quite the contrary is often the case,
in fact. This goes back to the "tough decisions" dynamic. Managers are not
hired as altruists. They are installed by the board of directors for one
purpose: grow the company and increase shareholder wealth. If an opportu-
nity arises for them to better fulfill their fiduciary responsibility, the
better business manager will exploit that opportunity, and he will do it
dispassionately. Companies run into agency problems when managers make
decisions which fail to maximize shareholder value, and those managers
often find themselves looking for another job in the long run. The bus-
iness world is cut-throat and often unsympathetic, and the lives of
most citizens are much better for this fact, believe it or not.

> I have seen no objective evidence which has convinced me that
> business leaders are inherently better able to make astute de-
> cisions than are those who have even more at stake in the com-
> pany than do the stockholders - namely the employees.

This argument is somewhat counter-intuitive, depending on whose
perspective is being taken into account. It is an issue of general
and specific knowledge. Professional managers, i.e.; the executive
management of a company, is installed by the board of directors pre-
cisely because they are better qualified than most people to make
business decisions at the corporate level. If you're talking about
the union worker on the shop floor, clearly the likelihood is great-
er that he will know his job better than the president of the divi-
sion for which he works. But I believe you were addressing senior
management -- the people whose purview involves the strategy and di-
rection of the entire company -- and the odds are vastly against
the shop floor union worker being able to fill the roll of a com-
pany president with any applicable competence, much less leader-
ship. It is the responsibility of senior management to consider
the entire company, including all of his employees, when making
decisions about the compay's future and welfare. Ultimately,
he must report to the board and to the voting shareholders.

> After a business failure, it's not the managers who can
> be seen in lines at the welfare office.

Life isn't fair, and nobody promised us that it would be.
But managers are not gods, and they are subject to the
same anonymous cruelty of life as all other citizens.
It's just that their bad decisions in a company have
an exponentially larger impact on the firm than a mis-
take made by a worker on the assembly line. And while
the worker may find himself in a welfare line after a
company closure, the manager may find himself in jail.
Let's assume that both gentlemen have families to
support...

> Fortunately, there are examples in the industry which enable me to agree
> with you about this. One of the paragons in this regard is the Fox
> Products Corporation, makers of bassoons, contrabassoons, oboes, and
> recently English horns. Their quality has been getting steadily better
> and better for more than 30 years. I don't have any direct knowledge, but
> I think it is safe to assume that the company is a profitable one. When
> they have wanted to make greater inroads into the market, they have not
> done so by cost cutting, reductions in the quality of their products, or
> by cutting their lifeline to those who have made the achievement of the
> highly positive image of their products - namely, their employees.

Fox Products would not be the success story that it is if it did not
do BOTH types of competitive action -- raising quality *while* cutting
costs. I wager that if I dropped by the Fox factory for a tour and
asked about the history of operations, I would hear a story about
continuous improvements in technology and processes, both of which
combined to enable higher quality products to be produced at lower
cost to the company. That's what efficiency is all about, and any
company that ignores it is destined to disappear.

-- Neil
Do You Yahoo!?
Bid and sell for free at http://auctions.yahoo.com

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