Take the story of Dell Computer [DELL] and its Taiwanese electronics manufacturer. The story is told in the brilliant book by Clayton Christensen, Jerome Grossman and Jason Hwang, The Innovator’s Prescription:
ASUSTeK started out making the simple circuit boards within a Dell computer. Then ASUSTeK came to Dell with an interesting value proposition: ‘We’ve been doing a good job making these little boards. Why don’t you let us make the motherboard for you? Circuit manufacturing isn’t your core competence anyway and we could do it for 20% less.’
Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. On successive occasions, ASUSTeK came back and took over the motherboard, the assembly of the computer, the management of the supply chain and the design of the computer. In each case Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. However the next time, ASUSTeK came back, it wasn’t to talk to Dell. It was to talk to Best Buy and other retailers to tell them that they could offer them their own brand or any brand PC for 20% lower cost. As The Innovator’s Prescription concludes:
Bingo. One company gone, another has taken its place. There’s no stupidity in the story. The managers in both companies did exactly what business school professors and the best management consultants would tell them to do—improve profitability by focuson on those activities that are profitable and by getting out of activities that are less profitable.
Is it time for a new twist on the TED model? The esteemed Technology, Entertainment and Design Conference, soon to be pushing 30, has become a juggernaut–what with sellout events, the viral success of online TED Talks, and the spin-off of smaller TED-X conferences. But the conference’s original founder, Richard Saul Wurman, is working on a new creation that radically overhauls the formula used by TED–much as TED itself reinvented the standard business conference model when Wurman launched it in 1984.
Wurman, who is no longer affiliated with TED (he sold most of the rights to Chris Anderson’s Sapling Foundation back in 2002 and broke off his remaining ties with the spin-off TEDMED Conference earlier this year), recently announced plans for his new WWW.WWW conference, slated to debut in Fall of 2012. So far, he has lined up some heavyweight collaborators—R/GA’s Bob Greenberg and @radical.media’s Jon Kamen are on board, GE is an early sponsor, and Yo-Yo Ma and Herbie Hancock will see to the music. Featured guests are still to be determined, though Wurman promises that the conference will be “like a dinner party with a hundred of the world’s greatest minds having a conversation, two at a time.”
But here are a few things the show won’t have: Speeches, slide shows, or tickets. Wurman’s plan is to stage a series of improvisational one-to-one conversations, held in front of a small invitation-only audience and then disseminated to the outside world via a high-quality, for-sale app that captures the event.
It doesn’t seem like it’s been four years since the last time Detroit automakers and the United Autoworkers Union negotiated a new contract. You may remember the discussions and agreements that, from the date of that contract, gave the automakers the right to hire many categories of workers and pay them $14 an hour, plus lesser benefits. Of course, the auto companies were facing the same issues as any other major industry in America; the issue squeezing their corporate bottom lines most painfully was the incredible rise in the cost of workers’ health care.
Then many national media outlets were reporting that Detroit was paying their workers more than $73 an hour for their labor. Yet not only did an influx of autoworkers not buy new homes in Westover Hills or Monticello, but that simplistic look at the net cost of factory work ignored more pertinent realities of car production and corporate accounting.
Well worth reading.
Since Tocqueville, foreign observers have often helped the United States to see itself in a new light, and the British thinktank ResPublica seems to be continuing in that tradition as it prepares to set up an American branch. During a recent visit to FrumForum, ResPublica founder Phillip Blond shared a presentation which included a startling fact: despite American politicians’ pro-small business rhetoric, the U.S. lags far behind most other developed countries in the share of citizens employed by small businesses.
“THE remarkable juxtaposition of American heartland, Midwest values and a whole lot of foreign accents” is what makes Midland, Michigan, a beacon of hope for the country’s manufacturing sector, reckons Andrew Liveris. His is one of those accents, though he no longer sounds crocodile-wrestlingly Australian. The boss of Dow Chemical has lived on and off for years in the company town that grew up around the brine wells that Herbert Dow first tapped in 1897 for his pioneering electrolysis process. The chemical firm still employs 5,500 of the town’s 42,000 inhabitants. (The second-biggest employer is Dow Corning, a silicone-making joint venture.) Dow’s success has delivered the nice homes, good schools and ball parks that make up the American Dream.
Like many immigrants, Mr Liveris shares that dream. But he now fears it is under threat. He has become one of the leading voices calling on the American government to embrace industrial policy. Last July Dow launched a plan to revive American manufacturing, which Mr Liveris then expanded into a book, “Make It In America”. On June 24th President Barack Obama appointed him co-chair of a new “Advanced Manufacturing Partnership” that brings together government, academia and business to “build a roadmap” for a more competitive manufacturing sector.
“Many analysts, dealers and executives believe the industry is actually healthier selling far fewer cars.” — Auto Industry Adjusts to New Normal: Low Sales, NPR, June 24, 2011
Everyone, it seems, wants to comment on the country’s new car sales lately. Among last week’s plethora of opinions, many argued that the auto industry is better off today selling fewer cars. Some comments explained how consumer spending fell back for the first time in nearly 18 months in May – partly because new car sales dropped. Certainly everyone reflected that just a decade ago Americans purchased 17.3 million new vehicles, but last year struggled to produce and sell just 11.5 million.
What was truly stunning about NPR’s reporting on the subject was that their expert was Jeremy Anwyl, CEO of Edmunds.com. True, Edmunds.com has become an extremely popular car-shopping Web site. With traffic estimated at 6.6 million unique individuals per month, no one can question its Internet credentials. But what Mr. Anwyl said does seem problematical, because it reveals that he lacks grounding in the industry’s historical trend. Moreover, in that NPR story Mr. Anwyl suggested that our new car market just wasn’t normal at 16 to 17 million sales a year; with population growth, he thought, we might someday see 16 million sales again.
The era of widespread offshoring of manufacturing from the US to China is coming to an end, according to a study that forecasts a renaissance for American production industries over the next five years.
The report by the Boston Consulting Group (BCG) forecasts that, by 2015 – on the back of good productivity growth and relatively low wages – the US is likely to be slightly ahead of China as a base for making many of the goods destined for sale in North America.
Until this week, only one topic was off-limits for questions to Warren Buffett at Saturday’s annual gathering of Berkshire Hathaway shareholders in Omaha: how serious is the Dave Sokol affair?
On Wednesday, however, the company issued an 18-page report from its audit committee about the former star executive’s trading in shares in Lubrizol, a chemicals group later bought by Berkshire, and declared open season for all questions to Mr Buffett.
Here are my seven:
1. How serious is the Dave Sokol affair?
You are the world’s most famous long-term investor. Recently, Berkshire’s shares have lagged behind the S&P 500, but your record of outperformance over more than four decades speaks for itself. Even big, conservative bets, such as the 2009 investment in Burlington Northern Santa Fe railway, have been well timed. But Mr Sokol was a frontrunner to succeed you as chief executive. You lauded him regularly in your annual letter to shareholders. His abrupt resignation and the circumstances surrounding it seem to suggest that this is more than just a blip.
2. Do you love some of your managers too much?
Norio Ohga, who was instrumental in bringing the world the compact disc and the PlayStation and is credited with building Sony into a global electronics and entertainment group, has died of organ failure aged 81.
“It is no exaggeration to attribute Sony’s evolution beyond audio and video products into music, movies and games, and subsequent transformation into a global entertainment leader to Ohga-san’s foresight and vision,” Howard Stringer, Sony’s chairman and chief executive, said in a statement.
“By redefining Sony as a company encompassing both hardware and software, Ohga-san succeeded where other Japanese companies failed,” Mr Stringer said.
A musician by training, who was a close friend of Austrian conductor, Herbert von Karayan, Mr Ohga led Sony during perhaps its most successful years, as president from 1982 until 1995, when the Japanese electronics maker became one of the most admired companies in the world.
It was under Mr Ohga that the name Sony came to symbolise Japanese manufacturing excellence and to define what was “cool” in the world of electronics – an image encapsulated in the catchphrase, “It’s a Sony.”
just got back from a very interesting but hectic week in New York and Washington, followed by two days at a conference in Hangzhou. During my meetings I noticed that much of the discussion, and many of the questions I was asked by both government officials and investors, focused on debt levels and reforms in the Chinese financial system. I have written a lot about rising debt in China and am glad that analysts and policymakers seem to be spending a lot more time thinking about balance sheet issues. Every case of rapid, investment-driven growth in the past century, as far as I can make out, has at some point reached a stage in which debt levels rose to unsustainable levels and precipitated either a debt crisis or a long grinding adjustment period.
The reason debt levels always seem to grow unsustainably, I suspect, is that in the initial stages of the growth model much if not all of the investment is economically viable as it pours into building necessary infrastructure whose profits and externalities exceed the cost of the investment. The result is real growth. At some point, however, the combination of subsidies, distorted incentives (in which investment benefits accrue to those making the investment while costs are shared broadly through the banking system), and very cheap financing costs leads inexorably to wasted investment and debt rising faster than asset values. This is when the debt burden begins to rise in an unsustainable way.