A new management paradigm - conserve cash
What we are experiencing now might be a new paradigm for successful management.
Only a year ago, companies that jealously hoarded cash were viewed with suspicion, even those as secure as Microsoft! To be a successful manager, it was thought, was to pay out significant dividends or to buy back shares. Thus the commercial paper market became popular with businesses borrowing to satisfy these conventions of the old paradigm. Then, late last year, the commercial paper market closed overnight which began a frantic scramble for cash to pay staff…etc. Since then, companies have sought to scramble together all the cash that they can and spending less in the process. Pressures from investors inquiring about the durability of the businesses cash flow at current “burn rates” has now replaced those of whining for greater dividend payments.
Some cash hoarders are now taking advantage of their reservoirs of stored up cash to buy up their supply chains, competitors or conglomerates at low prices. $71 of foreign acquisitions have come from Japanese companies last year alone and many Indian conglomerates are buying up in a similar vein. Microsoft is sitting on a $21 billion hoard and now has a lot of options with Bill Gates’ prediction that the firm can last a year with zero sales. These firms are the true winners of the current climate.
Thus companies have entered a new mindset: thrift is good. And in many respects this is true. However, thrift is only good until everyone does it, or what Keynes calls “the paradox of thrift”. If everyone stops spending and decides to hoard cash, nobody wins and the economy will slow down even more. The real issue for firms now will be finding a balance. While holding some cash in the bank will be vital, so too will be cut backs in the right areas and in the right way. frugal investing and spending must replace the current frozen markets soon or else the situation will become a lot worse.
Here’s a great link from the economist about this issue:
Dell Relocates - Nissan Downsizes
On the day that Nissan opted to cull a quarter of its workforce at the ultra-efficient car plant on Tyne and Wear, the story that caught my eye was across the Irish sea.
Dell’s decision to close its manufacturing capacity in Limerick and transfer production to a low-cost location in Lodz in Poland will come as a severe blow to the Irish economy….
A quite astonishing statistic from this news article today. It claims that Dell’s operation in Ireland accounted for 5% of the country’s GDP. Dell is Ireland’s largest exporter too. So the loss of around 1,900 jobs (add another 3-4,000 on top from suppliers to the factory) will deal a crippling blow to the local economy.
This is a good example of the multiplier effect - where a change in output and jobs in one business or market can have important second-round effects in related supply-chain industries or the local or regional economy. It has been estimated that the knock-on effect could be between one and three jobs lost elsewhere in the region for every one lost at the Dell plant directly.
read more...»Blade Runner
Changing your razor blade is no soft touch decision. After years of teaching my old three-blader to recognise and traverse the craggy features of my cheeks and jaw (I prefer to shave without a mirror) I took the plunge last week and swapped for one of the new Azor razors from King of Shaves. The Azor is the first British designed, engineered and manufactured razor in over a century and it was launched last June in a bid to win a share of the £315m annual sales of razors in the UK alone in a duopolistic market dominated by Gillette and Wilkinson Sword.
read more...»Waterford Wedgwood potters towards the brink
Another day and yet another venerable institution falls. The Waterford Wedgwood (WW) group had been in talks with US private equity groups for some time before those talks collapsed last Friday, and the Bank of America decided it could not extend its credit deadlines to the company any longer. In October WW reported losses of 63 million Euros, with debts of 450 million Euros, and it had been struggling since May 2005 to restructure the company, cut costs and shift to more capital intensive production, in order to survive a growing lack of demand for these high prestige crystal and china products.
read more...»Diseconomies of scale are human
One of John Kay’s phrases in his piece in the Financial Times yesterday will stay with me for the remainder of my teaching career. In a piece which focuses on the malign influences of political lobbying by huge economies of scale businesses that have been in relative decline for many a long year, John writes:
“That is true of the carmakers, whose problems are of much longer standing than the current downturn. In automobiles as in many industries, economies of scale are technological, the diseconomies of scale human. Human factors in business are generally more influential than technological ones in determining the long run fate of a company.”
This is a terrific article to use when discussing the root causes of government failures that can result from subsidies and bail-outs given to companies deemed “too large to fail.”
The remainder of John’s article can be found at his excellent web site
Some companies are too powerful to fail
Smart Guys and the Principal Agent Problem
Marshall Blundell considers whether the downfall of businesses such as Enron, Northern Rock, HBoS and Bradford and Bingley can be related to the principal agent problem.
“When a company called Enron…ascends to the number seven spot on the Fortune 500 and then collapses in weeks into a smoking ruin, its stock worth pennies, its CEO, a confidante of presidents, more or less evaporated, there must be lessons in there somewhere.” – Daniel Henninger, Wall Street Journal.
Enron Corporation filed for bankruptcy on July 22, 2002. The price of Enron stock had sank from its peak of $105 to just cents when it was delisted by the NASDAQ, resulting in employees and retirement accounts across America losing hundreds of millions of dollars. Through unrecorded transactions with Special Purpose Entities (SPEs) and “creative accounting techniques” (Arthur Anderson also went under after it was convicted for Obstruction of Justice in the auditing services it provided to Enron) Enron both concealed masses of debt and collateralized that debt into Enron stock.
The collapse provoked many questions about the nature of corporate governance in America but to both understand how a company such as Enron could come to collapse, and to learn anything from this, and similar events we need to understand the principal agent problem.
The rest of his piece can be read here:
