Friday, December 12, 2008

Planning for Industry Life Cycles

The auto industry bailout failed to obtain Congressional approval this week although news reports indicate that a few tweaks to the bill might have brought aboard enough Senators to secure passage. But, true to form, the U.S. Treasury holds out the possibility that it still will give some of your money to help the auto makers. It sounds like an end run to me.

All of these bailouts are making people mad. Mish Shedlock says,"Bankruptcy is the best possible result. I am sick and tired of taxpayer money funding corporate ineptitude. Nonetheless I am fearful that Bush and Pelosi will try one more time to revive the dead." Let's hope that the effort will not be resurrected. The industry has had 3 decades to restructure in the obvious face of global competition and innovation and, supported by easy credit, has not prepared adequately for the inevitable.

A couple of decades ago I read an article in the editorial section of the Wall Street Journal describing the demise of the British Steel industry at the end of the 19th century. In 1875 the British had 40% of the world production of steel and exported 40% of their output to the U.S. By 1896 their share of the world steel market had dropped to 22.5% and they exported little to the U.S. The Journal article attributed the demise in part to the industry's reluctance to ignore their sunk cost in the aging Bessemer process and reinvest in the more efficient open-hearth process. A history of the steel industry concurs: "[Etsuo] Abé explores the record of iron and steel firms in Victorian England by analyzing Bolckow Vaughan & Company. The leading problem of the company was its focus on the wrong technology, not switching to the open hearth furnace method until long after the technology was developed. It is apparent that the company was not focused on long-term decision-making."

Long-term decision-making in business is not only about developing a 3-year strategic plan to sell cars and compete in the existing market with existing resources. In a major corporation, it is not even limited to a 5-year investment plan. It also includes careful evaluation of product life-cycles and planning, at least tentatively, decades out, for the long term health and survivability of the corporation. There are established methodologies for doing that, which are well-known by sophisticated business people and which are regularly revisited by the best companies. Different strategies, such as grow, harvest, or exit, apply at different points in the life-cycle; and those strategies have different implications for investment and marketing. I have experienced such planning and seen it work quite well in a variety of industries from vacuum tubes to hard rubber. Whether or not there is planning for it, change happens (see, e.g. The End of the U. S. Piano Industry). It will either happen for you -- or to you.

I suspect that many company executives are reluctant to face the prospect of radical reorientation of their business when they have become emotionally and professionally committed to a product or a technology, or a location for that matter. It is not easy for an executive to step outside the day to day, or year to year, and think about the demise of a business that he and his employees have struggled for a lifetime to build. But that's what an executive and his staff need to do. And they need to do it well because choosing the wrong path can lead to unnecessary collateral damage -- negligent damage to people.

After the Japanese consumer electronics manufacturers overtook the American television industry in the early 1970s, they moved the fast-maturing manufacture of picture tubes and television sets to Taiwan and Korea and upgraded their home capabilities to higher technologies. It was not by accident -- and this in a culture that was committed to lifetime employment.

Peter Drucker wrote an excellent little book, The Effective Executive, in which he noted the importance of an executive's taking time off from day-to-day management to close his door and contemplate the future of the business. That is a tough thing to manage, but it is a key to developing an objective view of the business and the corporation's ultimate viability. And the CEO's resulting foresight should move the organization to understand and plan for the realities of a dynamic marketplace.

I don't know what kind of process the auto-makers undertook to address the long term rise and fall of automobile manufacturing in the U.S. As an outsider, I don't see individual transportation disappearing in the next 50 years. I expect that to be around. But, like 19th Century British steel, U.S. auto maker tardiness in adopting new technologies has lowered their sales potential; and their fixed costs, including union contracts, have left them unprofitable.

Let's Hope the Auto Bailout has Failed for Good . It will not be the end of the world as we know it. Bankruptcy just might provide the industry an opportunity to consider all options, including some that will allow a future in the United States.

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