Can the Economy Recover Without More Trust

Richard Leader, CFA, writing in the Houston Chronicle, had this to say about the trust and the economy:

Central to financial markets around the world is the issue of trust.  Trust enables people to do business with each other.  Lack of trust causes economic stagnation.  Lots of different things have contributed to this mess we find today.  Governments have promised benefits that they can’t deliver.  Corporations flush with cash are offering few new jobs.  Worker compensation is stagnant even as productivity has soared.  Add to this the repercussions of the dot com implosion of 2000, the housing collapse of 2008, and the sub-prime mortgage market treachery and it’s not surprising that people are unusually cynical.

Top economists say that trust is necessary for an economy to grow.  It’s the oil of the engine of capitalism.  Without trust, the engine seizes up.  Distrust is arguably the primary reason this economic crisis won’t go away.  The world economy is stuck in first gear.  While people generally want to be trustful, many institutions have not acted in a trustworthy manner.  Financial institutions, in particular, have done a very poor job of honest dealings with their customers.  The recent housing collapse looks like a replay of the 1930s, a time when Americans completely lost faith in bankers.

We couldn’t agree more with Mr. Leader.  Without greater trust in our institutions, particularly the institutions of business and government. we don’t our economy will grow fast enough to reemploy all those who lost their jobs in the Great Recession, as well improve the financial picture for the vast majority of working Americans.


Toyota Remakes its R&D Efforts to Speed Decision Making and Reduce Costs

The Wall Street Journal reported this week that Toyota is in the process of streamlining its R&D process:

TOYOTA CITY, Japan—Toyota Motor Corp. 7203.TO +1.51% said Monday that it has reorganized its vehicle-development system in order to speed decision making, cut costs and better appeal to car buyers world-wide.

The changes to core engineering and design programs bolster the authority of the company’s chief engineers, consolidate research and development into three groups based on geographical regions and limit final design decisions to smaller teams. Toyota, Japan’s largest car maker, dubs the effort its new “global architecture.”

Mr. Uchiyamada said a major challenge for Toyota is cutting costs while improving product design, a seeming contradiction that he aims to resolve by using more common parts and working more closely with key suppliers.

“We won’t feel we’ve succeeded until we raise the use of standardized parts to about 50% among similar-size vehicles in our lineup,” Mr. Uchiyamada said. He added that it will likely take “several years” to achieve that goal.

Using more standard parts reduces the need for smaller lots of dedicated components that can’t be shared among models. Greater volumes of common components help auto-parts suppliers spread out the cost of production.


Update: Why are layoffs the first resort for Pepsi?

Update 3-24-12:

Meanwhile, CEO Indra Nooyi’s compensation increased about six percent in 2011 over 2010, according to the Wall Street Journal today.

PepsiCo Inc. PEP -0.14% Chairman and Chief Executive Indra Nooyi received 2011 compensation valued at $17.1 million, according to a Securities and Exchange Commission filing released Friday, a 5.8% increase from the prior year driven primarily by an increase in the value of pension benefits.

Nooyi’s 2011 compensation included $1.6 million in base salary, up from $1.3 million, her first increase in base pay since becoming CEO in 2006. Stock and option awards totaled $9.5 million, roughly equal to year-ago levels, while her incentive plan compensation fell to $2.5 million from $3 million last year.

Nooyi’s pension value and non-qualified deferred compensation earnings was about $3 million, up from $2.1 million in 2010.

PepsiCo is undertaking a turnaround this year that will try to boost the company’s performance, especially in its Americas beverage division where sales have been lackluster. PepsiCo is slashing 8,700 jobs and boosting its marketing budget this year by up to $600 million that it will invest mostly behind a dozen global brands.

Update 2-9-12:

PepsiCo Inc. plans to spend up to $600 million more on marketing this year to try improve sales in North America and will lay off about 3% of its global work force to pay for it as part of a much-anticipated strategic overhaul to try to catch up to global rivalCoca-Cola Co.

PepsiCo’s job cuts will affect some 8,700 employees in 30 countries, and are part of a broader productivity program to slice $1.5 billion in annual costs from the global drinks-and-snacks giant by 2014.

Update:  1/13/12

Despite Pepsi’s move to cut costs and resurrect the Pepsi Cola brand, the board says it will stand by it’s CEO, Indra Nooyi.  It sounds as if everyone agrees that Pepsi needs to be more aggressive in advertising its flagship brand, to compete with Coke.  Once again, I don’t see a reason to layoff people to achieve that goal.  Why not enlist those employees in helping transform the company, to once again improve the profitability and market share of the Pepsi brand?


Due to a stagnant stock price over the past three years, Pepsi feels it needs to do something to demonstrate its commitment to earnings growth and to move in a positive direction by laying of 1% of its workforce, or 4,000 people.

Why are layoffs always the first response to distress?  Pepsi has an abundance of products; maybe they have just spread themselves out to thin with their acquisitions and focus on the Frito-Lay snack division.  Plus, this focus on “better-for-you” products at the expense of good ole’ Pepsi advertising and head-to-head competition with Coke will not keep Pepsi in the top of mind with consumers.

Consumers don’t eat soda and snack food because they are good for them–they eat them because they taste good and want a snack (and not always a healthy one!).  In addition, consumers like the head-to-head competition between Coke and Pepsi; it forces them each to bring their best advertising, packaging, and new products to the table for consumers; it brings out the best in both of them.

Because of our research on downsizing, which you can download for free here, and my former work as Account Executive for the Pepsi Cola account, I don’t think downsizing is the answer.  I think that getting back to basics and remembering what makes Pepsi exciting for its consumers is what will bring that stock price back up.  When I would call on Coke, they would never utter the “P” word.  Maybe it was arrogance, or maybe it was a total devotion to dominating the market.  Maybe Pepsi needs to take on that same mind-set.

Just my two cents.


GM and UAW Have a New Labor Contract Providing Greater Flexibility

GM and the UAW reached a new labor contract that provides greater profit sharing for employees and greater flexibility for the company should sales decline:

DETROIT—General Motors Co. Chief Executive Dan Akerson said a new labor contract with the United Auto Workers union will allow the company to be profitable in North America even if auto sales sink to lows seen during the height of the economic meltdown.

The contract keeps GM’s labor costs almost level—they are expected to increase by around 1%, GM says—and leaves out cost-of-living increases for workers. The contract provides for up to 6,400 new jobs, the vast majority of which are expected to be lower-wage positions.

However, GM’s chief labor negotiator, Cathy Clegg, said the company isn’t required to fill the new jobs if demand drops and the company needs to cut production.

“In these uncertain economic times, we were able to win an agreement with GM that guarantees good American jobs at a good American company,” said Joe Ashton, the UAW’s top GM official. “Now that GM is posting strong profits, our members, as a result of this agreement, are going to share in the company’s success.


Marvin Windows and Doors Avoids Layoffs Despite Housing Slump

As regular readers of this blog know, we have researched and consulted on organizational downsizing, and how to do it effectively, for two decades.  Most of the time, organizations do a poor job of it by any measure:  financial, operating performance, or employee morale and engagement.  Nonetheless, there are few that do it right, and based on my reading of this company in today’s New York Times, I think Marvin Windows and Doors, is one of them:

Marvin Windows might seem like a footnote in the nation’s economic ledger. It employs roughly 4,300 people, about 2,000 of them here, and has annual sales somewhere from $500 million to $1 billion. But what this company is doing — and, more to the point, what it is not doing — is worth knowing.

Marvin Windows and Doors is a throwback to another era. For starters, it is a private company. No public stockholders are complaining that the latest numbers fell short, that the share price is down.

What’s more, Marvin takes an old-fashioned, even paternal view of its role here in Warroad, where the Marvin family has run things for just about as long as anyone can remember. The company has cut employees’ pay and reduced perks like tuition reimbursement and 401(k) matching. Employees haven’t received profit-sharing checks in two years, nor have the 16 members of the Marvin family who work for the company.

But, unlike its top competitors, Marvin has refused to fire people.

Many here wonder if Marvin can hold out, particularly if, as many fear, the economy sinks into another recession. Company executives say they aren’t panicking yet.

“Housing isn’t in a recession. It’s in a depression,” says Susan Marvin, the company’s president and a granddaughter of George Marvin. “While it’s challenging for our people right now, and not everybody understands all the reasons why, the alternatives are devastating. These people would have to pick up and leave.”

The article is worth reading for many reasons, not the least of which is that when owners take the long-term view, and realize the value of their human capital in their organizations, layoffs as a first resort to even substantial industry downturns doesn’t have to be the rule.  Their cost-reduction tactics may not work in every organization, but do you think they would work in yours?


Getting a Good Deal on a New Home

Okay, this doesn’t have much to do with trust, but we thought we’d link to Karen’s recent interview in the Chicago Tribune about why we decided to purchase a model home when we moved to Michigan last summer:

When Karen and Aneil Mishra home-shopped in Okemos, Mich., in 2009, they restricted their search to new houses to minimize the effects of mold and dust on their family’s allergies. But they didn’t want to endure months of construction, which they had done for their last house in North Carolina.

The solution: They bought a 3-year-old model home.

The Mishras judged the house well-built and good-as-new, Karen recalls. So even though it had withstood a few years of foot traffic, they signed on the dotted line.

We’ve been very satisfied with the quality of workmanship on our new home, and we hope it was the right choice in this uncertain economy.  Other than having to deal with some pesky birds who liked to nest in our exhaust vents, which is a problem throughout our neighborhood, we haven’t had any real problems!


$20 for a Movie Ticket — No Wonder I Love Netflix!

Update 5-22-10:

Here’s an additional development reported in today’s Wall Street Journal that will help to spell the quicker demise of theater owners:

Major Hollywood studios and one of the country’s largest cable operators are in discussions to send movies to people’s living-room TVs just weeks after films hit the multiplex, a step that would shake up film distribution.

During a cable industry convention last week, executives from Time Warner Cable Inc. made the first formal pitch to the Hollywood studios for what is known as “home theater on demand.” The cable company presented a variety of scenarios. But the main one, which has received early support from some studio executives, would allow consumers to watch a movie at home just 30 days after its theatrical release—far earlier than the usual four months—for roughly $20 to $30 a pop.

While the plan could be a boon for consumers, it stands to be highly disruptive for the movie business, particularly theater owners. Hollywood would essentially be overhauling the “windowing” system which has sustained the industry for years.

Studios now maximize revenue by staggering a movie’s theatrical release date and the window, or time period, when it is released later on DVD or cable TV. DVD sales don’t diminish a movie’s box-office take, since the discs are sold long after a theatrical run.

But maintaining windows has grown more difficult as consumers have grown accustomed to an array of devices that make it easier watch movies whenever and wherever they want.

Original Post:  5-21-10

This news from today’s Wall Street Journal had me questioning once again a) whether some people didn’t go through the same Great Recession as we did, and b) just how quickly movie theater owners want to drive themselves out of business:

Several theaters will charge $20 per adult ticket to IMAX showings of the animated 3-D family film “Shrek Forever After,” the fourth “Shrek” installment from DreamWorks Animation. The theaters include the AMC theater in Manhattan’s Kips Bay neighborhood, AMC Loews 34, AMC Loews Lincoln Square and AMC Empire 42nd Street.  This weekend’s price increase come less than eight weeks after theater operators instituted some of the steepest hikes in a decade.

Our family loves movies, and sees a great many each year, but the increasing majority of them are either from Netflix, or on-demand cable.  If we lived in New York City, then $20/ticket would mean over a hundred bucks including refreshments for the four of us.  Unbelievable!


Openness pays off financially, too

According to a study to be published in the Corporate Social Responsibility Magazine, companies who are more transparent are more profitable.

Transparency, as the magazine defines it, means making information about practices like employee benefits, climate-change policies or philanthropic efforts publicly available.

According to the magazine’s analysis, being a good guy pays. The best corporate citizens list, which includes Hewlett-Packard, Intel, General Mills, I.B.M. and Kimberly-Clark, had a total return on shareholder value of 2.37 percent over three years. But the 30 worst had a negative 7.38 percent return.

We advocate openness as a core component of building trusting relationships and it is obvious here that such openness translates into real financial value.

I look forward to reading that study when it comes out on April 24th.


Toyota Destroys Customers’ Trust and Potentially Billions in Market Value as Well

Update 4-14-10:

Toyota will now be halting sales of one of its Lexus SUVs due to rollover concerns raised by Consumer Reports, according to the Wall Street Journal:

Toyota Motor Corp. said Tuesday it will temporarily halt the sale of a Lexus sport-utility vehicle after Consumer Reports magazine raised safety concerns about it.

The move was another blow for the Japanese car maker, which is trying to repair its image after a series of safety recalls. Consumer Reports issued a rare “don’t buy” recommendation for the Lexus GX 460, saying the SUV could roll over in certain situations.

The influential nonprofit magazine already had suspended its recommendations for eight Toyota models recalled in January for sticky-accelerator concerns. In certain conditions, the gas pedal in those models is slow to return to idle.

Update 4-13-10:

Now a feud between family and non-family executives has emerged at Toyota, as individuals blame one another for the quality and safety debacle, according to the Wall Street Journal.

Update 3-11-10:

Human error may contribute to a large percentage of unintended acceleration incidents, according to this op-ed in today’s New York Times by Richard Schmidt:

I looked into more than 150 cases of unintended acceleration in the 1980s, many of which became the subject of lawsuits against automakers. In those days, Audi, like Toyota today, received by far the most complaints. (I testified in court for Audi on many occasions. I have not worked for Toyota on unintended acceleration, though I did consult for the company seven years ago on another matter.)

In these cases, the problem typically happened when the driver first got into the car and started it. After turning on the ignition, the driver would intend to press lightly on the brake pedal while shifting from park to drive (or reverse), and suddenly the car would leap forward (or backward). Drivers said that continued pressing on the brake would not stop the car; it would keep going until it crashed. Drivers believed that something had gone wrong in the acceleration system, and that the brakes had failed.

But when engineers examined these vehicles post-crash, they found nothing that could account for what the drivers had reported.

By the way, we finally received our own recall notice late last week for our 2009 Toyota Camry Hybrid.

Update 2-24/10:

For a different take on the Toyota crisis, which compares it to the Audi unintended acceleration fiasco of the late 1980s, which turned out not to be a defect at all, here is Holman Jenkins of the Wall Street Journal editorial.

Update 2-9-10:

The bad news keeps on coming for Toyota, including the newly announced recall of 2010 Priuses and some Lexus models.  Last weekend’s Wall Street Journal had a terrific feature story, too, on how Japan’s national culture contributes to the secretive corporate cultures of firms such as Toyota.

Update 2-2-10

Here’s the latest on this total fiasco as reported by the Wall Street Journal:  all Toyota hybrids are now being investigated.

We can hardly be considered biased against the Japanese automakers, even though we both used to work for GM.  We’ve put our money where our mouths are over the years, and own a 2006 Honda Civic Hybrid and lease a 2009 Toyota Camry Hybrid.  I love my Honda (Karen doesn’t like it).  Karen likes her Camry, and it’s been a good sedan to transport our kids and take on vacations.  Nonetheless, I’m darn glad we leased the Camry, as we’ll be turn it back to Toyota when the lease is up based on the company’s horrific response to its defective brake system/electronics.  The news gets worse every day for the largest automaker in the world, and it’s not over yet, according to the Wall Street Journal:

Toyota Motor Corp.’s quality crisis deepened Tuesday, as U.S. regulators accused the company of dragging its feet on fixing defective gas pedals and threatened civil penalties and further reviews of Toyota products.

The move means that Toyota’s efforts to address its biggest-ever safety and public-relations mess are far from over. Last week, the administration indicated it had no issues with how Toyota had responded to the sudden-acceleration reports, which led the company to recall about six million vehicles and have been linked to at least five fatalities.

“While Toyota is taking responsible action now, it unfortunately took an enormous effort to get to this point,” Secretary of Transportation Ray LaHood said Tuesday in a statement. “We’re not finished with Toyota and are continuing to review possible defects and monitor the implementation of the recalls.”

Mr. LaHood said Transportation Department officials flew to Japan in December to meet with Toyota executives and remind the company “about its legal obligations.” The agency, he said, “followed up with a meeting at DOT headquarters in January to insist they address the accelerator pedal issue.”

The  highly respected journalist, Forbes magazine columnist, and one of my favorite writers on the automotive industry, Jerry Flint, had this to say:

Toyota‘s accelerator problem is the costliest car safety issue–and corporate disaster–in automotive history. It certainly dwarfs the sudden acceleration issue that hit Audi long ago, or the Firestone tire problem that destroyed the sales of Ford’s Explorer or those long-ago issues that created Ralph Nader’s book, Unsafe at Any Speed.

And there will be a great cost: incentives to get customers buying Toyota’s again when the problems have been solved at the factory; money to keep the wounded dealers alive, and money to pay for the recall work. We’re probably talking about a cost in the billions–not millions–counting those incentives. That’s money that won’t go to developing new models, new hybrids, new electric cars. And we’re not talking about the lawsuits, which will go on for years.

I may be wrong, and I do prefer my Honda over Karen’s Toyota, but I can’t believe that Honda would act in the same poor manner in which Toyota has.  Honda in my opinion is a nicer, and in this case, definitely more trustworthy car maker.


Journalists Say Financial Services Companies Need to Rebuild Trust and Overcome Credibility Gap

My friend and Princeton classmate Bill Haynes and his firm BackBay Communications, in partnership with Marketwire, have just conducted a survey of financial journalists that examines the reputation of financial firms.  They have found that the industry’s reputation has slipped further over the last year.  This second annual BackBay-Marketwire Financial Services Reputation Survey found that although last year reporters were focused on the problems financial institutions were having communicating effectively during the depths of the financial crisis, this year’s results reveal the extent to which trust has been lost and needs to be rebuilt.  I’ve provided an excerpt below.  Click here for a news release on the survey.


Financial Services Firms’ Reputations and PR Challenges Explored in Second Annual BackBay Communications and Marketwire Survey

Journalists Say Financial Services Companies Need to Rebuild Trust and Overcome Credibility Gap

BOSTON, March 17, 2010 – Financial journalists say the finance industry’s reputation has declined over the last year and financial services firms need to overcome a credibility gap with their constituents by being more honest and demonstrating they have customers’ interests in mind, according to the second annual BackBay-Marketwire Financial Services Reputation Survey.

Of the 107 journalists polled, 83% said the reputation of the financial services sector has declined over the past year, with 59% saying it has declined significantly, and 24% saying it has declined slightly.  Reporters blame the decline on the taxpayer bailout of banks and the bonuses paid to Wall Street executives.

The survey by BackBay Communications, a strategic marketing and public relations firm focused on the financial services industry, and Marketwire, a full-service newswire and communications workflow solutions provider, was conducted from January 15 to February 8, 2010.