Necessary but not sufficient: Control and value creation

Posted September 10th, 2017 by russfrazierwp and filed in Business and Economy
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One of the most common errors in reasoning that managers in business make is that if they are in control of their business processes, then they are creating value.

If I control my business processes, I will create value.
I am controlling my business processes.
Therefore, I am creating value.

After all, it is arguably true that in order to create any sort of lasting or meaningful value, the organization must deliberately take in inputs and convert them somehow to create value.

However, merely controlling the processes may be insufficient if the business model is unworkable. For example, not being able to charge a high enough price for the product or service. Businesses will continue on, carrying out their carefully laid out plans right up to zero net income.

Workplace people

Workplace people

A situation like that becomes even more precarious if the business is small because they often just have the one model and limited resources to deal with changes such as a cash flow crisis. A larger business with several reasonably decoupled projects can cut a failed project before it causes further losses and reassign personnel and possibly capital.

It is often only by force of economic reality that the organization takes corrective action. Then, because of the business’s debt or equity structure (i.e. leverage, investors) the action is catastrophic, resulting in personnel terminations, loss of capital or very unsound decisions.

Part of the problem has to do with the desire for managers to maintain control on a personal level. The need for control overrides the rationale for focusing on creating value.

When people become so focused on the challenges of control, whether it be the technical minutia of software development, the complexities of raising adequate funds for continuation or dealing with people, they lose track of the fundamental determining fact of profitability contained in, or insufficiently represented in, the business model.

As an exacerbating effect on this tendency, I offer you fad organizational structures that increase the silo effect between departments and reduce transparency and communication between key decision makers.

Sunken ship

Sunken ship

When this happens business managers put their energies into control, and not into value creation. The result is animated and engaged managers busy with the current crisis while the organization sinks further into trouble.

Collaboration versus Competition – part 2

Posted March 29th, 2013 by russfrazierwp and filed in Business and Economy
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Recently, I had a business meeting with a person I had never met before. She agreed to meet with me (I thought) to provide some feedback and guidance regarding a new business idea. We are talking Fuzzy Front End here, so development is still underway, there are lots of questions and uncertainty. The risk has been entirely on my part and nobody else has had to finance this venture.

I started my presentation and she became very impatient and immediately misunderstood what I was telling her. Then I suggested I show her the demo, because she obviously was not interested in the presentation. Well, that didn’t go very well. She assumed the demo was something it was not and then proceeded to lecture me about competition. So I felt pretty bad because I had wasted my time and hers going to her office. And the taste of being somewhat dressed down because of impatience and ignorance was rather sour and metallic in the mouth. Their mediocre office coffee did not improve it.

Let's beat the crap out of each other!

Let’s beat the crap out of each other!

Here is wisdom (not mine). Businesses that concentrate on differentiation instead of obsessing about competing in a crowded field are in a much better position to survive and thrive. This seems to run counter to everything I’ve experienced so far trying to get business ideas off the ground. It seems to me people are more interested in competing against each other individually than in collaborating with each other as a team. And I find it sad and demoralizing that I encounter this again and again when dealing with people. You know that Careerbuilder commercial where the managers are drinking martinis while entertained by the workers fighting each other? That is really, sadly, the case.
Cooperation fixes the machine.

Cooperation fixes the machine.

And if I said, “You know, you probably spend much, much more time collaborating with your fellow workers than you do competing. So it would be beneficial to you to learn how to collaborate and cooperate well, wouldn’t it?” That would go down like a lead balloon. Nobody likes that. They want to grind each other down, they want to win, win, win. Because the system had made us all into snarling dogs and we are not in control of it.

Small business taxes control hiring. Really?

Posted October 18th, 2012 by russfrazierwp and filed in Business and Economy
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There has been a lot of political spin this year surrounding the issue of small business taxes. One side maintains that small businesses will hire more people if their taxes are lower. Presumably, tax is a cost that if eliminated or reduced, will allow the business owner(s) to shift this cost to the operational cost of employee compensation.

The first thing wrong with this assumption is that small business owners are chomping at the bit, ready to hire, if only the government would leave them alone and stop asking for tax revenue. Why is that wrong?

Office work

An office with workers

A business would not hire additional workers unless the revenue opportunities, i.e., demand, were sufficient to expansion. The number of workers is determined by the need to produce the goods or services. If a business hires more people than is warranted by revenue, their profits decrease. So that means if a business hired workers based on a decrease in their tax burden, the workers would not be able to contribute to revenue, given the lack of demand. In this economy, I haven’t heard one single small business owner say, “I need to expand because of increased demand for my product/service. In order to do that, I would hire more people, but I can’t because of the government.”

I’ve heard a form of the second part of that statement, not the first. And that bothers me because I think it is disingenuous.

The second thing wrong with the main assumption is that small businesses apparently don’t do any scenario analysis or contingency planning for environmental conditions beyond their control. Those items include government regulations, taxes and such things as globalization and communications technology. If you were to ask a small business person, “Why are you doing this?” One answer you’re likely to get is, “More control over my life and career.” Alright. More control means you understand what you can change and what you cannot and you work within those limitations. You don’t sit on your hands and act helpless because you don’t know if your tax burden will change by 10%. You make adjustments to your business so you are ready for such changes.

But let’s say there is this scenario: A small business is operating very lean, with workers putting in overtime without extra pay, taking other compensation cuts, like cheaper health insurance, no 401(k), etc. The workers complain they are overworked. If they could have just one more person, they maintain, it would make their lives so much easier. But the business owner says, “Sorry. I can’t hire anyone, not even one more person, due to the taxes we pay. Perhaps if our taxes were lower, we would do so.” Really?

To hire one more additional person, the business would have to realistically be assured of at least one year of salary for that person. Let’s say the employee makes $50,000 a year. A reasonable rough estimate of salary plus benefits and employment taxes would be 1.3 times the salary. So this means the business needs an additional 50,000 x 1.3  = $65,000 guaranteed additional money available for operational costs. If that money came from a tax break, it would come from an incremental decrease on a percentage of overall revenue. Now let’s say the business does $260,000 in sales per year. To obtain a $65,000 operational boost, the tax on that $260,000 would have to be cut to 10%. At a 35% rate, the tax burden on $260,000 is $91,000, and at a 10% rate the burden is $26,000, a difference of $65,000. Not even the Republicans are proposing a tax cut that deep.

Collaboration versus Competition

Posted October 16th, 2012 by russfrazierwp and filed in Business and Economy
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To collaborate or to compete?

This deals with the issue of collaboration versus competition. We are conditioned and trained as middle class Americans to compete with each other from a very early age. It continues on through college and becomes more or less intense depending on your career path.

Consider the modern American system of meritocracy. Not a completely overarching principle, but frequently encountered when a person embarks on a professional career requiring at least one college degree. The competitive effort can be seen as a string of high stakes tests taken in a relatively short period of time, after prolonged study. It starts in the sixth grade now, with tests and quizzes, continues in high school and the SAT, continues on through university course midterms and finals. If you go to graduate school, you have to take the GRE, GMAT, MCAT, etc. Then there is more of the same. If you are a masochist, and go into a PhD program, you can expect a thesis defense. In every case just mentioned, there is a high-stakes, time-limited hurdle to complete, like a game. Some resemble zero-sum games with one winner and many losers (e.g., the highest SAT scorers get to go to MIT, Harvard, Stanford, etc., while most of the rest attend public schools) while others are not as strictly competitive.

A (low-stakes) zero-sum game

After you are done with all that, do you want to collaborate with people, or do you want to kick butt? You want to kick butt and take names. You want to make money because you were poor in graduate school. You want to dish out the shit because you’ve been eating it for so long.

Now, consider what has to be done to accomplish complex, resource-intensive and time-consuming tasks, for example, planning a city revitalization project, creating policy for leading a large country into the 21st century, designing a computer chip. It takes many people, of different specializations, abilities, skills, temperament, etc. all working together for a common goal. Are we as middle class Americans, honed by the process of obtaining credentials in a highly competitive environment suited to collaboration?


What’s it like losing your job?

Posted October 9th, 2012 by russfrazierwp and filed in Bitter lametations, Business and Economy
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Lot’s of people know what this is like. Here’s the perspective from an engineer who was making over 90K with bonuses, had, at one time, exercised stock options that paid for a new car and enjoyed a comfortable life. I used to travel internationally, enjoying the occasional business trip and vacationing in the Caribbean or at Lake Tahoe once a year. That’s over.

Well, I will say that after several years of reflecting, the hardest part for me has been the complete loss of social status. Engineers generally make useful contributions to the world. They have difficult jobs, which is partly why they (used to) get paid so much. It felt good to do a difficult job, be recognized for my work and earn pay reflecting some sort of corporate recognition of compensation. My friends, family and spouse respected me. Strangers treated me well.

That is all gone now, save for a grain of respect my wife is sustaining, somehow, but is notably strained. Is it money, is it simply the fact that I no longer serve a purpose? I don’t know the answer to that, but I will say that I might as well be a different person. It’s as if that other person I used to be no longer exists. Acquaintances, family and friends are suggesting I become such things as:

  • Fitness trainer
  • Pet sitter
  • Dog trainer
  • School teacher