December 6, 2002 Commentary # 3

 

Greetings:

 

            We are in a transition process of publishing a weekly commentary service that will be eventually posted on a new-look, new-function web site at www.merrifield.com. Until the web site is upgraded we will email the entire publication. We will try to keep them short, by referring you to documents elsewhere on the net.

 

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COPIES OF PAST COMMENTARIES

This is our third edition. If you would like copies of the first two request them from karen@merrifield.com. If you do request them, you might also want to request our E-Booklet entitled “New Solutions for a Different Kind of Downturn.” More detail on this 45 page document is at the end of this note.         

 

RE-PURPOSING COMMENTARY CONTENT ON OTHER SITES: The answer is “yes.” What is the possibility?

 

YEAR-END THEME:  CHANGE “CHANGE MANAGEMENT”

For better or worse, many companies plan their big initiatives and incentive compensation around calendar numbers making December a month for reviewing THE 2002 PLAN results and re-casting NEW PLANS FOR 2003. Because success rates for 2002 plans may have fallen short and our 2003 economy may well be challenging, maybe now is a good time to think about how to change how we pursue change. I hope the chosen topics in this note will help some readers do that. 

 

TOPICS:

1.       NEW YEAR’S HEALTH (RESOLUTION) SUCCESS RATES

2.       ROONE ARLEDGE: AN INSPIRATIONAL RULE CHANGER MOVES ON

3.       ECONOMIC HEADWINDS OR TAILWINDS IN 2003

4.       RETHINKING CHANGE/TRANSITION MANAGEMENT

5.       CASE STUDY: AN MRO DISTRIBUTOR SURVIVAL STORY IN PROGRESS

 

1.       NEW YEAR’S RESOLUTION SUCCESS RATES

Both people and their corporate communities are statistically weak at achieving big improvements or change. At the personal level, I have heard two interesting stats that seem believable: 1) The average New Year’s resolution for improving our health (“our first wealth”) lasts only 15 days. And, 2) only 5% of alcoholics go into “spontaneous remission” annually. The rest presumably maintain their stories of denial and their sub-optimal state of existence.

Surveys on the success rates for formal corporate change programs uncover equally dismal success rates. What will we do differently for how we pursue sustainable, breakthrough results for our corporate goals in 2003?

 

2.       ROONE ARLEDGE: AN INSPIRATIONAL RULE CHANGER MOVES ON

 

Roone Arledge, the most successful TV executive ever, died on December 5, 2002 at the age of 71. I grew up appreciating his sports programming innovations, and as a business executive I marveled at how he took two last-place, money-losing dogs – ABC sports and news – and transformed them into dominant #1 profit machines. 

      How did he do it? He perpetually innovated to give the viewer (the final customer) more value. He didn’t fine-tune the past with the in-the-box, incremental improvements. He didn’t cut costs to sustainable profits which never works anyway; instead, he forward invested in programming innovations that generated big wealth for all parties in the game – the viewers, the advertisers, the reporters, ABC and the athletes – that he converted from afternoon gladiators into prime time entertainers.

      I recommend that readers read and re-read the best obituaries on Roone (the NYTimes.com has an excellent one) and try to draw inspiration from what he did. In 2003, why not rethink your business around your most profitable customers? Why not put all of your players into the game with “open book management”, new plays to grow their productivity and the responsibility for doing so? Make sure that every employee knows by heart the top 5-10 most profitable accounts and the most important target accounts to whom they will say “YES! What’s your special need right now that I can take care of?”

 

3.       ECONOMIC HEADWINDS OR TAILWINDS IN 2003

Is our stock market in the midst of a new bull market or is it another bear trap rally? Are the Fed cheerleaders and the consumers who set Thanksgiving shopping records right about the hope that the “soft spot” in the US’s economic growth rate is behind us and a solid recovery lies ahead? If I knew for sure, I wouldn’t be doing this commentary; I would be tending to my vast stock market holdings, working on my tennis game and really getting into spirit and activities of the Holiday season ahead. Instead I’m polishing this note at a Washington D.C. airport at which I have been grounded for two days waiting for my home airport of Raleigh-Durham, N.C airport to de-ice.

 

But, I can share my guidelines with you. Be skeptical of government officials singing “happy days are hear again” and encouraging you to borrow more to consume, because it is patriotic. Question Wall Street spin meisters using “pro forma” earnings and valuations based on future expected earnings which then get adjusted way down. This latter group will do anything to get their kids into private Manhattan nursery schools and generate commissions. Look instead at stock valuations based on trailing, GAAP-scrubbed, bottom line earnings (the current S and P 500 P/E ratio on this basis is 37+!). And, remember that the blue-chip economist forecasts have been laughably wrong for the past two and half years using rear-view mirror data and tools that don’t work in post-bubble economies.

 

Instead, keep your eye on the bigger, longer-term, structural headwind problems. The biggest in priority order might be:

Unsustainable growth in and total levels of debt for all borrowers in the US.

China’s manufacturing export growth rates at the expense of all high-cost manufacturing countries. Under-funded pension liabilities which will eat into corporate profits and capital expenditure cash-flow. CEO hunker-down-itis.

And, the resultant on-going, too-slow growth rate of the US economy which guarantees creeping rises in unemployment and declines in consumer total wages, net worths and confidence. I have elaborated on all of these conditions in my past commentaries and in my article entitled “Post Bubble Economy Management.” (Request them both if you would like from karen@merrifield.com).

 

            In spite of occasional weeks of positive data points, the big trends and headwinds have not changed. Our average GDP growth has been 1.5% for the past two years, I think it will oscillate around that average at best through at least 2003. So, whatever you have been experiencing in your channel for the past two years, expect more of the same for 2003. If you want more background on some of these headwinds, here are some URL’s to check out:

 

1) For the total debt report just skim through the graphics at the following URL:

a)      http://mwhodges.home.att.net/nat-debt/debt-nat-a.htm.

 

2) Under-funded corporate pension problems have been huge. Here is a good recent article URL on that problem http://www.insightmag.com/news/331611.html.

 

3) As for CEO hunker-down-it is, I was amused to see that the same week that Sir Greenspan coined the term “soft spot” for our current economic growth, the Conference Board released highlights from a survey of 700 CEOs of the US’s largest corporations. The average response was to spend the same or less on capital expenditure for 2003 and to have the same to fewer employees. I think I would believe what the big companies already have baked into their rolling 12-month plans and what they are reporting as far as backlogs that aren’t there.

 

4.       RETHINKING CHANGE/TRANSITION MANAGEMENT

 

How many companies get positive, breakthrough, sustainable results from major change programs? I’m sure no one knows, and we could argue about what qualifies as “major change, breakthrough, etc.” I do remember that two surveys in the early ‘90s checked on results from “formal service management improvement” programs and both concluded that about 70% of these efforts were killed within 6 to 9 months and only 4 to 5% of all of the programs got sustainable results.

 

As an exercise, review the honest results for your biggest program efforts over the last few years. Then, to learn more from those efforts, check out two references on the net:

 

1.       At www.merrifield.com, read the “objectives” and some of the back-up articles for modules 5.1 to 5.13 for our video, “High Performance Distribution Ideas for All.” The URL is at the end of this paragraph. Once there, hit “control/end” to get to the end of a very lengthy document and then scroll up to module 5.1 to then skim to the end. I have always found that I have to make all of the employees knowledgeable about and responsible for change management at the – personal, departmental, company (and for some) the inter-company – levels. I have also found that unless I put in measurable, objective systems with which to constantly prod the transition process, human foibles will arise at all levels of the organization to undermine change. Here’s the URL:

http://www.merrifield.com/video/summary_notes.doc

           

2.       If organizations are so bad at “transition management”, you would think that there would be one best, published source for how to do transitions from “good to great.” Well, there are some better business books about great companies and their best practices, but there is only one that I have found that really delves deep enough into the human transition problem. The book is entitled:

“Managing Transitions: Making the Most of Change” by William Bridges. It was published in 1991; it’s $14 in paperback at Amazon.com. I suggest you read the 11 reviews that rate it at 4.5+ stars out of 5. The pictures and the checklists are worth the investment if you plan to do anything proactive in 2003 or would like to learn more from your past fizzles.

5.       AN IN-PROGRESS, MRO DISTRIBUTION SURVIVAL STORY

If you think business is tough, read on about a distributor that sells durable, MRO goods to manufacturing America, a sector that has been in a recession or a depression for the past 29 months and counting.

1)      The company peaked with 120 employees at several regional locations, they are currently at 82, a 32% headcount reduction.

2)      16 months ago, wages were cut 10% for the bottom 80% of the payroll and 15 to 20% for the top of the payroll. All health insurance cost increases have been passed on for the past 2 years and all incentive comp has been close to nothing for the duration.

3)      A break-even sales number is re-computed every month. If the company exceeds it, then they take 50% of the operating profit and pay it out to all on a gainsharing basis. Most months they have not been hitting the breakeven.

4)      The one successful thing they have tried on an experimental basis was a play out of our E-booklet entitled “New Solutions for a Different Kind of Downturn” (IT’S A FREE 45 PAGE WORD DOCUMENT VIA EMAIL; JUST ASK karen@merrifield.com for it). More specifically, the articles therein numbered 11 through 14 convinced them to “tackle the small order now..measure customer profitability and act.” They went to their largest account by both volume and transactions and illustrated how both of them were losing big bucks on transaction costs due to too small of an average order size. The distributor did an audit of the what was going on and got all of their recommendations accepted which included boosting average order size dramatically, picking up new business and identifying a whole new fee-for-service opportunity.

 

Based on this great success, the distributor CEO bought our “High Performance..” video through one of our many re-sellers. Watched all 11.6 hours of it over a week-end. Pitched it to his top management team who despite initial pushbacks is now digesting the entire contents. Their intent is to pursue all 7 sub-applications that come out of an initial simple customer profitability ranking report after first “signing up all of the employees’ hearts, minds and wallets” into the effort.

 

Sometimes when all of the traditional cures don’t work and the pain is great enough, we try not only new big change initiatives, but we change how we try to change. Most distribution companies have enormous profit and personnel productivity power locked up within their organizations, they just need the right combination to unlock it.

 

 

MORE ABOUT OUR E-BOOKLET

·          It includes the last 11 articles that Bruce has written since the Summer of ’01 which have not been posted on our web site.

·          It is a 45 page word document which is best downloaded over a fast internet connection. Hard copies are available by mail if you will send in a $12 check.

·          It also includes a list of our 24 and growing list of resellers for our “High Performance..” video who generally sell it for 50 to 65% off of our list price posted on our web site.

 

 

 

 

Best wishes,

 

 

Bruce Merrifield