The Saturn Saga

It seems I just can’t stay away from the auto industry…

On the front page of the business section in today’s Plain Dealer (Cleveland) are two articles about Saturn. One, with the tag line “General manager tells all…in automotive terms” is an interview with Jill Lajdziak, Saturn General Manager. The other, “Division’s models failed to live up to high concept” is an article by Christopher Jensen.

Today, more than 20 years after GM launched Saturn, I find the whole situation amusing. I can’t believe we’re wasting print on Saturn. I can’t believe GM is still wasting a dime on the brand. The whole thing is just mind boggling to me.

Saturn was established to be a company within a company, shedding all of the emotional and political baggage (and overhead) of GM to compete with Japanese imports. The whole point was to be low cost, good quality and practical. In the auto industry, this translates to low complexity: few models with even fewer refreshes.

From my point of view the Strategy was flawed from the start. First of all, it’s virtually impossible for the whole company within a company concept to work...especially with an organization with as much complexity and baggage as GM. And, secondly, the American auto industry thrives on variety. Yes, the Japanese got by with fewer models, but there’s been a huge amount of aftermarket customization of those models…rarely do you see a tricked out Saturn.

The Structure, like most old-school American manufacturing companies, was never appropriate. But, the Execution which was even worse. There was one bright spot in the Execution: customer service. Saturn is one example of a wildly successful relationship between the OEM and the dealer network and consumers. Sadly, that is the only success we can point to with Saturn.

When they didn’t sell as many cars as they’d planned, they violated the Strategy by adding more models (complexity). Additionally, from the start Saturn was riddled with quality problems. Now it seems they’ve decided to botch Execution even more by adding more models and shed the whole concept by sharing marketing, engineering and production resources with the rest of GM. This eliminates any semblance of low cost footprint that they had before – even though they are using Opal plants in Europe for most of the production and design.

All I can guess is that GM believes that the value of the consumer ‘quality’ brand and the access that it gives them to consumers who might otherwise buy imports is enough to salvage the division. I’m not convinced. Saturn consumers don’t typically ‘graduate’ to more expensive GM nameplates, although they may purchase another Saturn. While consumers liked the no-hassle dealer approach (which was groundbreaking at the time), competition abounds in that arena today.

GM has too many brands. Customer service is the only thing of value in the Saturn brand, and that is 100% in the hands of the dealerships. If this is how they plan to save GM, now might be a good time to short the stock.

(It should be noted that I also used information obtained from a December 13, 2004 article in Fortune, “GM’s Saturn Problem”.)

The Kentucky Derby Presented by Yum! Brands

Ok. Who watched the Kentucky Derby on Saturday? If you did, I trust that you were as appalled as I that the derby has now sold out. Literally. Its new official name is “the Kentucky Derby Presented by Yum! Brands.” Believe me, I couldn’t make this up. Nor could I conjure the seemingly endless stream of bad commercials sharing the good news that Yum! is the world’s largest restaurant company and parent to the likes of KFC and Taco Bell.

According to an article that appeared in the Wall Street Journal on Feb 1, 2006 (“Yum Brands, in Bid to Lift Profile, Hitches Name to Kentucky Derby” by Steven Gray), the objective was not to defile this sacred tradition, but to gain the attention of would-be investors. Really. David Novak, CEO of Yum! affirmed it in the WSJ article. The whole point was to attract individual investors. The article ended noting that it seemed like a good fit because Mr. Novak has attended the derby for 10 years, and Yum! typically entertains clients and employees at the event.

I cannot imagine a worse use of company funds. As CEO Mr. Novak has a fiduciary responsibility to shareholders, and this decision clearly demonstrates a serious lapse in judgment. I have no idea how much money this stunt cost the firm, but I can guess that it wasn’t even remotely cheap. And, I’m hard pressed to understand how increasing the individual investor holdings by 2-3% of total shares could even remotely be worth it.

If their Strategy was to increase individual investors, I would first ask why. What benefit is derived from increasing the individual investor base? The targeted increase wasn’t enough to substantially dilute institutional investor holdings. I just don’t get it. And, if I could be convinced that increasing the number of individual investors was a valid Strategy, my next thought would be to find a practical, cost effective way of doing that. Sponsoring the Kentucky Derby is neither.

It seems to me that the best way to attract investors of any type is to post attractive financial results month after month, year after year. P&G doesn’t have to worry that people will want to invest in Tide and can’t figure out how. I seriously doubt that’s a problem for Yum! either. Although, they could make the association more prominent on each brand website.

I cannot hide my disdain, partially because I hail from the fair Commonwealth of Kentucky. And, mostly because I can’t stand to see such poor business judgment.

Bill Ford in the Hot Seat

Since I took a shot at the US automakers in yesterday’s posting, I thought I’d finish the job today. My thoughts were prompted by a Wall Street Journal article: “Is Ford Rolling Backward with ‘Way Forward’?” by Jeffrey McCracken, B1.
I’ve spent more time than I’d like to admit in the auto industry. And, don’t tell anybody, but I love it. I’m excited and energized by the boundless opportunity in the aftermarket, while I’m drawn to the automakers in much the same way as I can’t take my eyes off a train wreck. I believe deeply in the merits of capitalism and the Invisible Hand, and I want to believe that companies are rational. All I have to do is take a look at the NA auto industry to be reminded that rational is relative.
We could spend months – maybe even years – debating the merits and follies that led us to where we are today, but I find it more interesting to speculate on where we’re headed. Our friend Bill Ford has his work cut out for him, and I’m not sure that he’s up to the task. Not because I question his capability – I’ve never met the man, so I certainly can’t comment on that. Simply because I’m not sure he really, truly understands the magnitude of the challenge before him. And, due to the nature of the corporate world, it’s highly unlikely that he’s got a team of direct reports who are all brutally honest and 100% committed (or that their direct reports are honest and committed, and so on).
There are countless challenges that Ford will encounter as he navigates the company’s “Way Forward”; however I believe the most important will emerge with respect to Structure and Execution. Sure, it’s important that they define a viable Strategy – the hardest parts here will be zeroing in on target consumer groups and implementing a business model that will enable them to actually make money. But, in the end, it’s the Structure and Execution that will determine success or failure.
Four of the biggest challenges that Ford faces with respect to Structure and Execution are:
Immense complexity – Ford has indicated that they need to reduce their reliance on a few vehicles (namely high volume SUVs and F-series pickups) by selling lower volumes of a greater variety of vehicles. This from a company that historically built a single plant to make a single vehicle. The requisite changes in behavior and approach are sweeping – from purchasing to the plant floor to engineering to the dealerships and beyond – and you can bet that employees will fight change ooth and nail, on all fronts.
Extensive innovation – The only way to increase the number and variety of vehicles is to increase the number in the pipeline. And, they’ll need a healthy dose of process and technology innovation to support the added complexity. It’s not like Ford has been a bastion of innovation in the past. They have to be willing to heavily invest in innovation and relentlessly manage the pipeline. Most large companies balk at the investment and discipline required to actually make this work.
Head to head competition – The bottom is falling out of SUV and pickup sales, Ford’s long-time strong suit, so they’ve finally decided to care about car sales. In recent history the only winners in the US car market have been the Japanese automakers. Ford has largely neglected this segment, and now is desperate to rebuild its reputation. Even if Ford can muster attractive options for consumers, don’t expect Toyota, Nissan or Honda to give up without a fight.
Elimination of incentives – In order to actually make money on auto sales, Ford has to quit paying customers to buy their products. The only way to do this is to make products that consumers actually want – more than they want competitive offerings. Establishing a portfolio of products that consumers covet will take time (if it happens at all) and eliminating the incentive mindset internally will be even harder. Everyone can agree, intellectually, that auto incentives have passed the point of diminishing returns, but actually eliminating their use is a completely separate matter.
Clearly, these aren’t the only things that Ford should be worried about, but they should be at the top of the list. And, while changing any one of these is an impressive feat, Ford must be firing on all cylinders to survive. I didn’t even touch on legacy costs, outsourcing, dealer relationships, the credit division and the myriad of other issues that abound.
Wall Street analysts are speculating as to whether or not the company will turn a profit this year. Here’s my prediction: no way, no chance, no how. The bigger question is: Will they position themselves for profitability in 2007 and beyond? I hope Bill Ford’s trusted advisors are doing their job because the emperor’s all dressed up and headed for the parade...

USPS Shenanigans

Buried on page A4 of today's Wall Street Journal is a short article by Corey Dade about the latest shenanigans on the docket at the US Postal Service. They're getting pretty creative in DC...makes you wonder if they've hired some high-priced consultants to help them come up with ways to try to defend their state-owned monopoly. And, their plans, as usual, are antiquated, bureaucratic and bad for consumers.

Fundamentally, the USPS is grasping at straws, looking for ways to validate its current Strategy, Structure and Execution instead of critically analyzing its approach and adjusting it so that they actually deliver (and capture) more value for customers, employees and investors (ie taxpayers).

As they say, my friends, membership has its privileges. I highly recommend – if you can swing it – that you start a business that is a monopoly. And, do your best to obtain government protection for that monopoly. Don’t get me wrong, there’s something truly amazing about the fact that I can drop a card with some photos of my daughter in a little blue box and a few days later they appear at the home of friends or family. All I’m saying is that the USPS has to apply the learnings from the real world in order to survive. And, while they are technically a monopoly, there are countless competitors cropping up – email, the Internet, FedEx and UPS, mobile phones. It is, in fact, this competition that is causing the organization to double down on its bad Strategy and even worse Execution.

Apparently, the powers that be at the USPS haven’t gotten the memo that cost-based pricing doesn’t work. The Journal article reported that revenue from first class mail dropped more than 4% in the first quarter of 2006 (v. Q1 2005). This indicates, in essence, a loss of market share. Customers are choosing other forms of communication…or perhaps no communication at all. The most disturbing fact is that fiscal Q1 for the USPS is October through December, most likely the highest volume quarter thanks to the holidays.

In response to this loss of market share and rising input costs, the USPS has decided to raise rates…again. The new rates will be effective in 2007 and will take the cost of a first class stamp to $0.42. Do they really believe that the increased profit from the price increase will offset impact of the (highly likely) subsequent loss of share? They really should check out the real world. Even the US automakers have learned that they can’t pass on their increased costs to consumers if they don’t have a superior product. (Take note, I’m not suggesting that the USPS model their response after the auto industry, just that arguably some of the most antiquated companies on the planet have figured this out…but not the USPS.)

And then there’s the issue of price inflation. Currently the USPS is second only to college tuition. If you look at rates between 1971 (when the USPS was officially established) and today, the price of a first class stamp has increased by approximately 6% per year. Consumer inflation typically chugs along at somewhere north of 3% per year. Maybe, just maybe, instead of raising rates, the USPS should examine and tweak its approach to better appeal to customers and streamline operations.

As if that’s not enough, Dade reports that the USPS is moving toward pricing by weight, shape and “other factors”, a la UPS and FedEx. He provides no specifics about what this means, but it can’t be good. People don’t really understand the current pricing. I seriously doubt that added transparency will come with the added complexity. This means that more people will have to actually go to the Post Office (there IS a fate worse than death) more often because they won’t know how much postage to use. The in-store experience at most Post Offices is nothing short of dismal, and more traffic will only make it worse. This, will likely drive consumers to switch to competitors at an even faster rate, which means an even greater loss of market share. And, if past performance is any indicator, loss of more market share will lead to more rate hikes. This, my friends, is a quintessential vicious cycle.

Now it’s time for the creativity: forever stamps. That’s right, the USPS wants to issue (for a limited time) first class stamps that can be used forever – regardless of future rate hikes. Now, in some ways this is a very appealing concept for me. Just last week, as I was mailing my employer taxes, I pondered the value of my current stamps (why don’t they print the amount on them anymore???) as well as the current rate (I can’t keep track of the seemingly endless hikes). I finally gave up and double stamped everything. I hate doing this because the USPS wins when I waste my stamps because I'm confused. But, the truth is, if I buy just one of these forever stamps, they win again. Bandits. Spending money today to horde stamps that I may or may not use in the future is just plain stupid. But, many of us will succumb to hedge the effect of future rate hikes…I can see my mom buying enough stamps to cover her holiday cards for decades to come…now that I think about it, at a 6% annual inflation rate, maybe we should all horde them. Maybe in 2025 there will be a thriving black market for forever stamps…