[Cross-Posted at Wild Wild Left]
There could be no surer sign of the sorry state of American business than the overflowing cesspool of self-help business books on which the business culture floats.
I don't mean the generic "how-to" books that explain the fundamentals of the business (Marketing, Product Development, or Distribution); how-to books coalesce around every common endeavor. I am talking about the business best-sellers that preach leadership, vision, and innovation, and which typically rely on historical case studies (parables) of actual businesses.
What a bunch of rot. Or, I should say, what a bunch of obfuscation cleverly designed to divert our attention from where they are playing the real game.
The basic plot of the business book is always the same: Heroic company embraces eternal virtues (e.g., hard work, integrity, respect for others), and satisfies customers by delivering value, thereby increasing shareholder wealth.
Next, the book discovers some Goofus companies that just don't get the program. Then the book moralizes about how if only these bad, stupid companies could resist the temptations of short-term thinking, they would not have crashed their multi-billion dollar enterprise, leaving behind a steaming crater of lost jobs, scrapped equipment, and ruined local economies.
Finally, the book posits three key pieces of advice that every executive must understand to avoid the bad fate: Be Good, Do Good, and always remember that People Are Our Most Important Asset.
The American Business Fairy Tale was reprised magnificently this year by the Grand Master of Business Books, Jim Collins. Collins' original 1994 hit, Built to Last, was followed by Good to Great in 2001, and Collins completed the trilogy in 2009 with How the Mighty Fall.
You already know the story, so I won't say much about How the Mighty Fall, except to note that Collins pits company pairs in the Goofus-Gallant model, focusing mostly on the ne'er-do-well businesses, and concluding that they are victims of "Hubris," "Undisciplined Pursuit of More," and "Denial of Risk."
But by focusing on the ne'er-do-well businesses as protagonists, How The Mighty Fall casts an unusually bright light on a startling panarama of corporate incompetence. In pushing the form to its logical extreme, Collins has inadvertently laid bare the Great Lie at the heart of all these business tales: the proffered explanation for the perceived behavior almost certainly is not true.
Large Corporations already know how to Innovate and Create Value and Invent the Future. It's been studied to death, and reported incessantly. Their failure to do so is usually not the result of intellectual or moral weakness, but typically by design. Consider this:
The senior executives who run these companies are smart, rich, and well-advised. They are multi-millionaires with golden parachutes; they are not doing it for the money. They have been trained in the official business principles at prestigious MBA schools, by the very same business professors who author the fairy tale books.
They continue to be advised on a regular basis by these same business professors -- the professors now wearing their "consultant" hats, or keynoting this month's business convention, or leading workshops at the company's annual executive strategy retreat.
If the professors are not there in person at any given moment, they are adequately represented by a private army of "strategic consultant" clones from firms like McKinsey, Accenture, Grant Thornton, Parthenon, and Boston Consulting Group, incessantly measuring, monitoring, and advising to ensure optimal performance. Heck, the executives themselves are probably even reading the books, too, like a Bible, reminding them to be good. They nod enthusiastically, even as they pillage their assigned sector of the economy.
It is helpful to understand business books as sermons, business professors as priests, and business schools as cathedrals, all intended to propagate an orthodoxy that renders a carefully concealed truth unthinkable.
What Collins accidentally revealed, by arguing too hard, is that there is no actual chance that these smart, trained, advised, compensated professionals would on a regular basis accidentally or stupidly destroy billions of dollars in shareholder value, any more than 747 pilots regularly crash jumbo jets.
That shareholder value is being destroyed is the second-biggest lie in the system. The first biggest lie is that the objective of the system is to create value in the first-place.
The key insight that allows all the puzzling pieces to fall into place is that large corporations in a capitalist economy are not wealth creation devices, but wealth extraction devices. They prey upon industries as would a mosquito or a tick, moving from host to host, extracting what blood they can.
Only these are REALLY BIG mosquitos, and they can suck an industry dry, leaving behind just a withered carcass.
Here is how it actually works, from the viewpoint of a large corporation tasked with achieving near-term revenue growth above market rates:
Step 1: Find a healthy, competitive industry that is delivering good value for a fair price. This is called a "Growth Opportunity," or an "Undermonetized Industry."
Step 2: Spend $1B to buy most of the competitors. This is called an "Industry Roll-up" or "Industry Consolidation."
Step 3: Fire nearly everyone and raise prices to generate mega-profits for a few years. This is called "Finding Efficiencies" and "Synergistic Growth."
Step 4: Once you get your $1B back and then some, sell the carcass and repeat in a new industry. This is called, "Exploring Adjacent Markets" and "Finding New Growth Horizons."
The shareholders make off like bandits; they double their money in no time. The acquired businesses are destroyed during the "Fire Everyone" step when key talent is lost, quality is compromised, and the brand is ruined. Even if the business does not immediately collapse, all the long-term investments in research, development, and business process innovation that would allow it to succeed in the future have been gutted, so a lingering death is inevitable. In the final stage, professional taxidermists are brought in to "dress up" the carcass for sale, and they have been known to find a sucker to buy the thing for more than just scrap value.
No shareholder value was destroyed -- it was simply extracted and transferred. What was destroyed was the careers of the people who were doing the work, the local economies built around the work, the livelihoods of the suppliers who were serving the industry, and the wallets of the customers who paid more and got less each year during the "mega-profit" or "rapid growth" phase.
Big Question #1: Why Does This Occur?
Answer: It's faster and less risky to extract wealth than to create it, for the same reason that it is faster and easer to drill for oil or cut timber than to create oil or grow timber. There may well be a big lucrative future in solar panels or electric cars, but it will take a huge up-front investment, with an uncertain payoff, which might not mature until decades hence, and you could lose it all if you bet on the wrong technology (e.g., Amazon's big bet on eInk technology may doom the Kindle).
By contrast, consolidating an industry is as easy as paying off the founders of the smaller acquired companies, who reliably will sell out their employees and customers for a few million dollars. You can complete the industry "roll-up" and start reaping monopoly profits quickly and reliably.
Big Question #2: Why Don't the Business Schools Say the Truth?
Answer: Like most clerics, business professors are deeply indoctrinated in the lies of their profession. They will tell you with a straight face that markets efficiently allocate goods, that marketing is essential to help consumers make wise choices, and that industry consolidation creates efficiencies.
There is a grain of truth, of course, in these ideas, and most business professors find it not in their professional interest to dwell on the caveats (markets are efficient but only in rare circumstances; marketing can inform the public, but mostly misinforms, and tends to create needs rather than meet them; industry consolidation creates efficiencies, but those benefits are mostly not shared with the public).
Tenure, book contracts, and consulting gigs are reserved for those professors with well-established reputations for regurgitating the dogma convincingly. The average Business School is much better endowed than the adjacent School of Education (see typical example in the image below). Whether you look at the physical comfort and conveniences that business professors enjoy, or just go straight to the salary, the difference is startling.
So of course there ARE business professors who can see through this stuff, but the Church of the American Business Academy has enough institutional safeguards to ensure that you won't hear from them. And for the same reasons, they typically leave the clergy.
Big Question #3: How Can We Save Ourselves?
Answer: Here we have some good news. Unlike most of today's intractable political problems, this one is so easy to solve that we already solved it, over a hundred years ago.
It used to be illegal to consolidate industries into oligopolistic wealth extraction machines. The various antitrust laws (Sherman Act, Clayton Act, Robinson-Patman Act) were all designed specifically to prevent these machinations, because the results had already proved poisonous. Do you know who Obama has placed in the key trade regulation positions and how they intend to approach antitrust enforcement? It really matters.
So, we don't have to write the laws, or even pass them -- simply enforcing existing trade regulations would be sufficient. That means eliminating today's insane enforcement standards that find "adequate competition" with just 2 or 3 companies dominating an industry. Instead, let's go back to the earlier, wiser policies that would stop a firm from acquiring businesses that sum to greater than 5% market share, and affirmatively break up businesses that get much larger than that.
Economists (think Chicago School of Law and Economics) will tell you even today that scaled up businesses are more efficient, but they don't mention that the efficiency gains do not result in any benefit to consumers, or the public, or the employees. In fact everyone but the acquiring entity's shareholders is worse off because the efficiencies do not get shared, and are in fact used as a sword to extract additional profits and beat back smaller competitors.
If instead we want the social benefits that come with massive industrial scale efficiencies, then we'll have to make sure those benefits are provided to the public, and not used against the public. The obvious way would be to have such entities publicly owned, like utilities. Whatever prejudices one has against publicly operated businesses (with 500 carve-outs, of course, for hospitals, universities, police, fire, libraries, park rangers, military, municipal utilities, roads, air traffic control, coast guard, life guard, snow plows, border patrol, space exploration, etc.), they could not possibly be systematically worse than the free market spectacle that Jim Collins parades before our eyes.
[Originally Posted at Jay's Right of Assembly]