Shifting Paradigms

Paradigms are a set of assumptions, concepts, values, and practices that constitutes a way of viewing reality for the community that shares them. (From a definition found at www.thefreedictionary.com/paradigm.)

When a paradigm in an industry changes, the business “winners” after the change most often are not the old-line companies who were the winners before the change. They are fresh new entities with new ideas for satisfying the market. The winners have no entrenched personal empires, no buildings and factories to amortize, no rigid ways of doing business – all of which prevent the old companies from changing.

What the new companies do have is a large dose of outside-the-box thinking, a willingness to take risks, the energy to get things done quickly, few layers of management….

Old, classic examples of paradigm changes include the railroaders who hauled passengers but thought of themselves as railroaders, and who were overwhelmed by the airlines who entered the business of hauling passengers in airplanes instead of trains. How would our landscape look now if the railroads, instead of scoffing at the airlines, had become the movers of passengers by airplane as well as trains?

Consider the Swiss, whose paradigm of a watch included a spring, escapement, gears, hands and a dial face. Enter the Japanese, whose paradigm for a watch includes a battery, a chip and a digital readout. The watch making business all but disappeared from Switzerland in its rush to Japan. The Swiss, who were offered the digital watch designs but passed on them, had a capital and emotional attachment to the old paradigm. Later, of course, the Swiss adopted many of the features of electronic timekeeping and do continue to make many fine watches. The volume market, though, theirs for many years, is now owned by companies in the Far East.

Almost every day paradigm shifts are taking place.

Consider the impact of NetFlix, with a new paradigm for distributing movies for the home market, had on the video store of the old paradigm. How many video stores remain, and how big a share does NetFlix have of the market? In watching the postal worker put mail in the boxes near my home, and seeing NetFlix envelopes in almost half the boxes, the question is answered.

Another recent shift is the advent of Craig’s List, the Internet classified advertising giant. From a small beginning in San Francisco, Craig’s List now has free nationwide classified advertising. It is very effective. Newspaper owners are crying about the demise of their classified advertising revenue, lost to Craig’s free list. Why did the newspapers not start the free lists? Did their thinking not go out of the box? What would be the situation if they had been the ones to start the free list, and receive advertising revenue for display ads on their pages? Would they be in such dire straights as they are now?

Now we see several paradigm shifts in the auto industry. Fuel prices will soon rise again, creating greater and greater demand for fuel efficient vehicles. Electric cars, and hybrid-electric cars will eventually dominate. Lithium ion batteries will replace older technology. Are the old-line battery companies leading the charge to lithium ion? It does not seem so – the bulk of the companies manufacturing them are in the Far East.

There will be many paradigm shifts resulting from the deep economic recession. The next posts to this blog will explore ideas about them.

Sign of the Times

As sometimes I do, today I looked in the Daily Camera, the Boulder (Colorado) daily newspaper, at the “Hot Jobs” listings. It was startling. As little as two months ago the number of jobs listed for Boulder and surrounding towns was over 500. Today it was just slightly over 300.

That is a 40% reduction of job availability in slightly over two months. Probably the end of season has some effect on the numbers, but not 40%.

The shortage of jobs is a grim reminder of the depth of the recession. It portends a long and slow recovery of consumer spending, the primary driver of our economy, and thus a long and slow recovery in the economy.

Bailout or Failure?

It is Wednesday evening and so far, there is no bailout program for the auto industry. Although a bailout is not the greatest idea, compared to certain other options, it is by far the lesser of two evils when considering the consequences of the failure of at least two of the three American auto makers.

Without an immediate bailout, GM and Chrysler will no doubt file for bankruptcy in the next sixty days. Executives of the companies have said bankruptcy would be q disaster because customers would not buy their cars. That does not make complete sense, though. If the manufacturers maintained their warranty programs throughout bankruptcy, and dealer service departments continued to operate, it seems people would buy the vehicles. The bigger problem of revenue generation is the lack of the right vehicles for the market, not a bankruptcy.

As earlier written on this blog, it still seems that bankruptcy of GM, with post petition financing guaranteed by the government; a line of credit for Ford guaranteed by the government; and the breakup of Chrysler makes the most sense.

If in bankruptcy, GM can quickly deal with the problems of high labor costs, high legacy costs, too many dealers and debt overload. They can shed models and factories and dealers, and renegotiate their debt, and in two years exit bankruptcy as a smoothly operating company with the beginning of a competitive model lineup. Many thousand dealers will be out of business, with great dislocation to customers and employees – unfortunately that is the consequence of the Big 3’s poor management through the years.

Although Ford is stronger than GM, they also may need to go through a Chapter 11 proceeding in order to achieve all their goals in the time available. Union reaction will have great importance in determining the issue.

The next few days will decide the fate of the companies, their employees, their customers and the many other stakeholders. Too bad I will not be the “Car Czar.”

GM and Bankruptcy

Executives of General Motors Corporation are saying GM cannot survive a bankruptcy, and needs government money to continue operation.

The second part of their statement is certainly true. In the latest report, GM is asking for $4 billion to keep operating through December and another $4 billion for January. With more to come.

The first part of the statement, about not surviving a bankruptcy, seems wrong. There are many, many cases of companies going into bankruptcy, emerging and regaining successful operations. Two come to mind – the Dana Corporation, and automotive and truck parts and accessories manufacturer; and Harnischfeger Corporation, a mining and heavy equipment manufacturer. Both now are successful, generally thriving companies.

Think about the airlines – most have been, are in, or are going into bankruptcy. People still fly on them. Usually there is an interruption for a few days, and then service is as normal as airline service is.

Then there are the the retailers. Kmart and Winn Dixie stores have been through bankruptcy, along with many others. Each is better off after the event than before. Customers continue to do business with them.

GM executives say people will not buy GM vehicles if the company is in bankruptcy. What is new about people not buying GM cars? People are not buying GM cars now because they are the wrong ones, and of lower than desirable quality.

Bankruptcy will give GM the tools to deal with the killer problems they face as they go forward. It will allow reworking legacy costs, labor costs and an unwieldy dealer organization. Yes, enormous problems are involved in restructuring those items. They can be overcome.

Car buyers would no doubt rather buy cars from a revitalized, restructured GM that from the one that exists now, propped up by massive infusions of our (taxpayers’) money.

Let the government infuse the money into GM after bankruptcy. Everyone except some GM executives will get more bang for the buck.