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GP 29 August 2007: The End Is in Sight

Light at the End of the Tunnel.  That very old joke still reverberates.  You know, the one in which the head of the ball bearing factory in Ohio, now three-feet deep in water, winces, “I can see the light at the end of the tunnel.  Unfortunately it’s a freight train with Chinese products coming right at me!”  While Wall Street prospers too much, executives along Main Street feel pummeled, the victims of economic shock waves coming from every quarter.  By according too much power to our financial sector, we have run down most of the other aspects of our economy.

Beast in the Jungle.  This week we have published “The Beast in the Jungle,” our Annual Report on Annual Reports 2006-2007, on the Global Province.  In it we reach the conclusion that the public company, as we knew it in the 20th century, is coming to an end.  Brutal global competition, new technology, but mostly a host of truly bad decisions by our central government—and of those in other developed nations—have brought it to its knees.  Companies have not helped their own case, as they have tried to improvise their way out of their difficulties. Even as they press new technologies into service, they use them to try to build moats around their old style corporate models.  Busy shoring up the past, companies generally have not uncovered a new corporate architecture and grand strategy that take aim at the years ahead.

The Wal-Mart Paradox.  Bruised on all sides, and under attack by many, there are little signs that Wal-Mart is striving for something new.  As you will read in “The Beast in the Jungle,” its annual reports, more than most, announce its social and environmental initiatives, almost on every page.  We note also that it is making special efforts to expand in major developing countries such as China, India, and Mexico, having taken its licks in the U.S., Germany, and some other developed arenas.  In theory, it is trying to do something quite different.

In practice it is still falling short.  It is still very much an unfocused general merchandiser who hopes it can get through the eye of the needle with low (ostensible) prices.  But its troubles are legion.  On a recent field trip to its warehouse store, Sam’s, one of our colleagues found gas prices to be $.14 a gallon higher than a station 20 miles and 20 minutes away.  Poor merchandise selection afflicted department after department.  Solid items Sam offered just a few years ago had disappeared.  One inhouse employee said, “If you spot something good, buy extra.  It may not be here tomorrow.”  In computers, where it has tried to make a little bit of a mark, it lacked proper accessories.  It has a problem deciding where it wants to achieve true excellence, something not implicit in its ‘cost’ mantra.

Vocal opponents of Wal-Mart rail against its labor practices and its mixed record as a business citizen.  We include a litany of their plaints in our Watching Wal-Mart section.  As a matter of fact, it may even be turning the corner here.  What’s more worrisome, we think, is that it simply may not be tending the store.  “Cheap everyday prices” will only cover its business sins for so long.  In this regard, it is simply the most visible of a host of corporations that are propping up an outdated business model with hard knuckle purchasing practices.  It is China’s biggest customer—a mixed blessing for several reasons, especially since it provides no incentive for the People’s Republic to improve its quality or its environmental controls.

Chez McDonald.  But the prognosis is not as gloomy as it seems: not all businesses are stuck in the past.  Hither and thither newer companies are being invented.  McDonald’s, the hamburger company that was a basket case just a few years ago, is staging quite a comeback.  Significantly, the job is getting done in Europe.  “The changes are paying off.  In the first half of this year, combined sales at Europe’s 6,400 restaurants rose 15 percent, to $4.1 billion, compared with a 6 percent increase in the United States, where McDonald’s has 13,800 restaurants and sales totaled $3.9 billion.”  See “To Woo Europeans, McDonald’s Goes Upscale,” New York Times, August 25, 2007, pp.B1 and B4.  “The chain now serves over 10 million customers a day in Europe, which contributes 36 percent to the company’s operating income, making it the most profitable region, after the United States.”  “But the ideas for how to change came from Denis Hennequin, president of McDonald’s Europe, the first non-American in that role.  As head of McDonald’s restaurants in his native France in the late 1990s, Mr. Hennequin had searched for ways to make fast food more appealing to a nation that prefers slow-simmered cassoulets and likes to savor a meal.”  He launched an upgrade of restaurant interiors which put some oomph in sales.  His outside design firm came up with nine different store designs, and franchisees could pick the one most appropriate for each location.  “A separate food factory in Munich is trying to come up with new menus for the different tastes in the 41 European countries, including Russia, where McDonald’s operates.”  “In France, he hired the same advertising agency as Apple Computer, another brand Mr. Hennequin said he admired for its adaptability.”

As we suggest in “The Beast in the Jungle,” truly cosmopolitan managers—along the lines of Mr. Hennequin—are a sine qua non of any company that wants to put its foot in the future, shaking off the muck of the past.  Similarly, it has taken a Dutchman, Fred Gehring, to save Tommy Hilfiger in Europe by taking it upscale. He is now CEO of the whole company, owned today by Apax Partners.  Of course, both companies will have to make further adjustments in their offerings to add-in value that is commensurate with their pricing.  We suspect the rebirth of many American companies will take place outside the United States.

Sources.  To read about Ohio’s loss of ball bearing and other jobs, see Stephen Greenhouse’s “As Factory Jobs Disappear, Workers Have Few Options.”  For a comprehensive look at China’s noxious environment, see “As China Roars,  Pollution Reaches Deadly Extremes,” New York Times, August 25, 2007, pp. A1ff.  Our Annual Reports on Annual Reports 1994-2007 are archived on the Global Province.  For a sprightly account of Denis Hennequin, see “Spotlight: Denis Hennequin of McDonald’s Europe,” International Herald Tribune, August 17, 2007.  He is obviously quite a fellow: “He still finds time to play his guitar in the band he set up with his family and ride his motorcycles, which are much more to him than mere means of conveyance.”  On Hilfiger’s critical move upmarket in Europe, see “Tommy Hilfiger: The F.A.M.E. Game,” International Herald Tribune, October 29, 2006.  Incidentally, examine carefully the International Herald Tribune, which is more fun and generally a better read than former half-owner Washington Post and current total owner New York Times.  Properly run, it could make the New York Times Company a ton of money.

P.S.  For a country very much on the mend in the face of impossible difficulties, one can take a look at Georgia, which all the while has had the Russian Bear breathing down its neck.  “Georgia on His Mind,” Wall Street Journal, August 25, 2007, p. A7 provides a snapshot of this amazing recovery.  “According to Mr. Saakashvili, Georgia's GDP was less than $3 billion five years ago.  It's now $8 billion and will double in three years.”  The impossible can happen anywhere and everywhere.

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