MBAs don't create greed, people create greed

The debate on "how to fix business schools" that rages on at the Harvard Business School's blog is just plain disturbing.  As someone who is on the edge of graduating from Ross at the University of Michigan, I take personal offense to the fact that a subset of people actually believe that people go into MBA programs as perfectly righteous human beings and come out cold-blooded economists.

The logic behind the argument on how MBA programs need "fixing" is beyond me, but I suppose I do understand its origins.  History has shown us that when something really bad happens, we must find someone to blame.  When kids acted out in the 1980's, some fanatical parents blamed dirty lyrics in rap lyrics from the Beastie Boys.  So, what did they do?  They "forced" the music industry to put big fat labels on their albums that said "Explicit Lyrics".  Any good marketer (with an MBA) can tell you what that did:  It created demand for products labeled as such because they were taboo.  I know from personal experience because I was a kid who bought one of the Beastie Boys albums labeled that way.

When someone thought kids were too violent, they blamed Bugs Bunny cartoons because Wiley Coyote trying to drop an anvil on the Road Runner was just too violent and we wouldn't want kids trying to mimic that behavior now would we?  For the record, I grew up watching those cartoons and I never tried dropping an anvil on anyone.  And, what have we replaced with Bugs?  I was unfortunate enough to not be able to sleep in on a Saturday and watched about five minutes of a Pokemon cartoon.  I could actually feel my brain turn into a gelatinious goo.  It had so many flashes of light and scene changes, I felt like I had just ridden a roller coaster without any safety restraints.

There are hundreds of more examples, but let's look at it logically:  Is the following statement true?  The people running the companies that caused the economic downturn all had MBAs.  Therefore, people who have MBAs will cause market downturns.

Anyone who has taken a logic class can tell you that this is a false causal relationship.  This is like saying:  When it rains, it is wet outside.  It is wet outside, therefore it must be raining.  What if I just poured a big bucket of water out on my porch?  Other things cause it to be wet outside, right?

This whole MBA debate is no different.  No amount of schooling is going to turn me into an unscrupulous, evil money grubber.  It's a more likely argument to say that if I were unscrupulous, I was that way before I started my MBA program.  One can also turn this into a circular argument.  I bet if you looked at many of the backgrounds of those who helped cause this mess, you'd find out many of them went to private high schools.  Maybe private education is to blame?

I'm not a psychologist, so I'm not going to provide any hard data on this one, but I've heard many say that your personality is pretty much set in stone after your tween years.  If this is the case, then the likely culprit are the people who raised these kids to believe that making money in spite of who you had to step on to get there is a way to cultivate success:  their parents.

Now just ask yourself who their parents are, and then maybe we can finally track down the real people to blame.

Why the auto execs can learn from Willy Wonka and Knight Rider

I never saw the creepy remake of Willy Wonka and the Chocolate Factory because I was told by several friends that Johnny Depp's depiction of Willy Wonka was so demented that it made Gene Wilder's depiction seem banal in comparison. I don't need the nightmares.

However, if you do remember the story, the long term lack of success with the automotive industry reminds me of the scene where Charlie asks Willy about the Everlasting Gobstopper. Here is a piece of candy that, no matter how long you suck on it, never gets smaller or loses any flavor. I find this concept to be completely disgusting, but let's assume for a moment that this is a feature that some kid would actually want. If you pay ten cents for a normal piece of candy, wouldn't you be willing to pay much more for the Everlasting Gobstopper?

There's also the episode of Knight Rider where some tire executives hire villains to stop a company that's invented a tire that impervious to nails. How much would you pay for tires that lasted the life of your car?

I compare that to the quality of automobiles. Back in 1946, cars didn't last as long, at least not with their original parts. They also didn't have airbags, traction control, anti-lock brakes, six-speaker stereo systems, bucket seats, seat belts, and countless other improvements. In 1946, the Buick Roadmaster Sedan cost $1,822. Adjusted for inflation, that's $19,156. Using Edmunds.com, I priced a 2008 Mazda 6 with a 6-CD in-dash stereo, compass/autodim mirror with HomeLink, door edge guards, floor mats, and wheel locks. It came in at $16,271. There are a lot of legitimate arguments for why cars cost more back in 1946. The two main arguments would be that that cars are less costly to manufacture now with welding robots, supply chain optimization, etc. and global competition. Buick didn't have to contend with Honda, Toyota, Nissan, etc. We'll come back to the role of competition and what it means when the industry as a whole did a poor job of capturing more consumer surplus for themselves.

There is one looming argument beyond all others why the willingness to pay for a car should be higher now than it was back in 1946: The Interstate Highway System was established by the passing of the Federal-Aid Highway Act in 1956. Prior to the establishment of the interstate highways, cars had a relatively short range. The highways serve as a complement to a car. It'd be like buying an iPod with no iTunes or a CD player with Michael Jackson's Thriller glued inside.

There's more proof of this. In Europe, where there exist several substitutes for traveling by car and where gasoline is much more expensive, Europeans are willing to pay more for their cars. A Ford Focus in the UK starts at $19,600 (using 1.47 USD = 1 GBP). Based on the competitive landscape for transportation needs in Europe from expensive gas and trains, planes, subways, and buses, you'd think Europeans would be less willing to pay big bucks for a car, yet they pay more. So, what's going on here?

So, I've kicked around that cars are worth more than we've paid for them. Competition is what has driven vehicle makers toward covering less and less of their fixed costs (e.g. building the factory) on a per vehicle basis. In any industry with extremely high fixed costs where a unit sold captures very little of that fixed cost, the only real solution is volume to achieve minimum efficient scale and capture as much economies of scale as possible. The problem is that demand for new cars is plummeting and companies like Toyota are even having problems with achieving profitability. What's this mean overall? It means the car industry is just way too overloaded with capacity, and unfortunately for GM and Chrysler, now is not a great time to be seeking salvage value on factories that only make cars since the last thing someone wants to do right now is make more cars.

Being from Michigan, I would love to see GM and Chrysler stay around and prosper, but it's a foregone conclusion that the industry needs to shrink. I don't foresee Toyota and Honda going anywhere given their market leadership. That leaves GM and Chrysler in a precarious situation, but it doesn't seem we're going to let them fail. The only car companies left to fail are going to be the small brands: Hummer, Saab, Volvo, and maybe even a Nissan.

Even after all of that bloodshed, I still think there will be overcapacity. It may drive one of the big dogs out of business, regardless of government intervention. It's like watching American Idol, except we're talking about the real world, with real jobs, in an industry that began in the United States. Maybe that's OK though. We lost the electronics manufacturing industry a while back and we weathered that pretty well. Perhaps the effect of downsizing of the US auto industry seems much worse than it actually will be, but who knows? If I knew this, I'd be a highly-paid automotive consultant who gets quoted in the Wall Street Journal.

It's a new beginning

Hi there. I never considered myself a blogger, but I decided to do it for two reasons: 1) (the good reason) it will force me to keep my critical strategic skills alive by continually analyzing different situations I deem interesting and 2) (the not-so-good reason) maybe someone may find some value in it and even think: “Wow! This guy is pretty bright! We should contact him and pay him lots of money!”

Don’t worry. I’m not holding my breath on the second reason.

Just a little background: I started my IT career more than 13 years ago. Since that time, I’ve run systems, run networks, developed software, run collaboration tools, installed firewalls, run my own IT consultancy, started up a IT solutions practice in a mid-sized firm, created frameworks and methodologies for deploying offshore IT, run an IT department, managed several budgets, led large IT programs, and work with lots of really smart people.

In that time, I’ve learned as much from education as I have through experience. I’ve seen a lot of technology go right and plenty more go wrong. I have observed countless mistakes and made countless mistakes myself. I have also been a student of ITIL, PMI, COBIT, Agile, and a whole bunch of other acronyms and catch phrases and discovered one thing: There is no silver bullet.

I’m also a student of business strategy, although unlike IT where I’ve been fortunate enough to get paid to do something I enjoy, no one has paid me for my business strategy skills because they are mainly untested. I am currently an MBA student at the Ross School of Business at the University of Michigan with a focus on corporate strategy and finance. I suppose this blog can also serve as a test to the school’s action-based learning approach. If my approaches to a variety of problems seem too theoretical or wrong, it’s either that I didn’t understand the frameworks I was taught or another case study on how MBAs are taught “pie in the sky” frameworks that aren’t applicable to the real world.

Only time will tell.