Business Strategy, A Square Tire

Monday, I introduced this series of articles in which I was to come up with a way to get out of debt fast, show you how to fix your personal finances, and show you how to succeed in business. My first article was “Get out of debt fast, a parent’s rant”. On the second article, “Self Responsibility, let’s stop the mooching” I probably touched some reader’s nerves, since I did not pulled too many punches. I also promised you that I was going to show you a square tire, and here is the picture. I found that tire in a back alley shop in Kuwait City (and yes, that is in Kuwait). Along the way, I am supposed to make these series of articles so interesting, that you will want nothing more than to bookmark my blog, and recommend it to your friends. So, let’s see…

What can you do with a square tire? Other that using it as a fairly big paperweight, or exhibit it as a curiosity, it is worthless. Now, imagine how many people would buy a square tire. A few would, since you can sell almost anything to most people. Soon, however, the novelty would wear out, and you will no longer be able to sell square tires. What is the problem with that business model or business strategy? You spend money buying raw materials, pay employees, pay benefits for your employees, and produce something of little value. As time goes by, revenue diminishes, raw materials probably increase in value, fix expenses remain there, and suddenly, you realize that you are on the road to bankruptcy.

What am I trying to say here? I will probably hurt some sensibilities yet again, and that is ok by me if I can get you to think outside the box. Someone once said that the only people that like changes are “babies with wet diapers”. So, here it goes:

First thing first: Lets check out the reason the Economy of the United States tanked, and see if we can learn something from it.

Early in the twentieth century, the American Dollar was king, and the reason for it was that the Dollar was backed by gold. Money being printed, actually had an intrinsic value, since it was to be readily converted to gold. Later on, someone came up with the great idea that the United States, the great industrial Nation that introduced the so many advancements to the world, including the assembly line, could still guarantee the dollar, and the currencies of the world were to be measured against the U.S. Dollar, which was supposed to be converted to gold. As you can see, there is really no big problem, since we still had gold to back our monetary system. This was an international compact called Bretton Woods Agreement.

Somewhere along the way, the United States continue to prosper, sure, we had our rough patches. Who can forget the Great Depression in the late twenties and thirties caused by protectionist laws, and lost confidence in the economic future of our Nation. With an average jobless rate of 25% and most able to workers having their hours cut, in addition, we had a President that ruled for four terms (FDR) and yes, I am using what I believe is the right term, since he ruled for four terms. Thanks God the Constitution was amended to prevent further Presidents from Governing more than two terms.
Unemployment during the Carter years, was over 10%. And interest rates were over 20%. Just imagine if you had an Adjusted Rate Mortgage in those years. Compare that to a more or less 6% unemployment rate today, our economy is in bad shape, but it is still better than on the Carter years. The claim that we are in a depression equal to the Great Depression, is a severe exaggeration. Are we going to get there? Who knows. Also, Iceland, Russia, Venezuela, and many other Nations are just in as bad a position as we are.

But, I see some alarming trends. An out of control government is one, the mistake that we as a Nation made to go from a production Nation to a purely consumerist society, is another.

Now, I am not an economist, and even though I have tortured myself with marketing, macroeconomics, microeconomics, managerial accounting, and a few more of those… I have over 195 college credit hours, I do not claim to be an expert. However, I have made plenty of economic mistakes, and I have seeing first hand how not to run a business.

Let me ask you a simple question… if you have no assets, and your debt is twice as much as what you make, can you survive? In your private business, if your debt is twice as much of your assets, you are not producing anything of great value, will you be able to get a loan? I do not think so.

Right now, according to the to The Bureau of Economic Analysis (http://www.bea.gov/national/index.htm#gdp), the Gross Domestic Product for 2007 in the United States was about $3.4 Trillions. The latest estimates of the financial bailout of the United States is in the $7 Trillion Dollars. You know as much as I do that when the Government gives you cost estimates, they are usually wrong; these are the people that paid about $700 for a hammer, for goodness sake, and the same people who cannot run their own Cafeteria without tax payers subsidies.

What does that tell you? Our primary lender has several Trillion Dollars of our debt in their possession, and if they decide to cash in, how are we going to pay that debt?

What does the United States produce? Other than debt? Our auto industry is destined to fail. Their business model does not work, remember the square tire? They cannot compete with the foreign auto industry, and if they get a bail out, we are only prolonging the patient’s death. The auto industry can be revived but it needs to be allowed to go bankrupt, so their debt, and contracts can be renegotiated, their business model can be streamlined, and it can go back to be a world class industry. Remember the square tire? If I give you more money to continue producing square tires, I am wasting my money, and eventually, you will want to get more money from me, since I just slowed down the rate of which you go bankrupt. Next time, I will have no more money, because I will be the bankrupted one.

I declared bankruptcy once, it was not easy. But I can say that I learned my lesson, how about the big executives of the many businesses that are too big to fail, have they truly learned from their mistakes? Our

politicians are still receiving counsel from the likes of failed Freddie Mac and Fannie Mae who cooked the books in order to receive bigger bonuses, one of such received over $90 million dollars in salary. The ones who are screaming the loudest in Congress are the ones who were saying that there was no problem in the United States Housing Industry. The politicians come up with a new bailout scam almost every other day, and use the money for whatever else, other than what they say it is.

The United States deficit is in the Trillions of Dollars, and Government has not specified one government program that they are going to cut, or reduce. They keep increasing the size of Government, and by the looks of it, nobody has a clue of how to fix the problem.

When a Nation stops producing, taxes their businesses, and overtaxes the higher earners, it slows down the economy, since it is those people and businesses that create jobs, thus stimulating the economy (Economics 101). The top 10% of earners in the United States pay he highest capital gains taxes in the Planet (http://dx.doi.org/10.1787/422013187855, Organization for Economic Cooperation and Development (OECD) in Paris).

So, the bottom line:

1. When you get advice from someone, don’t imitate Congress, do your research and make sure that you understand what you are getting yourself into.

2. Fire those who are not producing, lie to you (like politicians do), and if they have no clue what they are doing, and cannot be trained, fire them also.

3. When your operating expenses are close to matching your own revenue, it is time to streamline your operation, reduce personnel, and decide whether is time to close shop or start a new paradigm.

4. Do not get so in debt, that you cannot fulfill your obligations.

5. And last, but not least, learn to “Fail Forward Fast”… If your project is not working, scrap it, and do something different. Make sure that you do your homework.

6. Make sure that you are producing something of real value for your customers.

This is just common sense, if what you are doing is not working, what makes you believe that it will work?

Learn to be flexible, and be smart about it.

I am not an economist, but, like someone likes to say, “I am a thinker”. Follow your gut instinct, take action, and use common sense.

As always, I welcome your comments and suggestions. I encourage you to post your best business strategies; and, since I am not a historian, you are welcome to expand in the history of the topics expressed here.

Let me know what topics you would like me to cover or rant about. Let’s make this blog your blog.

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