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Ford Bets Big on Small Cars in Asia

June 26th, 2011 Comments off

Hidden in this article from The Wall Street Journal is that Ford is taking a target costing approach to sell more cars in Asia.

Last year, Ford began building the $7,600 Figo at a plant in Chennai, India. It developed the car by starting with an older version of the Fiesta originally designed for the European market. Ford modified the vehicle and stripped out about $1,000 in cost to sell it at a much lower price in India, Mr. Hinrichs said.

Rather than trying to sell the same model everywhere, Ford is looking at what local markets will bear and what consumers value and finding ways to modify its existing models to fit.

Corporate News: Ford Ramps Asian Car Plans — U.S. Auto Maker Bets Small, Inexpensive Cars Will Fuel Projected 50% Gain in Global Sales by 2020. Jeff Bennett. Wall Street Journal. (Eastern edition). New York, N.Y.: Jun 17, 2011. pg. B.7

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Unintended Consequences of Tax Laws

February 21st, 2011 Comments off

Unintended consequences. Photo credit: David King on Flickr

Unintended consequences have probably plagued every tax law since the beginning of time.  As described previously with regard to import tariffs on Ford vans, wily taxpayers can and will find ways to pay lower taxes by exploiting loopholes unwittingly created by legislators when they are crafting the laws and trying to pander to lobbyists and constituencies along the way.  In Saturday’s Wall Street Journal (which I happened to have time to actually read — something that is in short supply these days) there were two pieces in the same section that highlighted the nature of unintended consequences.

The first of these is a piece on US companies that are flush with cash on paper, resorting to borrowing funds to avoid repatriating income back into the United States that was earned elsewhere.  So instead of being able to create jobs and innovations at home, the unintended consequence is that the money is being reserved to spend (now or later) overseas.

Politicians have been carping about the more than $2 trillion in cash sitting idle in corporate coffers even as unemployment remains high. But much of that cash isn’t in the U.S.; it is abroad. And it isn’t likely to come back home unless U.S. tax laws change.

U.S. companies are taxed at up to 35% when they bring home the earnings generated through the operations of their overseas subsidiaries. They get a credit for any taxes paid to foreign governments—but, since the corporate-tax rate in the U.S. is one of the world’s highest, most companies are in no rush to bring the money back onshore. By keeping those earnings abroad, U.S. companies can indefinitely defer their day of reckoning with the IRS.

That can put firms in the peculiar position of having tons of cash offshore that they might need but can’t use at home without taking a tax hit.

The U.S. is the only major country that taxes foreign earnings of its own companies this way. American investors may not come out ahead either. In a 2007 survey of executives at more than 400 companies, Massachusetts Institute of Technology economist Michelle Hanlon found that the desire to avoid the repatriation tax led to a variety of distortions, most of which end up making companies less efficient.

Particularly noteworthy is that the United States is the only major country with these kinds of regulations.  That creates an unequal playing field and may result in more jobs being off-shored in the future.  Read more at:

The Intelligent Investor: Why Investors Can’t Get More Cash Out of U.S. Companies. Jason Zweig. Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 19, 2011. pg. B.1

The second article is a unique take on the “marriage penalty” that hits joint filers with higher income taxes than if they had remained single.  This one focuses on same-sex couples that have a recognized union according to state law but that is not recognized (because no same-sex union is) at the state level.

U.S. tax and property laws are so complex that unintended consequences are common. Here is one: Thanks to a 1996 federal law aimed at preserving traditional marriage, thousands of same-sex couples in California, Nevada, and Washington state could get big tax bonuses on their federal returns starting this year.

The bonuses are off-limits to heterosexual married couples—a sharp reminder of the “marriage penalty” that often dings two-earner couples.

The three states also now apply community-property laws to registered domestic partners. So the Internal Revenue Service—which must follow state property laws—has ruled that these couples should figure their total community income and split it down the middle, starting in 2010.

That is where the benefit comes in. Although domestic partners must divide their income equally, the federal Defense of Marriage Act prevents the IRS from treating these couples as married joint filers. So for 2010 and after, each partner will claim half the community income but still file as single or head of household.

The result, in many cases, is a federal tax savings because a couple will avoid the marriage penalty that often raises taxes for two-earner heterosexual married couples.

“We’re speaking in hushed tones about this benefit, trying not to call attention to it,” says Chris Kollaja, a CPA with A.L. Nella & Co. in San Francisco.

WEEKEND INVESTOR — Wealth Manager — Tax Report: Same-Sex Couples And The Marriage Penalty. Laura Saunders. Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 19, 2011. pg. B.9

Hulu Reworks Its Script as Digital Change Hits TV

January 27th, 2011 Comments off

Like music and telecommunications before it, the digitial revolution is set to hit TV hard in the next year or two.  One player that has emerged is Hulu, a joint-venture owned primarily by the companies that control the legacy broadcaster Fox, ABC, and NBC.  What is interesting is that NBC is now controlled by cable TV giant Comcast and Hulu may end up being a big threat to the cable TV industry.

Even before now, the culture of Hulu that has made it successful has clashed with the culture of its owners:

The partners hired Mr. Kilar, former general manager of Amazon.com Inc.’s North American media business, giving him autonomy to chart a new course. Mr. Kilar, 39, was determined to create an independent corporate culture closer to the tech world than the tradition-bound television business.

The company built a Silicon Valley-inspired startup in a low-slung office park in Santa Monica, a few miles west of its Hollywood owners. In the break room, engineers modified a refrigerator to house a beer keg, cutting a hole in it to fit a special tap in the shape of Hulu’s logo.

Mr. Kilar gave new hires a culture manifesto, an 1,100-word document that paints Hulu as a frugal meritocracy where “Fruity Snacks boxes hold up our monitors,” but where everyone has a “neurotic focus on quality.”

In an office expansion, Mr. Kilar and senior managers gave up their offices to sit at desks in an open floor plan among hundreds of employees, underscoring Hulu’s egalitarian approach.

It wasn’t long before the new venture clashed with owners’ established ways.

What is interesting to me is that Hulu may need a certain kind of culture like the one it has created but that may be prevented by those clinging to the past. Ultimately some company or group of companies will write the future of what TV looks like…the legacy players need to decide if they want to be part of that ride or not.  There has already been upheaval at Hulu (read the rest of the article linked below) as they bring in people with cable/satellite backgrounds to manage operations instead of people from tech/startup backgrounds that were running things initially.  This is a great example of how culture can impact a business, possibly negatively.

Hulu Reworks Its Script As Digital Change Hits TV. Sam Schechner, Jessica E. Vascellaro. Wall Street Journal. (Eastern edition). New York, N.Y.: Jan 27, 2011. pg. A.1

Is Chrysler Destined to Repeat Errors?

November 22nd, 2010 Comments off

The Wall Street Journal today had a piece about an effort by Chrysler to market it’s new Fiat 500 model by offering so many options for customers that they may be creating excessive strategic risks as a result. 

The car, which goes on sale in January, will be available in three versions—”Lounge,” “Sport” and “Pop”—offering 14 exterior colors, 14 seat colors, six wheel styles and a range of graphical designs that can be applied to the car’s body panels, allowing customers to make their Fiat just about the only one of its kind.

All told, there will be about a half a million combinations, Chrysler says.

The title of the article includes the phrase “options overload” to describe this situation.  The decision to offer customization of the Fiat is to try to appeal to those that want a car that is an exact fit for their wants or needs.  It ignores, however, the fact that most customers want to take their new car home with them immediately.  If that were not true, car dealers would not have 500 cars each on their lots tying up capital.  It sounds like Chrysler has done a nice job redeploying an existing plant to allow for greater customization, but they will still produce cars that are not special-orders to keep the plant running and that is where the risk lies. 

Too many choices also can leave dealers holding lots of cars but not the exact one a particular customer is looking for — a recipe for losing a sale, said Mark Rikess, an auto dealer consultant based in Los Angeles. That’s because most customers don’t want to wait for the model they want to be shipped from another dealer or custom-made at the factory.

“We are an instant-gratification society,” said Mr. Rikess. “About 80% of car buyers expect to drive off the lot with their new car that day.”

For the last several years, car makers have tried hard to bundle features so they can produce a dozen or so versions of a vehicle that will satisfy most buyers. That limits the complexity on the factory floor and dealership lots.

To allow customers to order specialized models, Chrysler has retooled the plant in Mexico where the 500 is being built. Scott Garberding, Chrysler’s manufacturing chief, said the factory has been set up to move special orders to the front of the manufacturing queue.

Suppliers have be asked to keep more parts on hand so they can more quickly build a seat or interior combination and ship it to the plant within a few hours, Mr. Garberding said. The plant also will use a paint system that will allow a faster changeover in colors.

Still, some customers may have to wait 30 days or more to get their custom-ordered car.

For those who don’t want to wait, the company plans to hold a pool of the most popular versions that can be customized with features added at dealerships, such as stripes and checkerboard decals on the roof.

Read more of today’s article at:

Options Overload for Fiat’s 500 — Buyers Offered 14 Colors, Six Wheel Styles, Decals; Will It Leave Orphan Cars? Jeff Bennett. Wall Street Journal. (Eastern edition). New York, N.Y.: Nov 22, 2010. pg. B.1

Furthermore, I was reminded of a couple articles from 2007 when I read about Chrysler’s plans in today’s paper.  I managed to dig these up thanks to D2L not being purged yet from way back when.  Both of these are examples of car companies not being focused on customer wants/needs…we’ll have to see if Chrysler can execute its strategy today to avoid the errors exhibited only a few short years ago.  Read these pieces for some examples of what has happened before when car companies have tried to guess what customers wanted and “orphaned” models lingered on dealer lots as a result (to be sold only after massive discounting).

Lots of Vehicles — Big Dealer to Detroit: Fix How You Make Cars; AutoNation CEO Sees Inventories Rising Fast; The Big-Wheel Problem. Neal E. Boudette. Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 9, 2007. pg. A.1

 One of the toughest problems facing the ailing U.S. car industry stems from Detroit’s century-old business model, which dates to Henry Ford’s mass production of millions of largely identical Model T’s. Rather than build cars to suit customer tastes, U.S. auto makers churn out what makes sense for their plants, and then use incentives and rebates to lure buyers.

Another piece about the auto industry not being focused on the customer.  This one is a letter to the editor that was in the Wall Street Journal in February 2007.  Same song, different day…

I Wrestle Chrysler for a Wrangler, Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 24, 2007. pg. A.5

Supervalu in Pricing Vise

October 20th, 2010 Comments off

Today’s Wall Street Journal had a piece on a local giant, Supervalu, and the tricky balancing act they need to pull off to successfully set prices amid cost increases, strong price competetion, and a stagnant economy.  Given that we are talking about pricing in class right now this is especially timely and grocers are among the most price competitive businesses operating on razor-thin margins with many cost leaders vying for business.  In a way, food has become a commodity and people are looking for the lowest price in many (most?) cases.  We can argue whether or not food being commoditzed is in the best interest of our population and country, but it is the reality that Supervalu (amongst others inclusing Walmart) find themselves operating.  The pressure is intense to remain profitable while juggling the costs and prices…

Earnings: Supervalu in Pricing Vise. Timothy W. Martin, Paul Ziobro. Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 20, 2010. pg. B.4

Starbucks Baristas Told “Two Drinks at a Time”

October 13th, 2010 Comments off

Starbucks continues to tweak policies and procedures for its employees to heighten the quality of its coffee while still efficiently using the time available to employees.  Last year, there was an article about the time-and-motion studies that were being undertaken by the coffee giant to squeeze extra seconds out of the preparation of each cup of joe, but an article today seems to put the brakes on that by outlining a new poliicy that requires more specialized work such as steaming milk for each drink individually and never working on more than one drink at a time. 

The new methods have “doubled the amount of time it takes to make drinks in some cases,” according to Erik Forman, a Starbucks barista in Bloomington, Minn., who says his store began making drinks under the new guidelines last week. Longer lines have resulted, says Mr. Forman, who is a member of the IWW Starbucks Workers Union.

Startbucks insists that eventually these kinds of policies will actually speed up the process of making drinks, but the employees quoted seem to the the opposite will be true. 

Starbucks insists the new procedures will eventually hasten the way drinks are made and lead to fresher, hotter drinks. Steaming milk for individual drinks, for example, “ensures the quality of the beverage in taste, temperature and appearance,” the company documents state, while focusing on just two drinks at a time “reduces possibility for errors.”

Instead of focusing on these changes in terms of time savings, if I were Starbucks I would put all of the focus on increased quality.  If people want fast coffee there are plenty of outlets for that (like McDonalds) but Starbucks should focus on differentiating itself to again be the town gathering place that just happens to serve coffee as well.  Their stores should cater to the “experience” rather than the product.  In other words, the experience should be the product. 

Over the last few years, Starbucks has been applying to the coffee counter the kind of “lean” manufacturing techniques car makers have long used as a way to streamline production, eliminate wasteful activity and speed up service. The company has deployed a “lean team” to study every move its baristas make in order to shave seconds off each order.

That team discovered that many stores kept beans below the counter, leading baristas to waste time bending over to scoop beans, so those stores ended up storing the beans in bins on the top of the counter. To boost the freshness of the coffee and to bring back some of the “theater” that had been lost, the baristas also started grinding beans for each batch of coffee, instead of grinding the day’s beans in the morning.

While they seem to be trying to focus on the quality and atmosphere, I thnk they risk confusing people as to where they fit into the marketplace by also discussing the time it takes to make each drink.  The article from last year (linked above) indicated a desire to go in that quality-focused direction. and today’s article mentions it too, but I’m not sure it offsets the dissatisfaction from the employees quoted in the article.  Of all the parties that need to be convinced that this is the right move, I’d say the #1 group is the employees.  Without their buy-in with the new policy it is likely to be ignored or followed in such a way that employees (and eventually customers) are dissatisfied.

At Starbucks, Baristas Told No More Than Two Drinks. Julie Jargon. Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 13, 2010. pg. B.1

Why So Many People Can’t Make Decisions

October 13th, 2010 Comments off

Decision making is a key component of strategic management accounting.  Nearly everything we discuss in class has to do with getting information so that people can make better decisions.  As I’ve posted before, however, there is a risk of information overload where filtering out irrelevant information becomes more important than having enough information to make a decision.  Also, a recent piece highlighted that consumers have an easier time making purchases if they have fewer choices.  In fact, having too many choices makes it less likely that they will purchase anything.

In that context, I found a recent Wall Street Journal article very interesting because it highlights the fact that people with certain personality types have a harder time making decisions.  Those that have high levels of ambivalence find it more uncomfortable and more difficult to make decisions. 

If there isn’t an easy answer, ambivalent people, more than black-and-white thinkers, are likely to procrastinate and avoid making a choice, for instance about whether to take a new job, says Dr. Harreveld. But if after careful consideration an individual still can’t decide, one’s gut reaction may be the way to go.

In contrast, people that see the world as black and white and that can easily fall on one side of an issue have an easier time making decisions, but whether or not those decisions are “better” decisions is less clear.   A certain amount of ambivalence is necessary and desired in leaders so that all points of view and options are considered but too much seems to indicate that negative aspects fog the view of the decision maker:

Every job has good and bad elements. But people who aren’t ambivalent about their job perform well if they like their work and poorly if they don’t. Dr. Ziegler suggests that black-and-white thinkers tend to focus on key aspects of their job, such as how much they are getting paid or how much they like their boss, and not the total picture in determining whether they are happy at work.

Black-and-white thinkers similarly may recognize that there are positive and negative aspects to a significant relationship. But they generally choose to focus only on some qualities that are particularly important to them.

By contrast, people who are truly ambivalent in a relationship can’t put the negative out of their mind. They may worry about being hurt or abandoned even in moments when their partner is doing something nice, says Mario Mikulincer, dean of the New School of Psychology at the Interdisciplinary Center Herzliya in Israel.

The conclusions in this article would seem to indicate that the “typical accountant” would be better at decisions than most since most accountants I know fall squarely in the “black and white” camp.  Still, I know from personal experience that I have a really hard time making decisions (even trivial ones) even though I see myself as a black and white, non-ambivalent thinker.  Perhaps my own view of myself is out of touch with reality or maybe I just don’t fit the mold…in either case there is a lesson here as well that things that apply broadly to populations may not apply to individuals within that population. 

The bottom line is that knowing how you approach decisions is as important as having facts to make a decision.  Being able to see the whole picture while still making a timely, effective choice is the key to those in leadership positions.  Before one can get to that point, he/she has to know that different decision personalities exist so that they can take measures to move to a better place where decision making is concerned.  Even after reading this article several times I’m still not sure what conclusion one is supposed to take from it…maybe it is just that I can’t “decide” what the article is about?!  Still I find it interesting to ponder the points in the article and I think that is enough reason to share it here. 

Why So Many People Can’t Make Decisions. Shirley S. Wang. Wall Street Journal. (Eastern edition). New York, N.Y.: Sep 28, 2010. pg. D.1 

Volkswagen to make U.S. push

October 5th, 2010 Comments off

The Wall Street Journal today has an excellent front-page article documenting some missteps made by Volkswagen in the United States market that has resulted in VW claiming a paltry 2.2% market share along with plans to turn that around in an effort to become the world’s largest automaker by the end of the decade. One of the ideas being implemented is designing, for the first time, a car to specifically meet American tastes rather than selling what works in Europe in North America in nearly identical form.  This is interesting to me because I’ve read elsewhere that Ford is taking the opposite approach trying to produce car models that are virtually identical no matter where in the world they are sold.  VW also risks, in the process, alienating the small but devoted following that it currently has.

“A lot of people worry that we are going to start making VWs for the masses,” says Mark Barnes, VW’s U.S. chief operating officer. “I like to say we’re going to bring the masses to VW.”

The retooled compact sedan marks the first time VW engineers have designed a model specifically for the U.S.

Next year, a new family-size sedan is scheduled to roll off the assembly lines at a newly built $1 billion plant in Chattanooga, Tenn. It is VW’s first U.S.-made car since the 1980s. On its heels comes a revamped New Beetle.

“I am fully aware that Volkswagen was too cautious for too long in North America,” Volkswagen Chief Executive Martin Winterkorn said at a test-driving event for the new Jetta in San Francisco this summer. His remark was a nod to the car maker’s decades-long penchant for deploying cars designed for European tastes across the Atlantic. That left its U.S. operations with models too small and expensive to go head-to-head with Asian and American rivals. Now, he vowed, “we have turned that upside down.”

Adding to the challenge is the constant change at the top in VW’s American operations:

Adding to the challenge is an unanticipated switch at the helm of VW’s U.S. operations.

In June, Stefan Jacoby, a blunt-spoken German who took to wearing cowboy boots to dealer meetings and car shows, left his post as U.S. chief to become Volvo Cars’ new chief executive. His departure came just a week after he presented the new Jetta at a splashy launch party in Manhattan’s Times Square featuring pop singer Katy Perry. VW bosses scrambled much of the summer to fill the void left by a key architect of its American comeback strategy.

Mr. Jacoby’s replacement, former General Motors executive Jonathan Browning, is new to the U.S. market, having spent most of his career at GM’s European operations and managing Jaguar under Ford Motor Co.

Some U.S. dealers complain that the revolving door of U.S. chiefs—Mr. Jacoby was the third to go in five years—reflects a culture at VW’s headquarters in Wolfsburg, Germany, that views the U.S. as a career way station, or worse, graveyard.

Assuming that the leadership and design challenges can be met, there is still the issue of getting Americans to notice.  Marketing has been ramped up to target certain demographics such as Hispanics and families, but the results thus far appear to be mixed.  Before reading this article, I didn’t even know that Volkswagen offered a minivan even though my family purchased a Toyota Sienna less than a year ago. In an interesting partnership with Chrysler, VW rabadges the American van as it’s own with some minor tweaks but production had to be halted due to low sales.

After dropping plans for a modern version of its Microbus for fear it would be too niche and costly, it signed a deal with Chrysler to modify and rebrand the U.S. car maker’s Town & Country minivan under the VW Routan name. VW tightened the minivan’s suspension, gave it a sleeker front end and kept it in the same price range as the Chrysler. With an ad blitz featuring Brooke Shields, it aimed to capture 5%, or 45,000, of the 700,000 annual minivan market.

But the Routan’s launch coincided with the auto industry’s nose dive in late 2008. So many of them sat unsold on VW dealer lots last year that the auto maker asked Chrysler, which builds them at its Windsor, Ontario, plant, to temporarily halt production. While much of the rest of the minivan market has rebounded, Routan sales have slipped 0.8% to 12,539 vans so far this year, one-seventh of the number of Town & Country sales in the same period.

VW officials argue that the Routan has enabled them to sell to a key new customer segment. The company still expects the Routan’s market share to grow as more consumers become aware of it as a minivan option.

But Casey Gunther, VW’s top-selling U.S. dealer, says the Routan isn’t what people expect from VW.

“It’s like someone trying to sell you a piece of chicken and claiming it was a steak,” Mr. Gunther says.

VW, he argues, could achieve its 800,000 sales target, “but we need to elevate the brand with products that play up our heritage,” such as the Microbus concept or VW’s sporty Scirocco, which it sells only in Europe. “There are so many people out there who love the lifestyle VW represents,” Mr. Gunther says. “I’m worried we’ve turned into a follower and not the leader.”

There are countless other great examples in this article that address things we discuss in class like strategy, international competition, product design, and more.  It is not a short piece, but is well worth the read when you have 10-15 minutes.  Seeing where things are at in 2, 5, or 10 years will be even more interesting.

Volkswagen Aims At Fast Lane in U.S.. Vanessa Fuhrmans. Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 5, 2010. pg. A.1

“Bolt-on” Merger Deals Dominate Business Scene

September 27th, 2010 Comments off

Piggybacking on the Southwest/AirTran piece I posted earlier, here is a video piece from The Wall Street Journal that touches on that strategic move along with few others.

Estée Lauder touches up makeup push

September 7th, 2010 1 comment

Estée Lauder has been mentioned in at least one class the last couple weeks as we have discussed strategy.  In that context, here is an interesting piece from today’s Wall Street Journal that talks about changes that are being made at department store cosmetic counters to revitalize the Estée Lauder brands with younger shoppers.

In an effort to reshape Estée Lauder’s U.S. department-store base, which is nearly one-third of the company’s revenue, executives from the company’s Clinique, Estée Lauder and MAC brands have been testing new counter designs that allow shoppers to browse on their own, new promotions and express lanes for busy shoppers.

“There is huge opportunity to restart sales growth and shopper traffic in department stores,” says Mr. Freda.

There are also some elements of cooperation between value chain partners highlighted in the article:

Shaking up beauty departments involves cooperation between cosmetics manufacturers and retailers, because the counters and sales staff is typically funded jointly in closely guarded agreements. Mr. Freda says the economic downturn has helped ease negotiations.

“The recent recession has opened up many companies—for sure ourselves and many of our retail partners—to be willing to put more dynamic change into the way we go to market,” he says. “We are cooperating, I believe, better than in the past in the area of change.”

Theory & Practice: Estee Lauder’s Counter Makeover — Cosmetics Company Touches Up Department-Store Sections With Express Lanes, Browsing Areas. Ellen Byron. Wall Street Journal. (Eastern edition). New York, N.Y.: Sep 7, 2010. pg. B.10