The Market Meltdown & The Question of Trust

18 Comments

Over the weekend, I ended up on San Francisco’s ritzy Fillmore Street. I stopped by to say hello to my dry cleaner and then to Ed Nahigian, a gentleman who has been taking care of my footwear since I moved to San Francisco. As with everything else, the conversation turned to the market meltdown and the pending auto-industry bailout. From our conversation emerged some common sense advice that’s applicable to business of all shapes and sizes.

Nahigian is one of the nation’s millions of small business owners and has been around longer than most Web 2.0 entrepreneurs. In other words, he knows what he is talking about. He was fuming over the idea of Detroit bailout. When I asked Ed, what was the secret of his success and his survival for nearly three decades, he was quick to point out: trust. As long as a customer trusts his work, (s)he is going to come back. It’s good advice that works, even in this interconnected world of ours. It is easy to find success. It is easy get users to trust your service. But it is hard to maintain that level of trust.

It is not just Detroit, for we have lost trust in the banking system, our financial stewards and to a large extent in the abilities of those who we elect to govern. Trust, or lack there off is why a bank as big as Citibank was staring down the abyss and had to go to the US government from help

As someone who was always attracted to the American Way, it is easy enough for me to figure out that since World War II, the U.S. economic engine has worked on the basic tenet of planned obsolesce. The idea was actually very simple: Consumers would replace their goods with either beefier products or more stylish gear or gear with more features. They would do so because they would trust the quality of the merchandise coming from a company.

As a company management, it was your job to understand consumer’s desires and plan for the future. But somewhere along the line, a lot of companies forgot three basics of building a good business. These basics are looking at the future, earning customer trust, and managing the business well. Detroit gets an F for its efforts on those three counts, and hence are in trouble that they are in. 

In our backyard, there are two computer makers that have done a good job of executing on those fronts — Apple (s APPL) and Hewlett-Packard (s HPC). Apple and HP have done a good job of predicting their customer needs and built a product portfolio that has style, quality and (more importantly) taps into the primal urge of consumption. These two companies have held their own in a tough market and met their financial projections.

In comparison, Dell (s DELL), which was at one time the champion of the PC business, last week reported a 3 percent decline in revenues and a 5 percent dip in net income. Dell gets 60 percent of its revenues from PCs, while HP gets about 33 percent of its sales from computers. PC sales are expected to slide drastically next year, according to some estimates. Dell’s predicament is no different than automakers who relied too much on trucks and gas-guzzling SUVs. It shows that no matter how big a company gets, it shouldn’t get arrogant in its success and forget who butters its bread. 

Ed’s common sense advice is something all of us startup guys should adhere to.

Photo courtesy of Gmonster25 via Flickr.

18 Comments

rloughery

Om the part I took to heart is how we can learn and sometimes look to “traditional” businesses for lessons. And a lot of times its the small enduring ones that we can learn the most from. This past spring I did a quick post on the shutting down of VideoEgg’s YouTube like offering. The post was titled “Quality is Remembered, Cheap Prices are Long Forgotten.”

The idea for the post came to me while I was driving through a very very small town in central Pennsylvania and I noticed a sign on a little furniture shop that had that saying.

My thoughts were around how a service like VideoEgg was a quality service but ultimately it’s model didn’t prove out. And how we put a lot of trust in start-ups, (trusting them with our pictures, video, documents) and if this is too precarious? Or should we trust the established tech companies more…. Anyway good post and important lesson, Quality and Trust. No business can possibly succeed without it.

Charles Green

As someone whose work focuses on trust, I read your post with great interest.

I find trust failures are of several kinds. Venality is often at the heart of financial trust issues; no surprise, since financial institutions often deal with money itself. Short-term-itis is visible on industries built on immediate gratification, e.g. short-term sales, consumer goods.

The auto industry is a severe case of basic, rockbottom competency. It is the East Germany of American industry. Have a look at my own blogpost on this subject at
http://trustedadvisor.com/trustmatters/451/Do-You-Trust-Detroit

I suggest some more radical solutions than those generally discussed.

Thanks for a thoughtful blogpost, and an equally thoughtful set of responses.

ronald

@OM,
the problem is how to prevent it in the future. And how to get there without breaking everything today.

I think a good starting point would be a new 21st century definition of Monopoly. Like, to big to fail, is a good starting point.
Rethink the model of Economy of scale, diversity is good in the long run.
Do not allow the selling of math equations describing a fictional product. That’s what our “smart” financial Institutions basically did, after they run out of ideas on how to produce real products bound to real Money.

Om Malik

@weldon,

on the issue of planned obsolesce, i think you answer your question yourself. For the longest time, marketing and messaging were a way for making things obsolete and hence forcing us to think about buying the shiner, newer thing. Quality, remained a constant and there was belief that certain brands stood for quality. I think now the focus went on marketing only, and the focus shifted away from quality.

Think about it this way — most people want to buy american cars, except they don’t know if they can trust them. Or find them stylish enough It is the crisis of confidence in the auto makers and now in big banks.

@Mike Puchol

I agree with you – bailing out poorly run organizations that are themselves to blame for the problems doesn’t make sense. However, i think one needs to be pragmatic about the impact on hundreds of thousands of people who are unwilling victims of the stupidity of their senior management.

weldon

@Mike Puchol – just to make your point more strongly, Detroit is already paying workers to stay home and the state pays unemployment too. UAW contracts keep unproductive workers in “job banks” getting paid to do nothing, or Detroit pays more than half their wages (for 6 months?) after a layoff, and the state picks up the rest. This NY Times article explains how Honda is more responsive to changing consumer preferences because their modern factory lines can switch from making Elements to Civics fairly quickly. http://www.nytimes.com/2008/07/03/business/03auto.html?fta=y&pagewanted=all

Mike Puchol

What I fail to see is why does the government have to bail out the financial institutions? Why doesn’t it become a financial institution itself (which it already is – sort of), to bail out the people in real trouble? That is, businesses who cannot get financing to carry on their work or expand, people trying to get a mortgage to buy a house. If there are banks and lenders who face the chopping block – let them take it. Others will come to replace them. What the fed is doing is replacing the imaginary money that has been ‘created’ with real, hard currency. This money, eventually, will have to come from somewhere, and this can mean a number of things, from a much weaker dollar to huge national debt. In any case, I think the people who drove these business into needing $700bn in aid should go to prison, never mind take pay cuts!

Regarding the auto industry – again, if these companies have been miss-managed into extinction, and were supporting thousands of imaginary jobs, how is government money going to help? Will they dump the SUVs right off the production line into lake St. Clair? Or will they instead pay people to stay at home? In any case, it doesn’t speak much for capitalism.

@Manish J: BusinessWeek’s Daniel Goldstein also gave Apple two years until they shuttered their retail arm when they opened the first store back in 2001. Facts prove he was dead wrong – and so are you.

winston lawrence

If I took out insurance on your house or every house on your block without having any financial tie to you OR that property and then if the insurer sold insurance on your house to everyone that wanted to pay the premium how long do you think it would take before your house had an accident?

Trust has little to do with the current situation the current govt’s active role in deregulating and actively refusing to regulate these big financial entities and their complex Ponzi schemes are what is now landing us in this mess. So the govt last month nationalized the banking industry, the auto industry is next, maybe the airline industry after that – so now we just trust the govt. right?

weldon

I want to comment on two quote from your piece…
“…the U.S. economic engine has worked on the basic tenet of planned obsolesce.” – I think this skirts the issue.
“…and (more importantly) taps into the primal urge of consumption.” – agree with this statement completely.

“Planned obsolescence” implies that manufacturers design products to purposely fail. It makes me uncomfortable because it seems to place the blame on manufacturers for conspiring to defraud innocent consumers by not releasing the best products that they are capable of producing. I have more faith in the open market to weed out bad products and reward companies that make good products. There’s still a trade-off between making products that don’t fail and products that people can afford, but I don’t think companies intentionally cripple products so you have to buy a new one in a year or two.

However, I agree that the American economy is driven by the need to buy more and more stuff, as you touch on in the second quote. Consumerism has driven the economy because Americans feel good about themselves based on what they own. And marketing has convinced us that owning “new” stuff is better than owning last season’s “old” stuff, be that clothes, cars, or consumer electronics.

I had a professor in college that argued that consumerism arose out of a psychological need to redefine self-worth because assembly-line manufacturing created too much distance between workers and the product of their labor. I wrote about that a couple years ago on my blog here… http://rewindblog.com/2006/11/consumerism/ (the lecture itself was about 20 years ago)

Om Malik

@Ronald,

I agree with you — the hardest thing to do is say no to bandaid solutions but say yet to long term future options. I think prevention is the best option and that unfortunately is something our society of instant gratification doesn’t quite reward.

ronald

Way to much short term thinking, Be it for shareholders, next quarters results. Or Management team pockets, avg. 2 year on the job as CEO.
Now this is not the 19th century anymore where even large share holders where long term investors. Money is moved with the click of a mouse. This leads to Money being moved on short term impulses, not analytical facts. Which leads to a negative feedback loop, so Management does what every young Engineer does, at least ones. Over optimizes (short term profit), which in massively connected system will certainly get you into big trouble.

But the real problem is, the people in charge are still acting like young Engineers. Fighting fires instead of developing a plan to stop fire fighting and make sure it will not happen again. Everybody who has been in this position knows, stop fighting fires after you have started doing it, is really hard to do. It seems so logical to step on the the flames and the next one and ….. We need some experienced supervision. First thing teach every Economist engineering 101.
Where do Economist learn math? Or is economy like quantum physics, if the equation doesn’t work. Just add another dimension, maybe somebody else figures out if the dimension exists.
Or we could go into the illusion of more data equals better information. I will get a coffee instead.

jim

@ Manish: I agree with Om that you’re dead wrong about Apple. The Apple customer is not cutting back when it comes to Apple products. Apple’s product price points are well-thought out in that the customer perceives value when Apple does things like drop the iPhone price to $199. It is still high in comparison to other phones but Apple has created such pent up demand for it that at the “lower” price, customers open their wallets. This is true for their laptops as well. This strategy seems to be holding water even in the current climate.

Om Malik

@Manish J

I think you are absolutely wrong about Apple. The fact is they built a product (or series of products) that predict the wants of their consumers — not quite the 90% of the masses that buy Windows PCs — is one of the reasons why they keep selling their devices. I think they have a lower priced offering – $199 phone – which even today is selling briskly on the shelves. They are focused on a market segment — regardless, through the big downturn of 2001-03, apple did just fine.

On people going for more affordable computers, I agree with that logic. Perhaps that is why I expect them to sell tons of macbooks and not as many pros over coming months. As for the net-books are all noise as of now, and a lot has to happen before they gain some value.

Om Malik

@kowbay,

actually your comment doesn’t make much sense. if you didn’t trust a product, you wouldn’t buy it. if you didn’t trust a service you wouldn’t pay for it. and companies that can’t be trusted are going to lose in the market place. i think it is a truism that would hold as long as there is a consuming-society around us.

Manish J.

Om,

It comes down to trust and knowing what your customer wants, customer is king.

I’ve been thinking lately that Apple is sorta going down the path of the American automotive industry – build products that THEY think consumers will want. Steve’s arrogance around the iPhone and not building a cheap computer is similar to the big SUV’s that Motown has been cranking out. Add to the fact that the retail market is getting hammered, we’ll see how good the Apple Stores hold up over the next 2-3 quarters.

The current economic environment points to people not upgrading computers and going for ones that are more affordable, why not build a cheap netbook and a USD 99 iPhone to rock the market and change the game yet again. I know, I know Apple is all about going after “that consumer” that can afford it’s products…those same consumers are cutting back.

kowbay

I don’t see this “common sense” concept has legs. It’s been around for ages, never gotten any backing. Not even Ballmer would bid on it. Best stick to 21st century stuff, Om.

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