Shareholders of JP Morgan Arguing Over the Wrong Things

Shareholders of JP Morgan are having the wrong argument.  The discussion over splitting the roles of Chairman and Chief Executive Officer is all about performance and trust.  Do they still trust Jamie Dimon?  Do they still believe he is the right man to lead JP Morgan?  If the answer to either of these is no, then they need to advocate to the board to terminate him.  Splitting the roles of Chairman and CEO does nothing except put Jamie Dimon into the position of resigning.  Splitting the roles is a clear vote for either losing faith in his leadership, or believing he’s doing a bad job.  Let’s talk about those issues, not worry about what titles he has.

Shareholders would do well to take his tenure in total, and to recognize a few things.  Mr. Dimon and his team led their institution through the greatest economic downturn in our life times and the second worst downturn in the past 100 years.  Not only did they weather the storm well, they were able to regain enough financial strength to absorb a multi-billion dollar trading loss from “London Whale.”  That’s a remarkable feat.  

You may be of the opinion that Mr. Dimon should have known about the Whale and stopped it.  He runs one of the largest companies on the planet, not just one of the largest financial institutions.  No matter how many safeguards put in place, there cannot be perfect oversight of a company’s employees once the second employee is hired.  How many parents fail to steward their children effectively when they’re in the basement with friends, let alone from another continent?  

That being said, Mr. Dimon is Chair and CEO.  He must accept the failure of his people and processes.  I am not one who believes he should lose his job over the Whale, but his compensation and his discretion of action should be restrained by the board.  The board must act, regardless of what titles he holds.  It would behoove both the board and Mr. Dimon to provide transparency to their deliberations and to their methods of oversight and control of management.  This is simply good governance.  

The issue isn’t over titles.  The issue is over performance, trust and governance.  Let’s get beyond the semantics of titles and see action from the company and board that address the root cause issues.

If Only Ron Johnson Had Been a Lean Enterprise CEO…

If Ron Johnson had been a Lean Thinker, it’s possible he’d still be running J.C. Penney and leading a historic transformation.  Instead, he missed the most critical element needed to lead a transformation:  the Voice of the Customer (VOC).  He’s not alone in making this mistake.  I learned the hard way what it means to miss the VOC or to mistake a customer’s desire for their need.

In the late 1990’s while president of Wabtec’s freight group, we heard again and again from our railroad customers that they needed electronic brakes on railcars.  We diligently “listened” to our customer, as one is taught to do from the beginning in business.  We and our chief competitor dumped tens of millions of dollars into R&D and acquisitions of technology companies in the pursuit of a suitable electronic braking solution.  More than ten years later, there is only one fully electric braked rail line in North America, and it is in a captive mine.  What did we do wrong?  We failed to understand the VOC and the need of our customer.  When we worked harder to understand those needs, we discovered their true need was to stop their trains faster.  With faster stops, they could convince the Federal Railway Administration to allow them to run their trains closer, therefore increasing the capacity of their existing rail lines.  Simple, but so hard to “hear”.  We “listened”, but didn’t “hear”.  Our customer was telling us the solution, not the problem.  They were telling us an answer based on their knowledge of available solutions.  Once we understood their need, we were able to design an elegant solution that doubled the rate of signal propagation in a train’s braking system, thus cutting braking time in half, while using standard rail cars.

Ron Johnson clearly didn’t “hear’ his customers.  I’m not sure he even tried to listen.  His core customer was a different buyer than those who purchased from Apple.  They were also different from the customers he had experience with from Target.  He took a model that worked with a different set of customer needs and tried to apply it to a very different set of customers.  Had he spent more time truly understanding the needs of his customers, he would have made very different merchandising and pricing decisions.  His customer’s needs went beyond price to emotion.  Listening to frequent and loyal JCP customers’ interviews, you hear regularly that not only was price important, but they wanted the sensation and emotional lift from “getting a deal” through a regular program of specials and discounts.  There was an emotional need that wouldn’t be satisfied by simply assuring every day low pricing.  His customers were likely heavy users of services like Groupon.  Instead of understanding that, he thought of them through a Target style lens.  His best bet would likely to have been to meld the specials mentality with that of Target’s core shopper mentality, which is a willingness to pay barely more than Walmart for higher quality goods, and the pleasure of not being seen at Walmart.

Truly investing in understanding customer needs is a difficult and involved process.  It is crucial to any company.  It is essential for survival, whether you’re thriving today or struggling.  It enables the company to use data and focus to create products and services that provide distinct competitive advantage over other offerings.  It forces all layers of a company to remain close to the customer and their needs, and to focus resources on uniquely fulfilling those needs.

The “Tortoise” of Manufacturing

Since John Stevens test rode a locomotive around a track in 1825, the railroad industry has provided the backbone to the industrial revolution and certainly remains one of the critical workhorses of the U.S. manufacturing industry today.  Perhaps the greatest physical feat of 19th century America was the creation of the Transcontinental Railroad.  But bring up investments in the railroad industry at your next cocktail party and you’re certain to get yawns, at best.  Like the tortoise in the “Tortoise and the Hare”, railroad stocks have continued to chug along at a steady, albeit cyclical pace, lacking the excitement of the growth stocks of other industries.  But Warren Buffett and Schilling Ventures agree… steady is not so bad these days and given the current combination of high oil prices, finite energy resources and the dire need for U.S. infrastructure spending, we believe railroads could become the growth stories of the near future.

Not since the day President Dwight D. Eisenhower signed the Federal-Aid Highway Act of 1956, which spurned the construction of possibly the “greatest public works project in the history of the U.S.” has our nation been in such dire need for infrastructure spending.  The American Society of Civil Engineers has been sounding the alarm about the nation’s deteriorating infrastructure for years.  A report they issued in early 2009 paints a bleak picture of the state of the nation’s transit systems, giving rail and aviation specifically a “D” grade.  Though budgets are tight in Washington these days, investment in our crumbling transit systems is critical to the growth of our overall economy and should be considered a “smart investment”.  According to ASCE, absent an additional $1.57 billion per year in infrastructure spending, including surface transportation, between now and 2020, the US stands to lose “$3.1 trillion in GNP, $1.1 trillion in trade, a $3,100 per year drop in personal disposable income, $2.4 trillion lost in consumer spending and a little over 3.1 million jobs.”

But why invest in rail?  Despite seeming bulky and antiquated, railroads should be considered an efficient means of transport going into the 21^st century.  Rail actually has dramatically higher energy efficiency numbers than trucks or airfreight… to the tune of 400 ton-miles per gallon of fuel, compared with 200-300 tons for trucks, according to the Rocky Road Mountain Institute.  And in terms of fuel consumption, they are more than 10 times as efficient as trucks and 30 times more efficient than airfreight according to the Department of Energy.  Stephen Leeb, editor of the investment newsletter Complete Investor, says “In a world of high oil prices and potentially scarce energy resources, betting on railroads and on the infrastructure to improve them makes a lot of sense”.

Taliban Leadership Lessons?!

As I read an article in The Wall Street Journal about the Taliban’s growing control and influence over major portions of Karachi, I remarked about how desperate life must be for those involved.  Either desperate in terms of their need and therefore willingness to support the Taliban, or desperate in terms of oppression and helplessness under their “rule”.  A most remarkable quote was from a milk merchant, “The Taliban steal from us, but then get our money back when others steal it.”  I then thought about what lessons and parallels can be learned for business leaders.  Here are a few thoughts.

1. Why do these “take-over’s” occur?  There has to be a leadership vacuum.  In that leadership vacuum, there is a lack of execution by local managers to satisfy the needs of their constituents.  Much the same as in business; if you’re the incumbent supplier to a customer and fail to continue to satisfy their needs in price, quality, delivery, etc, you open the door to a competitor arriving and satisfying those needs.  Clearly, the Karachi governmental leaders have woefully failed their customers.  The Taliban are filling the vacuum.
2. Local behaviors will always trump centralized behaviors.  The central counter terrorism police commander is quoted along the lines of “over my dead body” about the Taliban gaining a foothold.  Neighborhood residents are quoted as saying they rarely see a police patrol.   The Taliban are first responders to peoples’ needs, while the police don’t respond at all.  Clearly, the central commander is out of touch with his customers.  He’s also attempting to placate their needs with words.  Local action by the Taliban is eliminating any semblance of central control.  For business leaders with multiple locations in particular, this is a crucial point.  Leading from “corporate” isn’t leading.  Local manager’s actions will always trump corporate platitudes and programs.  Even in single location businesses, decisions by those more “local” to the work will always trump those issued from the head office.
3. Given the power of local decision-making, what is a leader to do who has more than herself to manage?  A great mindset is the one called out by, “Think Global, Act Local”.  This was originally an environmental call out, but it has real value in leadership thinking.  It is the underpinning of Strategy Deployment, and why that methodology is essential to success in any setting.  Strategy is the “global”, while strategy deployment and daily management are the “local”.  Using this methodology to link people’s local actions with the global strategy creates a process based “control” on outcomes.  This makes it highly visible when local management isn’t taking the proper actions to satisfy their customers’ needs. It also has a Lean Compass to underpin the cultural behaviors expected of both local and global managers.  This is something the Taliban and many other organizations both political and economic have deeply understood.  Combining a global culture centered on certain values with clear expected behaviors creates a tightly knit ethos for action.  The Taliban’s goals and values are reprehensible, but they are clearly elucidated and the behaviors in support of them are also quite clear.  They then combine this with highly responsive local action to gain strong support.

In a nutshell, they have a strategy, have clear actions to support that strategy planned out, and relentlessly pursue local actions to support their intended outcomes and satisfy their customers’ needs.

Welcome to The Industrial Leadership Blog

It’s taken a long time to get us convinced to start a blog.  My first reaction was, who would want to read what we have to say?  Enough people have been kind enough to mention articles we’ve written or pieces from our newsletter to convince me that we sometimes have something worthy of discussing, so here it is, our inaugural post.

 Schilling Ventures is born out of a desire to do things differently.  We want to lead U.S. manufacturers to competitive advantage in global markets by embracing a Lean Enterprise Culture.  We want to take what we learned about M&A transactions from top quartile private equity professionals and marry that with what we learned about exceptional execution on strategy from world-class companies.  Finally, we want to make this marriage one of long-term success.  We think in decades, not quarters.  We don’t want to be burdened by fundraising or the pressures of quarterly analyst calls.  We want to focus our energy on disciplined deal making, and exceptional execution on our strategy post close.

We also look for our own deals, not for deals put to auction.  This creates a lot of “pain”.   We face dealing with inexperienced and ill-advised sellers.  Very often, they’re not real sellers.  Getting the information we need is onerous and time consuming.  We do our own market, competitor, technology and customer research; there’s no investment bank doing this work.  The good thing, though, is that we develop a deep understanding of the business through the courtship process.  We also have no buyer’s remorse; we weren’t the high bidder in an auction, we were a fair bidder that built trust into the transaction with the seller.

We look forward to sharing our views on the economy, general business, leadership, our industries of interest, and perhaps a bit of politics to challenge the discussion. We intend to use this blog as an exchange between our team and our readers. Please follow us, we encourage comments and posts to our blog.  Now please sit back, relax and enjoy the flight.

Do You Know What’s in Your Drinking Water?

Most people prefer to drink bottled water because of its convenience, taste or quality.  However, not often realized is the way in which they are regulated.  The Food and Drug Administration (FDA) regulate bottled water, and tap water is regulated by the Environmental Protection Agency (EPA).  While the FDA is ordered to strictly follow EPA standards of safe drinking water, differences do occur.  The EPA and FDA are regulate 96 and 91 chemical, physical radiological and microbiological contaminants, respectively.  There are, however, 11 contaminants that are regulated in public drinking water that are not regulated in bottled water, and 4 contaminants regulated in bottled water that are not regulated in public drinking water.  While a net difference of 7 contaminants exists in favor of public water, the content is worth exploring.

One glaring difference remains in the way microbiological contaminants are handled.  Since the “Bottled Water Microbial Rule” took effect in December of 2009, bottled water is now regulated against E. coli with specific requirements for follow-up monitoring in any positive test event.  The EPA currently has no enforceable standard E. coli in source waters.

Regulations within the industry will continue to change, and the private sector will have little to say about it.  We are fortunate enough to have plentiful and safe drinking water all throughout the United States, no matter what the regulations may call for.  Most other parts of the world struggle to find abundant sources.  While we may not be capable of changing industry standards, Schilling Ventures believes in employing continuous innovation to make adequate technology readily accessible.  We believe that improved water treatment processes will make regulations less polarizing in the U.S., and water supplies less scarce in developing parts of the globe.