Browsing the blog archives for December, 2014.

Running the Government like McDonald’s

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Government can learn a lot from business. Most private companies get their revenue primarily from customers so responsiveness is not an option. Keeping customers happy and cutting expenses are essential. Continuous improvement is the norm. Consider the case of McDonald’s.

During the last decade, McDonald’s added a lot of new products, including oatmeal, snack wraps, and lattes. The company doesn’t release specific data, but one estimate identified an increase in the total number of offerings from 85 to 121 between 2007 and 2014. Each new product was intended to expand service. Who can argue with more choices?

There was a problem with this approach. Each new product required a new station for preparation, new training procedures, and additional labor. Collectively, these changes broaden the responsibilities of employees, crowd the food preparation area, increase inventories, lengthen waiting times, and raise costs, all of which have hurt the company’s ability to deliver Big Macs, fries, shakes, and other staples. Rivals like Five Guys, Chick-Fil-A, and Chipotle Mexican Grill are smaller and more focused, and have lured many customers away. As a result, McDonald’s just experienced the sharpest decline in same-store sales in 14 years.

There’s a simple lesson here for business: Sometimes less is more. But government can learn from McDonald’s as well. The Constitution underscored the notion of limited government, giving Washington certain, specific responsibilities. As stated in the tenth amendment: The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people. Sticking to a short list was intended to keep Washington focused and responsive. A government involved in fewer activities should have an easier time keeping its eye on the ball and doing those activities reasonably well.

Like McDonald’s, governments at all levels—especially in Washington—have expanded their reach over the years. Amidst the massive continuing resolutions required to keep the behemoth moving, government waste and cronyism have soared to an all-time high. McDonald’s responded to its crisis by announcing the elimination of eight menu items—about 7% of the total. More might follow, but eight is a start. With an $18 trillion nation debt, why can’t Washington take similar action and eliminate 7% of its spending?

Some will disagree; I’ve heard the rejoinder many times: “You can’t compare government to business because you can’t run government like a business.” There are certainly differences, but the principles associated with managing both entities effectively are quite similar. Besides, if you don’t run government like a business, then how do you run it?

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Obama & the Business Roundtable

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The Business Roundtable (BRT) is a group of US CEOs that seek to promote pro-business government policies. My review of the BRT is mixed. Some of its positions, like the group’s support for “comprehensive immigration reform,” are just plain self-serving. In fact, the notion that CEOs and the President should “work together” to solve our nation’s problems might sound good to some, but it’s a recipe for cronyism.

My concerns aside, President Obama addressed the BRT on Wednesday and made some interesting comments:

http://www.whitehouse.gov/the-press-office/2014/12/03/remarks-president-business-roundtable

The last 2 paragraphs before Q&A were particularly revealing:

But, domestically, the area where I have the deepest concern is the fact that although corporate profits are at the highest levels in 60 years, the stock market is up 150 percent, wages and incomes still haven’t gone up significantly, and certainly have not picked up the way they did in earlier generations. That’s part of what’s causing disquiet in the general public even though the aggregate numbers look good.

And one thing I’d like to work with the BRT on is to ask some tricky questions, but important questions, about how we can make sure that prosperity is broad-based. I actually think when you look at the history of this country, when wages are good and consumers feel like they’ve got some money in their pocket, that ends up being good for business, not bad for business. I think most of you would agree to that. And we’ve got a lot of good corporate citizens in this room; unfortunately, the overall trend lines, though, have been, even as productivity and profits go up, wages and incomes as a shared overall GDP have shrunk. And that’s part of what is creating an undertow of pessimism despite generally good economic news.

The President is arguing that CEOs have a responsibility to be “good corporate citizens” and increase wages when profits and stock prices increase. When they don’t, a “disquiet” and “undertow of pessimism” develops in the populous. He’s wrong for at least 3 reasons:

First, wages are—or at least should be—determined by the market, not profits or stock prices. Companies pay workers what is necessary to get a job done. Companies don’t increase wages because profits increase. If this were true, then wages would fall at a company when profits decline. The market simply doesn’t respond this way.

Second, shareholders incur risk that typical workers do not bear. Companies that lose money still have to pay their workers—or lay them off; their shareholders suffer the consequences. Workers wishing to share in the bounty of anticipated company growth should become shareholders and accept the risk. You can’t have it both ways.

Finally, Obama only mentioned profits, share prices, and wages. He neglected to address the myriad government policies and regulations that discourage companies from hiring workers. Whether it’s Obamacare, his higher minimum wage proposals, or his support for amnesty for illegal immigrants, Obama’s policies—not corporations—have created the “disquiet” and the “undertow of pessimism.”

The President’s comments reflect a continued misunderstanding of how business can and should function.

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