The first case for today was on the US Steel industry - where the average earnings by the employees is 27% higher than in other manufacturing industries. Some industries are held hostage by premium wages - some characteristics of these businesses are:
- Labor is organized and is economically able to strike
- Substitute labor is not available to the company during a strike
- Alternate sources for comparable products are available
- Businesses cannot be made competitive with new investments
Retirement options in many of these companies are quite generous. In fact in one US Steel company there were 13,000 employees and 74,000 retirees to take care of. Given the rising medical costs in the US, it makes these companies very unhealthy. The steel manufacturers were squeezed between the raw material suppliers and the unions.
How countries react to import tariffs is closely linked to politics as well. Here is the example: In 2002 the US imposed temporary tariffs of 8-30% on imported steel - in order to protect the US steel industry. Because of NAFTA, Canada and Mexico were excluded. There was widespread belief that the Rust Belt of Pennsylvania and West Virginia would benefit the most - one each won by Bush and Gore in the 2000 election, but were considered marginal states, which Bush aimed to win in the next elections. EU retaliated with counter tariffs - but not on Steel, but on Citrus from Florida. Wonder why ? Because it was state in which Bush barely managed to win and it titled the overall votes in his favor for Presidency ! In the wake of WTO ruling these tariffs as protectionist, Bush withdrew the tariffs in late 2003.
To American unions, globalization is a force that has wiped out the jobs of millions of well paid blue collar workers - hence they fight for higher wages and cradle-to-grave benefits. This has killed many industries in the US. Some unions are lucky - a good example are the dock-workers of the West Coast, who load and unload cargo ships; these guys make over $100,000 per year and get full health care benefits for life. Because of their good pay, they can easily endure a prolonged work stoppage. Management cannot afford this, as it affects almost $300b in cargo that flows through these docks every year. One not so pleasant example is the Detroit's dysfunctional system of paying employees not to work, which has been well chronicled. (See http://wsjclassroom.com/archive/06may/auto2_jobsbank.htm for more details on this)
One always associated unions with communism and communist countries. It is revealing to learn that unions are so powerful in many parts of the capitalist economy - including US, Germany, Netherlands, Italy, Spain ... the list goes on.
The second case was on "Operations for customer experience: Blending empathy with execution", which was discussed through a case on Cleveland Clinic, which is one of America's top hospital chains. They are famous for many medical first. The most innovative idea to me, was their logic of not charging tuition fees in their medical college. The logic is noble - to quote their CEO, " The average debt for students graduating from private medical schools, such as this, is more than $150,000, making many graduates less likely to pursue careers in academic medicine. By providing full tuition support, we want to ensure academic careers as physician scientists".
"The patient is not only an illness .. he has a soul" - Dr. Favaloro, Cleveland Clinic surgeon who performed the world's first coronary bypass in 1967. Normally health care outcomes are judged according to a narrow scientific measurement of the procedure outcome in terms of solving the illness. In reality, the broader success should be judged according to how the patient was treated in terms of the overall patient experience - including empathy, treatment and caring. Every visitor to a hospital is scared - and how the doctors and staff treat the person makes all the difference.
Service and experience is already becoming extremely important to many parts of the economy. This requires organizations to think differently in terms of : Measurement criteria, Rewards and incentives, recruitment profiles, Infrastructure and processes.
Good customer experience = Flawless execution x Empathy
While focusing on processes, it is quite important to articulate the recovery process, in case something goes wrong. And things will go wrong. A good recovery is more likely to convert a customer from a detractor to a promoter easily than the effort required to convert a passive customer to a promoter. This is useful for organizations which use Net Promoter Score (NPS). See http://www.netpromoter.com/np/calculate.jsp for more details on this.
There was a mention in class today about Baumol's theory of 1967 related to services industry. The concept and the fact that it was written so many years back, forced me to do some more research on the Internet. It is fascinating. Here is a small preview of this - called the Baumol's disease
What is Baumol's Disease?
Post World War-II, many industries went through a revolution of factory automation. Manufacturers could automate parts of their manufacturing processes and drastically increase their productivity. Productivity here as the cost of manufacturing a product unit divided by the labor cost required. Productivity increased when products could be manufactured through automation with less labor. This resulted in great displacement of manufacturing workers along with a decrease in the cost of manufactured goods.
Baumol addresses the economics of this displacement with a model he calls the Unbalanced Expansion Model. According to him, there are two kinds of activity sectors:
- Sector 1: The progressive sector consists of activities such as manufacturing in which productivity is increasing rapidly due to innovations such as automation.
- Sector 2: The other is the non-progressive sector containing activities that are not becoming more productive, such as most service activities. These include education, health services, governmental services, and many others.
Today, we can include IT and Health care in the second category. Many activities performed by educated professionals cannot be automated. Baumol points out that a string quintet composed by Mozart still needs five musicians for a performance, the same as in 1787. The two sectors have experienced very different rates of productivity growth and are therefore unbalanced.
The consequences are great. Many people who work in the progressive sector lose their jobs to automation. Those remaining can be paid more because the automation has saved their organization enough money to raise salaries.
The non-progressive sector cannot increase its productivity but its wages go up nevertheless because of rising wages in the progressive sector. The non-progressive sector's services, therefore, become more and more expensive because the increasing labor costs are not offset by innovation and automation. Because fewer workers are needed in the progressive sector, the number of people in the non-progressive sector grows.
From an impact perspective, if we believe in this theory, then the following will be true:
- Services will become a larger portion of the GDP
- More labor will be working in the services industry
- Public spending by governments will increase, resulting in larger deficits
The last session was on Spain. Again a very difficult situation here as well. Declining GDP, unemployment at almost 20%, decline in government revenues and increase in government expenses - all this resulted in budget deficit being 11.4% in 2009. Is this another Greece in the making ? While the EU can bail out Greece, Spain is four times the economy of Greece. Is this a threat to a Euro ? Time will tell.
Today we had a rotational group dinner by citizenship - all the Indian AMPers have decided on the next meeting in India - Mumbai Jan 17th 2011. And the convener is Farhan Pettiwala (Norfolk Mechanical ) and the host is Jyoti Narang (COO - Taj Group of Hotels). Fantastic.
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