Cost - Be Flexible With Selecting And Employing Resources

Detroit fell in love with robots in the 1980s. Led by GM's Roger Smith, robots seemed to offer the promise of improving quality, eliminating dangerous jobs, and making Detroit more competitive with Japanese manufacturers.

However, robots of that era had some drawbacks. If you wanted to shift the robot to do a slightly different task, the setup time wasn't very fast and engineers had to make the changes. When the robot's purpose was to eliminate lower cost jobs, the savings often weren't so great.

In addition, the robots tied you into assembly-line methods in many cases. Because technology was advancing rapidly, the robots also had to be replaced pretty frequently with better robots.

By contrast, robots make a lot of sense for exploring Mars. It's much more costly and difficult to send a person there than a robot. On Earth, however, people often have the edge over robots because people can adapt so much more rapidly and inexpensively than robots can.

Many organizations make a mistake when they commit all their resources in one direction. What was the stroke of genius in one era can be the competitive vulnerability of the next era.

Consider lean manufacturing. That sounds hard to beat, doesn't it? But if you design offerings to be more modular, customers and consumers can customize their own offerings to flexibly fit their circumstances.

That do-it-yourself option will often be preferred by customers and consumers where they gain major cost and time advantages. In fact, more modular decorating choices would probably attract buyers to vehicles because owners would prefer such truly custom cars.

In other cases, lean manufacturing doesn't apply or could be a hindrance. If you keep a vehicle long enough, there are going to be many parts to repair and replace. Since labor in repair shops often carries a charge of over $80 an hour, designing vehicles so that they are less expensive to repair could save a vehicle owner hundreds of dollars. If that design meant that the original manufacturing cost a bit more, the owner is still better off with this trade-off.

Vehicle companies love to load up their offerings with various extras for which they can charge a high price compared to the cost. Thus a standard vehicle with a stripped down price of $14,999 may actually sell for $24,999 with all of the geegaws.

Since most vehicle manufacturers primarily produce vehicles for unsold inventory rather than to order, the decision of what extras to add can layer unnecessary costs on vehicle owners. When demand is weak, these vehicles may sit rusting on the dealers' lots.

With a different design for such extras, dealers would have the option to remove some extras from vehicles and add the extras to another vehicle . . . or to ship the extra items to another dealer or the manufacturer. Or if the automobile design is modular enough, the owners could do some of the removal work for themselves and resell the extras online.

How can a manufacturer stay flexible? Run high quality experiments of totally different approaches for delivering stakeholder value. Here's an example: The Detroit manufacturers have labor and retiree agreements that the vehicle makers feel are too expensive. At some manufacturers, thousands of auto workers show up to simply sit in a room for the day and still draw full pay for their "guaranteed" jobs.

Obviously, the union wants those people protected. Equally obviously, the companies would like to pare those costs.

Rather than trying to keep splitting an ever smaller pie as Detroit's market share plunges, the two sides might do better to investigate how they could retrain these surplus workers and healthy retirees. For instance, those employees might wish to work as automotive technicians for dealerships and repair shops.

Although such jobs pay much less than what automotive workers receive, the subsidy paid by the vehicle companies would be substantially reduced . . . even after providing incentives to switch from doing nothing. Certainly, workers who like to keep busy would enjoy the change.

But you also have to be cautious about experiments with strategic consequences that may tie up resources. Here's an example: General Motors launched its Saturn brand as a way of learning how to succeed with low-priced, good gas mileage cars.

In making that decision, the company failed to appreciate that a successful experiment could mean adding a full lineup of Saturn vehicles . . . requiring additional investments in the billions of dollars. The result of the experiment's success has been to make Saturn more like GM.

At the same time not enough has been done to make GM more like the successful aspects of Saturn. Was this experiment a net gain? It's too soon to tell. Had the same resources gone into trying the same experiment with Chevrolet, you cannot help but feel that GM's strategic benefits would likely have been larger.

There's a tendency to treat each decision as being totally disconnected from every other decision. But some decisions have large implications for future commitments.

New Orleans and the Netherlands were committed to maintaining levees and dikes just as soon as they began to build on land that was below sea level. Discounted cash flow analysis is supposed to deal with this problem of taking care of long-term needs in economic ways, but that measurement doesn't usually do so because decision makers often ignore liquidity and opportunity costs.

Here's why those factors are important. Great opportunities show up in discontinuous fashion. Let's look at the stock market as an example.

You could buy almost any U.S. stock in August 1982 and make a fortune over the next 17 years. If you had bought almost any U.S. stock in 1973, you would probably not have seen any profit for more than 10 years.

The wise organization keeps access to lots of resources so that huge opportunities can be pursued whenever they randomly appear. But that doesn't mean it makes sense to chase the top of the market.

Here's a specific example: Mercedes-Benz bought Chrysler through a stock swap for a price of $37 billion in 1998. The purchase has been viewed by some as a major failure.

Within a few years, the combined companies were trading for a value lower than Mercedes enjoyed when it made the purchase while Chrysler experienced steep losses. Eventually, Chrysler was sold at a pittance by Mercedes-Benz.

A weak Chrysler, by comparison, could have been purchased by anyone in 1978 for less than two billion in stock, and you would have benefited from having Lee Iacocca lead the turnaround with K-cars and minivans.