Impressions

The Ideal Corporation

By Tim Holland

It seems to me that large corporations are evolving into pure management and accounting administrators. Companies structured along vertical integration models, whereby they own and operate the various levels of development, production and distribution, are not only unusual but also seem to be on the verge of extinction. The global economy, which has surely opened up markets that were previously inaccessible, or at least unavailable, certainly shares a good part of the credit or blame depending on your perspective.

The traditional global business model was one of acquisition. The idea was that when an export or import market became a significant revenue generator you would investigate buying your supplier or manufacturer or, if permitted, establishing a manufacturing or distribution branch of your own. The plan was to cut out the middle man, save the expense and bank the profit.

The concept of “fair trade” can often be a misnomer. Fair to whom would be the first question that comes to mind. For instance, we grow cotton and ship it to Hong Kong and they turn it into clothing, which is shipped back to the US. The cotton farmers are happy, the clothing manufactures in Hong Kong are happy and the clothing buyers in the US are happy. Where’s the problem?

Of course, we now see that since the clothing manufacturer in the US cannot compete with the cost of doing business in Hong Kong it decides to shut down its US clothing factory and sets up a factory in Honduras. Okay, whose happy now? Well the cotton farmer is still shipping cotton to Hong Kong, who now not only ships clothing to the US but also fabric to the US company’s new factory in Honduras (which has created jobs for Hondurans), which ships clothing to the US and also exports to other countries and the US clothing buyer now has two sources of inexpensive clothing. The number of manufacturing jobs lost in the US, the fair traders in the global economy claim, is insignificant compared to the jobs created in Hong Kong and Honduras and earnings being generated by the original US clothing company operating outside the US.

What else is happening is that the whole process of clothing manufacture has become much more complex. A need has now developed at the US company for more elaborate accounting procedures; hence more financial management, more international trade management. It is now also time to move the company to New York, Chicago, Atlanta or someplace similar where a wealth of high tech communications, financial and trade based educated workers can be found and there is no need for the factory in the country anymore.

Now move up to the next step. Our company has established branches and subsidiaries in a variety of countries in Asia and Latin America and is selling worldwide. It has attracted the attention of a much larger global company and is bought out. The new owners have no interest in owning bricks and mortar in Asia and Latin America and seek buyers for the factories. Their interest is in buying a completed product at the cheapest price where ever it can be found worldwide.

So what has evolved? Once upon a time a company’s focus was customer, employee and shareholder. Focus on the customers – if they are happy, the employee will have a steady job and good pay; if the customer and employee are happy then the value of the shareholders cannot fail to increase. Today the order has the shareholder first, the customer second (give the customer the minimum necessary to meet their needs) and the employee third (squeeze the employee as much as possible - use them, abuse them and throw them away).

Corporations are now poised to move in and out of businesses as quickly as possible. Buy bricks and mortar only as a last resort and farm the production out to a third party – if they don’t perform or become too expensive, dump them and move on to some one else. The same is true of distribution and sales: don’t do it yourself if you can get away with it. Above all don’t get involved with hourly workers – they’re too expensive in the long run.

The ideal corporation? A CEO, CFO, COO, CIO and their related staffs. Subcontracting agreements for everything else; if any part of the operation doesn’t meet return guidelines – don’t fix it – sell it, replace it and move on. What you manufacture is not as important as maximizing the return on investment. Management as an end unto itself. Finance as an end unto itself.

Have we as a national economy lost our way? It would appear so. Our focus has become “all gain – no pain.” Be it a manufacturer that has become a “brand” with no responsibility for the actual creation of the underlying product or a loan made to be sold to a second or third party – the concept is the same: maximize the return; distance oneself from the product originator. We are becoming a country of traders. However, while there are great profits to be made, a trader must rely completely on others and therein lies the great risk to any nation for what works in peacetime can be a disaster in times of strife. The economic and business model builders live by “all things being equal” but in reality we all know they never are.

Note:

This opinion/essay is the property of the author. It is offered for use by individuals who are also free to copy and make it available to other individuals as they wish. Anyone wishing to make use of the material for commercial purposes must seek permission of the author, who can be reached at Impressions@Tim-Holland.com. Such permission will not be unreasonably refused.