WARNING: The following article contains bragging. (I’ll let you know when it’s going to get thick).
I was first introduced to the concept of the Single Quarter Manager in 1994 over lunch with Ben Rast; Senior Vice President of Morgan Stanley’s office in Columbia, South Carolina.
According to Rast, the Single Quarter Manager’s objective is to make himself look good in the short term, without ever considering the long term effect of his actions on the future of his company.
In an effort to boost cash flow he fires the Research and Development staff, along with the Maintenance staff.
He tells Sales that anyone who can’t meet his impossible sales goals will be joining their unemployed brethren from Maintenance and R&D. As you might expect, the salespeople cut every sleazy deal with every potential customer with no regard to the profitability to the company, without even regard for next quarter’s sales.
At the end of the first quarter, the Single Quarter Manager’s division boasts an all-time high profitability. In fact, the Single Quarter Manager has set such records that he’s immediately promoted to a corporate job at company headquarters.
Now, consider the plight of his replacement.
The division can’t sell any more stuff.
With the profitibility of these deals so low, they can’t show a profit offering the original products to any additional customers – not that there’s any additional product to be had. Between the sleazy deals pushing the demand curve and the breakdown of the equipment from lack of maintenance, there’s no extra original product to offer.
There’s no new product to offer existing customers, either, ‘cause the R&D staff departed without developing one.
The next manager of this division will fail in the most spectacular fashion, achieving the worst profitability in the history of the company.
Searching desperately for answers, the company will replace him. They will systematically replace at least two more just like him. None of the Single Quarter Manager’s successors will be able to turn the division around.
The company’s only solution is to hunker down, tough it out, and start growing new customers.
That takes time.
A lot of time.
I was reminded of Mr. Rast’s description in early June of this year when, like you, I first learned of GM’s “Employee Pricing For Everyone” promotion.
GM had just posted a loss of over a billion dollars. That’s billion, with a “B,” in the first quarter of 2005.
This was followed by a thirteen percent decline in May sales, which was blamed on the increase in gas prices.
Dealers had a three-month inventory of ‘05’s on their lots. With the downturn in sales, it appeared that those units might not sell before the ‘06’s came out.
How did GM’s management react to the May sales slowdown?
They announced a workforce reduction of 25,000 and a new sales incentive, which they called the “Employee Discount For Everyone.”
Ford quickly followed with a discount program of their own: “The Ford Family Plan.”
Then Chrysler piled on with “Employee Pricing Plus” which gave customers the same price as Chrysler Group employees, plus additional cash back of up to $3,500.
The programs, said one analyst of the auto industry, “represent a desperate and necessary move for desperate times.”
“Now that,” said I, “is a spectacular example of Single Quarter thinking.”
It came as no surprise to me on Monday of this week to learn that in the first nine days of October, U.S. auto sales tanked. It seems that the end of September coincided with the big three domestic auto makers ending their summer “employee discount” offers.
“GM’s sales fell 57 percent and Ford’s fell 45 percent as sales in the U.S. auto industry dropped 33 percent from a year earlier.
“The aftermath of the employee-pricing programs is having a dramatic impact on automotive retail sales in October,” Jeff Schuster, executive director of global forecasting at J.D. Power and Associates, said Friday.
“Ford’s chief sales analyst, George Pipas, said Thursday that October sales would likely fall because the employee discounts spurred customers to buy sooner than they might have.”
Arizona Republic, October 14, 2005
Really? (He said incredulously, with just a hint of sarcasm). Discounts spurred customers to buy sooner than they might have? Who’d have thought?
(Brace yourself; the bragging starts here).
Seems I predicted this maneuver, as well as its outcome, on pages 20-22 of Fishing For Customers And Reeling Them In.
“Pretend for a minute that you’re a small town automobile dealer. In any given month you’ll sell about thirty cars. That’s about the demand in your community for your brand of vehicle.
“Then your new sales manager has an idea. “Let’s do a ‘cash back at signing’ event. We’ll draw in record sales.” So you do the event and you sell forty vehicles this month. GREAT NEWS, HUH?
“Well, actually you got the thirty customers who would have purchased from you anyway, and ten more. Where did the other ten come from? Chances are there were not quite ready to buy, and the cash back convinced them to commit early. The extra ten customers may well have come from next month.
“So now your sales are lagging in month number two, and the sales manager says “We have to do it again. Remember how well that promotion worked last month.” So, you again offer the cash incentive.
“This time you sell forty-five units. The other twenty who would have been in the market in the second month, and twenty-five from the third month. Can you see where this is leading? At some point you’re pulling from so far ahead of the demand curve that no amount of incentives will convince customers to buy now.
“Then what do you do?
“You’re about to have the worst month in the history of the dealership. It’s just around the corner… and there’s not much you can do to stop it.
“And remember that these last few months of cash back at closing have cut deeply into your profit margins. We’ve already established that you must have full margins to remain profitable. You’re selling more cars and making less money. You’re also trapped on a treadmill that just keeps turning faster and faster.
“This is the problem with Call To Action advertising. And the longer you do it, the less effective it becomes.”
Fishing For Customers And Reeling Them In
Wizard Academy Press, 2004
In his April 11, 2005 column, Motley Fool’s Rich Smith pretty much agreed with me when he said “When Ford lists a car at $17,000 and then incentivizes it down to $15,000, it makes a sale more likely today with the consequence that that sale will not occur tomorrow.”
Ok. Rich and I recognized the danger of such short-term thinking. Done bragging. Now what?
How about two new predictions:
1. Deep discounts from MSRP will now become the way business is done in the auto industry. From this point forward, cars will not sell without a discount. (Hey, I remember life before cash back deals became S.O.P. for the industry. I predicted that they’d never go away either. Oh, wait. I already said I’d stop bragging. Scratch that last comment).
2. I wouldn’t recommend buying stock in Ford, or GM, or Chrysler. They’re all in for a long non-profitable stretch that sill be marked by further desperate moves from the auto manufacturers as consumer resentment toward them continues to grow.
You want evidence of that resentment?
- This summer a Chevy Suburban half-ton, four-wheel-drive LT model, could be purchased by any of us for $9,798 off list. A Silverado 1500 extended-cab pickup could be had for $7,888 off list.
- The Lincoln Navigator luxury 4×2 was offered at $9,012 off retail. Price for the Ford Escape became $4,212 off list price.
- A fully loaded Town and Country minivan could be purchased for nearly $6,982 off list. The Dodge Durango sport utility could be purchased with zero percent financing for 36 months, and a $4,000 cash rebate.
The big three automakers have each effectively admitted that after shaving $7,000, $8,000, even $9,000 off the price of their vehicles, they’re still profitable.
If you’ve purchased a new vehicle in the last few years, do you now feel as if you didn’t even get kissed?
Will you ever pay full price for a car again? Will anyone?