The Last Word: Breaking the Rules

October 2, 2008
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The scenario: a large U.S. manufacturer with a history of a well-measured approach to quality and production is directed by its board to increase profits and market share, and to do so quickly. The CEO decides on a quick-fix approach and moves his company to the use of substandard materials and practices to reduce costs and improve time to market. He’ll re-invest in more solid manufacturing as the profits materialize. The profits roll in and the pressure increases to garner more. The intended re-investment in manufacturing is delayed. To add further incentive, the CEO learns legislators have created laws that permit him to cut even more corners. Profits and market share grow while investment in a now-anemic manufacturing system goes unattended.

The board’s and CEO’s shortsightedness catches up with them and they go out of business. After all, in the U.S. market-driven economy, that is what is supposed to happen when companies fail to perform. But suppose it doesn’t happen that way.

Recent headlines abound about the U.S. government bailouts of the mortgage, banking, investing, automotive and airline industries. Why the special treatment? The marketplace landscape is littered with manufacturers who went out of business because they either didn’t make a product well, didn’t make a product anyone wanted, couldn’t compete financially, were poorly managed or any other of a dozen reasons. Those companies that fail often are replaced by companies that do better and are rewarded with marketplace success. So, why the federal bailouts for companies who could not succeed in the marketplace?

Part of the answer may be in the U.S. Congress’ attempt to make up for its own poor decisions. Republicans and Democrats created legislation that allowed bankers and mortgage companies to offer high-risk loans to those who could not afford it and they loosened restrictions on the financial portfolios that investment companies maintained. These actions resulted in short-term profits that could not be sustained once markets softened. Rather than see these companies go out of business, in large part because of their own doing, Congress decided it was in the “national interest” to keep the firms afloat with your tax dollars.

In 1978, then-President Jimmy Carter signed the Airline Deregulation Act, which effectively ended artificial price and cost supports and opened the door to more competition. Legacy carriers had to compete against low-cost carriers such as America West, Southwest and jetBlue. Pan Am, TWA and Eastern couldn’t compete and went out of business. Delta, United, American and Continental all have been in and out of bankruptcy and received post-9/11 government support to stay in business. Now they have their hands out again. Meanwhile, the low-cost carriers have thrived because they give customers what they want and do so at a profit. If the public prefers the quality and service of a low-cost carrier, why should the public be forced, with its tax dollars, to support carriers that don’t meet expectations or are poorly run?

The only industry that actually makes a product, the automotive industry, has also self-inflicted its current wounds. Long ignoring the call for fuel-efficient vehicles, it has finally begun to curtail the overproduction of SUVs and trucks. Long hampered by high labor costs, it has finally begun to close out-of-date plants and eliminate manufacturing employees who did no actual manufacturing but were mandated by the unions to stay on the payroll. If foreign car manufacturers-who must buy the same raw materials, build the same facilities and face the same customer demands as U.S. carmakers-can succeed, should we be forced to bail out, again, our domestic manufacturers?

None of these groups seeking bailouts and government assistance do or make products in our “vital national interest,” for example, defense products or technology. If the normal course of events was allowed to take place and these companies were allowed to fail-not all of them would, some would find a way to stay in business-how would that be any more disastrous than when a manufacturer, who employs hundreds or thousands of employees, is forced to close its doors?

A market-driven economy and marketplace forces companies to be accountable or suffer the consequences. The recent string of government bailouts flies in the face of this Darwinian rule. If government “rescues” some companies and not others, it essentially has chosen favorites. With the exception of industries in its vital interest, the government has no place in choosing favorites. If the market wants Freddie Mac and Fannie Mae, Lehman Brothers, Chrysler and United, et al. to succeed, it must be by the same rules that all other companies must abide. That is, ultimately, the true test of a market-driven economy.

Share your thoughts with me at williamst@qualitymag.com.

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