Lee Iacocca's infamous Federal bail-out should have been the wake-up call for the industry, but Chrysler, after a few years of building lighter, more efficient cars, rolled over and fell asleep again, as did GM & Ford management. Why think about the long term when stockholders are outside the doors TODAY demanding higher quarterly dividends? Long term expense forecasting was apparently not considered worth the effort by top management at Chrysler, Ford or GM.
Further evidence of auto management's short-sighted focus on quarterly profits lies in the many legal and lobbying delay tactics employed by the Big Three. Seat belts, padded dashboards, turn signals, front-end crumple zones, airbags, fuel tanks in vulnerable positions, unstable roll characteristics and other basic safety factors have all been resisted and delayed by auto company corporate boards. Even today, GM has legal and lobbying maneuvers pending to resist efforts by California and other states to require greater fuel efficiency. Are the fat cat auto CEOs sitting before Congress today really going to change their modus operandi if taxpayers bail them out?
3. Domestic Airlines (R.I.P. -- 2010?)
Airlines corporations have been struggling to become and/or stay profitable for decades. Remember when airlines competed on service and price? Seriously, they used to do so. In the old days before Republicans declared regulation a cardinal sin the food on airline trays was actually fresh and edible; one of the best baked trout dinners this writer ever ate was served on a United flight to Chicago!
Before deregulation flights left on schedule more often than not. Lines were usually humane. Today, it is difficult to discern what factor airlines compete on, or for, or against--almost as difficult as figuring what comprises the gooey product served on that little white melamine tray.
Somehow airlines management can't get it all together, in a market with (1) a government-granted franchise (i.e., to compete one must have FAA certification, so most of us can't just open a competing airline business and start selling tickets tomorrow), (2) a potentially insatiable demand (who among us wouldn't like to jump on a plane this week-end and see an old friend or favorite relative 900 miles away?), and, (3) since most travel is employer-paid, with a third-party reimbursement structure like the old-time Blue Cross contracts (i.e., where the patient requests the service and Blue Cross paid the doctor directly--isolating the patient from the true costs). Most entrepreneurs would love to compete in a deregulated, third-party payor marketplace such as the airlines enjoy, but today's airline management teams can't seem to find a winning formula.
What could be so tough? To simplify the issue, imagine two basic pricing models: the Yellow Cab model and the Greyhound Bus model. Either you get in, drive to the destination, and pay amount on the meter or you buy a ticket at the posted price, meet the bus on time, and jump off when it reaches your stop.
But no, the airlines tie themselves into Gordian knots to extract maximum revenue by pegging ticket prices to (at last count) over a dozen factors including time of day, departure city, destination city, proximity to hub, direction from hub, day of week, category of buyer (business class, economy, etc.), tour group discount, number of days booked in advance, local landing fees, week-end stay, bereavement or illness necessity, and so forth.
The fare game (no pun intended here) airlines play is known in Econ 101 as trying to grab all the revenues "under the demand curve."- Picture a graph with both horizontal and vertical axes. Label one axis "-Quantity" and one "-Price." In the classic example, a business evaluates costs, predicts demand, then settles on a price. For example, pricing TVs at $1000 may result in annual sales volume of 100 TVs, but dropping them to $800 could increase sales volume to 500, while pricing them at $250 could allow you to move 800,000 units, growing to 1,600,000 TVs sold at $125 each. Multiply each pair of numbers (unit price times units sold) to find the total annual revenues at each price point.
Plotting the points on your graph where corresponding price and quantity lines intersect creates a "curve"- that describes how sales (demand) will look at each price level; shade all the space between the axis and the optimal sales volume and that area ("under the demand curve"-) graphically illustrates total revenues. The area not shaded is business you "left on the table"-, usually for good reason--like the new investment required if you surpass your TV factory's capacity.
Airline managers at the airlines try to grab it all--from the single ticket for the desperate fellow willing to pay almost anything to make it to Dallas by dinner time to the nearly infinite tickets sold if it only cost $5 to fly across the country. Their greedy management strategies, intended to grab the whole area under their demand curve, conflict with the tendency of a prudent business to predict and minimize expense and to maximize profit (not revenue).
The obvious result was seen in the airline bailout after September 11, 2001, when the air travel market was decimated in the wake of flight restrictions; airlines had never maintained a sound relationship between costs and revenues, so the severe drop in ticket sales had an inordinate effect on their cash flow and profitability.
4. Health Insurance (R.I.P. -- 2010?)
CEOs in the commercial insurance companies like Aetna, John Hancock, and the latter day Blue Crosses and Blue Shields, have exhibited ineffective cost "management"- skills as third party intermediaries. This has resulted in--Oops! Can this be true? Huge INCREASES in health care costs rather than the expected decreases! That's right, the annual 2%-3% health care cost inflation in the 1960s was seen as not well managed, so the intervention of commercial life and casualty insurers was intended to control and moderate both the delivery and the costs of physician and hospital services. Did management's strategy work? The evidence suggests otherwise.
Although new technologies account for a portion of health care cost inflation, much of the cost increase is attributable to--you guessed it--the efforts of insurance giants to manage (i.e., squeeze) costs for their health care accounts. By placing restrictions on services provided, demanding detailed pricing, and requiring extensive documentation before reimbursing even routine procedures, health insurance companies have had a paradoxically toxic effect on the management of health care. Instead of streamlining health care delivery and its reimbursement, their typical cost management "strategy"- has been to increase documentation requirements, delay payments, and deny valid claims, with very little attention paid to quality and cost improvement methods like clinical pathways and other proven disease management strategies.
In response, physicians and hospitals have added layers of claims processing experts, costly billing software and computer systems, outside reimbursement consultants, and chart readers (who retroactively read patient charts and document every billable procedure). All this extra work adds about 30% to overhead in the average physician's office, and adds similar expense levels for hospitals. Add this to the 30% overhead and profit that insurance companies extract from our health care premiums and at least one major aspect of cost inflation becomes obvious insurance-induced overhead that may reach 60% when all factors are considered! So while commercial insurance corporations apply only about $.70 of every premium dollar to actual health expenditures, Medicare devotes $.97 of each premium dollars to physician, hospital and ancillary reimbursement. Ask your Ph.D. in systems-analysis MBA professor to explain that one.
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