It is large due to corporations taking on lean-business models from MBAs over the last decade+. When a business runs lean, it becomes more fragile to disruptions. Unfortunately due to our economic system, there is a semi-regular boon-bust cycle, so if it wasn't COVID, it would have been something else that kicks the stool out from under the legs of these corporations.
In the past this wasn't as big as an issue because the risk was spread out amongst a multitude of small to medium size corporations. But again, over the last few decades corporations have become mega-conglomerates through buyouts and mergers/etc... Too big to fail. All the eggs in fewer baskets. Again, in an attempt to keep growing, because in our current economic system and the culture promoted in it (partially by MBA's) is the idea that if your company isn't growing it's dying. And even if it's growing, if it's not growing by a large enough amount it is failing...
So you could have a 1,000 person corporations stabley making 100 million in revenue. Providing good benefits and salaries to all. But if its not growing, then it is viewed as failing ... It's truly an absurd mindset and culture.
As an MBA with BSEE/MSEE, this is exactly correct. Too many take the degree and training as a blindly followed cookbook rather than just "ideas to think about and think of trying". It SHOULD BE the latter!!
The "religion" of profit maximization and cost minimization has a price - it's NOT GLOBALLY OPTIMAL OVER TIME for the survival of the organization (profits, anti-fragility, etc.) nor for the larger system of a national or global economy.
Mathematically, flat, non-cycle economic systems are IMPOSSIBLE. You can never achieve it WITHOUT introducing systemic instability because you are eliminating ALL the information REQUIRED to maintain feedback control and you are removing agility of the system. Once the error signal goes to zero, the system is 100% out of control! It's open loop. Then any "environmental" change can tip the entire system over where that could be a competitor, other nation or "act of God" disruption.
And this is what happens when you profit maximize/cost minimize to its ultimate limit. And on the way to that extreme, you are increasingly make the system more brittle and the probabilities of failure increase.
Re having all people being "productive", the reality of things like Price's Law also make reliability worse as an organization (corporation, government, etc.) grows.
Price's Law says that the number of people who actually do most of the work is proportional to the square root of the organization size. In the case of supply chains, most of the people who are "assuring system reliability" actually aren't and generally are incapable of doing so anyway. It's a reality due to network effects (adverse ones but the same dynamic as the good ones - you can't control or differentiate the two).
Note you can take it to the other extreme: not worrying about profits is just as bad if not worse. Socialism/Collectivism doesn't work either for similar reasons actually.
Your anti-MBA, anti-profit-maximization rant misses one thing: Southwest is the only major US airline with zero bag fees (for the first 2), no business or first-class cabin, no seat upgrade charges, and until recently, the only one with no change fees (other airlines backed off change fees during the current pandemic). It doesn't chase major international routes, partner with 3rd party booking engines, or fly overnight/redeyes. LUV has consistently, for 40+ years, optimized its culture over profits.
>LUV has consistently, for 40+ years, optimized its culture over profits
Something has changed in the last 10 years - the last five in particular. I obtained my frequent flyer number from them in 1985 and have flown them hundreds, if not thousands of time so yeah, I have a LOT of experience to draw from.
But isn't this the exact point of operation, controlling and finance in any large corporation wants to find? Extract from bottom to the top until it breaks and then hope to steer back a tiny little bit and keep operating in that state?
Finance never did produce, it's whole purpose is to extract.
Run a gasoline engine to lean and it will start to heat and stutter...
As for the growth, in a peaceful society you can grow as much as the amount of people you supply, so without war there will probably no other way than saying goodbye to growth.
No company wants it to break to the point of "meltdown". From a practical view, it loses too much money. From a (maybe, maybe not) cynical sense, it makes it too obvious how much they're extracting from the bottom and invites action from the government or workers.
Yes, but with finance based on transitory MBA executive suites job-hopping around the corporate world, the right play is to price in the risk during your term and a bit after, so the 10-year risk is ignored, but if you can strip everything out of redundancy, product development, etc., the numbers will look better for a while, you get your bonus package, and move to the next opportunity/victim.
When things have been built to last, there is a lot of "fat" that can be cut - for a while.
The numbers will always look better - until they don't.
When the music stops, the "lean" "financial engineers" will be long gone, and those still there will have not the slightest clue how to re-start a culture of serious product/service development or robust operations, and the corp falls into a death spiral.
If you are a trader, you DGAF.
If you are an investor, watch for numbers improving without product and operations improving, and new markets being opened.
I was not disagreeing. The biggest problems come where finance is not sophisticated and management is seduced by cost cutting. Those often go hand in hand.
Sure that's the theory. But how do you accurately price in risk for rare events? The uncertainty is so large that any price you set is effectively just a guess.
Insurance and derivatives are supposed to find prices for rare events. And if an organization can't insure or securitize a risk it should make them think real hard about mitigation.
You guess based on data and do your best, that is more or less how all expert opinion works. An actuarial table also doesn't tell you anything about what will happen, but it allows you to do your best.
> But if its not growing, then it is viewed as failing
I’ve only seen this in wealth generation instruments. Outside of those, I haven’t seen much of the “culture“ you’re referring to. In that framing, I think it makes sense and is anything but absurd.
The company is dual purpose at this point: part original mission (airline) part communal investment. Being a great airline that is comfortable with its current market definition isn’t sufficient for its second purpose. The commune’s investment expects growth in the abstract sense. They aren’t interested in Airlines, they’re interested in purchasing a piece of future growth.
Your Vanguard mutual fund’s performance depends on exponential growth - healthy retirement strategies live primarily off of growth, not principal, during the retirement phase. Maintaining value (~+2% on paper growth) doesn’t earn your company a place in society’s communal pool of assets.
Take a look at earnings reports...a company that doesn't grow from last quarter is considered a failure. A company that grows but doesn't hit goals from last quarter is considered a failure.
Aye, I think that’s the point I’m making. Earning reports are for public companies. The company is part of society’s communal wealth if it’s publishing a quarterly earning report. Check out the companies not posting quarterly earning reports - because they aren’t publicly traded - and not building towards a public offering; I don’t think you’d find this same “culture.”
In your scenarios, the public communally purchased shares of future growth, priced in against the stated goals - and the public’s confidence the company would reach those goals.
What other outcome would you expect? If you think this is the market being irrational, you -personally- can buy at the “failure” price. If you’re right, you’ll do well over a long time horizon.
"Lean" is an idea that worked so well at first that it transitioned from being a brilliant insight into finding "stale" capital hiding in in-process inventory and parts to being a management fad, applied to things that do not actually benefit from the approach. It's not the only thing that went that way.
"Car Guys vs. Bean Counters: The Battle For the Soul of American Business"[1] by Bob Lutz tells this story really well, from Lutz' vantage point trying to salvage General Motors from the clutches of an army of MBAs.
There's a decent summary of the book (and the general problem) in the 2012 Time article "Driven off the Road by MBAs"[2] as well.
Your opening statement impresses me as a rather gross generalization. Kind of pro-union, anti-big business.
Nothing wrong with making an effort to lean out an organization, which is simply meant to make it more efficient and more competitive. It's not specifically just cutting staff, it's a lot of things. The trick is to not confuse leaning out with cannibalization. Like Musk says, if you aren't having to add stuff back in, then you aren't deleting enough.
The airline industry is under insane pressure given the environment, and this stuff is bound to happen. Safety may even be unintentionally sacrificed. This space is far from thermodynamically sound right now. If somebody has an easy answer for it, that would be some fat consulting stacks for the BTC fund.
I'll counter your generalization with my own: F250's are hammered with middle-management baggage. MM makes shitty decisions, and still causes tons of wait states. Having consulted for five F500's now, my observation so far is that the 250-500 range are much more incentivized to do what it takes to become more competitive. OTOH, the F20's I've consulted for severely need some waves of boomer (my gen) retirements.
BTW, the general reason M&A activity increases is because the associated market space has contraction pressure on it. What else are you supposed to do? The beginning of the end for markets, governments, empires. That's just the way us humans do things.
MBA here. Does not sound like hate but statement of fact. In my experience the US MBA and general management management teaching is very dollar-based in stark contrast to, say European management education. This will lead to extreme efficiencies and the M&A boom of the past few decades is probably linked to it as well. And it does not have to be the CEO: most practical daily decisions cutting all buffers for maximum efficiency are made by mid to upper management.
It's not really MBAs, more like "business rules cult". MBAs are just the primary vehicle through which these viral rules of operation have spread. For example, when I worked in semiconductor manufacturing in the 90s you'd constantly hear at management training seminars "reduce inventory because it costs money". Also "offshore because it's cheaper" and "outsource activities that aren't core to the business". Every single one of these things has a downside, often not visible until "bad stuff happens".
These trite rules get repeated so often they become like The Mandalorian "This is the way".
I think every industry is full of this kind of nonsense. Some closer to home examples : everything needs to be in the cloud; immutability is good; use 3rd party SaaS services for everything; code comments are bad; ...
Dangerous is a word that doesn't actively justify trade-offs. With SaaS offerings, you're trading opex costs to save on capex costs, which can mean a really big difference in terms of opportunity costs. You also are paying for the expertise that you'd need to develop internally otherwise. These aren't simple black and white choices. Operating at FB level scale means that saving 2% on your cost of revenue is billions of dollars. If this is the only "Big" outage FB has for the next 2 years, and it's saved them billions of dollars, isn't the fairly small risk of a single point of failure worth it?
You have to accept some risk, and it's often hard to compare risks on the business side vs risks on the technical side.
If you use a saas for login, one for business process A, one for business process B, C, D,... if just one of these fail, you might be at risk of losing business and huge amount of money for something you have no control on.
You are lowering you cost but by doing so, you are increasing your risk.
Furthermore, by using external saas, some business will have a tendency to get rid of some IT people to "really" save on cost which means you'll lose manpower for when something happens.
Software development has changed in the last decade and now everybody knows that they have to take failure into account when building software. Chaos Monkey opened the eyes of a lot of It people.
There should be some "MBA" level chaos monkey solution.
Your statement shows lack of understanding of how the modern corporation works.
The COO may have been there 30 years, and may lack an MBA, but increasingly it is this type of CxO that has been reyling upon MBAs and other consultants (operations research) to restructure the organization into an optimized-but-fragile state.
It is the rare old-hand that can standup to younguns talking tech and math, subjects he does not feel comfortable with.
Not disagreeing, but also I don't think it's even necessary for any MBAs to be involved (although such a corporate structure would be very unlikely). All that's needed is a set of incentives that reward a certain style of business to the detriment of others. Based on our total set of economic policies, the US has those incentives in many (most?) sectors of the economy.
Are you suggesting that old people uncomfortable with math and tech are the best people to be leading major corporations? Even Herb Kelleher was only 40 when he started Southwest.
In the past this wasn't as big as an issue because the risk was spread out amongst a multitude of small to medium size corporations. But again, over the last few decades corporations have become mega-conglomerates through buyouts and mergers/etc... Too big to fail. All the eggs in fewer baskets. Again, in an attempt to keep growing, because in our current economic system and the culture promoted in it (partially by MBA's) is the idea that if your company isn't growing it's dying. And even if it's growing, if it's not growing by a large enough amount it is failing...
So you could have a 1,000 person corporations stabley making 100 million in revenue. Providing good benefits and salaries to all. But if its not growing, then it is viewed as failing ... It's truly an absurd mindset and culture.