More Sand in the Gears...and Maybe in Your Coffee?

My business partner quoted an incredible statistic the other day. He told me that Starbucks is hiring 200 people per day! According to information available on their website, they now have 3,205 company-owned stores, and recently opened 266 stores in the 21 weeks prior to February 26 of this year. The numbers are 10,985 and 744, respectively, including licensee locations.

So Howard Schultz is opening more than 10 company stores per week, which would account for the employee growth. That is, 2 company stores per day, plus 5 licensee stores per day, plus turnover. With 'more than 100,000' employees currently, they are adding roughly 1% to their employee base per week. Allow for some Kentucky windage, and they are growing like topsy.

At these rates, I would guess Schultz lies awake nights wondering how his company's culture can withstand this sort of dilution and explosion among its ranks. When the US military saw these levels of growth during WWII, they employed the "cadre" system- seeding new units with experienced combat veterans. Is Starbucks doing this? Can they afford to, if they are moving into new locales?

This exemplifies my point in a prior post regarding how rapid growth necessarily creates a counterbalancing inertia of mediocrity resulting from a tidal wave of new, "foreign" influences who are new employees. How long has Starbucks to grow before the inevitable slowdown from unmotivated human "sand" in the corporate gears occurs? Will quality suffer? Turnover rise? Margins thin to pay for adequate talent and training at breakneck speeds?

To once again paraphrase Tom Wolfe from "The Right Stuff," at which "seam" will it blow?

It's only a matter of time. As I write this, I've just read of Intel's big reorganization, and Microsoft's losing 11% of its market value just today in trading.

Don't ever say "it can't happen here.....or there." Schumpeter taught us that it happens "everywhere" in time.

How McKinsey "Helped" EBay Ignore Google

Last week's Wall Street Journal contained an article discussing how EBay had, to its chagrin, ignored Google as a competitive threat. Of note was a passage noting that McKinsey produced a report for EBay in 2003 which allayed the latter's fears of Google moving into ecommerce.

So much for relying on one of our country's most expensive consulting firms' strategy advice. I think there is an important lesson to be learned from this situation.

When I consider which are the current leading technology firms which dominate and shape the business landscape, five names come to mind: Google, EBay, Yahoo, Apple and Microsoft.

What disappoints me is that EBay, with corporate veteran Meg Whitman at the helm, would honestly think McKinsey could possibly teach her management team anything, when her firm is already at the vanguard of business experience. Along with the other four I mentioned, EBay is virtually changing and writing the rules as they go along.

It would seem sensible for Whitman to choose 3-4 wise "greybeards" of her acquaintance to come help role play some of the other four companies with her management team at their offsite meetings. I could see EBay learning how others would think to employ the assets of Google or EBay in various scenarios.

But asking McKinsey for a "report" on Google's probable moves and intentions? I can't understand it. If Whitman and her team aren't the best-positioned people to provide these answers, with a little perspective from a few carefully-chosen individuals, how is an outside consulting firm going to do it?

My partner and I, in chatting about this story, unexpectedly swapped identical McKinsey anecdotes. He was at Merrill Lynch some years ago, and I was with Chase Manhattan Bank. We both witnessed McKinsey come in about every 4 years and recommend changing some organizational aspects of our respective firms to what they were 4 years earlier. I'm not joking about this. At Chase, McKinsey reorganized Corporate Lending between market segment and product lines about three times while I was there. They are legendary for creating revenue streams on the thinnest of rationales.

If you were the CEO of EBay, would you really have ignored Google for the last three years? In an industry sector rife with boarding house reaches such as Microsoft grabbing browsers from Netscape, and Apple jumping into applied digital music devices and online content systems, would you truly expect Google to restrict itself to search engine product/markets?

I wrote a few months ago that I believe Google understands the vulnerability of its, and any, temporal search engine. That is why they have been extending their brand like crazy onto anything remotely addressable from their current competence.

In a way, though, this WSJ story might be very good for the US business community. With such a glaring gaffe by McKinsey, on behalf of a technology leader like EBay, perhaps other companies will be more judicious in their use of, and choice of, consulting "help" when they deliberate on their strategic directions and threats thereto.

Financial Utilities

My friend B is a truly prescient guy. He's had an enviable career in various parts of the financial service industry, the details of which I will spare the reader, in deference to B's wish for continued anonymity. He still does some consulting, and values his public persona, vis a vis his rather more unvarnished candor with me.

I can vividly recall my phone call with him in early 1996, when I was the first Director of Research for Oliver, Wyman & Co., now the financial services consulting unit of Mercer Management Consulting. As I was sitting in the firm's computer room, watching over the crunching of some data on my large-scale study of what accounted for superior returns in financial services companies, B and I were discussing trends in the industry. He predicted that, henceforth, the money center banks of the day would conglomerate further into only 3-4 financial "utilities." By that he meant money center banks plus ancillary businesses- brokerage, asset management, and insurance. Or variants thereof.

Well, we're there now. With Citigroup as the vanguard of the then-illegal union of banking and securities businesses, there are now three roughly interchangeable giant financial utilities in the US: Citi, BofA, and Chase. BofA acquired MBNA, and Chase's merger with Banc One combined a huge chunk of midwestern bank assets with the second-largest New York City banking company.

In a recent exchange of phone calls and emails, B commented that in the most recent quarter, all three companies had similar results, proportionally, with likewise similar strong and weak unit performances. He wondered aloud whether we are now at a point where these financial utilities are essentially on autopilot, and need not really be "led" by anyone. In short, the CEOs have become largely irrelevant and interchangeable.

I think B is right. The current CEOs of Chase and Citi are very, very pale shadows of David Rockefeller and Walter Wriston, titans who led much more dynamic and unique institutions in their days. I don't even know offhand who runs BofA, but I see from its Yahoo profile page that it is indeed Ken Lewis, the surviving CEO of what was once, long ago, NCNB. Or First Union. I can't recall which of them eventually got BofA, and which is now "Wachovia."

Even the second-tier utilities are pretty similar as well. Conglomerations of what we used to call "regional" banks. Wells Fargo and Wachovia are all that remain of First Interstate, Security Pacific, First Bank System, Wachovia, and one of the two Charlotte-based banks that isn't now BofA.

To continue, B suggested I go check the market performance of the three major financial utilities to see if those performances, too, have become very similar. I did, and I think one would say, "yes," they are not so very different now.

The top of this post features a Yahoo-generated price chart for some 30 years, as a sort of long-term secular trend reference. While it is not, technically, a total return chart, the change in stock prices, assuming reasonably similar dividend policies, is close.

What I note from the very long term is that, distortions of compounding on very recent years aside, the performances of Chase and Citi have been nearly identical since 1995. Since roughly 1992, all three seem to perform similarly.

Very recently, Chase seems to have gained a bit more acceleration. But with the recent spate of acquisitions, it's not clear what the longer-term, steady-state performances will be.

Overall, though, I think my colleague B's observations and insights are correct. It really doesn't much matter who is at the helm of these utilities anymore. With a few exceptions, such as Citi's recent swap of asset management for a brokerage business, they are now subject to the same global and US forces, have similar business and asset bases, face similar raw material (i.e., money) and operating costs. And thus, I would be surprised if any of the three financial utilities, Citi, Chase and BofA, achieve consistently superior total returns in the future that none of them have attained in the past. It's not something one usually sees in diversified financial service firms alone, let alone 'this' diversified and gargantuan.

Chase Manhattan Bank: A Reunion

A little-known integration occurred this past year. When Banc One and Chase (ok, JP Morgan Chase) merged, two former Chase-executive-led pieces of banking were rejoined. Banc One contained, among its various components, the old First Chicago Bank.

A few years before I joined Chase Manhattan, in 1983, it experienced an internal conflict which, to judge from the then still-audible echoes, rivaled that of the English Reformation. Chase's eventual COO, Tom Labrecque, had marshalled support to defeat an opposing team of senior executives in order to claim the mantle of succession passed down from, and through, the legendary David Rockefeller. David's presence was still felt at the bank, if only as a guiding spirit. The losing faction, led by Barry Sullivan, departed to run First Chicago. As I was told, such was the animosity, that Sullivan's compensation package allegedly included the provision that he would be paid slightly more than whatever the CEO of Chase Manhattan was earning.

From a longer-term perspective, the re-integration of these two Chase management teams reinforces a lesson for me. Strategies, size and specific economic conditions notwithstanding, the split didn't really matter after all.

Now, those two asset bases, and much, much more, including the very large and also mediocre old Chemical and Manufacturers Hanover Banks, are all one larger group of unremarkably-managed assets and businesses. In the end, to this point, it didn't matter what route the businesses took, nor who ran them. A consolidating industry slammed them all together under ever more colorless and less strategically innovative management.

Thus, the observations of my friend and colleague, B (he still plies his trade in parts of the industry) have come to pass. A few very large, faceless, nearly-identical financial "utilities" now dominate the sector.

More on this in my next post.