Tuesday, December 31, 2013

Competition is good

Warren Buffett’s Berkshire Hathaway and Jorge Paulo Lemann’s 3G Capital just purchased Heinz for $23.3 billion.  This raises an obvious question, "why is Heinz worth more to its new owners?"

The value creation can be seen in the actions of its new owners. 
Since taking over, Hees has eliminated hundreds of jobs, grounded corporate jets, limited spending on office supplies and pulled the plug on mini-fridges at the office. Savings will help pay down $12.6 billion in borrowing supporting the deal.

In other words, the old owners were letting executives shirk, or incur unnecessary costs.

If executives do not maximize shareholder value, it gives someone else the opportunity to come up with a better plan, buy the company, and execute it. 

If someone else can do things better, faster, cheaper, or more attractively, then consumers will abandon the products of the old company (product market competition), or someone will buy the company and make sure they do (competition in the market for corporate control).

Both types of competition help align the incentives of firms (who want higher profit) with the goals of consumers (who want lower prices, and higher quality).  

EXTRA CREDIT:  how do we align the incentives of those providing government services, like mail service or regulation, with the goals of consumers? 


  1. The main goals of delivery services, such as the US Mail service, are to provide goods, written correspondence and advertisements in a timely manner. The products must also be delivered in and received by the customer in good condition. This delivery service would have to be provided within the working hours allocated, in a safe manner for the delivery person and the public, and in a cost effective manner such as on foot delivery or delivery using the government supplied fuel efficient vehicles. If the mail delivery person’s bonus structure were related to these core competencies, the delivery people would have additional incentive to meet these goals. Goals need specific parameters tied to these outcomes and must be defined. These specifications would have to be measured periodically, or annually during the persons review.
    1. The percentage of complaints of delivered materials damage vs. the total number of deliveries is factored into the percentage of the total bonus. This specification counts toward up to 25% of the total bonus.
    2. Goods are delivered in a timely manner. Each delivered item once received by the delivery person for customer delivery can take no more than 2 delivery cycles to distribute as reported by received date. The percentage of products delivers in 2 days is factored into 25% of the total bonus structure.
    3. Percentage of reported driver safety infractions vs. the total number of times the delivery route was made. This percentage would work against the total bonus percentage of 25%.
    4. Fuel consumption efficiency calculated by the vehicles gas mileage and the number of miles the routes consist of, along with the reproducibility of the amount of fuel used each day. This is calculated as a percentage and factored into 25 % of the total bonus structure.

  2. Perhaps the most basic thing the US Postal Service could do to align its employees with those of its customers is to provide a better work environment. I’ve personally known many USPS employees over the years and almost to the person they would comment on what an awful place it is to work. Now surely some Post Offices are better managed and run than others. But across a spectrum of large, small, and medium post offices – almost all thought of a unpleasant places to work. The most common comment I’ve heard from a multitude of friends who’ve since retired from there is how poor the management is. So, you work for 20, 25, 30 years plus and end up miserable along the way. Yes, mail does move and for a small amount of money – you can move any parcel to almost anywhere. But your experience in the postal store itself? Not so much a positive experience.

    The larger issue at hand is that the USPS has not kept up with trends in technology. There is no email offering to compare to giants like Google Gmail. Being unionized the postal service has been relatively immune to cost cutting options like shuttering and consolidating post offices and reducing headcount. The union that controls the greater population of postal workers has worked overtime to block these kinds of decisions that would have long ago been made had the USPS been a private business.

    What you have left is a bloated organization with morale issues that permeate the entire organization and the customers they serve.

  3. I personally work for an organization whose costs grow to mostly poor management. It seems that every cost cutting measure is met with a cost increase in another department.

    The CFO has made blunders that have put employees at risk with their insurance and I am certain had monetary costs to rectify with the insurance companies. Moreover, the Finance Department grows with more employees but still runs in the same inefficiencies as before.

    The companies tactics to save money, such as docking a sick day for employees when they close due to an emergency, both unethical and illegal, have been met with key senior staff, demoralized by these and other actions, to leave for new organizations.

    The organization does great work for the community. But given their financial situation and reliance on key staff, real cost cutting and evaluation of non-money generating departments, such as finance need to be evaluated.

    The organization needs the assistance of outside consultants to re-evaluate their model and make them more financially officiant and hopefully, solvent, to attract key staff. Perhaps if they felt more financially secure, the culture would change for the employees. After all, the employees take their cues from the management.

  4. We can all agree that most everything Warren Buffett invests in is usually a good investment and the Heinz purchase is an excellent investment. After purchasing:
    “Heinz for $23.3 billion, Since taking over, Hees has eliminated hundreds of jobs, grounded corporate jets, limited spending on office supplies and pulled the plug on mini-fridges at the office. Savings will help pay down $12.6 billion in borrowing supporting the deal” http://managerialecon.blogspot.com/search/label/01.%20Introduction%3A%20What%20this%20book%20is%20about
    They focus primarily on cost with the buying of an underperforming asset where managers are not maximizing shareholder value. Then, use its own resources to develop a strong business and financial plan that will make the company more efficient and competitive against its rivals “Heinz shook up leadership to promote accountability and faster decision making, according to a statement from Michael Mullen, a Heinz spokesman. “Heinz will reinvest more of our dollars where they directly impact our business — in our brands and our products, and most importantly, in benefiting our consumers,” http://nypost.com/2013/09/18/buffetts-big-dividend-puts-squeeze-on-heinz/
    By Buffett and Lemann taking control of both run away executive expenses as well as focusing on debt reduction knowing that the Heinz’s brand can become a more profitable company again was a good decision even though it took a little more work than originally realized.



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