CLP Beacon - Business Issues and Solutions

Wednesday, October 21, 2015

The Regulation Conundrum Resolved

The misalignment in regulation: A conundrum resolved.
By Brian Newton

Do we need regulation? Is regulation good or bad? I feel the answer is usually “good” as long as customer needs are met and company initiatives are aligned. Additionally, the answer as to whether regulations are good or bad usually depends on the perspective of the constituent: government, consumer and company. Each likely has a different view. Regardless of the view, regulations exist and successful companies can and should deal with them using a solid business framework and by doing so we can realign business objectives with the regulation – more or less.

I will share a brief retrospective of one major regulation and then provide some thoughts and prescriptions for resolving the misalignment. Consider the Food, Drug and Cosmetic Act, under which over half of all items purchased in the US are regulated. (The following 2 paragraphs are drawn largely from the FDA website.)

The 1938 Food, Drug, and Cosmetic Act was a watershed in US food policy. Largely through the efforts of women’s groups which pioneered policies designed to protect the pocketbooks of consumers, food standards were enacted to ensure the ‘value expected’ by consumers.

The 1938 Act eliminated the ‘distinctive name proviso’ and required instead that the label of a food ‘bear its common or usual name’. The food would be misbranded if it represented itself as a standardized food unless it conformed to that standard. The law provided for three kinds of food standards: 1) standards or definitions of identity, 2) standards of quality, and 3) standards regulating the fill of container. Regulators had the authority to set standards ‘whenever in the judgment of the Secretary such action will promote honesty and fair dealing in the interests of consumers’.  That is a rule under which companies must operate.

The objective of the FDA is to ensure only quality products that are clearly described in their labels are available and consumers are thereby able to make informed decisions as to whether they want to purchase the product. In the case of drugs, labels also must describe any contraindications as well as possible side-effects so that the patient and healthcare professional are able to make an informed decision. What’s not to like about this?

Here’s the rub. Making quality products costs more. Whether it is high quality ingredients for foods, drugs, whatever, those ingredients cost more than lower quality ingredients. And properly labeling any product so that it is possible for the consumer to make an appropriate purchase decision, costs more than simply saying the product is, say, bread.

With real incomes declining in the US over the past 30+ years, the only way for companies to increase profits has been to reduce costs or provide less content for the same price (as long as the size was disclosed). Many more tasks have been automated and machines now perform those tasks. So labor costs have been reduced. Yet, if the size of the market is not increasing, other input costs must be reduced for profits to rise. One option: switch to lower quality inputs. Rather than all meat being used in dog food, one could include “meat by-products”. Since dogs, and many dog-owners, don’t read labels, the reduced cost of producing the dog food (without a commensurate price reduction) means higher profits for the producer. Other options exist that can grow the market through line extensions, new market development or broadening the eco-system. Yet many companies don’t consider these options for new routes to revenue and margin.

Okay, this is a simple example. However, it draws from an Econ 1 lecture by Prof. Richard Sutch at UC Berkeley for whom I was a teaching assistant. He was calling into question the use of price controls that Richard Nixon’s administration had imposed in the early 1970’s. His example was from a label of the cat food he had been using up until the price controls were imposed. Once the controls were in place, his cat stopped eating the food. (No, the cat really did not know about the regulations nor was he conversant in the rules, but the taste was different and this was a finicky cat.)  Eventually Prof. Sutch inspected the label. He found that new, lesser quality ingredients were now part of the cat food! Price increases may be limited and often result in a reduction in quality in order to increase profits. For human and pet food, as well as drugs, this is why the FDA exists – i.e., to ensure the foods and drugs provided for consumers (and their pets) in the US are of appropriate quality.

You may be wondering why I am writing this at all. After all consistently producing a quality product is exactly what a firm should do to build and maintain a strong reputation that consumers will recognize and value, and therefore purchase that firm’s products. So meeting the regulator’s requirements is simply good long-term business strategy. This begs the question: What’s missing?

Well, the management of many firms is often less interested in building and maintaining a firm’s reputation. Why would I say this? Firms’ managers, especially those in public companies, are compensated by short term bonus plans. If the firm increases profits, or more usually earnings per share (EPS), then senior management is paid a larger bonus. Ah yes, that old, very short-term, philosophy as emphasized by Wall Street. Indeed, it is not annual numbers but rather quarterly numbers that are the focus!

You know that regulations exist and given the explanation above, companies have to conform. Certainly they do. But let’s take a different view and let me offer some options that a company can implement to meet their business needs while aligning with the regulations.

1.   Strong leadership building a culture that keeps companies focused on doing the right things for customers.
2.   Company leaders can change the compensation structures to be more balanced between short term and long term goals.
3.   Keep customers happy, satisfied, and in the long run the company and consumers both win.
4.   Company leaders can set strategies to grow the market through line extensions, new market development or broadening the ecosystem.
5.   Understand the regulatory environment and see if there are ways to use the regulations to the company’s advantage. Sounds simple but often this is not easy to do. Companies must accept the fact that regulatory constraints exist and focus on those factors within their control.  In doing so, the companies must effectively manage their risks.

I don’t have the definitive answer to alignment yet these above prescriptions, among others, can be used to help companies focus on the right strategies and tactics. Let’s keep the dialog open and let me know if you have a contrary view. If your company or organization would like to discuss regulatory effects on your business and look at palatable options to engender change, please feel free to contact me at

Tuesday, October 13, 2015

Three Business Lessons From The Cardinal Way. Or how the St. Louis Cardinals Win Year After Year

The 2015 season may be over for the Cardinals but they have played in 12 of the past 16 post-seasons. So how does this small market organization generally outperform higher paid rivals from the big cities?  The Wall Street Journal wrote an informative article on the subject  (see, which boils down to – you guessed it – people!
First, players prefer to play for a winner. Employees feel the same way about the companies for which they work. They want to know that the business model is sound, strategy compelling, and the company is in control of its destiny. If 50% of your employees say they don’t either know or agree with the direction of your company you are in trouble. In great companies, 80% of employees are both aware of and agree with the company’s direction.
Second, players want to play for a team that has a caring culture. Yes, even huge ego athletes that earn millions of dollars per year want to know management and the fans care about them. A caring culture in St. Louis enables professional baseball players to perform better in a Cardinal uniform than any other. This actually helps the club compensate for a lack of payroll due to the small St. Louis market. They simply get more production for their payroll dollars than the competition. Of course, this makes sense for any business.
Third, Cardinal management are “eternal optimists.” The “Cardinal Way” includes a consistent approach to the game that is aggressive and disciplined. Management supports players for playing aggressively and rewards them whether the risk works out or not. This support helps the players feel safe in taking the risks which are required to win consistently. Giving employees the space to take risks and expecting the best is a good recipe for profitable business growth.
Playing to win, caring about employees and encouraging risk taking is nothing new. The Cardinal organization is just one of the few that does not just talk about it but does it. The results speak for themselves.   Do you agree with these lessons?  Let’s continue the dialog.
C-Level Partners was created to help companies experiencing market turmoil or who are moving through different phases in their lifecycle.  Contact me at to see how we can apply Business Lessons from the Cardinal Way to your business.

Friday, October 9, 2015

Business Lessons from THE INTERN

I don’t normally do movie reviews; in fact, I have never done them and this won’t be the traditional movie review.   However, I wanted to write something about a movie I saw Saturday nite called The Intern, with Robert Di Niro cast as a 70 year old retired executive who took up the role of an intern to a young female CEO of an e-commerce start-up.

I enjoyed this movie for several reasons.  First, it takes place in the Park Slope area of Brooklyn, NY, not too far from where I grew up.  I resonate with things New York City.  Second, the context of the movie is an e-commerce start-up run by a young 30s woman who founded the company and is the CEO.  I can relate to that because I am an angel investor with TechCoastAngels and I have heard pitches from similarly situated women (and men) and have been a coach and mentor to these types of companies and even worked for a few of these companies.  Third, The Intern is a senior citizen and is recruited to the firm when they thought that hiring senior interns was the right thing to do.  I can relate to that character as a former executive and on the “wrong” side of 50.  Di Niro feels he can have fun in the job and has the passion and energy to help out.   I can relate to that as well.

Other than relating to the movie, the location, and the characters, I found a few take-aways from a business perspective.

  1.  Everyone should find their passion.  Age is not an issue for sharing passion, having energy, or smarts.  Witness Warren Buffet and Charlie Munger, or Sam Walton when he was driving around in his F-150 visiting stores in person across the country, or Arthur Blank, or countless others who have a vision and desire to make a difference.
  2.  It is hard to manage two families- a business family and a home family. Startups are like children and need to be nourished.  It is tiring and taxing to manage the business and the people at work, and then go home to switch gears and be a husband or wife or parent.  
  3.   Leaders have to learn to delegate and not take on everything themselves. In the movie, Anne Hathaway, the founder/CEO tried to do everything herself and that caused part of the stress and almost caused her to lose her company and her family.  A few months ago, I wrote a blog on two words that can help an entrepreneur (or other businessperson) achieve success.  Those two words are FOCUS and PODFU.  The CEO needs to focus on what is important and then plan, organize, delegate, and follow-up (that’s the PODFU) to ensure things are on target.
  4.  Age is a state of mind to a large degree. I have seen young executives who have no vision nor energy nor the passion and drive to succeed.  I have seen young executives who don’t fit the culture of a company whereas some of the “middle-people” felt right at home.  And interestingly, I have seen a senior generation fit in to a younger culture because each group was willing to learn and listen.  Why?  It’s what you bring to the table.
  5.  Context and experience cannot be taught but can be applied.  In The Intern, years of management experience by Di Niro’s character proved helpful.  And so did his affable, approachable and helpful nature.   He even taught the younger generation what it meant to be a gentleman. Remember your handkerchief.  As Di Niro said in the movie, he is everyone’s “uncle” yet his expertise from his prior career coupled with his character helped the young CEO cope with the stresses of her business and family.

I enjoyed The Intern as a good way to spend a couple of hours and highly recommend it. It probably had more meaning to me given the premise of the movie, where it took place, and the start-up environment.  Rotten Tomatoes gave it a 59.   I gave it nine pizza slices out of a possible 10.

Let me know what you think and feel free to write to me at or at