Impact Investing: How To De-Risk Deals With A New Financial Model, BRRM!


Investing

Nonprofits are in trouble, big trouble! We depend on nonprofits (charities) for a lot of the world’s Social Good… schools, hospitals, nursing homes, senior centers, legal aid, and more. But recent changes may soon spell the doom of nonprofits as we know them! What’s happening? Can charities fix their problems? Will it all be OK in the end? Let dive right in and see!

Back in the 1950’s tax laws were reformed, making charitable donations tax-deductible. But in 2016, the Standard Income Tax Deduction was doubled, and suddenly fewer Americans could donate enough to charities to itemize their deductions. Without the benefit of a tax deduction, would American’s still donate as much money to charities?

Pundits said that donations would start to dry up, and they were right. Despite stock markets rising to new highs and arguably the best economy in US history, charitable donations fell by 2%. Add to that the decline in government funding for programs for the poor, elderly, and sick. That larger tax deduction has had ripple effects, and now there is talk of a new round of cuts to social good programs, to pay for the bigger deduction.

Grants from private foundations are also shrinking. Partially because of falling donations. Partially because foundations have begun to turn to Impact Investment as a way of funding charities. That shifts foundations from giving out grants to making loans. Loans that must be repaid.

Struggling nonprofits will need to struggle even more as they learn how to work with unfamiliar new forms of funding. With 1.5 million US nonprofits, generating 2 trillion dollars in revenue and expenses, we should all be very concerned about how well nonprofits are doing.

Nonprofits have always been the stepchildren of the business world. Banks are cautious about working with nonprofits. Nonprofits can receive donations from complete strangers. That does not sit well with bankers. After 9/11 new Federal rules to reduce money laundering began to conflict with nonprofit functions, like receiving donations or sending money to poor (and politically unstable) nations. From a banking point of view, donations look too much like illegal money transfers.  For bankers, nonprofits raise suspicion and create risk.

Then there’s Wall Street. Stock markets have been the juggernaut of the corporate world! Impact Investors can’t find enough social good deals. Charities and Impact Investors should be a perfect marriage. Apple, Microsoft, Amazon, and countless other for-profits became successful because they had access to capital, and they could sell equity.  But our nonprofits? It is illegal for nonprofits to sell equity.

In a world where Impact Investors are actively seeking out social good investments, if nonprofits want to survive they need to structure good ideas as good investments, and de-risk their projects. The Balanced Risk Revenue Model, or BRRM, can address these issues by making social good investments easier for Impact Investors to execute.

Before diving into the model, a bit of truth in advertising. For the last year, I have been working with a group called Nicky’s Gardens of Hope. They are working to open a residence for 150 adults with intellectual and developmental disabilities (IDD). I’ve worked closely with Nicky’s mother, Adriana Piltz, and seen up-close the hurdles facing any organization that wants to create a comprehensive, quality service for IDD adults.

So Adriana and I worked on a solution, BRRM, to make it easier for Impact Investors to fund social good projects. Nonprofits must address their image of risk. Risk, any risk, can be offset. Balanced. In the 1970s Wall Street learned the math behind risk, and used tools like the Black-Scholes model to balance that Risk. Once risk could be controlled, the Dow was able to grow from 1,000 points in the 1970s to nearly 30,000 today.

We don’t need to be rocket scientists to address the risks faced by nonprofits. We just need to understand a few basic elements, be aware of some new innovations, and then fit these pieces together into a functional model. Let’s begin with…

Capital: All businesses need money to operate. How you access money, and how you pay taxes is dependent on the type of corporate entity your business uses. When Adriana was in the early stages of creating Nicky’s I asked a mutual associate, who had an excellent financial and accounting background, what he thought. Since the project required land for the residency, he assured me that our corporation MUST be a REIT (a for-profit, Real Estate Investment Trust).

B Corporations: I asked him if Nicky’s could receive donations and all government grants. He said we would lose both, but a REIT was still the way to go. So I did a bit of research and discovered the Benefit Corporation or B-Corp. This is very similar to a “normal” forprofit corporation, except that the “B” (in this case Nicky’s Gardens of Hope), receives disbursements of profit before the shareholders.

Nearly, but not quite: B-corps have access to capital markets, just like any other corporation. But there would be fewer barriers to bank loans. Transferring profits from the for-profit to the charity would make up for the decline in government funding. But we would still give up the benefits of a nonprofit. Unless… we added a few more steps.

Together @Last: By merging a B-Corp, with a nonprofit, we can gain the benefits of both types of entities. The B-Corp would own and run all assets, and the charity would provide the services (the residency).  It requires a bit of proprietary wizardry to merge the functions of the two entities, but it creates a flexible structure that can be used by a wide range of charities, foundations, and non-profits.

Revenue: Investments and loans need to be repaid, with interest. Most nonprofits, have opportunities to build on their core businesses and develop new lines of revenue.  But they usually lack the business expertise (and funding) to launch new businesses. But BRRM uses a proprietary Business Incubator to launch new businesses. By working with Investors, funding AND industry expertise can be leveraged to ensure the success of these businesses. And what does the nonprofit provide?

Social Good:  Investment funds and the Millenials that fund these funds, want more than just profit from their investments. The “Double Bottom Line”, is just one way of expressing that investors are looking for a profit (often a very modest profit) plus Social Good. CSR (Corporate Social Responsibility) and ESG (Environment, Social, and Governance) are part of the growing vocabulary of social good terminology. Charities need capital markets, bankers, & investors to finance social good, but capital markets, bankers, & investors need charities to develop the projects that do social good.

The bottom line to BRRM is pretty simple. At one end of the business world, nonprofits are under increasing financial pressure, and projects that could do a lot of good are going unfunded. On the other end of the world are Impact Investors that control trillions of dollars in funds, but cannot find enough deals that make financial sense.  BRRM can’t fix the world. That’s a job for charities and foundations. But if the problem is getting a project funded, BRRM could be your way to bridge the gap.

Are you an Impact Investor with more money that deals? Want to know more about BRRM? Look me up and we can talk!

 

Chris Niccolls

http://www.linkedin.com/in/chrisniccolls

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The End Of NonProfits, The Rise Of NeoProfits!


Donations2

When we think of doing good, we think of NonProfits. Charities, Churches, Foundations, and do-good organizations. Society didn’t always depend on “501 (c) 3” type charities. Charities trace their origins to the beginning of history when the great and powerful were expected to do “good”… giving food and gifts to the poor. But does the ancient concept of charity still work in modern days? Let’s dive in and see!

There is always a need for charity. When everyone was a  farmer, there was a surplus of food in good years and in bad years families go hungry. In very bad years, families starve. Famines killed people and destroyed irreplaceable skills. Continuing famines weakened society and opened the door to rebellion and revolt.

Feeding the poor was an important function for the Church and the King. As soon as medicine became effective enough to be a profession that was separate from religion, government hospitals became a new element of charity. 2,000 years ago the first public hospital was built in India, soon followed by Greece, Rome, and China. The Roman Legions added the idea of clinics and field hospitals (Valetudinaria). By the time of the Crusades in 1100 AD, Templars and other wealthy organizations funded hospitals.

In the 18th century, Royalty and Religion were challenged by the Enlightenment. Fraternal orders, labor unions, and political parties could now provide charity and social services. The industrial revolution and the rise of banking created vast fortunes, and a new class… millionaires. The late 19th century 1% spread the concept of… philanthropy. They either directly funded good causes or donated to Foundations, organizations that specialize in raising money and then granting it to the best causes.

The final element of modern charity came in the 1950’s… the 501 (c) 3 corporation. If you met the IRS criteria, donors receive tax benefits in exchange for donations and charities are exempted from certain taxes. This process was designed to create a “virtuous circle”, that incentivizes donations and reduces the cost to operate a charity. Charities were now ready to fix the ills of the world.

Yet, that’s not what happened. While charities do spend hundreds of billions of dollars, the problems of the world have grown. Hundreds of years ago we worried about crop failure. Today, we fear that the entire world’s ecosystem is failing, or that the sea will drown whole nations. No single nation, to say nothing of a single charity, can solve the problem we face today…

Food Security: Lack of food is still a very real issue. But in America, Europe, and the developed world food insecurity is a dwindling issue. Natural disasters can create temporary food shortages, but the ever-present threat of famine is gone. Well, if you live in the developed world. Famine remains a real threat for the rest of the world. We are approaching our global food production limits. The Earth’s population will grow from today’s 7.6 billion to 11 billion (in 2100). Also, the world is increasingly choosing foods (especially meat) that consume more land, water, and resources.

Health: Modern medicine is literally miraculous. Diseases that have plagued mankind throughout history have been wiped out. The human genome has been mapped. Lifetimes are 50% longer than our great-grandparents. Doctors and paramedics routinely bring the dead back to life. Physically and mentally disabled individuals can live full and meaningful lives… if their families can afford the healthcare bills.

Demographics: Japan, with the oldest population in a developed nation, began to see small towns disappear in the late 1960’s. Too few children, too few young workers, and a goring senior population have played out the same way in Europe and now the US. The remaining rural population moves into big cities, and the small town fades away. 40 nations now have zero or negative population growth. Dozens of other nations will join that list in a few decades. If immigration to the United States slows, we too will have negative population growth. In the coming decades, the poorest half of the world may starve while the developed half dies a slower death from lack of workers. Can nonprofits keep our global world together?

Employment: Jobs are being replaced by computers and robots. Charities have always helped the unemployed, working with whole regions where employment has been permanently disrupted… the rust belt, coal towns, Appalachia, Detroit, tobacco road. If technology changes the very nature of employment, can nonprofits deal with these new unemployment issues?

Economic Inequality: Americans once believed that economic growth alone would close the gap between rich and poor. But inequality is more than just poverty. Many benefits come from wealth… better health, more education, gender equality, and reduced violence. The inequality gap began to close in the 20th century, but in the 21st it is once again growing. Wealth has become more concentrated. The richest 1%owns half of the world’s wealth. Does anyone have a plan for global equality?

The Destroyed Environment: The journey to the 21st century provided us with miraculous medicines, new materials, and phenomenal qualities of food. But our society is only beginning to admit to the cost of that journey. Pollution, global warming, species extinction, economic inequality, and on and on. A few decades ago humanity feared that the world would end in a nuclear winter. Political and military tensions de-escalated, and humanity survived. But global warming may be just as destructive. How do we fix a broken world?

Problems are bigger and more complex than in the past. Today’s young philanthropists aren’t impressed with the results of a century of nonprofit work. Millennials want to do good, but are more likely to write an app than write a check to solve systemic problems. Likewise, they are rejecting investments that fund the corporations that are the source of today’s problems (pollution, depleted resources, gender inequality, etc.).

Modern charities and modern capitalism grew up together. They began at the same time, developed together, and were both created by the same groups and people. Evolving throughout the 19th and 20th centuries, both tackled global issues and added the new features and processes they needed for their expanding roles. In the 21st century, Capitalism has embraced Impact Investment. Nonprofits are ready for their next makeover.

Impact Investors are, first and foremost, investors. The difference is that the “return” on their investment is more than just financial. The “something extra” is often called “the double bottom line”. The United Nations calls it “ESG”, or Environment, Social, and Governance. Simply put, don’t degrade the environment. Contribute to your community (create jobs, buy goods locally, reward workers for improving the community, promote gender equality). And have an open, transparent, and fair workplace (no discrimination, fair promotions, whistleblowers feel safe, management followup effectively on complaints).

The old model was that big corporations would make money during the day, and then philanthropically fix the world’s ills at night. Big corporations need to make money AND do good. All the time!

The nonprofit version of Impact Investing is Mission Related Investing (MRI). 20th-century charitable grants were to be spent. 21st-century charitable investments are to be repaid. As more foundations and funds evolve from grants to investments, nonprofits will need to evolve their operations to be functional, profitable corporations. Impact and Mission investors will seek a more modest profit than other investors, but they will still seek a profit.

All of the top foundations are moving assets into Impact Investment. Ford, Rockefeller, and Gates foundations have pages on their websites that explain their new Investment Strategies. This is a necessary stage in the evolution of Foundations, but the combined financial pressure of impact investing and ever-shrinking government funding will likely be too much of a transition for many nonprofits.

Is that it? Is it the end of the nonprofit? Not yet. Impact Investing and MRI are just two of many elements that are shaping the future of the nonprofit. That future is the Neo-Profit, a new hybrid that blends the best features of the for-profit and the nonprofit. Neo-Profits could solve many of the problems of funding and management that plagued the 20th Century nonprofit. Impact Investors provide the capital, the relatively new “Benefit” corporation provides a better foundation for the Neo-Profit.

But we’re still missing one element that ties everything together. How will Neo-Profits pay back investors? For that, we must turn to the newest and most advanced concept in Neo-Profit… the Balanced Risk Revenue Model, or BRRM. And that discussion… is another story, for our next blog!

 

 

 

 

 

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Will The UAW Strike Change The Auto Industry?


car manufacturer

After a month, it looks like the United Auto Worker’s Union (UAW) strike of 2019 will soon be over. It has been a strange strike. There was a time when even the rumor of an auto strike caused the US economy to falter. President Trump, who ran as the candidate of the little man, hasn’t said much. Neither have the democrats. We have 24 x7 news, but very little of it has been about the strike. Yet, could this strike be the turning point for the Auto Industry?

The reason for the strike goes back to at least the 2009 Auto Industry collapse. With no bank willing to bail them out, auto executives fired workers, cut benefits for remaining workers, and then flew their private jets to Washington to beg for a bailout. Unfortunately, one of their first meetings was with New York Democrat, congressman Gary L. Ackerman.

His opening statement was, “Couldn’t you all have downgraded to first-class or jet-pooled, or something, to get here? It would have at least sent a message that you do get it.” Fly first-class seats and **shudder** rent a limousine (you know, just like the average joe)? The “Big Three” auto-makers never thought that they would suffer such humiliation for a  measly few billion dollars.

The workers, however, are much more familiar with “give-ups” during an economic downturn. When the economy falls, regardless of their productivity, workers get pay cuts, get fired, and lose benefits. In 2006 the full cost of an American auto worker was between $70 and $75 per hour, with a starting salary of $31 per hour. Automakers who moved to the US (Honda, Nissan, Toyota), but built factories far from Detroit, with their labor costs around $45. Our (mostly) American car manufacturers complained bitterly that they just couldn’t compete with the new (somewhat American) car manufacturers.

By 2015, Big Three hourly labor costs fell to around $58. Starting wages continued to head down-hill, and many Detroit factories relocated to states with more flexible labor laws. The current entry-level rate for GM production workers is less than $17 per hour.

This “two-tier” wage system has become a common feature at modern union shops. New workers, usually Millenials, start at a lower wage and are capped at a lower wage than workers with more seniority. have wage caps. They will never make the money the previous generation made. Many will never be eligible for benefits, and even those that are eligible will receive much less than older workers. Workers of past generations could afford to live a middle-class life off of assembly-line work. Millennials can only look forward to declining wages and lost benefits.

In the last century, it was normal for industrial workers to have cycles of pay cuts and layoffs. But these were followed by cycles of rehiring and wage increases. The upside of these cycles has virtually disappeared. It’s now all downhill. While it does look like the negotiations that will end the strike will give one-time bonuses it will also close 3 plants. Despite the fact that business is up (GM alone made profits of $35 billion over the last 3 years), and the labor cost gap between America and “foreign” cars (that are made in America) is much smaller auto companies need to cut labor costs, by another $4.5 billion.

Closing old production lines (and plants) is a central part of the Auto Industry’s plan for the future. The oldest plants usually have the most obsolete equipment and the most expensive employees. oth can be removed when a plant is closed.

In the past, when one factory was closed, workers could transfer to another. Today, however, few factories are still in and around Detroit, the birthplace of the American Auto Industry. New factories are usually in different states, and production workers are never offered financial assistance to move to another state. If they did move, they would lose all seniority and apply as a new worker, at entry-level wages.

Not a very attractive option, but it will get worse for America’s auto workers. The auto industry is undergoing its greatest transformation since Ford introduced the assembly line…

End of the sedan: A “car” used to mean a sedan, or maybe a mini-van or station wagon. In just a few years, all of these models will be gone. Nobody wants to buy them anymore, and auto companies make more money from higher-margin vehicles, like SUVs and Pickup trucks. Auto companies need those profits to produce new products like…

Electric Cars: Few of today’s cars are electric (1%), or even hybrid electric (2%). However, within 5 years every car manufacturer plans to transition from gasoline and diesel to electric vehicles. That’s a HUGE change! Aside from Tesla, every car manufacturer must retool every factory. How will they fund the transition? Largely through worker layoffs and pay cuts.

Today’s electric cars have higher-costs and lower performance than comparable gasoline vehicles. But by 2025 they will cost less, perform better, and have dramatically lower fuel costs. That’s why auto companies MUST retool, and become more efficient.

New Vehicle Types: Gasoline-powered cars have been tweaked for a century, and there’s not much room for further engine efficiency. Electric vehicles (EVs), especially their motors and batteries, have a lot of room for improvement. Electric motors typically have 5 to 10 parts, while the ICE (internal combustion engine) has hundreds of parts. Electric is 2-3 times more efficient as converting power into motion. EV’s don’t need a water cooling system & radiator. Motors are located in or near the wheels, eliminating transmission systems and gears. Even 12 volt power cables can be replaced or eliminated, cutting 200 lbs or more in weight. Most of the mechanical parts under your hood will go away, eliminating the entire front end of your next vehicle.

Lower-weight and increased fuel efficiency allow for new design opportunities. The car of the future could be bubble-shaped, with seats facing each other (like a conference room). Maybe it will be something completely different. But it will have fewer parts, and require less labor. We won’t need billion-dollar factories to make a car. And that means we will see a LOT more new car companies.

China: China never sold traditional vehicles in the US. But they may be very successful in selling EVs. China is the world’s largest EV manufacturer, a major source for elemental lithium (critical for new batteries), and (along with South Korea and Japan) is a dominant battery manufacturer.

Self Driving: Your next car might not drive by itself, but  it will have more self-driving features. Eventually, autonomous driving will become a standard feature. Like seat belts. If the Big Three give away software that took billions of dollars to develop, how will they make up these losses? Yep… more layoffs and salary cuts.

UBER: Fewer young adults want to own a car, especially in cities. They use bicycles for short-trips and shared cars for longer distances. UBER doesn’t want to be a taxi company, they want to be a logistics company that rents vehicles to consumers and corporations.

If we efficiently share cars, fewer cars will be on the road, eliminating 100 million (or more) vehicles. Similarly, if electric trucks are self-driving, inefficient humans (that require sleep) will be replaced. When vehicles can be on the road 24×7, the same work can be done with fewer vehicles.

America has as many cars as adults. The US population has moved out of rural areas and into cities, and no longer needs as may long-distance vehicles. We have reached maximum car saturation. That has increased traffic congestion. Parking is unaffordable. Fewer car sales, simpler and less expensive vehicles, and the loss of vehicles due to sharing. That the reality for UAW workers, which will lead to a loss of a quarter or more of their jobs in just the next decade.

The only question is, “How will this play out?” Will the UAW accept declining wages and small membership or will they rebel? If they do rebel, what will they ask for? Is there any way to choose a different path for workers? What do you think? Share your opinions with us!

linkedin.com/in/chrisniccolls

 

 

 

 

 

Posted in Backup Plans, cars, Common Sense Contracting, Employment, Expectations and Rewards | Tagged , , , , , , | Leave a comment

Why Not Refill Instead of Recycle?


Milkman

Big food companies are revisiting a very retro idea. Why not reuse instead of recycle? Consumers have learned that we haven’t really been recycling for the last 20 years. Instead, we just sent our garbage off to China. Once it was transported around the world, some garbage was recycled. But more was just dumped in the ocean. What was recycled was often done in a way that created a LOT of pollution and toxins. But the pollution was a world away. And that was good enough! At least until last year, when China refused to recycle garbage from the US and Europe. Has the time arrived for America to go back to reusable packaging?

Let’s take a few steps back. Why do we have a crisis today? The oceans are filling up with plastic. Our landfills are… filled. If you live in a big city, in the autumn after the leaves fall from the trees, you see shreds of plastic bags caught in almost every tree branch. Plastic is not the only form of recyclable garbage, but it is a big part of the problem.

Before the 1970s, very little packaging was made of plastic. But as time went on we got better at making stronger, more diverse, and less expensive plastics. And that’s the problem. Today’s plastic is incredibly durable. And cheap. That’s why plastic replaced cardboard containers, paper bags, glass bottles, and other containers.

What was used before plastic? For food products, glass was often used. It was durable, could be made into any shape, and it could be made efficiently cleaned and reused. Consider the milkman. There was a time when milk, bread, and other products were delivered to your door. After you drank the milk, you left the bottle on the front step and the milkman replaced it. The old bottle, a very heavy glass bottle, was taken back to the dairy, washed, sterilized and refilled for the next customer. Except for the occasional broken bottle, there was virtually no “consumer waste”. For the consumer, it all happened automatically!

But then something happened. Small grocery stores gave way to supermarkets. Instead of going to one store for eggs and milk, a butcher for meat, a specialty store for olive oil, another store pickles… you could do all of your shopping in just one store! What will they think of next!

Soon, the milkman faded away along with the home delivery of soda-pop, seltzer and other products. Now, everything could be purchased at the supermarket. Thick reusable glass bottles for milk and soda morphed into plastic containers. Empty a milk or soda bottle and you’re left with a plastic container. Then, water became America’s favorite beverage. Instead of flowing out of kitchen taps or public water fountains, drinking water meant more empty bottles. Plastic bottles. Globally, more than 1 million plastic bottles are produced. Every minute. That’s over 525,000,000,000 plastic bottles every year. JUST plastic bottles!

Initially, we just threw out plastic bottles. Later, recycling programs were introduced. So we carefully separated recyclables, which went to a “recycling center” which just cleaned and packaged the plastic, shipped it overseas to China… where most of it was dumped in the ocean. Pretty soon, the ocean was filled with garbage.

For a while, we thought that the best solution was to design containers that used less plastic or that quickly biodegraded. But it only slightly slowed the tidal wave of plastic. More efficient packaging helped, but we kept wrapping things in plastic. Remember just picking up some tomatoes or a head of lettuce? Now we buy produce in plastic “clam-shells”.

Now add the billions of people have been raised out of grinding poverty in the last couple of decades. As wealth rises consumers tend to buy more processed foods, which leads to more packaging. America and Europe may have created plastic garbage, but every continent now contributes to the garbage pile.

Why not get to the root of the problem? Just stop making plastic bottles and containers. Go back to reusable containers made of glass, steel, and durable materials. A couple of dozen big brands (such as Procter & Gamble, Nestlé, PepsiCo), announced their interest in reusable containers. A firm called Loop will work with consumer product companies to used steel and glass containers’ Loop will deliver products to everyone’s door and then pick up and reuse the containers.

Good, but not good enough folks!

Consumer packing for food and home products is ground zero for plastic packaging.  Amazon and Walmart are slugging it out to see who dominates this space. Both are also pushing for home delivery, with Amazon in the lead. Amazon is building their own air fleet and airports, “one-upped” the industry standard 2-day delivery with a 1-day service, developed hundreds of “delivery partners” to move packages that last mile, and have filled our homes with Amazon delivery boxes.

Unexpectedly, Amazon has breathed new life into a home delivery service decades ago. ESPECIALLY after their take over of Whole Foods. Amazon does deliver milk, eggs and juice… just like the milkman! And a whole lot more. Due to their delivery service, Amazon adds 1.5 million cardboard boxes to our trash every day! And then there’s the soon to be trash inside of the boxes. Wait a minute! If the milkman used to deliver consumer packages to your home and then take it away to be reused… why can’t Amazon take a leadership role taking back and reusing their own packaging?

Amazon is spending millions, if not billions, to deliver their products to consumers. More and more, the guy who shows up at your door to drop off a box to your front door is an amazon employee or partner. Why is it impossible for them to pick up the garbage their deliveries create?  Who is in a better position to demand that more of their suppliers provide reusable packaging? And, wholefoods has it’s own brands of milk, juice, ice cream, sodas, water, etc. As the producer, they can certainly require reusable packaging. And they own the delivery services that can become pickup services to return the empties (and maybe a few of their boxes)?

If Amazon wants to crush its competitors, which does appear to be their goal, having a national “reuse” service would differentiate them from their competition. When you place an order with Whole Foods, you have the option to add a tip, because… ahhhh…. Amazon can’t afford to pay their workers? Why not add another option? For a few dollars more allow customers to select “reusable containers”. Let the market price the value of reusable containers.

IT’s going to take a lot more than Amazon to fix the plastic pollution problem. But no single corporation is better positioned to make reusable packaging something more than a quirky idea. They have the volume, they have the customer base, and they have the ambition to make it happen.

What do you think? Is reusable packing a good ides? Would you use it? Would you even pay a bit more to reduce the pollution problem? Tell us! Let us know what you think!

linkedin.com/in/chrisniccolls

 

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A Krafty Lesson About 21st Century Consumers


Velveeta

The Golden Triangle is an interesting management concept. This magical object allows you to easily build any two sides. The third side, however, is more difficult, and expensive. “Good, Fast, Cheap” is one of the most common golden triangles. Want a good fast car (maybe a Tesla)… not Cheap! A fast and cheap computer… it may not be good, and break after a week. How about a tablet? Well built (good), and cheap? Bet it’s not fast!

The economy is filed with these Triangles. When these triangles fail, it can have catastrophic consequences! Today, we will look at a specific economic Triangle that drives how corporations create and sell products.

  • Consumers: In Capitalism, consumers are the most important element of Supply & Demand. All demand starts with the consumer. When consumer need is not met, that market may simply fade away.
  • Producers: When individuals or corporations identify an unmet need, they race to create new products to fill that need. Some can identify needs purely by gut instinct, but most require marketing firms, survey data, and experts to convert ideas into products.
  • Investors: Producers (especially start-ups) need investors to finance new products. Investors, in turn, want assurance that consumers will buy the product. Some investors just want a profit, while others demand a good reputation, socially positive activities, protection of the environment, and more.

Simple, right? Yet, it can be incredibly difficult to build and manage this three-sided relationship. Consider the Oldsmobile. Once an icon of the American car industry, by the late 1980s the brand lacked excitement. Thir reaction was to launch a new ad campaign, “It’s not your father’s Oldsmobile!” Millennials may be asking, “What’s an Oldsmobile?” That’s a great question! Oldsmobile is a multi-billion dollar brand went extinct in 2004. Which is the big “ah-ha” for today’s discussion!

Should designing new cars have been given a higher priority than new ads? Maybe. Too many big corporations fail to address life or death problems, even when they are aware of them. If industry giants can’t solve their problems, how can smaller firms survive? Let’s examine Kraft-Heinz, one of America’s best-known food companies, and a corporation in decline. Let’s see what we can learn!

Big companies always want to be bigger, so in 2015 Kraft and Heinz (two of America’s biggest food companies) merged. Change was coming to America’s food industry. Younger customers no longer trusted big food companies. Millennials want small farms and organic products. They don’t want genetically modified, chemical-filled, highly processed foods. With hundreds of iconic brands between them, Kraft-Heinz could feel secure against the growing winds of change. Or so they thought.

Heinz was founded in 1869. Before refrigeration. Before even commercial canning. Heinz dominated preserved foods… pickles, relishes, condiments, and foods made with brine or vinegar. American consumers could buy pickles and sauces from Heinz rather than making these products themselves, saving homemakers millions of hours of work. More importantly, the move from home to industrial kitchens meant far fewer cases of botulism and other deadly forms of food poisoning.

Kraft was created in 1923. Originally, it was a cheese company at a time when almost no homes had refrigeration. Soft, mild cheeses spoiled quickly. Cheeses that lasted a long time were often quite pungent, and not to everyone’s taste.  Processed cheese (like Kraft’s Velveeta), were mild but long-lasting. Even without refrigeration! Factory processed foods gave America a miracle food and a good value!

Homemakers no longer needed to work from sun-up to sun-down. Soon other manufacturers came up with new miracle foods. In a poorer world, food that never spoils was a great thing! But we soon learned that food additives have consequences. “Forever Food” may be devoid of nutrients, and taste.

Consumers once trusted big companies and valued their products. Now the opposite is true. Big corporations know this. They’ve learned to create small firms, or at least the illusion of small firms, to introduce “all-natural” and artisanal products. In the short term, this may work, but consumers when consumers discover the big corporate ownership of those “small firms”, they become even more cynical.

In the 20th-century big food, firms developed scientific testing facilities to identify new foods preferences. Like Kraft “Easy-Cheese”, a spray can of processed cheese. I doubt that customers specifically asked for aerosol cheese. But surveys, marketers and food engineers turned perceived needs into this product. And Easy-Cheese was a success… for a while.

Today aerosol cheese is out. WAY OUT! All chemical-filled foods are out. Infinite shelf-life is no longer a consumer desire. Kraft executives have known this for a long time. Yet, they continue to manufacture foods from 50 years ago. Food designed for consumers that no longer exist.

Kraft’s corporate reluctance to eliminate or change venerable but no longer desirable products has had consequences. Kraft, not surprisingly, was reluctant to inform stockholders about their downward spiral. But as a public corporation, this reluctance was bordering on misrepresentation to shareholders. Regulators demanded action, Kraft’s stock price tumbled, the CEO and the head of marketing were removed. Most recently, Kraft wrote off $14 billion in corporate value. Consequences.

Consumer demand changes rapidly. Kraft-Heinz must have a board of directors that understands consumer demand and can act quickly. Did you know that women shop for groceries twice as often as men? Then why is the Kraft-Heinz Board of Directors more than 80% male (mostly, older men)? Companies run by people who don’t buy their own products can easily fall out of touch with customer demand.

When a Board of Directors lacks diversity, it becomes risk-averse. A lack of diversity means a lack of personal experience with new (or different) markets and products. New technology and globalization are accelerating change. Big corporations that are still operating like 20th-century firms will struggle in the coming decades, and some will fail.

Not just Kraft, but most big food companies are struggling with the all-natural, no chemical, cruelty-free requirements of the modern consumer. Newcomers like Beyond Meat and the Impossible Burger seemingly came out of nowhere and are now worth billions of dollars. Established brands should have identified the huge (and unmet) demand for plant-based meat products. Established brands like… Kraft-Heinz.

Kraft was wall aware of the market. 15 years ago Kraft bought Boca Burger, a leading plant-based “meat” producer. Clearly, Kraft could identify food trends. The buy-out increased BocaBurger’s sales from $40 million to $70 million in its first year. But in the last 5 years? We are in the middle of the hottest plant-meat market the world has ever seen, yet Boca Burger lost half of their market share. Kraft should have dominated this market. Yet Boca Burger is headed towards obscurity.

This isn’t just a food industry issue. Big car companies face major changes as vehicles become electric and self-driving. Yet today’s innovation and excitement often come from new, small firms. In an age of incredibly fast transformation, big corporations have an Achilles heel. They cannot move quickly. Add to this the often smothering culture of the big corporation, and even when small firms are bought by big corporations, the spirit of innovation may not survive. Small and innovative “DNA” can’t always be transplanted.

Good, Fast, and Cheap have been the legs of the golden triangle for Kraft and Heinz for the last century. These are probably still the right legs, but the definitions have changed. Good means more than “stays fresh (forever)” or “made in a sterile factory”. Organic, natural, no preservatives, sustainable… have all moved up in importance for consumers. other large swings in definition and desire will follow. Will today’s big corporations be able to keep up with these changes?

Probably not. Many very recognizable brands died in the transition to the 21st century. Arthur Andersen, ASK Jeeves, Blockbuster, Borders, Compaq Computers, Friendster, General Cinema, Kodak, MCI, Netscape, Pontiac, RadioShack, Saturn, TWA, US Airways, the WIZ, and Woolworths… to name just a few brands that could not survive, or could not survive on their own. As the speed of transformation increases, so too will the speed at which old corporations die.

What do you think? Will we see most of the old corporations die off in the next few decades? Is there still time to save old corporate America? SHOULD we even try? What do you think?

 

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The Not So Little Truck That Could!


E-Truck

A 45 ton truck… with no gas tank!

2020 is expected to be the year of the electric vehicle, a turning point where EVs become a mainstream option for consumers. Every car company has announced an electric or electric hybrid option for 2020. With a simpler engine, far less maintenance, and a lower cost for fuel, electric will make sense for the majority of car owners. After a century of innovation, the gasoline engine hasn’t got a lot of room for improvement, but electric vehicles will get better and better over the next few decades.

Some EVs today cost a bit more but will save money over the vehicles lifetime. In another year or two, even the base price will be lower, making EVs a slam dunk winner. Of course, there are a few other trends that will also favor the use of EVs.

For example, 2020 will also be the year that the Sedan Dies! Sedan style vehicles are just not selling. Every car company is phasing them out. Not just individual models, all sedans. No more produced, no more developed. GONE! Consumer vehicles will primarily be SUVs and pickup trucks. And maybe something new?

Electric vehicles provide new options for designing a car. For example, you can place motors in the wheel hubs. This makes it simpler to deliver 4-wheel drive. Plus if any single motor fails, the car’s software can rebalance the power (and steering) and off you go. Without a gas engine under the hood, everything past the dashboard can go.

A new design could shorten the car profile by several feet, making for a lighter and more efficient vehicle. Alternatively, the dashboard could be moved to the front edge of the car, expanding the passenger compartment by 50%. Move dashboard instruments onto the windshield and the front of the car could be one big window. Make the car self-driving and you don’t need a driver’s seat.

A more conservative design could use moveable seating, allowing you to convert from a traditional layout (driver’s seat facing forward) to a “mobile office” (with all passengers facing each other), by pressing a button. Changing the configuration would be as easy as changing the adjustment features on your seat.

New options and efficiencies mean big changes for the car industry. Even bigger changes are likely for niche vehicle. Consider the mining industry, with their super-sized trucks and specialty vehicles. For example, coal mining is basically the science of blowing the tops off of mountains, digging up the coals seams, and then getting the coal to where it will be used. Usually, there is a road going up the mountain and a lot of very big trucks taking the coal back down the mountain, or to the nearest coal trains.

Interestingly, mining roads are often privately owned. These single-use roads have simplified rules compared to public roads. Also, private roads are not subject to the regulations public roads operate under. It is much easier for private road owners to introduce self-driving vehicles.

Once the coal seam is exposed, god-awful big empty trucks go up the mountain, and then god-awful big truck full of coal go back down the mountain. Pretty simple, right? Because the truck is big and coal is heavy, a lot of gas is burned moving coal around. However, when you change to an EV (a HUGE EV) you no longer need any fuel.

I don’t just mean you don’t need to buy gas. Nor do I mean that some big solar or wind farm provides the power. What I mean is that by driving up and down the mountain you create your own power. Did I hear, “Whaaaaaaat?” Allow me to explain.

Look at a simple electric vehicle, such as an electric bicycle. Most e-bikes have their motor in the hub of the rear wheel… just like putting motors in the wheels of a car. If you apply (electric) power to the motor the wheel turns. Apply more power and the wheel turns faster. But if you manually turn the wheel, the motor becomes a generator and the motion of the wheel generates power.

Sounds like a useful feature! And it is! On an electric bike (or any EV) this is often used to recharge the battery. Tinker with this and you have a “regenerative brake”.  You can increase the resistance so that every turn of the wheel generates more and more power, which creates greater braking power.

Our titan of an EV, the Elektro Dumper (or eDumper), has regenerative brakes. Great big ones! On day one, you start with a full charge, heading up the hill empty (a mere 45 tons). Every site will be different, but the battery will probably still have 80% of the charge left at the top of the mountain. It only takes a few minutes to load 65-tons of coal. The truck then heads downhill, with brakes (Regenerative brakes) on full all the way down. As long as the eDumper can drive downhill with a full load, no recharging is needed… ever.

According to the manufacturer, Kuhn Schweitz, the greater weight on the way down the hill not only recharges the batteries, but each eDumper will produce megawatts of surplus power every year that can be sold back to the power grid. No fuel and it makes money while you drive, by generating excess electricity. All the while still doing the same job of moving coal around as a gas-powered truck. That is a GAME CHANGER!

The switch to EVs will revolutionize Detroit… Ummm Kansas? Ahhhh… Tennessee? Well, wherever we build cars today will be revolutionized. Temporarily at least, a lot of new factories will be built. But a surge in EVs will mean the sunset of the petroleum industry. And a huge change for Agriculture, since 10% of the “gasoline” you buy at the pump is actually Ethanol (alcohol, mostly made from corn).

Of course, Millenials are the biggest wildcard of all. They want a small carbon footprint, they don’t like cars, many don’t even want to drive. What Millennials do want is, bicycles! Manual, foldable, rented or electric… bicycles are everywhere. Trendsetters and entrepreneurs are trying electric scooters, with mixed results. And ride-sharing services like UBER are converting car owners into ex-car owners.

The eDumper is just one example of how electric (and self-driving) vehicles will gain a foothold in America, and then become integrated into day to day life. Driving on a private road is simpler than driving in the middle of a city or on a crowded highway, but each step brings new car technology closer to everyday use. Battery production will ramp up, batteries will become smaller, and prices will fall quickly. Batteries are one of the most expensive components of an EV. Lower prices will catapult the EV ahead of its gas-guzzling competitors.

What about you? Thinking about buying an EV? Waiting for a self-driving car? Giving up on owning a car and just getting an UBER account? Tell us what you think!

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The Trump You Know


Trump 2

The 2016 election was a bit… strange. OK, it was VERY strange! Perhaps stranger than anything else in our lifetime! Today, we will look at just one of the Stranger Things. Specifically, how did Donald Trump win enough votes to become President without any clear history of Conservative, Liberal or any other recognizable political beliefs? Or was this a carefully developed plan to keep his beliefs hidden? And that’s the subject of today’s blog!

In 2016, Donald Trump was a major figure in New York City, a self-professed billionaire (still waiting for those tax returns!), a very recognizable real estate brand, a casino operator, a television celebrity, promoter of famous (or infamous) products, and a frequent guest on popular (if not mainstream) talk shows like the Howard Stern show. Yet, despite all his national visibility, Trump left virtually no political footprint.

In the process of becoming a Presidential candidate, you make public a lot of statements and you tell the world about your political beliefs. Once public, they are set into the concrete we call “major media coverage”, and exist forever, just a Google away. Members of the Republican OR Democratic party MUST work their way up the political ladder and pay their dues, long before running for the highest office in the land. In order to attract the support you need to keep moving up, you need to attract reporter and news stories. That leaves a big footprint on the political landscape.   

Occasionally, someone rich and famous enters politics for some very specific personal benefit. A local political office, like a seat on a zoning board. This allows them to gain some advantage for some property they own, while still remaining relatively anonymous. Likewise, taking a position in a private or government regulatory group, such as the National Dairy Council, could give you a great deal of power and anonymity, assuming that all of your interest are very confined to all things Dairy-ish.

But the National stage is different. You need issues. Big issues that are interesting to enough voters to get you elected. It could be housing, education, the military, agriculture. There are a lot of big issues out there. A candidate from a religious background might tell us how they are concerned about the nation’s morality. Military officers can be a legitimate voice for improved international security.

Regardless of the theme, a politician who seeks national office also seeks ever-larger forums to announce their views…. reporters, talk radio, articles, youtube. You want your views to be heard, and you want to leave behind a record of those views.

But not Trump.

Trump has been interviewed many times since he became “a thing” in the 1980s. His first big interview, with Tom Browkow in 1980, may have said it all. Brokaw asked, “Mr. Trump, what’s left in your life? You’re 33 years old, you’ve got all this money.” Trump’s response was, “I just want to keep busy and keep active and be interested in what I do. That’s all there is to life as far as I’m concerned.” That really does seem to everything there is to say about Trump.

Consider his career. He is a very well known Real Estate developer, but aside from some disagreements with local politicians, we’ve heard little about his politics. He was a Television Celebrity, but there we only learned that he loves beautiful women and money. Was this the result of a decades-long plan to eventually run for the Whitehouse? Or did he just never think very much about national politics and international issues?

What we can tell is that he was focused on New York City and on his properties. New Jersey came up a lot, but only when he had a casino. Florida is in his thoughts, but those thoughts were mostly about golf and his favorite getaway in Florida, Maralago. International travel? No surprise, he mostly travels where there is Golf or a property deal.

Trump didn’t belong to the Republican or the Democratic parties, but he publically supported Hilary Clinton. Does that mean that he is a rich, liberal Democrat at heart? Probably not, since he ran as a conservative Republican. Yet even as a Republican, he has been firmly against key Republican issues, like free trade and globalization. Free trade and globalization are the bedrock of the modern “Ronald Regan” Republicanism. Before the 2016 election, this was sacred ground for the Republican party.

But Trump has a Foundation, right? That must mean something! The Trump Foundation was created to “distribute proceeds” from his best-selling book, “The Art of the Deal”. It was shut down in 2017 by the New York State Attorney General’s office due to mishandling of money. When it was alive, it wasn’t active and Donald Trump had not personally contributed for more than a decade. We’re not going to find much insight here.

Trump’s most famous book, “The Art of the Deal” was a bestseller, but it’s “ghostwriter”, Tony Schwartz tells us that Trump didn’t write any of it (he just answered questions), and it is a fraud. Many ghostwriters actually write the entire book on their own. The fraud that Schwarts is pointing to is about an investigative piece by the New York Time, which found that Trump’s wealth comes from money illegally transferred to Donald Trump by father, not from the financial triumphs of Donald Trump. The book is fiction. According to a number of other ghostwriters, Trump never wrote those and they too are… shall we say aspirational rather than factual?

Undoubtedly, many biographies are similarly “unauthentic”. But Trump’s books will not tell us much about who Trump is. Which is how he entered the 2016 election as a political enigma, a blank canvas where others could project their hopes and dreams.

Could. For the last couple of years, Donald Trump has been making up for lost time and telling the world what he thinks, while those who know him have been sharing stories of the “True Trump”. As a result We have become used to news stories that begin with, “The President of the United States” and end with “porn star”. Sometimes more than one porn star.

That’s a problem for some supporters. Like Evangelical Conservatives. They felt that Trump could leave his past behind him… and they could forget about the divorces, flashes of anger and profanity, the petty personality, the massive ego, the scandals… and become a political leader. Or not. Every year Trump gets more… Trumpy… not less. In 2020 Christian supoporters need to choose between their public beliefs (blessed are the meek, the Bible, Jesus) and their desire for power (much less Jesus-like).

Ironically, Trump’s beliefs may not matter. In 2016 Trump ran against a candidate that a lot of people love to hate, Hillary Clinton. More than a few pundits tell us that many voters didn’t so much vote for Trump, as they voted against Hillary Clinton!

Michale Moore, a staunch Trump opponent, predicted that Trump would win because, “Hillary… is hugely unpopular — nearly 70% of all voters think she is untrustworthy and dishonest. She represents the old way of politics, not really believing in anything other than what can get you elected…. the kids don’t like her, and not a day goes by that a millennial doesn’t tell me they aren’t voting for her… The enthusiasm just isn’t there.”

If Hillary Clinton runs in 2020, Trump just might win by default. But against anyone else… ANYONE ELSE… it’s a different election. In the last election, Trump was the contrarian. He pointed out flaws in everyone else’s policies. But no one could nail down what Trump believed in or planned to do once in office. Trump even said he had several “Secret Plans”, but never revealed them. Here are a few of his campaign promises:

  • Renegotiate NAFTA: The new deal, the USMCA, was signed by the Presidents of the US, Canada, and Mexico in 2018. But it was not been ratified by the US.
  • The Wall: Mexico would pay for a wall to keep immigrants out of the US.
  • Healthcare: He said that it would be easy to draft a better healthcare plan than the one Obama put in place. And a cinch to get everyone to vote for it.
  • Iran: Obama’s “nuke” deal with Iran was “the worst deal ever”. It only stopped nuclear development for 10 years. Trump would immediately stop it, forever, and as a bonus stop all missile development.
  • Industry: Trump will make more industrial jobs than ever before in history.

With policies attached to his name, it’s going to be a very different campaign. Undoubtedly, he will Can Trump continue to attack his opponent’s policies (as every politician does), but can he defend? We know that he hates being asked questions in press conferences, how will he react to reporters questioning him about his Presidency? Will the debates be carefully monitored and controlled or will the candidates face off directly with each other. Will Trump even agree to a debate?

Trump may be many things, but now he supports many things. He has backed policies. He is now the Trump you know, and not just “the other Candidate”. What do you think? Has the last couple of years been the Presidency you hoped for, or are you looking for a new candidate? Tell us what you think!

 

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Supply & Demand: The Secret Power Behind Capitalism!


Balance 2

Millennials don’t trust Capitalism. While Capitalism has done enormous good, self-interest sometimes takes precedence. Yet, Capitalism survives. And continues to evolve. New dialects of Capitalism are built on the original foundation, but the dynamic balance between Capitalists and Public interests is constantly changing. Let’s dive right in and look at where Capitalism is headed!

While Capitalism has evolved, its foundation is recognizably that of Adam Smith’s, The Wealth of Nations. Published in 1776, it was a runaway bestseller, placing “Supply & Demand” front and center for Capitalism. This simple, yet incredibly powerful concept, is so simple that Capitalists sometimes forget why it’s important.  

A healthy balance between Supply & Demand (especially Demand) is critical to the health of Capitalism. Let’s turn back the hands of time, to just prior to Capitalism, to the early 1700s when it was still the age of…

Monarchies: America grew up as Monarchies declined. Kings led the economy and created the laws. The legitimacy of the King came through their “Divine Right”, their appointment by God. Which could not be questioned!

Yet, Enlightenment philosophers (including the Founding Fathers of America) did question that right. They asked, “If Kings lead by God’s command, why is there famine, economic collapse, plagues, and natural disasters under Kings? Why do Kings squabble over land that God gave to other Kings? Why didn’t European citizens have a better life under Divinely appointed leaders”? Their conclusion was that Natural Rights (life, liberty, and property) come from the People, not the crown.

American Democracy: Democracy and Capitalism were cousins that grew up together. Capitalism placed political legitimacy in its citizens. Capitalism placed economic control of the economy in the same hands. Citizens (consumers, the People) are the “Demand” in Supply & Demand. Elections address political Demand, and the free market addresses economic Demand.

However, America’s Democracy and Capitalism were both tempered, or indirect. For example, before 1913 many senators were appointed by state assemblies, rather than voted in by citizens. The Electoral College (a remnant of those earlier days) can, and recently did, reverse the popular vote in a Presidential election.

Capitalism had similar restrictions. Early Capitalists wanted to sell the products that citizens wanted to buy, but before marketing existed… how could you know what citizen/customers wanted? In a day of less-sophisticated customers, simpler products, and local Capitalism, it wasn’t much of a problem. Capitalists sold into the market where they lived and worked. The needs and wants of Capitalists and the needs of customers were very similar. Demand by proxy (corporate owner, bankers, etc.) was good enough.

Industrial Capitalism: By the late 19th-century, farms replaced by factories, Capitalism was national (and becoming global), and products were more sophisticated. New processes, chemicals, pollution, undesirable byproducts, and deals with unsavory people in faraway places, made corporate decision making more complex.

It is difficult for a single Capitalist (or board) to act as the proxy for millions of customers. When factories were in one city (or continent) and customers in another, Capitalists learned how difficult it was to balance the Demand of two very different populations. Often, you had to choose winners and losers, of often to the detriment of whoever was far away and out of sight. Without a strong attachment to either group, a Capitalist might simply choose their own interests over the Demands of customers.

As long as Capitalists and Corporate executives reflected the mainstream beliefs of America… at least the parts of America that mattered… this proxy for Demand worked well enough. In the 1950s, America’s idea was a middle-class college-educated one income suburban dream house. But soon, women graduated from college and became wage earners, minorities wanted suburban homes, educated consumers asked uncomfortable questions, today’s luxuries became linked to tomorrow’s environmental nightmares. The time for proxies was running out.

Monopolies: As corporations grew larger, industries consolidated, and monopolies were born. Monopolies tended to artificially prevent competition, violating a core concept of Supply and Demand… the free market… and distort or ignore Demand.

In the late 19th to early 20th century, monopolies were everywhere. Oil, coal, steel, salt, sugar… you name it and there was a monopoly. Monopolies kept prices high and prevented innovation. Luckily, Democracy came to the rescue. Capitalism worked overtime and after decades of effort, monopolies were dismantled.

Communism: Karl Marx, the person most associated with Communism, and influenced by Adam Smith’s writing, predicted that Capitalism was about to evolve into something new. If Capitalists replaced Kings, surely the government would replace Capitalists. Marx theorized that Communism would take place in an advanced nation (England or Germany), with well-developed democracy, industry, and many union workers. But it didn’t work out that way.

Instead, Communism took root in 50 underdeveloped nations. Lacking Capitalism, Democracy, or even an industrial base few allowed for Demand. Instead, Communists had a “command” economy where the government directly controls what factories produce, how property is used, and who gets which resources. Command economies don’t ask what citizens want, they dictate what a good citizen should want, attempting to socially engineer citizen desires.

The results? 48 of 50 Communist states died, leaving just Cuba, and China. Let’s give Cuba a pass. Is China still Communist? Then why do so many Chinese Communist officials own corporations, sit on corporate boards, or own equity? 20th-century Communists would be aghast! We’re going to need to wait and see where China is headed.

Fascism: Another type of command economy. Fascism fuses government and business leaders into a single organization that runs the nation. For a while, Italy and Germany were seen as the future of Capitalism. But Fascism died quickly after WW II. Another example of the dangers of distorting Demand, or substituting elite opinions for the Demands of the people. 

Socialism: After WW II, the colonial empires collapsed. and the last elements of Monarchy fell away. And American Capitalism spread around the world. France, Germany, and England were the most likely candidates for ongoing Capitalism, but their more extensive labor union history meant that national elections would dwell more on social protection than in America. National health care, guaranteed unemployment benefits, and extensive worker protections defined European Democracies.

Scandinavian nations were equally interested in social issues but also took great pride in their ancient forests and pristine beaches and rivers. Environmental protection became an important element of their political contract with citizens, and later in their Demand for goods. In the 20th-century, these differences seemed dramatic. But by the 21st-century, every Democratic nation adopted some or all of these social programs.

Consumer Capitalism: Towards the end of the 20th Century, the global economy evolved from industry to service and data.  How much steel or coal was consumed by industrial firms became less important to the economy than the number of new homes, cars, and iPhones that consumers bought. Direct consumer Demand, not the desire of corporate leaders, drove the economy.

Wall Street had grown enormous, partially because bigger corporations need more services, but mostly because the average citizen was investing in Wall Street. By the 1990s huge retirement funds poured money into Wall Street, which in turn invested in corporations. Governments unions now invest trillions of dollars in corporations around the world.

Consumers… Citizens… The People… directly determine Demand. Marketing rapidly matured, trying to predict and direct consumer demand. With varying degrees of success. More recently, “social media” bypassed traditional marketing in consumer and political arenas. The Internet-connected world is struggling to define the role of social media. Are they the new intermediaries, just a distraction, or perhaps a dangerous new stage in our economy and our politics?

What Comes Next?: This brings us back to the Millenials. They deeply distrust Capitalism, and they have little love of the political system. They have examined both Capitalism and Democracy. Ever since the “1 Percenter” protests on Wall Street, they have conflated both. The political elite, economic leaders, the wealthiest people. In the minds of the Millenials, they are pretty much all the same. And the Millenials are not completely wrong.

A well-publicized fact is that a couple of dozen families control as much wealth as the poorest half of the world (i.e 3.8 billion people). The ultra-rich have long since blended their political and economic interests. Why don’t you? If you believe in Global Climate Change, but your political representatives simply will not read or acknowledge the scientific evidence, why not go directly to corporations with your demands.

Consider where the political and the business side of the world are on issues like Climate Change. Ted Cruz from Texas believes, “climate has been changing from the dawn of time… (and) will change as long as we have a planet Earth.” That’s very progressive for Ted who used to say, “global warming alarmists are the equivalent of the flat-Earthers.”

Compare this to statements from ExxonMobil. On their website, they commit to “addressing the risk of climate change by reducing our emissions, helping consumers reduce theirs, and advancing research to find new low-emissions technologies for the future.” Global Climate change is all over their communications. They admit it is real and they say that carbon… including carbon from ExxonMobile… is the cause.

The Millenials might be onto something here! Corporations, around the world, are realizing that social issues, the environment, how companies treat their workers (or even their products… such as cruelty-free meats and Free-Trade goods) are important to this generation of consumers. Or to phrase that differently, these issues matter to THEIR consumer and THEIR Investors.

This explains the rise of Impact Investors, who are interested in more than just the traditional “bottom line”. Impact Investors are asking for a double bottom line. They want profitability AND, and a better world. I would go so far as to say, they DEMAND it.

Adam Smith’s concept of Supply and Demand has always been very simple. But understanding Demand can be very complex. Especially when your firm does not represent the values of your customers. Millennials DEMAND a double bottom line from both. Companies that survive the 21st century all need to learn how to listen to that demand and deliver the solutions yoyr customers want!

What do you think? Have your opinions about your part in the economy evolved? Did you move from a consumer to an advocate for certain types of products or for “social good” based corporations? Talk to us and let us know what you think!

 

 

 

 

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The Big Payoff: IDD Adult Employment


ROI-return-on-investment

America is THE Capitalist nation. That’s why not just American citizens, but our Government, really needs to understand some basic Capitalist ideas. Like “Return on Investment” (ROI). For example, President Trump’s trillion-dollar tax cut was supposed to raise wages and pay for itself. Sadly, this does not appear to be the case. Mitch McConnell says the problem is entitlement programs, which cost a lot but get little or nothing in return. Is either argument true? Does Washington understand ROI? Let’s dive in and see how true Capitalism could drive more enlightened government spending.

Let’s look at the example of employment for Intellectual and Developmentally Disabled (IDD) adults. Few American’s have heard the term “IDD”, but most know the term “Autism”. Autism is just the best known of a number of intellectual and cognitive disabilities… Down’s Syndrome (which is genetic), cerebral palsy (resulting from birth issues), meningitis (a brain infection), and of course physical impact to the brain (Traumatic Brain Injuries, or TBI).

Until recently, IDD received little attention. A new generation of drugs greatly aided individuals with depression, schizophrenia, and bipolar disorders, providing a great deal of attention for these disorders. Unfortunately, there are many different forms of IDD and no obvious cures. Promising treatments are on the horizon, but insurance may not pay for the next miracle cure. Still, even without a cure seismic changes have occurred in the IDD world.

In the 1960s Down’s syndrome meant a life expectancy of just 10 years. Today Downs syndrome adults live to be 50 or older. Life expectancies have expanded across the entire IDD spectrum. However, the government, which pays for and regulates most IDD service providers, takes a very long time to adjust to change.

Even though IDD children live to be adults, services are still focused on childhood… primary school education, pediatric medicine, and family support in these early years. Issues of adulthood, higher education, employment, and living an independent life isn’t the focus, making these issues a struggle for IDD individuals and families.

Even with today’s limited medical technology, many more IDD adults could function as a fully-engaged member of society. The greatest wish of every IDD parent is for their child to grow up, get a job, and live a dignified life. Yet, due to this outdated model of IDD life, the government is not focused on employment, and 80% of IDD adults are unemployed.

It is vitally important that the government makes this shift, and avoids the coming IDD crisis. Let me explain.

  • In 2004 the Center for Disease Control (CDC) tested children and determined that 1 in 166 were autistic. Today the number is 1 in 59, and rising.
  • Traumatic Brain Injuries (TBI) affects 2.5 million Americans every year. But Millenials text while driving, and traffic accidents (and TBIs) are up
  • The NFL and college/high school sports have suppressed or distorted evidence of TBI’s. Only now are TBIs, especially in young athletes, being diagnosed.
  • Improvement in obstetrics allows women to have children later in life. This has led to an explosion in the number of Downs syndrome births.
  • Many factors have created this hidden IDD crisis. More IDD individuals, with longer lives, and the government is still playing catchup.

Many IDD adults are “work ready”. Yet once they approach adulthood, their services are terminated. IDD families are very familiar with this service “Cliff”. Adults with IDD should be focused on college, jobs, and living on their own. Instead, they and their families scramble to re-establish basic adult IDD services before they fall of the “Cliff”.

If adult services focused on employment during this transition, America would gain enormous financial benefits. What are these benefits and how would IDD adults contribute to society? Let’s start with…

DO WE NEED IDD WORKERS? Yes, we do! The economy is humming along at just 4% unemployment. Businesses are complaining about the lack of workers, especially for entry-level urban jobs. Shifting demographics led to fewer young workers. And Millenials increasingly reject traditional entry-level jobs. We have a brewing employment crisis, yet there are workers who can fill open positions. IDD workers.

ARE THERE BARRIERS? Definitely! Some employers are uncomfortable offering jobs to anyone who is different. Some IDD adults have physical or intellectual disabilities that are too severe for employment. However, the number who can fill many of America’s entry-level jobs is quite large.

While autistic adults can have idiosyncrasies that make employers cautious about hiring, hyper-focus and high IQs often makes them exceptional high-tech workers. Ford Motor, Microsoft, JPMorgan Chase, SAP, and other firms formed the Autism at Work Employer Roundtable, to facilitate autistic employment in high-tech and finance.

At the other end of the employment spectrum, IDD adults are often regarded as exceptional workers, who are far easier to retain and motivate in entry-level positions than their non-IDD coworkers. IDD workers are the solution for many of America’s most difficult to fill positions!

WHO CAN WORK? Most IDD conditions are best defined as a spectrum rather than a single condition. Conclusive tests are rare. Down’s syndrome is an exception. It is extra code in the 21st chromosome and can be verified. Diagnosis of intellectual development often requires waiting until a child is older, and can react to questions and tests.

As previously discussed, children diagnosed with autism rose from 1 in 166 in 2004 to 1 in 59 in 2014. A frequent quote is that over the next 10 years 500,000 autistic children will become adults, or 50,000 every year. Other IDD disorders are less well documented, but an extremely conservative estimate would be to double this population to 100,000.

Not all of these individuals can work. So, let’s make another very conservative estimate. Assume that just 35% to 50% of these IDD adults are “work ready”. Interestingly, Forbes Magazine estimates that 35% of the IDD population successfully enrolls in a college. If someone can take college courses, can they perform work in a supermarket or a coffee shop? I’d say, “Yes, they can!”

But we’re not quite done. Not everyone who is “work ready” is in a position to work at any given moment (I’m in school, out sick, on vacation, working but only part-time, left one job and looking for another, etc.). This “frictional unemployment” is why unemployment never reaches 0%. Deducting general unemployment (currently 4%), as well as the 15-20% of adult IDD who do have jobs, yields an “excess” unemployment rate of 76% or between 1 and 1.5 million IDD adults who are able, available, and ready to work.

WHAT WILL THEY EARN? Every parent wants their child to have a good income, great benefits, and work that their child can be passionate about. For IDD families, any job at all is often an unachievable dream. Yet, with just a small effort, our  “work ready” IDD adults could have real jobs. At the low end of our estimate, we will use the new minimum wage of $15 per hour, or $30,000 annually.

At the high end, we could use the average US income ($48,000) or the median US income ($61,000). However, the best number is RPE (revenue per employee). In addition to paying their own salary, workers must pay their share of the building they work in, utilities, insurance, advertising, profits, and other costs.

RPE is usually calculated by industry, with utility workers generating $1.6 million, industrial workers generating $360,000, and supermarkets generating just $200,000. Other entry-level industries fall in this low range. Let’s use this for our calculations.

CAN GOVERNMENTS SAVE MONEY? Absolutely! Cities, states, and the federal government tax the revenue generated by IDD adults. Over a lifetime, using the ranges we’ve discussed, each individual will generate between $1.2 and $8 million. The entire “work ready” population, for 40 years of work, will generate between $1.2 and $12.2 trillion dollars. Not millions, not billions, that’s trillion with a capital “T”.  A staggering number that is hopefully… too big to ignore.

But there’s more. If they are employed, IDD individuals would no longer need to receive disability unemployment payments from Social Security. The government would still pay for childhood programs, for medical support (perhaps at a lower rate, depending on income), and other programs, but this payment… averaging $14,800 a year… would end.  That’s $600,000 over 40 years. For all “work ready” IDD adults, its $15 to $23 billion in a lifetime. Even by itself, this is a compelling argument to solve IDD unemployment.

Also, we should consider the cost of our criminal justice system. Including prisons, police, and prosecution America pays $189 billion annually. IDD adults are just 2 to 3 percent of the population, but they are fully 20 to 30 percent of imprisoned Americans.

Why is it so high? It’s a lifetime of issues… falling out of school programs, families without resources, and a condition that makes it difficult to fit into mainstream society.  IDD adult employment cannot, by itself, keep these adults out of the criminal justice system.

What employment can do, however, is to provide IDD adults with daily socialization, ensuring that they can better interact with the police and other authorities. This lack of social skills can lead to tense, potentially life-threatening situations. Through social skills developed at work, fewer IDD adults will be a burden on the police and our court system.

WHAT’S THE ROI?: As much as $12 trillion in additional economic activity. And a modest $23 billion reduction in Federal spending. Government deficits are at an all-time high. If these numbers are not compelling enough to employ IDD adults, how big a number do we need?

And then we have the problem of America’s rapidly shrinking small towns. People are leaving, and there aren’t enough young adults to fill the entry-level jobs that are needed to keep these towns alive. In just a few years, America will follow the examples of Japan and Europe, and small towns and villages will be deserted. If we want to improve our economy and preserve small-town America, we need to fix IDD unemployment.

How do we fix IDD employment? The full answer requires a followup article, but the short answer is a new financial model created by an innovative firm that I work with… NGOH. They are a startup that will provide services for IDD adults in New York’s Hudson Valley.

Their model employes high functioning IDD adults in profitable businesses. These businesses provide needed services, employment, and tax revenues for the community while business revenues support homes for disabled IDD adults that cannot work. This self-supporting model is an innovative path towards employing high-functioning IDD workers. While providing less-able IDD adults with long-term homes and financial security.

Do you have a family member with IDD? Do you work in the industry or are you an Impact Investor looking for a new investment model? Tell us what you think, or contact us on Linked-In!

https://www.linkedin.com/in/chrisniccolls/

https://www.linkedin.com/in/adriana-piltz-7aa59a16/

https://www.linkedin.com/in/thomasvanantwerp/

Posted in Best Practices, Decision Making, Employment, Improvement, Learning and Development | Tagged , , , , | Leave a comment

Last Days Of The American Cowboy


Cowboy

Every culture has a mythology. It tells us about how we see ourselves. For example, America has two distinctly different worlds of work. On the one hand, we have highly educated and highly paid professionals… lawyers, doctors, financial experts, consultants. On the other hand today, we have highly structured and low paying work… clerks, cashiers, janitors, fast food workers, fulfillment centers, call centers. That’s the reality, but which one is our mythology? Neither! In our heart of hearts, we all want to be… Cowboys!

Cowboys? As in leather chaps, living with cattle, sleeping on the ground, and really bad food? Well… no, not exactly. But that’s the thing about mythology. It’s not meant to be real. It’s about image and style. And for American, Cowboys are a symbol of freedom. And Individuality.

When Americans think of independence, the lone, independent Cowboy, wandering America’s great open spaces on his trusty steed. Maybe our lack of remaining open spaces makes the image of the Cowboy even more important. Even the term “Cowboy” MEANS and independent outsider, a disruptor!

Remember the series Mad Men? If I said that Dan Draper was a Madison Avenue Cowboy, you would instantly know what I meant. He’s independent, he can look after himself, he has rugged good looks… you can see him as a Marlboro Man, smoking on his horse, just as the sun sets on 500 head of cattle. Cowboy.

But Cowboys have been gone for a very long time. Starting in the 1970s, that image of the independent, self-reliant worker evolved from Cowboy to  Independent Truckers. Cowboys had open spaces and Truckers had the open road. Cowboys got cattle to market, and Truckers hauled loads. As independent as they were, Cowboys would get together for annual cattle drives, and sit around the campfire swapping stories about rustlers (who could steal their livelihood). Truckers would form up into convoys, talk to each other on their CB (citizen’s band) radios, and swap stories of outwitting the smokies (who could steal their livelihood).

As Cowboys gave way to Truckers, Truckers must now give way to factory workers. Oh, Truckers will still live on, it’s a while before the robots take over. But they will no longer be Independent Truckers. In 2018, a new law took effect that requires Truckers to use an Electronic Logging Device or ELD. Now, wherever a Trucker goes, the ELD goes with him. And the Truckers ain’t happy.

In the old (old, old) days, Many Truckers were independent. They owned their own trucks, they took contracts, delivered goods, and hopefully made a profit. With a bit of luck, an experienced Trucker could make a good living. Knowing the best roads, where construction and congestion were, being a good judge of the weather, and knowing where local police were more… forgiving, made the difference between success and failure.

But GPS replaced experience, trucks became too expensive for independents to afford, and truck owners wanted to know more about what truckers were doing with their very expensive equipment. Big trucking companies did have reasons to worry. There are a lot of accidents with big rigs. Owners can be fined for many issues. Efficient fuel use is vital to making a profit. and of course, late deliveries mean that everyone is fined. Truckers once took (semi-legal) shortcuts, occasionally exceeded the speed limit, carried a bit more cargo than was strictly legal, or even took the occasional nap by the side of the road. Now every “irregularity” must be explained.

While Truckers always had to keep some sort of log of their activities (if only to track expenses), for most Truckers the ELD means you have “Big Brother” riding with you. The ELD may question you in real-time, as it tracks you minute by minute. Any variation from the set of actions the software believes that you should be performing, and you will get a call asking for an explanation. And you may be fined. The open road isn’t open anymore.

The Cowboy died away when America’s open range was closed off and turned into farms. Of course, technology had a hand in their demise. With steam locomotives, you could get cattle to market sooner, without losing weight from their long journey.

Once a computerized manager watches your every move, the old Trucker image soon fades away. ELDs will continue to take on management responsibilities, diminishing the role of the Trucker. Eventually, the long haul truck just becomes a component in a distributed factory. And Truckers become factory workers. The transportation industry is rebranding itself as Logistics, de-emphasizing people and vehicles, placing more value on software and data. The next logical step is to replace Truckers completely, with self-driving vehicles.

The ELD may give the trucking industry what it desperately needs, more reliable and less expensive methods of moving goods. But once the decisions of the ELD are valued more highly than the experience of the Trucker, it becomes a small step from telling the Trucker what to do to just driving the truck on its own.

Is this the Last Roundup for America? Is the Trucker headed for the same fate as the Cowboy? Tell us what you think!

 

Posted in Best Practices, Decision Making, Delivering Services, Employment, Robots, Uncategorized | Tagged , , , , , | Leave a comment