Food for thought on business, employee wages, etc.

[Apotheosis]

Ok, I'm not an economist. I am not an MBA, I am not this I am not that.

The question I have though, and it comes from this funny thing called "logic", is the following:

As a business owner, manager, etc., do you forsee the continual need to cut down on salaries, benefits, etc. while at the same time raising your cost of goods sold a good idea?

I know we're in a "global economy", to coin an overused term, but, isn't the concept of cutting cutting cutting harming the profits of the businesses?

I mean, lets look at it this way, pretend I run a farm, and hire 5 employees. They make 80$ a day. They also patronize my market, so that money comes back. In addition, their families shop at my market. Finally all their friends patronize my market, and now I am actually profiting.

Oops! I just discovered that I can fire 1 employee, to save on costs. Now all of their friends, family, etc. decide to shop at the other market.


I know this is overly simplistic, but umm, don't I have a semi-valid point/concern?

[Drezzt]

No. Stop trying to think, george. Back under the bridge with ya ::poke poke::

[ElanthianSiren]

IMO, it depends how many people you piss off. I'm going to use walmart as an example, as I think it was the catalyst for this post.

People don't just boycott walmart for the few factors you've considered. They do it because Walmart pushes out small businesss (where families have shopped for years), walmart abuses their employees (see -- 'oh we didn't know any of those 1$ a day mexican immigrants we were hiring to clean our floors were illegals!' walmart scandal plus various other scandals), walmart is political, walmart tries to impose religious values on its customer base (see their list of banned books! omg! no sex for you!! evil naughty consumers), most of their shit is cheaper elsewhere (especially if you're determined NEVER to shop there and are good at finding things on sale), and they're very good at screwing their suppliers as well.

Now, add to all that pissing off your employee base. I think for awhile, you will have a very strong business model, as walmart does, until people wise up to your abuses (ie the few upset voices turn to a dull roar) and the fact that they can get the same commodities cheaper in many instances, especially if they consider the implicit costs of what you do.

-M

[Terminator X]

Walmart puts the little guy out of business.

[Drew]

Originally posted by ElanthianSiren
IMO, it depends how many people you piss off. I'm going to use walmart as an example, as I think it was the catalyst for this post.

People don't just boycott walmart for the few factors you've considered. They do it because Walmart pushes out small businesss (where families have shopped for years), walmart abuses their employees (see -- 'oh we didn't know any of those 1$ a day mexican immigrants we were hiring to clean our floors were illegals!' walmart scandal plus various other scandals), walmart is political, walmart tries to impose religious values on its customer base (see their list of banned books! omg! no sex for you!! evil naughty consumers), most of their shit is cheaper elsewhere (especially if you're determined NEVER to shop there and are good at finding things on sale), and they're very good at screwing their suppliers as well.

Now, add to all that pissing off your employee base. I think for awhile, you will have a very strong business model, as walmart does, until people wise up to your abuses (ie the few upset voices turn to a dull roar) and the fact that they can get the same commodities cheaper in many instances, especially if they consider the implicit costs of what you do.

-M


And yet they account for 7 cents of every dollar spent in the United States.

[ElanthianSiren]

I did say... for awhile you will have a very successful business model.

-M

[Drew]

The truth is, that for most things, people value price for 98% of their buying decision and everything else matters very little.


My dad told me a story a long time ago about how he held a poll at his company if people would like a gym at the office, and if they would use it at least once a month. The response was overwhelming that they would. He spent a lot of month and devoted a good amount of space to adding a big gym and showering facilities. After the first week no one used the gym at all. No one ever stuck around longer at the job because of the gym or asked for less of a pay raise because they had saved on gym membership. Long story short his moral was, money is the bottomline, the perks are all secondary.

[Drew]

Originally posted by ElanthianSiren
I did say... for awhile you will have a very successful business model.

-M


Well, when it fails, make a post about it.

[ElanthianSiren]

Originally posted by Drew

Originally posted by ElanthianSiren
I did say... for awhile you will have a very successful business model.

-M


Well, when it fails, make a post about it.

Why would I do that? I'm quite happy discussing the things that will lead it to failure eventually, unless you'd rather it not be talked about. I understand there's some subject matter that people find upsetting. If it hurts your feelings, I'll kindly stop discussing Walmart's shortcomings and why I choose never to shop there.

-M

[Showal]

Walmart is a little different than most business models. Walmart sits pretty because they have such big orders that most suppliers can not afford to refuse them. If I was a smaller company and Walmart was paying 50% of my income, even if they're buying my products cheaper, I couldn't really afford to get mad at walmart and tell them no. It wouldn't be smart even if they only accounted for 10% of my income. They have the ability to push around their suppliers and get things for cheaper.

Business gets very difficult when you get into the small "word of mouth" parts. There are several parts involved in a decision like this:

<<Oops! I just discovered that I can fire 1 employee, to save on costs. Now all of their friends, family, etc. decide to shop at the other market.>>

First, if you treat your employees respectfully, people generally will not feel angry enough at you to convince everyone they know not to shop their anymore when they're cut because of company costs. Especially if you arrange to help them out with another job and pay them while they're unemployed. Second, it works into what Drew was saying. If you're charging cheap, most people would rationalize that they "can't afford to go elsewhere" even if someone asks them not to. I'd say I couldn't afford to buy coffee from Starbucks every morning if someone asked me not to buy from Dunkin Donuts. However, it can work out against the employer, like the massive amount of people switching over to satellite because of how ClearChannel treated Howard Stern. Word of mouth is strong, but it doesn't always work.

I agree a lot with Drew about the price is the most important part of things. The perks are secondary. There are obviously more fine details involved, but that's a good general statement.

[Drew]

Originally posted by ElanthianSiren

Originally posted by Drew

Originally posted by ElanthianSiren
I did say... for awhile you will have a very successful business model.

-M


Well, when it fails, make a post about it.

Why would I do that? I'm quite happy discussing the things that will lead it to failure eventually, unless you'd rather it not be talked about. I understand there's some subject matter that people find upsetting. If it hurts your feelings, I'll kindly stop discussing Walmart's shortcomings and why I choose never to shop there.

-M


My feelings aren't hurt at all, but your point was that Wal-Mart has pissed off a lot of people and that has hurt their business. However, they are the largest retail business in the world which flies in the face of your point. If what you say is true and in 10 years Wal-Mart is half the size it is today, you will have been correct. But what you appear to be saying and the reality of the situation seem to be divorced.

[Jazuela]

I mean, lets look at it this way, pretend I run a farm, and hire 5 employees. They make 80$ a day. They also patronize my market, so that money comes back. In addition, their families shop at my market. Finally all their friends patronize my market, and now I am actually profiting.

Oops! I just discovered that I can fire 1 employee, to save on costs. Now all of their friends, family, etc. decide to shop at the other market.

I don't think it's that clear-cut. I'll use your example, because the Walmart example doesn't fit the scenario. One's a small local shop, the other's a mega-conglomerate.

If I'm the only market of its type in town, then no, friends and families will not be going to the other market. Not if they have to spend $20 in gas round trip to get there and back.

If my prices are cheaper, for the -exact same things- as the other market, then no, friends and family will not choose to shop at the other market.

If my market offers things that the other market doesn't offer, and those things are in high demand, then the answer will still be no.

If the other market cares even less about its employees than I do, then the answer will still be no and in fact I would imagine THOSE employees are already sending their friends and family to my place.

So it really depends. If my market is in financial trouble because of the overall picture of life in my town, then a kindly-worded termination would probably not cause an ex-employee to make a fuss about it (unless it was a problem employee).

[Apotheosis]

Ok. My first example was bad. Let's try this. Delphi, a major auto supplier, has recently filed for chapter 11 bankruptcy protection. Currently looks like they are asking for MAJOR wage concessions from employees. One figure being tossed around is that employees who were making $25/hr. are now going to be making $11- $12/hr.

What I am trying to get at is this: If you, (as a corporation/business) of any size, continue to reduce wages, benefits, etc. are you not cutting into your own consumer base? If I'm an automaker, and I layoff, say, like, 30,000 people, are those going to be 30,000 less sales of my autos in the future? (30,000 is pretty small figure, I know).

[Drezzt]

Originally posted by Yswithe
Ok. My first example was bad. Let's try this. Delphi, a major auto supplier, has recently filed for chapter 11 bankruptcy protection. Currently looks like they are asking for MAJOR wage concessions from employees. One figure being tossed around is that employees who were making $25/hr. are now going to be making $11- $12/hr.

What I am trying to get at is this: If you, (as a corporation/business) of any size, continue to reduce wages, benefits, etc. are you not cutting into your own consumer base? If I'm an automaker, and I layoff, say, like, 30,000 people, are those going to be 30,000 less sales of my autos in the future? (30,000 is pretty small figure, I know).

Absolutely not. Especially in this case the employees know why their wages may be cut. It's either cut wages or you can not have a job at all.

What you're cutting is your loss at the end of the quarter to stay in business, not the employee's neck. Yes, this does affect your employee's income but they in turn will probably tell their friends/family to buy MORE of your product in order to enjoy their benefits again and bolster the company's bottom line.
"Hey fred, you still looking for a car? Better get one quick because I hear they're raising prices soon."
Employee says this and thinks "if I can get fred, barney, wilma AND betty to buy a car then maybe, just maybe we'll be able to put off the layoffs and pay cuts."
If only 20% of your employees do this then your red ink is reversing already.

Now, you also have the flip side of that. The rotten apple employees.
They'll say "Uck-fay this. I was lookin for a job when I found this one. I'll just work somewhere else."
Those types of employees with no loyalty whatsoever are better leaving anyway, so the company wins on that front too. Hiring is never a problem in today's market. For each current employee you have 20 more applications from qualified people waiting in line.

I guess the lesson to be learned here is that companies have been scaling back and cutting workforce when they're in trouble for centuries. If they do it soon enough it usually works. If they wait till they're bailing water on a sinking ship they'll be in the SSI/Social Security line before you know it.
Trust that they're doing what they find to be the best thing considering their circumstances. They've likely done plenty of research and analysis on it before making these heavy moves.

;)

[Apotheosis]

Yeah, I understand this is a tough subject, and is industry dependant, however, the intangible effects of laying off employees is not lost on me.

[Drew]

Originally posted by Yswithe
Ok. My first example was bad. Let's try this. Delphi, a major auto supplier, has recently filed for chapter 11 bankruptcy protection. Currently looks like they are asking for MAJOR wage concessions from employees. One figure being tossed around is that employees who were making $25/hr. are now going to be making $11- $12/hr.

What I am trying to get at is this: If you, (as a corporation/business) of any size, continue to reduce wages, benefits, etc. are you not cutting into your own consumer base? If I'm an automaker, and I layoff, say, like, 30,000 people, are those going to be 30,000 less sales of my autos in the future? (30,000 is pretty small figure, I know).


It's the employees fault Delphi is in the mess to begin with. The union got entirely unreasonable benefits and it's crippled the company. Just like major airlines. It's no coincedence that all the big old carriers who are unionized are going bankrupt (and dissolving those old union contracts) and all the new carriers who don't have unionized employees are thriving. It's an important lesson and one that I think corporate America is taking note of. The airline industry and GM/Ford's current health care crisis is the death knell for the outmoded industrial style of employ seen in America's previous major companies.

[Gan]

The last thing you want to do is cut capital investment (land, labor, equipment). You'll want to invest in more efficient technology, more efficient labor practices, and reduce extranious fixed and variable costs. I have this discussion with CFO's and accountants of hospitals every week, where their first reaction to economic slowdown is to cut labor staff. Yes trimming labor reduces immediate overhead, but it also limits your ability to create overhead when demand spikes upwards.

[Valthissa]

I think the mechanism you may be thinking of is called the multiplier effect. Samuelson derived the basic equations in the 40's (I think). The basic principle is that $1 of wages generates more than $1 of economic activity so reducing wages has a negative impact on overall economic activity.

I have found that it is very expensive to layoff even minimally skilled employees. As Ganalon suggests investment and reduction in fixed costs typically yield the most savings over time.

Unlike what others have posted about people being strictly motivated by the lowest price, in many businesses sales are almost 100% relationship based. The general equation is that commodities are bought on price and other transactions are bought on relationships/intangibles.

For what it's worth I don't like Walmart because I don't think they provide good value. Cheap is not the same thing as inexpensive.

C/Valth

[Drew]

Originally posted by Valthissa

Unlike what others have posted about people being strictly motivated by the lowest price, in many businesses sales are almost 100% relationship based. The general equation is that commodities are bought on price and other transactions are bought on relationships/intangibles.



That's when you are spending someone else's money. All the examples I pointed to involved someone's money in a personal matter.