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Review: Cornered By Barry C. Lynn (Wiley/2010) [Basil and Spice]
[February 05, 2010]

Review: Cornered By Barry C. Lynn (Wiley/2010) [Basil and Spice]

(Basil & Spice Via Acquire Media NewsEdge) Feb. 5--Lynn offers three possibly valid concerns about today's American economy: 1) Monopolies are gaining power, largely surreptitiously through takeovers that preserve existing brand names.

2) Savings achieved by consolidations (eliminating duplicate and unprofitable products and facilities) are often used to fund additional consolidation.

3) Vulnerability to high prices and supply problems increases as the number of suppliers is decreased.

He then buries those ideas (and readers' minds) with hundreds of pages of lugubrious and tiresome weak arguments, all while failing to provide summary data to solidify his points. Consider the following - Early in Cornered (Wiley/ 2010), Lynn reports on the sad case of Menu Foods -- based in Canada, it is the largest maker of wet cat and dog food in North America, producing both high- and low-end products (some 180 brands) for 17 of the top 20 retailers. In 2007 it undertook the largest consumer-product recall in North American history. The problem was adulterated gluten (melamine and cyanuric acid -- used to artificially boost protein readings) from a single producer in China, and cost Menu Foods some $32 million in legal payments and fees alone. An unknown, but believed large, number of pets died. Concentration of supply and manufacture, Lynn's concern, clearly acerbated the problem.

Lynn continues, pointing out that giants Colgate-Palmolive and P&G split over 80% of the market for toothpaste, almost every beer is manufactured or distributed by Anheuser-Busch In Bev or Miller-Coors, that Campbell's has over 70% of the retail space for canned soups, and 9 of the ten top brands of bottled water are sold by Pepsi, Coke, or Nestle. However, he does not address the key issue underlying Menu Foods -- severe risk derived from concentration of manufacturing plant and supplier, and it doesn't likely exist. Lynn also fails to recognize that there are some good reasons for consolidation -- the most obvious being simplified distribution. Can you imagine how the cost/unit of distributing a new soup from an independent company would compare with that of Campbell's? Further, why would Wal-Mart, Albertson's, etc. want to take the time to deal with numerous small soup vendors, instead of a few large ones? Lynn then reports that during 2006 and 2007, Wall Street conducted about $4 trillion/year in mergers and acquisitions. However, reaching any conclusion as to whether this seems excessive requires comparison with monies invested in R&D and new facilities during that same period, and Lynn does not offer that data.

Another example factoid from the book -- U.S. media companies have consolidated from 50 to 6. Again, readers cannot be certain what to make of that report -- first, because it doesn't pass the 'common sense' test (only 6 media companies in the entire U.S., including all the little rural entities?), and secondly because major consolidation is a natural occurrence as industries mature. Then we learn that Parker-Hannifin formerly priced products simply on a cost-plus basis, then began also looking at which products had a monopoly or near-monopoly and raised their prices higher than previous. Homer Simpson's likely reaction -- 'Duh.' Regardless, Lynn fails to offer any assessment of how much prices would be lowered if manufacturing and distribution were less concentrated, and even concedes that Wall-Mart largely uses its market power to keep prices low.

Macy's operates over 850 department stores in the U.S. and is a major player in the department-store market. Lynn writes with considerable umbrage about Macy's power to boot the Liz Claiborne line for its refusing to agree to exclusive distribution through Macy's; meanwhile, Hilfiger was similarly threatened and agreed. What Lynn fails to include, however, is that department stores overall have lost half their market share between 1995 and 2002 (to 19%), and have undoubtedly lost more since then. Thus, it's understandable why, when threatened, Macy's might choose to distinguish themselves in the marketplace by only carrying goods not available elsewhere. Are customers hurt or endangered by this consolidation? Not likely? So why bring it up in Cornered? Henry Ford is famous for many things, one of which was his love of vertical integration -- displayed at what may be the world's most famous auto plant, the Ford Rouge River Complex near Detroit (2,000 acres). Facilities included a blast furnace, glass-making, 90 miles of railroad track, a large power plant, docks for company-owned ore freighters bringing ore from its own mines, and of course large assembly lines. (Ford also tried growing his own rubber trees -- Fordlandia.) Supporting rationale for vertical integration include minimizing order transaction costs, and maximizing control. Unfortunately, new problems emerged -- inability to master each of the technologies and skills required at every step, relying on captive internal customers created producer complacency, increased infighting over transfer-pricing and internal communications, inability to maximize divergent scale economies throughout the system, and many potential outside customers refusing to utilize any excess capacity to avoid subsidizing their own competitors. (Eg. How often would you guess Chrysler or G.M. would buy Ford's extra steel?) Thus, vertical integration has since largely fallen out of favor, and the practice of each of the 'Big Three' operating their own parts manufactures went with it. (Another reason to cast off parts manufacturing was to reduce U.A.W. union leverage.) Not unexpectedly, some auto parts production consolidation took place, largely initiated by the success underlying the new Toyota Production System's emphasis on reducing component variability through reducing the number of suppliers; this also increased the remaining suppliers' motivation to cooperate and lower costs. Another reason for off-shoring (and reducing American suppliers) is to facilitate foreign sales -- part of the reason Boeing outsourced large portions of its Dreamliner 787; lowering costs and the strength of Boeing's Machinist's Union were other reasons. Lynn, however, simply sees this evolution of management thought as something dark, and never tells us what the current concentration of auto parts suppliers is, etc. Ergo, who knows if we're vulnerable because of too few U.S. auto parts or airplane suppliers.

There are, however, a number of seemingly obvious 'de facto' cases of self-imposed vulnerability due to too few U.S. suppliers. Examples include the skills and equipment for production of vaccines, LCD and LED screens, and some electronics have been mostly lost through off-shoring. Worse yet is the loss of millions of highly-skilled and somewhat lesser-skilled jobs due to eliminating and reducing U.S. sources. Lynn, however, devotes only limited attention to this major problem.

Finally, Lynn covers the startling decline of Motorola, particularly in the Phoenix area. Lynn ascribes this to their having invested too much in R&D vs. paying dividends -- thereby aggravating Wall Street and financier Kerkorian. The market power of Verizon and AT&T are also blamed. Motorola's Phoenix decline is personal to me, having gone to school with a number of their engineers and benefited from some of their excellent quality improvement training. However, I'm not aware of anyone else that blames Motorola's decline on 'too much R&D' or excess Verizon and AT&T power -- rather, it was due to increasing foreign competition, especially in cell-phone design. (What would Verizon or AT&T get out of being unfair to Motorola?) Bottom Line: Author Lynn may be onto something. However, Cornered does not allow readers to determine how serious the problem is, except in the Menu Foods instance.

? Loyd Eskildson is retired from a life of computer programming, teaching economics and finance, education and health care administration, and cross-country truck driving. He's now a reviewer for Basil & Spice.

Review: Too Big To Save By Robert Pozen (Wiley/Nov 2009) To see more of Basil and Spice, go to Copyright (c) 2010, Basil and Spice Distributed by McClatchy-Tribune Information Services.

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