Ecomonic Lesson

The following is a chain email I received recently. I applaud the passion to stand up and fight for a cause, however before taking any action it is important to understand a little about economics and how it can help (or hurt) the action being taken.

Here is the email:

GAS WAR - an idea that WILL work

This was originally sent by a retired Coca Cola executive. It came from one of his engineer buddies who retired from Halliburton. It ' s worth your consideration.

Join the resistance!!!! I hear we are going to hit close to $4.00 a gallon by next summer and it might go higher!! Want gasoline prices to come down? We need to take some intelligent, united action. Phillip Hollsworth offered this good idea.

This makes MUCH MORE SENSE than the "don't buy gas on a certain day" campaign that was going around last April or May! The oil companies just laughed at that because they knew we wouldn't continue to "hurt" ourselves by refusing to buy gas. It was more of an inconvenience to us than it was a problem for them.

BUT, whoever thought of this idea, has come up with a plan that can really work. Please read on and join with us! By now you're probably thinking gasoline priced at about $1.50 is super cheap. Me too! It is currently $2.79 for regular unleaded in my town. Now that the oil companies and the OPEC nations have conditioned us to think that the cost of a gallon of gas is CHEAP at $1.50 - $1.75, we need to take aggressive action to teach them that BUYERS control the
marketplace..... not sellers. With the price of gasoline going up more each day, we consumers need to take action. The only way we are going to see the price of gas come down is if we hit someone in the pocketbook by not purchasing their gas! And, we can do that WITHOUT hurting ourselves. How? Since we all rely on our cars, we can't just stop buying gas. But we CAN have an impact on gas prices if we all act together to force a price war.

Here's the idea:

For the rest of this year, DON'T purchase ANY gasoline from the two biggest companies (which now are one), EXXON and MOBIL. If they are not selling any gas, they will be inclined to reduce their prices. If they reduce their prices, the other companies will have to follow suit.

But to have an impact, we need to reach literally millions of Exxon and Mobil gas buyers. It's really simple to do! Now, don't wimp out at this point.... keep reading and I'll explain how simple it is to reach millions of people.

I am sending this note to 30 people. If each of us sends it to at least ten more (30 x 10 =3D 300) ... and those 300 send it to at least ten more (300 x 10 =3D 3,000)...and so on, by the time the message reaches the sixth group of people, we will have reached over THREE MILLION consumers. If those three million get excited and pass this on to ten friends each, then 30 million people will have been contacted! If it goes one level further, you guessed it..... THREE
>>>>HUNDRED MILLION >>>>PEOPLE!!!

Again, all you have to do is send this to 10 people. That's all. (If you don't understand how we can reach 300 million and all you have to do is send this to 10 people.... Well, let's face it, you just aren't a mathematician. But I am, so trust me on this one.)

How long would all that take? If each of us sends this e-mail out to ten more people within one day of receipt, all 300 MILLION people could conceivably be contacted within the next 8 days!!!

I'll bet you didn't think you and I had that much potential, did you?

Acting together we can make a difference. If this makes sense to you, please pass this message on. I suggest that we not buy from EXXON/MOBIL UNTIL THEY LOWER THEIR PRICES TO THE $1.30 RANGE AND KEEP THEM DOWN.

THIS CAN REALLY WORK.

Do you think this will work?

Here is the problem. The price of any item in a marketplace is determined by what what the consumer is willing to pay for the item. More importantly, the price is a direct result of the supply and demand for that product. When supply exceeds demand, prices will eventually come down. The opposite is also true. When demand is high for a product and exceeds supply the price for the product will increase. Shifting demand (as suggested in the email) for the same product to another company will only hurt the company the consumer refuses to buy from. Meanwhile, all the other competitors will start raising their prices to keep up with the increase in demand for their product.

If the author really wants lower gas prices, then the effort should be directed at reducing the overall demand for gas and oil. More supply and greater inventories with a decrease in demand will bring the price down.

This is basic economics.

Citigroup

Yesterday's post was on shareholder value. Here is another example of a company who values the shareholder (and themselves) above their employees.

Citigroup (C) announced a massive restructuring earlier last week. The headline from this restructuring is 17,000 job cuts! Wow, is this because the company has been mismanaged for so long? So one day you need 17,000 employees and the next day you don't? The company rids itself of "back office" employees like they are some sort of a disease. These same people are the workhorses that make people like the CEO, Charles Prince, as rich as he is.

So, who is going to do the work that is left behind? They certainly didn't get rid of all that work overnight, did they? 17,000 full time employees equates to 35,360,000 hours a year. It begs the question, what were these people doing and how will it effect the customer? Work doesn't just disappear. Less people doing the same, or even close to the same amount of work means mistakes and inefficiencies. With these mistakes come increased costs of doing business. Of course Citigroup won't tell you this. For them, it is all about the stock price.

Why all the job cuts? Well, Charles Prince was quoted as saying "nobody is more upset about the stock price than I am". I wonder why. He owns 1.6 million shares worth about $83 million. Maybe he is trying to get to $100 million. Why not upset 17,000 lives in the process to squeeze a few extra million to line his pockets.

Prince may get his wish in the short-term as the fools rush in to buy on the promises of the company. But will this provide long-term value to the investor? Does owning 1.6 million shares affect the decision making ability of a CEO? What do you think?

Shareholder value

Dell recently announced that they had identified a number of accounting errors and evidence of misconduct at their company. This news follows a bonus takeaway I talked about in a previous post. http://givemebigmoney.blogspot.com/2007/02/opportunities-in-guerilla-recruiting.html
The news just keeps getting worse at Dell, but Dell is similar to many other companies in corporate America. The difference is, Dell got exposed. Others won't be far behind.

So what drives this sort of behavior? One of the major culprits is executive compensation. Incentive plans that reward top executives based on the value of the share price is a recipe for disaster. The temptation to manipulate the books to prop up the stock price is very real when the executive stands to lose a boat load of money from reporting a quarter that missed "expectations". Yet most companies continue to reward their executives with stock options and restricted stock forcing executives to focus primarily on the stock price.

While it is important to continue to provide value to shareholders, short-term solutions that put the company at risk is not the answer. Top executives should be rewarded on revenue growth, employee retention, profit, leadership skills as determined by their employees, and ethical behavior as determined by an independent firm. These are things that will provide long-term value to the shareholders.

Taking care of the business will take care of the share price. A lesson many companies have failed to learn. It has already caught up to Dell, who is next?