James Long, Ph.D., P.E. Retired Analog and RF Consulting Engineer
Why Businesses Fail & Under Perform
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Any fool can trade short-term gains for long term losses.
They are the ones who do.
Failures can be grouped into the following areas:
Which has implications for government agencies.
Falling in Love With Your Product
The product is so fantastic that:
There will be an unending supply of willing investors no matter how little of each financing round is spent on product development. One company farmed out the product development to an engineering services company. They only spent 10% of the financing rounds on product development. The other 90% went to executive salaries for positions with nothing to do.
Only the highest performance and quality version is wanted by the customers. One manufacturer of barbecue grills only marketed the $350 version with stainless steel and other features. The argument that Ford made more money on Escorts than Lincolns made no effect on the sales philosophy.
Customers will pay any exorbitant price you select for the product. One maker of a new math software program charged three times the going rate. They sold one copy a month until they went under.
If the product doesn't sell, it is only a matter of time before the customs discover it. Many companies hover over the edge of bankruptcy for years in a booming market while waiting for their product to sell. One extreme case is eleven years in the booming data network area and consuming 165 million dollars for product development without any products being sold.
The product version with the lowest sales volume and highest development cost will be done first. It is thought that the status of having such a good product will attract investors more readily than if the high volume, high profit margin product is made first.
Charging What the Market Will Bear
Charging more than necessary leaves room for competition to undercut you. HP microwave division is plagued by this problem. They charged much more for their products than necessary and a whole slew of competitors came in at reasonable prices and took the market away from them.
Incompetent marketing "experts" frequently put their customers into this dead end street. They frequently don't know the market and don't realize that reasonable prices will pull in more customers and result in much higher total profits.
One software company went under because the marketing "expert" told them that they could charge three times the price of the competition. They sold one product a month until they went under.
One other variation on this is to only offer high end products. This leaves room for the competition to start small and overtake you. Honda made small motorcycles and now outsells Harley Davidson and is eating away at the automobile market.
HP had this same problem. They dropped low end products as they went to high ends ones. This spawned a whole industry of low end competition. Eventually, HP got itself exclusively into the very small niche market of high end test equipment.
Making it Difficult for Customers to do Business With You
The Monty Python Cheese Shop sketch is alive and well in many businesses.
Poor web sites are quite common. This includes poor search engines and serial access play 20 questions type navigation. Motorola is one notoriously poor web site.
Ignoring customer communications guarantees no sales. Cambridge U Press USA is a prime example. I have four requests in to them about their economics series printed for The Royal Economic Society. No reply so far. Princeton U Press answered a similar question from me in one day including titles, prices, availability, and order numbers.
Pig in a poke guarantees low sales. The Folio Society wants you to commit to buying a certain number of books from a list they refuse to show you. If you take a chance and commit, they send you a list and it is a now or never proposition. You have one chance to select the books. The Easton Press sells similar books, but they send you a catalog, and you can order any time and even pick individual volumes from sets.
Making the Schedule Into a God
Not correcting errors found later on because the schedule says that that part of the project is over. One company, which is no longer with us, discovered that the low power supply voltage necessitated using expensive op-amps that had a large common mode input range. Since the power supply had already been specified, but not purchased, the schedule said that it could not be respecified.
Punting in order to get the project portion finished in time. Another company, whose stock is selling for 3% of its original price, took a SWAG on the modulation format for their product in order to meet the release schedule. It turned out to not work satisfactorily in the customers' applications and all of the units were returned.
Spending to schedule in spite of reality. Another company had a schedule of the release date and sales projections. They staffed up with sales, service, and manufacturing personnel to be at full strength on the product release date. The product did not sell well, and the staff salaries depleted the resources so that the product could not be redesigned to the customers' suggestions.
Using Politics to Eliminate Technically Superior Rivals
Killing the goose that laid the golden egg and trading short-term gains for long term losses. A small company had a three person section that technically outperformed a department of several dozen people in a larger company. The larger company bought out the smaller and the three person section was disbanded, and the three people assigned to other duties. Ten years later, the smaller company, which had been the industry leader, was reduced to such a low level of mediocrity that it was closed down and the remaining people reassigned to positions in the larger company.
Another form of this is only hiring subordinates who are less talented than yourself. HP microwave division did this, and it is a contributor to their present problems.
I have seen this applied to hiring consultants. The people who are in trouble would rather have the project fail than have it succeed with someone more talented than themselves.
Using Irrelevant Staff Selection Criteria
The sole staff selection criteria should be job performance. Frequently, other things, such as bra size, sexual preference, fraternal society membership, or government regulations control who is hired. Unfortunately, you cannot get away from being forced to hire a few equal opportunity parasites. (These are not the same as people who come under the equal opportunity laws and have talent.)
It is invariably the case that people who rely on these irrelevant criteria to get hired could not get hired based on talent.
One company that consumed $165 million in eleven years with nothing to show for it had Knights of Columbus members for most of its executives.
Many companies in Texas have a glass ceiling above which only native born Texans can rise. This explains why many Texas companies have not achieved their full potential.
Family run large businesses fall into this category. Family run technology companies are notorious poor performers.
Living in Paperwork Fairy Land
Government agencies frequently do this which is why their regulations are unconnected with reality and frequently harmful to society. This involves never leaving your office and thinking that memos and reports are the truth, the whole truth, and nothing but the truth.Winchell's Donut House has this problem. They have regulations to prevent employees from playing the radio. The store managers send in reports of compliance even though the radios are played and drive customers away. Winchell's is doing so poorly that they cannot replace worn out equipment. Complaints from the customers to the CEO are ignored because they don't match fairy land.
No Supervision of Activities
The mice play while the cat is away. Writing memos and directions do no good if no one follows them. You will suffer from staff errors whether you know about them or not. You can only take corrective action if you know early enough.
The owners of one bookstore spent their time riding their horses in the country while a hired person ran the store. This person only ordered books in quantities of five and once a month. The unsold books piled up in the back room while the customers for the popular books could not find them and went elsewhere. A slow down in the economy came and the store's debts overcame the low sales. The owners tried running the store themselves but it went under in three years taking their quarter million dollar investment with it.
Conflict of Interest
Dracula in charge of the blood bank. (Or president Clinton chaperoning a beauty contest.) The people with the charter and authority to correct false directions and remove incompetent staff are the incompetent staff that made the false directions. Frequently, they are drawing salaries several times larger than they could get at another business. This is very much like journalist not reporting how they cause crime by giving notoriety to wrong doers and give them suggestions on what to do, also known as "copy cat crimes."
Non-business criteria for employment. Employees are put into busy work nonproductive positions and useful positions requiring skills they lack so that they can be paid out of the business revenue for providing perks for the executives. Such people frequently are selected for such non-business reasons, such as bra size, same national origin as the president, ass licking skills, or society and organization membership.
The company founders and executives spend all of their time and resources maximizing their share of the business. This entails:
Minimizing employees' share by fair means and foul. This gets them employees from the lower range of talents. It also motivates any talented employees to leave.
There is no time left over for running the business. This causes very little to get done and many rounds of financing are required to bring the product to market. This dilutes the original investors and executives' share of the business more than what they gained by being greedy.
Employees sabotage the business. One president verbally promised stock bonuses for getting a product to market but reneged once it occurred. The employees covertly destroyed all documentation for the product and then quit.
Backfires in financing rounds. One board of director fired the president and had to issue four times as much new stock as already existed and at a price of 1 or 2 percent of the previous round in order to get any financing at all. This cut the founding president's share by 4/5 which was a much higher loss than what he had gained by dishonesty. This company had me on retainer and later refused to pay for the work I had done. The software people developed the microwave hardware and communication protocols with predictable results. Eventually the board of directors sacked the whole company and restocked it with talented people.
Something for nothing is the common way for financial frauds, advertisers, and dishonest politicians to hook suckers. Goods and services can be provided at no cost to society, or so they say.
SyQuest Example This company had an initial monopoly on the removable media area. They charged high prices for them. When the ZIP drive came out they increased the capacity of their media and lowered the price of the new media but kept the old media at a high price. They also prevented any other company from making media for their hardware. ZIP encouraged others to make media. As a result it became cheaper for users to junk their SyQuest products and buy new ZIP products which they did. SyQuest is no more.
Employee salary conforms to the old adage of you get what you pay for. Lower talented employees take longer to get the job done, and the job is not done to the customers' satisfaction. A classical example was Diana Rigg's low salary for The Avengers. She got disgusted and left the series which folded a year later.
Tools trade time for money. Since time costs money, they pay for themselves in lower labor costs and quicker time to market. One company that had to sell out to another had spent so much on the executives' European luxury cars that the production line ran at reduced throughput from lack of tools in good condition. Another company lost a big potential customer when the customer was taken on a lab tour and noticed the predominance of 30 year old vacuum tube hobbyist type test equipment. Crown Books "saves" money by not fixing their store software. The books in print data base frequently cannot display a book that is in print and stocked by other stores. Their ordering software deletes orders at random without notifying anyone, such as the person placing the order. [Two years after writing this, Crown Books is bankrupt.] Blockbuster Video "saves" money by not getting a binder for the loose leaf book of videos available that was worn out with use and replaced less the binder which is on back order for the last year with the supplier of the pages.
Advertising brings in more than it costs.
Minimizing staff during slack times backfires. There once was a famous semiconductor manufacturer that laid off the R&D staff during a slack time and continued to manufacture and warehouse the old product. When the business cycle went up, the competitors offered and delivered superior products they had worked on during the slack times.
Short cutting the development process by not testing extensively before committing to packaging etc. Going directly to the manufacturing process with the highest up front cost and lowest per unit cost ends up costing more when the design has to be changed in order to work.
Announcing a new product before it can be delivered sometimes causes people to stop buying the old product which cuts off the revenue for developing the new product.
Announcing new product performance parameters and failure rates before they are proven to be attainable will either lose your credibility with customers if they are not met and cost you a mint if the reliability turns out to be less than the guarantee period.
Designing the cabinet before what goes into it is finalized.
Making the tooling for making the housing before what goes into it is finalized. This frequently causes the product performance or manufacturing cost to be compromised to meet the size requirement.
Downsizing by Eliminating the Most Talented People
This usually happens when the bean counters who are totally lacking in business skills are in charge of the company. That is, ones who do not realize that it is talent, not human bodies, that produce products that sell. They trade short term gains for long term losses.
The most talented people usually get the largest salaries. When they are gone, the remaining people make more uncorrected mistakes that produce products and services that customers do not want and do not buy.
The first way saves severance costs. The company circulates a rumor that layoffs are coming. The most talented people start searching for jobs elsewhere and get them. The people with no talents have to stay behind because no other company will hire them.
The second way is to directly lay off the most costly people, who are also the most talented.
Irrelevant Expenditures (Delusions of Grandeur)
Unnecessary executives drawing salaries for doing nothing. One company had more executives than workers. Another company had a VP for manufacturing when there was no product developed.
Unnecessary facilities that are larger and more elegant than needed.
Executive fringe benefits paid immediately and use up funds better spent on product and market development.
Charity donations of the type which put the company name before the public, but not customers.
Executives draw large salaries while the company makes no progress. The lack of progress is hidden from investors. One golf accessory company took in several million a year and spent a few thousand on consultants. The rest of the money went for executive salaries. No product ever went to market.
Fake test marketing of products to give a false reading of future sales. One company paid people in a economically depressed area to use their product. The high use rate was used to set the stock price on going public. The product never sold, and the company folded after the in crowd sold their stock early on.
Stock price manipulation over several cycles. One company made a great media splash on their new product for the utility industry (which was not their core business.) They put all of their resources into the test of the product by a real utility. They did not support the test, and the test result was negative. Before the test results were made public, the stock price soared. After the results were made public, the stock price plummeted. Members of the in crowd were able to buy cheap early on, sell at the peak, and then sell short for the decline.
Shedding stockholders just before profits are made. One company took in over a hundred million dollars to develop their product. They filed bankruptcy with an exclusive that kept outsiders from rescuing them. Then they sold the assets to a smaller company for 1/1000 of the development cost and went to work for the new company less the old stockholders.
The world is one monolithic market. Winchell's Donuts, Carl's Junior, Safeway, and the Sunnyvale Town Center Mall play the same nonstop sorrowful, culturally lower class music in their Sunnyvale stores as they do in their stores in lower class areas. The people in Sunnyvale are happy with their lot in life and do not have any sorrowful feelings. They are also highly cultured with the highest percentage of residents having four-year college degrees (68%) and graduate degrees (25% [included in the 68%]) of anywhere in the country [Since writing this, the mall has become bankrupt due to lack of customers and stores and is to be torn down]. In the case of Winchell's, it is due to a lack of leadership skills [not being able to enforce the rules] and not a lack of knowledge of the markets. Winschell has abandoned the location in Sunnyvale and an immigrant Asian family has taken over the location and is doing well selling the customers what they want to buy. [Since writing this, Target has placed a store with a food service area in the Sunnyvale mall. Despite the higher prices and hard benches, they have diverted customers from Carl's to the point that there is a rumor in the mall that Carl's is seriously considering closing the location. Target has complete silence in their store.]Crown Books headquarters has a single rigid list of what books all stores must stock and not stock. This list is independent of the local customers' interests and buying habits. [Since writing this, Crown has gone out of business.]
Pushing the market instead of following it. Blockbuster Video was taken over by new management. They drastically reduced the categories that the videos were displayed in. The customers did not do a store inventory to find what they wanted, the went elsewhere. Apple Computer went for years trying to sell only high price, high performance models until they almost went under. Now they are going under by refusing to sell the customers what they want to buy. Apple insists on selling units with flashy looking cabinets and a severely restricted choice of removable media drives. Every time an outside company makes these items Apple takes measures to shut them down. As a result of all this, Apple has condemned themselves to a niche market when they could have been the major market leader. Amazon.com once owned Bibliofind.com which was a used book site where something like ten thousand vendors paid $30 a month to have their used book stock listed. Many of these vendors were retired people liquidating their libraries to get cash to live on. This provided a wide selection of books not found on ordinary used book sites. Amazon closed down the site in order to force the vendors to use the more obtuse, more expensive Amazon store system. The vendors went to other sites, such as ABE.com instead of Amazon to the great financial loss of Amazon.
Making it difficult for customers to do business with you. Motorola was once the countries premier two way radio and semiconductor manufacturer. Try getting data sheets from their web site or FAX back service. You have to fill in all sorts of information before they will send you an advertisement for their products.
Being satisfied with an arbitrarily selected level of performance. Many businesses drastically under perform because they are satisfied with a level of performance well below what they could achieve.
Mice play while the cat is away. Many business owners let someone else manage the business and never check on their performance. This, in combination with the above problem, leads to disaster when the next down turn in the economy occurs. A Sunnyvale bookstore manager only ordered books in quantities of five and once a month. The store drove away customers who could not find the popular books in stock while the debts of the store mounted from the unsold unpopular books collecting in the back room. The store owners were too busy riding their horses in the country to check the accounts, and they were satisfied with the profit checks they received each month. When the economy dropped in early the 1990Ős, the stores debts caught up with them and they went under.
Letting Accountants Make the Major Business Decisions
General Electric was once the world's leading semiconductor company. The accountants calculated that there was such a small market for such things that they got out of the business. The employees went to National.
Logitech was the original leading company in digital still cameras. They did not bring out new models because the accountants saw the market as small and saturated.
Hewlett Packard was buying up small instrument companies whose products have yet to be perfected. They were ignoring their internal staff's pointers of severe, if not impossible to overcome, problems with the partially developed products.
ESL decided to only bid on large projects as that was where the profits were. They chose to ignore the fact that it was usually the company that did the preliminary, small development work on the technology that was a shoe-in for all of the follow-on work.
In 1778 during the war farmers were faced with a choice of selling their crops to the British army for gold or the US army for paper money. They sold to the British. General Washington requested that congress buy food and transport it to the US army because none could be had where they were. Congress sent him more paper money because it was more economical to buy locally and save the shipping costs.
Government Regulations that are Disconnected from Reality
Society is a complex feedback network. Government agencies do not take the whole system into account in making their regulations, many of which are counter productive and some are outright harmful to society.
For instance; parental child abuse would be totally eliminated if all children were raised in orphanages. Instead, they would be subject to child abuse by orphanage workers as well as have the mental illnesses caused by the lack of human warmth commonly found in orphanages.
Agencies only get bad publicity for errors of commission, not omission. This makes them commit errors of omission. For instance, the FDA gets bad publicity if a drug they approve kills people. They get no bad publicity if people die because they don't approve a drug. As a result, many people die because of the FDA regulations.
High level directions for business are done by government workers who do not have the talent to be even a middle level manager in the industry they regulate.
A further example from the US state of Nevada. The regulating agency for Professional (chartered) Engineers thinks that engineers do not learn new things on their own and must be forced to do so by law. This is sort of thinking that there should be a law requiring president Clinton to commit adultery on a daily basis. The agency claims that without this forced learning, engineers will design things that will harm the users. (Do the laws of physics change?) In order to fulfill these safety driven requirements, engineers can take language lessons.
Promoting Incompetents to Get Them Out of the Way
If someone is fouling up the operations at their present position, they will do even worse at a higher level.
One aerospace company had a former big wig from the CIA as CEO. His first act as CEO was to lay off everyone at the software division and close it down. He then decided that since software was more lucrative than hardware, the company would only bid on software contracts. In three years they got no new business.
The higher ups got him out of the way by making a new level of management and placing him in it. From that vantage point he was able to foul up three companies which he did thoroughly.
Promoting Incompetents In General
This is summed up by Adam Smith around 250 years ago:
Men of no more than ordinary discernment never rate any person higher than he appears to rate himself. He seems doubtful himself, they say, whether he is perfectly fit for such a situation or such an office, and immediately gives the preference to some imprudent blockhead who entertains no doubt about his own qualifications.
From The Theory of Moral Sentiment page 260. [Human nature never changes. Incompetent managers promote incompetent subordinates. They also engage the incompetent consultants.]
Only Selling Through Distributors
When you use distributors, you are doubly isolated from the customers. The goals of the distributor are not yours, and the goal of the distributor employees are not those of the distributor.
You want to sell all of the products you can no matter how small the quantities. You want everyone to know about your products, even people who are not now designing or manufacturing with them because they will be designing with them in the future.
The goal of the distributor is to make the largest profit with the smallest effort. This means only selling large orders and not bothering to let people know about your products.
The goal of the distributor employee is to exert the smallest effort they can without getting fired.
Watkins Johnson once had their market to themselves. The distributors were so difficult to do business with that so many competitors sprung up that now Watkins Johnson has had to switch business areas to survive as a shadow of their original self. The details are that WJ made hundreds of modular components. There was no rime or reason to the prices. On any given design about 50 possible products could be used. The distributors would only disclose three prices at a time and with a week time delay. The designers gave up in disgust and designed in Q-Bit and Cougar components because they had advertised prices. The WJ distributors were afraid that if competing distributors got wind of their prices, the competitors would under bid them.
Missing The Market
Failing to enter a lucrative market is usually done by very large and very small businesses. The large businesses are overly focused on their market segment. The small businesses are lead by managers with modest business skills.
The classical example of a big business was Xerox failing to enter the macintosh-windows type computer market on the ground floor because they were only interested in increasing the sales of toner. I once worked for a defense contractor who only did intercept and direction finding work. I suggested a research and development project on using the received bit error rate to control transmitter power. They turned it down because it was not concerned with their three year projected products. They are now out of business and every portable telephone in the world uses my patentable idea.
Small businesses are frequently that size because of the talent level of the owner/manager. They have blundered into a niche market and are afraid of doing anything different. One video distributing business has the rights to a very popular British television program. They have issued half of the episodes on VHS tape and stopped there. Another very successful distributor wants to issue the whole set of episodes on DVD which shows what should have been done. Software companies frequently issue only high performance, high price versions of their product. They could easily make lower performance versions just by removing some features from the pull down menus and sell to a different market segment with pure profits from not having any additional development costs. There is a hole in the business envelope printing software market between the $10 low end home consumer packages and the $2000 bulk mailing, address correcting packages. Small businesses will not pay the $2000, but would pay $200 for programs without the bulk mailing and address correcting features. This hole was once filled with MacEnvelope which will not run on IBM type computers.
Another factor of this is not knowing the market. Ford did a good survey before bringing out the Edsel. They found what people wanted, but not what they did not want. The public wanted a flashy car without the mundane Ford name. Honda learned from this. Their up market cars have different brand names.
The music industry does not know that people's recreational budgets are money limited, not product limited. This means that people have a fixed amount to spend on recreation. They do not do as the music industry thinks and select the number of CDs they will buy and economize by not eating or being homeless. The efforts to prosecute song swappers will only backfire. The decline of music sales comes from five sources. 1. The saturation of the market for re-release of vinal titles. 2. The saturation of the market for music of limited sources, like classical. 3. The poor economy makes people economize on their recreational purchases. 4. I suspect that the number of people in the music buying age is declining. 5. The quality of new music is so low and a repetition of previously released music that people do not buy it.
Because Of or In Spite Of
This occurs when a group of procedures are used, some of which are counterproductive enough to reduce the net effectiveness to a low level. Unskilled managers then assume that all of the procedures are productive.
Several decades ago HP had a socialist method of evaluating employees. If a project succeeded, all people on it got good reviews, even the lower skilled people. If the project failed, all people including the talented ones got bad reviews. As a result, incompetent people got promoted an good ones left to from the competition. The other HP policies were effective enough to compensate for this one.
In the early days of radio broadcasting, it was thought that by playing a variety of music a large audience would result because there was something for everyone. Small audiences resulted because there was something to offend everyone. Starbucks, at least in the past, had a policy of playing a variety of music in their stores. Fortunately, the staffs were offended by the music and brought their own in to play. Also it was fortunate that the customers had the same social and economic level as the employees and liked the music. I suspect that whoever was in charge of the music thought that they were improving the sales.
Stray From the Knitting
This occurs when a successful company has excess cash and buys out another company in a different field. Instead of leaving them alone, the first company "improves" the operation of the bought out company to the point that it goes out of existence.
This commonly occurs when a contract manufacturing company buys out a contract design company. I know of several cases of this. They "saved" money by restricting the design tools and replacing the talented engineers who left with much lower paid and less skilled engineers. After a while, the customers went away because of the poor designs made by the lower paid engineers who were working without the proper tools.
One company which made high performance gizmos was bought out by a company which made low performance, mass market gizmos. Many customers for the high performance types wanted immediate delivery of working units when they did buy them. This required that a stock of manufactured gizmos had to be kept on hand. To "save" money, funds were not to be tied up in unsold stock and the company had to take orders before starting manufacturing. This eliminated the customers who paid huge premiums for immediate delivery. Engineers who left were replaced by lower paid, lower skilled ones who could only design low performance gizmos. This company is a shadow of its former self and may go out of business.
One company was first in the digital radio market. The company owner was so distracted by his squeezing the last fraction of a percent profit from his personal real estate deals that he let other companies come in and take over the market. His company is no more while Harris, Digital Microwave, and GTE prospered growing to hundreds of times the size of his company at its peak.
There are people in the world who are so technically talented that they can make snap judgements that are correct 98% of the time.
They work on small projects where the 2% factor does not harm them or if it does it is easy to make modifications to fix them. These people get a false view of their project engineering skills and take any objections from others as an opportunity to practice their debating skills.
As the projects they work on get larger and other people have to be used the 2% factor can be fixed in a secret way by the workers who interact with each other. The problem occurs when the projects get so large that the workers are isolated from each other and cannot make corrections and the 2% affects dozens of aspects of the project. You end up with an army tank when a hang glider was intended and no modifications can transform the tank into a glider. This setback usually ruins the company.
One of the has been nation wide department stores used to go to a small manufacturer and offer to buy more products than they could produce. The price offered was high enough that the supplier could get a loan for the purchase of more production equipment and make a profit.
The next year the offered price would be lowered so that the supplier would lose money, but not as much as if they defaulted on the loan for the production equipment.
The suppliers would reduce the quality of their products to minimize the losses and the department stores customers got products that would quit shortly after the warranty expired. This drove away customers. After several famous specialty product manufacturers were made bankrupt, word also got around and suppliers refused to do business with the department store.
What Happened to the "Peace Dividend"?
It was squandered by commercial company engineering managers who could not evaluate the talented engineers that were out of work once the cold war stopped.
One of my friends designed equipment that detected and decoded spread spectrum signals form highly developed industrial nations' military. He got a job designing spread spectrum cordless telephones. The company pre-advertised the range as the free space one and not the ground base one. They also overruled this engineer and eliminated the integration after the despreading. This cut 20 dB off the system performance. The product never reached market.
Another one of my friends designed signal collection equipment that would be classed as science fiction level. He applied for a job at an integrated circuit company. The marketing manager (who had also worked in the same defense company) of the division interviewed him and told him that he was a shoe in for the job. The engineering manager selected the candidate whose designs were the worst and had to be hand tweaked on the bench because the manager considered that bench time was the most important measure of an engineers' skills.
I have had many occasions when the customer did the system engineering in a totally sub optimal way and would not listen to reason. As a result, I designed what they specified and when the performance was less than what they dreamed of it was the consultant that was the fault. Most of the time these companies make similar mistakes on their other products and they end up going out of business.
Sir William Preece, Ph.D., F.R.S., M.I.E.E.
William Preece lived during the last half of the 19th century. He went to school to learn to practice medicine. There is no record of his graduating. He then learned to be an electrical engineer by the apprenticeship method. This required him to learn what today is 7th grade algebra and the electricity portion of High School physics. He was a mediocre performer.
His political skills were much higher. He got himself appointed the chief technical officer of the British Post Office Telegraph Department. When the telephone was invented he said that there was no need for it. After it became commercially successful he got it nationalized and placed under the control of his department. He claimed that radio did not work. After it was proven he tried to get it nationalized and under his department's control, but was not successful because Marconi was also a good politician.
He got himself knighted, given an honorary Ph.D., elected as a fellow of the Royal Society and a member of the I.E.E. In his papers before these societies he made many elementary technical errors. He also condemned things that he did not have the talent to understand, such as Maxwell's equations or AC impedance. When people pointed out his errors or published on things he did not understand he used his political connections to have them suppressed. He even had the editor of a commercial electrical magazine fired because of publishing material on Maxwell's equations.
As the new ideas were placed in practice in other countries that he had no post office jurisdiction over, he quietly stopped condemning them and had the Post Office do them. He would then publish papers about the wonderful things the post office was doing under his direction and did not give credit to the inventors of the methods and techniques, but instead inferred that he was the inventor of them.
After his death, his friends wrote an obituary describing how he had invented all of the new wonderful telephone and radio technology.
For more information, read Oliver Heaviside by Paul J. Nanin published by Johns Hopkins University Press in 1988 and 2002.
I have seen one startup go under because the chief engineer was like Preece. One company had an under performing department that was headed by such a person. One university that could have been the first ranked research organization in a new scientific area is now an also ran because of such a person. In these cases, the slack is taken up by other organizations and only the investors and students suffer. It is when there is a monopoly situation where the world suffers. One example is the Church as it existed in the past (remember Galileo and the Pope?). Another is patent rights or copyrights. The holder either does not sell the product or sells a substandard one.
Where to Relocate Your Business
The states' Professional Engineering laws can give you more candid information about a state than can their Industrial Development Departments.
The purpose of schools is to teach people how to learn on their own. This is why there is a large market in engineering books. Engineers are able to learn from the books. In Silicon Valley engineers buy and read an average of one book every two months. There are commercial study courses for people who have trouble learning on their own. Most engineers avoid them because the are expensive and have low amounts of information transfer as they are optimized for slow learners. Another characteristic of engineers is their driving curiosity. It is a common complaint of their spouses that they spend so much time reading and tinkering that they ignore their family duties.
Some state Professional Engineering Laws require engineers to take the study courses other states do not. This is a good indication of the level of sloth of the engineers in each state and also of the other workers. If taking study courses gives them more information that the amount the get by reading on their own, you can be sure that that state's engineers are very low in talent. To give you an example, California has no such requirements while Oregon and Nevada do.
Another subject is that the makers of the study courses have gotten them mandated by law even though they have been rejected by a free market. You can use this information to make your own evaluations about whose best interest these state governments have in mind.
Is Corporate Accounting Misconduct New?
Certainly not. It is just that on the last round such a large number of every day people got hurt that politicians and journalists are now interested for the votes and newspaper sales.
It is my belief from observations made while in the consulting business that many start up companies are there for the sole purpose of fleecing investors. Their main product is smoke and mirrors. If they go under before going public, no one can legally show that they were amongst the 90% failures because of anything other than bad luck. The executives get to keep the income from their inflated salaries. If they go public, well you know the story here.
The following were mostly observed by me in the five years prior to about 1992. All of these companies are now out of business.
Some examples of smoke and mirrors are loaning out products and extrapolating sales volume from that base. The loan is disguised as a purchase with right of return one year later and payment is not expected until then.
One company made a big deal of their patent for tapping fiber optic cables. Investors did not know that this is a very small market, almost as large as horn polishing services for pet goats.
Another company made telemetry devices with a market saturation sale potential of 10 billion dollars and an annual sale of a few hundred million dollars thereafter. Their stock soared on the announcement of an upcoming field test. The devices were installed for a one year test. After the year was up the in-crowd had sold their stock at inflated prices and the test was pronounced a failure. Any engineer examining the product before the test would have predicted failure.
Another company test marketed their game of skill with cash prizes paid out of the fees collected to play it. This was tested in an economically depressed area and the people were allowed to play for free and keep the cash prizes. This was used as a basis for extrapolating sales to the general public.
A golf accessory company sold several million dollars of stock each year and spent under fifty thousand with the lowest charging (and therefore a garage hobbyist) consultant to develop a product. The rest went to executive salaries. None of the products ever worked.
A communication network company announced a the release of their first product for three months in the future and did not have the product design even started.
A company was going to exhibit their computer accessory in two weeks at a show. They called me in to develop it. All they had were 10 executives drawing fat salaries and a set of hand drawn schematics for a product that would not work. I declined.
Before the advent of 802.11 products, two companies were formed to develop a product with the same function. Each had no idea what they were doing and tried to defy the laws of physics. They sold a lot of stock though.
One company leased equipment from a friend of the CEO. They paid 3 times the going rate for state of the art equipment and were supplied obsolete equipment that was purchased from junk sales.
Back East a commercial real estate limited partnership was formed. The managing partner gave the maintenance contracts to his own companies that charged more than the going rates. In fact, the rates were what it took to make the partnership not make any money for decades. A similar thing happens in small companies that have major stockholders that are also executives in the company. They get bonuses large enough to make the dividends to the minor stockholders zero. There is no market for the sale of the minor shares of stock. The company is run so that there are no assets of equipment and when the major stockholders retire the company folds. In effect, the minor shareholders gave large gifts of money to the major shareholders.
A company was formed to use artificial Intelligence to design new medications. As it could be predicted, humans were better at it than artificial intelligence. The stock holders were left with nearly worthless stock. The CEO had a history of hoaxes including one involving a novel by C. S. Lewis that very few people now believe was by him.
Implications for Government Agencies
Since 90% of new businesses fail mostly because they do not give good value to the customers, I suspect that 90% of government agencies cost more in taxes than they provide benefits to the public.
Some agencies are counter productive. They do harm to the public. One example of this is the scare tactics used by journalists to attract viewers. The viewers become "Chicken Littles" and insist that government agencies ban the harmless thing the journalists have been making hoopla about. The agencies, in order to not be condemned by the journalists, ban the harmless thing. Another example is employee protections are so costly in labor that many business do not have any non-family employees. The government would rather have a person cheated out of an entire job than possibly cheated out of some fringe benefits.
Another example is the Nevada State Board for Professional Engineers which has continuing education requirements that are functionally like the old joke about the person looking for their wallet under the street lamp instead of where it was lost because the light was around the lamp.
The net loss gets worse as the size of government grows. As the agencies get larger and more numerous, they can apply their resources to more counter productive activities.
Here are two examples. On the U. S. Naval base at San Diego a small child was molested. Both the child and the father said that it was not done by the father. The father was arrested anyway. DNA tests were made and showed that fluid left by the molester was not that of the father. The naval authorities continued to prosecute the father. It took a civilian court order to set him free. So much for the honesty and competence of some attorneys employed by the military. [For some reason the Navy attracts the most incompetent officers relative to the other services, I was a Navy brat and served in the Army and therefore am in a position to know. Let me give you an example. My late father attained the highest enlisted rank, Master Chief E-9 (AQCM)in electronics and had p-2 proficiency pay. When he retired he applied for a job at a small electronics company. They gave him a written exam in electronics. He scored so low that he did not qualify for the stockroom clerk job. I later gave him my old component hifi set. He had his chair in the corner of the room. One speaker was to the right of the chair pointing into the room. The other was on the opposite corner of the room pointing into the room. I tried to explain acoustic imaging to him but he po-poed me with the statement "Speaker should be as far apart as possible."]
On of my acquaintances who lived in Los Angeles adopted an infant found abandoned on a side walk in Hong Kong. When she got older they had trouble with her wanting to not do her homework and associate with drug dealers. A government official went through the schools touting for students to denounce their parents for child abuse. This child made false charges against her parents and was taken from them. The case records contained false statements of fact that the government official refused to change. A court order was made directing him to correct them. A check later on revealed that he had not complied with the court order. He got all upset that the father wanted the court order complied with. It took a contempt of court threat (prison term) to make him correct the records.