Monday, December 12, 2005

What Happens When Managers Sell Their Textbooks Back...

For those who aren't aware of current trends in the collegiate textbook industry, there is an increasing propensity for students to not only attempt to purchase as many of their textbooks used, but also to sell as many books as they can back to the bookstores (or conceivably to other students if that option exists) to get some quick cash. Personally, I've sold back the vast majority of my books which, even under the most random circumstances, I could not ever see myself opening after the last day of class. On the other hand, most of my legitimate business/finance books and a few others have made the cut and are currently resting peacefully (if not a little dusty) on a shelf in my basement at home. While I think I have only gone back to these books on maybe a handful of occassions (my first inclination is usually to just 'google' stuff I don't remember, obviously), I'm almost certain at some point in the future I'll need to go back and re-read/learn some material.
Getting to my point, just today, while studying for a Multinational Financial Management final later in the week, I came upon alot of interesting discourse in the textbook. One section, however, drew my particular attention, specifically Chapter 17 ("Capital Budgeting for the Multinational Corporation"), heading #8 ("Getting the Base Case Right"). Without overcomplicating the matter, the Author (Alan C. Shapiro if anyone is that intrigued) says:
"To come up with a realistic base case, and thus a reasonable estimate of the incremental cash flows, managers must ask the key question, 'What will happen if we don't make this investment?'"
He goes on to cite General Motors' decision in the 1970's to forgo investment in smaller cars which were, at the time, less profitable than GM's current stable of gas guzzlers and land-yachts (which I think were also referred to as "sedans" at the time, but given their proportions, handling, etc, Land-Yacht seems much more appropriate). As anyone who's laid rubber on any road in this country in the last 20+ years can attest, this decision has clearly hurt the financial health of what was once the largest, most influential company in America in ways from which it may never recover, all while Toyota, Honda, etc have thrived at their expense. I could not agree more with Shapiro when he asserts that the critical error made by GM (and others) is to ignore competitor behavior and assume that the base case is the status quo. GM, in opting not to come out with new products for fear that they will cannibalize its existing product line left a profitable niche for the Japanese automakes to exploit and profit from. They failed to realize that sales would be lost regardless, and for their arrogance we'll call it, those sales were given up to a competitor.
Not every American company has faltered thusly, however. Take the recent revival and success of Apple with their iPod line. A few months ago some analysts were mind-boggled by the company's decision to cease production of its most popular product - the iPod Mini - and to replace it with the liliputian iPod Nano. Looking back on Apple's decision, anyone who's walked into a Best Buy or even browsed the virtual aisles of ebay has witnessed the enormous customer reception the Nano (as well as Video) has encountered. That is not to say I agree with their decison, but consider a line from my finance textbook which I think makes a very important point (one that is occassionally lost on managers):
"In a competitive market, the rule is simple, if you must be the victim of a cannibal, make sure the cannibal is a member of your family."
If we examine the situation with Apple thusly, the decision to launch the Nano and cannibalize Mini sales seems to make alot more sense. With Flash-memory prices dropping steadily, it was only a matter of time before someone else introduced/marketed a product that had the right combinition of characteristics (form factor, price, usability, etc) to lure would-be iPod Mini buyers away, perhaps bringing the profit machine that has recently been Apple to a grinding halt. I just did a quick search for flash-memory based mp3 players, and lo-and-behold, C|Net has a review of their editors top picks (accessable here: http://reviews.cnet.com/Music/4521-6532_7-5021434-2.html), which indicates that every major competitor (Samsung, iRiver, Creative, Sony, to name a few) already has a competing product on the market, some of which garnered equal praise as the nano, for almost 1/2 the price! While we can never be 100% certain what would have become of the iPod Mini had Apple been complacent to rest on its laurels, it is more or less certain that, at least for the forseable future that Apple will continue to be a force to be rekoned with in the consumer technology (and now music and video distribution) arena.

While I haven't spoken with Mr. Jobs since running into him @ Macworld NYC a few years back, I'm gonna go out on a limb and guess that someone at Apple, if not Jobs, still has a few old college textbooks laying around somewhere...

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