Two Wrongs

The Curse of Capital Management

The Curse of Capital Management

When I worked with Dell as a primary vendor of computer hardware for a previous job, I was surprised by how much the interaction felt like buying financial products from a bank, rather than technology from an engineering company.1 Being green to that sort of interaction, I even naïvely asked why we didn’t speak to our house bank for the financial parts and then pay the cash price on the technology – but apparently that’s not how things are done. I didn’t get a good explanation, but I assume there are lots of quirks in the contracts that make it sensible to use the Dell bank when you buy things from Dell. Separately, I had learned that much of airlines’ profits come from money management, and that Boeing’s downfall may be that it has become obsessed with managing capital rather than building airplanes.2 This seems to have started around the time they acquired McDonell–Douglas and the McDonell–Douglas finance whiz executives replaced many of the engineers of Boeing.

I started to sense a theme.

The pieces came together when Cedric Chin over at Commoncog started writing more about the capital leg of business expertise. Capital management refers to how one uses the resources at one’s disposal efficiently, and this is one of the pillars of successful organisation.

Most large and successful organisations are good at capital management3 It’s possible to be bad at capital management and still be large and successful, but that is a strategy that relies more on luck, so results in fewer large and successful companies. (Actually, that’s not a coherent argument but I’ll leave it as an exercise to the reader to find the Bayesian sleight of hand.), so it’s not surprising that large and successful companies (Dell, airlines, Boeing) are half-banks already. But it seems to me that excessive capital management is also a very common dysfunction among large and successful companies, and much like a three-legged stool needs all three legs, an organisation cannot live on the capital pillar alone. When an organisation with a lot of resources switch to focusing mainly on capital management they can earn a lot of money in the near term (years, maybe decades) but the resources will eventually run out if the company keeps missing the market or their products suffer in quality.

The big question for me is why the banking parts of an organisation end up overruling the productive parts. To me as an engineer, it’s not obvious that it should be so – and it doesn’t always happen. Amazon are great at capital management, but they still know how to make products, and I’m sure there are many more cases. For example, my mind is drawn to Korean chaebol like Samsung and Hyundai that seem very capital-whizzy and yet make products that appeal to a broad range of people and industries.

Here are some ideas that might explain why capital management takes over an orgasination:

I don’t know which of these – if any – are true. But it matters because it may give us a clue on how to avoid it. I’m not influential in a large and successful organisation, but maybe one of my readers are, or my children will be. I don’t want you to be Boeing your organisation.