Volume 100: Super Bad Feelings.
1. Super Bad Feelings.
tl;dr: Musk takes a break from shitposting to can some people.
Depending on whom you ask, Elon Musk is either the most singularly brilliant innovator of our age - pioneering vehicle electrification, solar power, and commercial spaceflight, or an egomaniac, shitposting bully-troll, prone to extreme hyperbole and fits of impulse who has been credibly accused of sexual harassment.
Who knows? Maybe he’s all those things, none of them, or somewhere in the middle. What I do know is two things:
His public persona is more deeply interconnected with the Tesla brand than any equivalent CEO.
That public persona has shifted hard from techno-utopianism to trolling across a wild array of topics, from crypto to Bill Gates, to working practices, to politics.
In addition to the “will he, won’t he” narrative around his attempted purchase of Twitter (currently, we’re in the “won’t he” part of the cycle as he accuses the company of breaking its contractual obligations), I can’t help but wonder what, if any, impact his public trolling might have on Tesla?
I wonder how many people have recently had the same conversation my wife and I had. As our aging vehicle slowly falls apart, we’re likely in the market for a new car soon and have already decided our next will be electric. Yet, as we discussed options, we immediately rejected Tesla for a single reason - neither of us wants to put a single cent into Elon Musks’ pocket, no matter how good the car might be.
Take his recent behavior. First, he derogatorily slaps down his employees by saying anyone who wants to work from home must be in the office for a minimum of 40 hours p/week, or they can “pretend to work somewhere else.” (Ironic, coming from a man so prolific on Twitter that shitposting looks suspiciously like his full-time job). Then claims that because of a “super bad feeling” about the future economy, Tesla requires a 10% across-the-board headcount cut.
Take these two statements together, and what are you left with? Simple, he wants those who’ve decided to work from home to leave so he doesn’t have to pay them severance. Sprinkle a dash of praise for Chinese Tesla workers “burning the 3 am oil” as they’re forced to live on the factory floor due to zero-covid government policies, outstanding court cases for institutionalized racism, ongoing workplace safety and injury coverup scandals, and this does not appear to be a particularly well company or culture. And you know what they say. The fish rots from the head.
I can’t help but wonder at the timing. For the first time, Tesla faces meaningful EV competition. Ford has beaten it to the truck punch with the F150 Lightning, which includes the ability to, drumroll please…recharge a stranded Tesla (meanwhile, the much-hyped Cyber Truck is…nowhere), while the likes of Mercedes and Audi are competing hard at the luxury end with vastly better quality than Tesla can manage (those panel gaps, OMG), GM prepares an assault on the mid-market, and Ford (again) sells every Mustang EV it can make.
Meanwhile, the Tesla “built with zero advertising” brand remains worryingly dependent on a PR halo created by a CEO who’s given up on techno-utopianism to instead revel in political shitposting, market manipulation, and bully-trolling his employees. All while very publicly trying to/not trying to buy Twitter.
It’s all very bizarre. Were there anything approaching good corporate governance at Tesla, I’d have expected the board to lay it on the line for their brand-defining CEO by now - perhaps insisting he keep his phone in his pocket or delete the Twitter app. But, since there isn’t any corporate governance at Tesla…buckle up.
Meanwhile, I’ll be curious to see how many other folks look elsewhere for that new EV as quarterly sales data comes in over the next 12-18 months.
2. Desire as strategy.
tl;dr: Mercedes Benz outlines its non-strategy strategy.
Sticking with the motoring theme, Mercedes recently announced their new global strategy, “The Economics of Desire.”
Get past the hype, and the basic gist is pretty straightforward; profits over volume. They intend to do this by doubling down on higher profit luxury vehicles and eliminating models that sell in greater volume but lie at the cheaper and lower profitability end of the scale.
Upon seeing this, my first reaction as a brand guy was basically one of “finally.” Mercedes is finally reigning in a bloated product portfolio that had them competing in segments of the market that are quite different from their brand perception as one of the world’s most premium marques.
And it makes sense. One of the most dramatic economic trends we continue to see is economic inequality, as the hollowing out of the middle classes leads to wealth gathering at the top and people gathering at the bottom. Mercedes narrowing their portfolio toward higher-priced vehicles is simply a response to increasing inequality, albeit not the kind we might immediately think of. Equally, we’re also entering a profit over volume stage of the industry cycle. Led by VW Audi Group, there’s now a recognition that volume as a goal has driven stagnating company valuations because they aren’t accompanied by decent profitability. And finally, it’s also a case of “never let a good crisis go to waste.” Like other car companies before it, Mercedes is using the shift to EV and zero emissions as an umbrella to make bigger strategic changes than they might otherwise have felt they could.
However, all that said, the car industry is notorious for having a lack of anything approaching strategy. So, is desire truly a strategy? While my immediate response is that on its own, no, it is not, how they say they intend to act means that it probably is. In other words, desire isn’t really the strategy; moving the product portfolio upstream to be more exclusively focused on luxury is.
But, the proof will be in the pudding, especially in how they define “entry luxury,” which could cover many sins. How many mass models will Mercedes really eliminate, how will the AMG & Maybach portfolio pan out, and how long will this newfound focus last? Because, for car companies, the temptation is always to build that smaller, cheaper, higher-volume model. I suspect the fundamental question about how valuable “desire” ultimately is as a strategy won’t so much lie in what they choose to make but in what they decide not to make - and how long they can resist the pull of volume models.
If this ends up as nothing more than a rearranging of the deckchairs, where they simply re-label mass-market vehicles “entry luxury,” then it won’t have been a strategy at all.
We will see.
3. What to do if/when things turn downward.
tl;dr: Some thoughts on what it takes to take on recession.
If you listen to most commentators right now, it would be hard not to surmise that a recession is imminent. Potentially an apocalyptic one.
We’ve been here before, and if there’s one thing we can predict with great confidence, it’s that human beings are truly awful at predicting the future. I also find it unsurprising that the folks bleating the loudest are those with the heaviest exposure to asset markets that have crumbled in recent weeks. It’s easy to understand Elon Musk having a “super bad feeling” when his net worth has halved as Tesla stock drops, Sequoia Capital freaking out as their firehose of free money dries up, and their portfolio companies halve in value, or Jamie Dimon predicting a hurricane ahead. (of course, in Dimon’s case there might also be a little market manipulation going on so that he can go bargain shopping later. We’ll see)
However, there’s no doubt that multiple things are happening that make things highly volatile right now. High inflation (although some believe it to have peaked), the end of quantitative easing, rising interest rates, market concentration, drought, Chinese Covid policies, crypto fragility, and war in Ukraine are all having an impact on everything from cars to baby formula, to gas prices, to housing markets, to global wheat supplies…and Sriracha. Anyway, the possible knock-on effects are potentially very dark.
So, what happens if/when things turn down, and you’re running an agency or consulting firm? Well, I’ve been here before, and perhaps by looking backward, I can help you look forward.
In 2008, while I was busy getting married, Lehman Brothers collapsed. The ensuing financial crisis led to our most valuable client disappearing overnight. After that, I discovered we were (knowingly) working with two major global corporations at below cost while also working pro-bono for a major cultural institution. We were deeply unprepared for the financial mess we now found ourselves in. Here are some tips on not finding yourself in the same mess:
Take a hard look at your current client list. How likely are they to be exposed to a recession, what are their contractual obligations to you, and what percentage of your revenue do they represent? If you’re heavily exposed to startups, I’d advise you to try and diversify your new business efforts immediately. VC capital has flowed like water for years, but it’s coming to a grinding halt right now, and that portfolio of DTC retail case studies you’ve carefully curated will quickly become worthless as these businesses crater and start going bankrupt. (I learned the hard way that no matter how good the work, a case study is utterly worthless if the corporation fails).
If you have clients you’re subsidizing or working for pro-bono, get on top of that immediately. One of the biggest fallacies is that you can win a client by pricing below cost and then charge more once you’ve demonstrated value. Avoid this trap AT ALL COSTS because it creates the opposite situation - you train the client to expect a certain cost/value equation you’ll never be able to train them out of, but you can’t afford to continue delivering. If you must subsidize, make it clear that you’re making a financial investment in them for that project, and be clear about what it is. Don’t hide it. Equally, if you’re working pro-bono, tell the client what the budget is you’re investing in them, and then stick to it as if it’s a paying job. And if you have any pro-bono jobs happening right now, try to get them to the finish line as soon as possible, so that you can:
Over-deliver for your best clients. When things turn downward, your best clients aren’t the sexy ones; they’re the ones that are the most financially stable, the most likely to pay on time, and the ones with the biggest upside potential from a budget perspective. Look after them, put your best teams on their business, and err on over-delivering rather than under-delivering. These clients will give you the best chance of extending the relationship to help get you through the difficult times. However, be extremely disciplined in how you make these decisions. There’s always a temptation to over-invest in sexy clients going nowhere. A big ugly corporation giving you a $50k project might be something you can grow to $500k if you’re smart and diligent. A tiny but sexy company that has to scrimp to give you a $50k project is ungrowable.
If you find yourself in a position where you have to make layoffs, cut hard and do it fast. The worst mistake you can make is to take too long to cut too little. Then you have to do it again in a few weeks or months, then again a few weeks or months after that. Nothing kills a culture faster than everyone looking over their shoulders, waiting for the chop. So it’s better to cut hard and fast and shift the narrative toward re-building. The trick is not to cut too deeply into the muscle. The trick, trick, is not to put yourself into that position in the first place. With that in mind, start doing the following:
Enhance your new business muscle today. It’s tempting to think you can get through recessionary times simply by growing your relationships with existing clients, but this is largely a fallacy. There’s always a certain amount of churn, and if you cut your new business capacity to service existing clients, you’re putting yourself at huge risk if/when a big client goes away. Instead, you should seek to enhance your new business muscle. Get on top of those case studies you’ve meant to get to. Get on top of your website, Instagram account, LinkedIn, and PR vehicles you employ, do that proprietary research report, write that HBR article. If you have folks on the speaking circuit, get them out more rather than less. In a recession, RFP requests and projects never dry up completely, there are just fewer of them, and they get harder to win. If they’ve never heard of you, clients won’t put you on the list, and if you don’t have a team that impresses them, you can’t win.
In addition to enhancing your new business muscle, get tight about your value proposition. If your value proposition starts with a statement like “We believe…” then stop. Nobody cares what you believe; they care about what you can do for them. Get tight about what you’re really good at, how you create value for clients and the kind of value you create. Think about it through their lens rather than yours. What problems do they have, how does what you do help solve them, and why do you do it better than anyone else?
Eliminate the lazy response. In the good times, the phone rings a lot, getting business isn’t that hard, and we get lazy. Don’t be lazy. If your typical RFP response is full of boilerplate assembled by junior people, you’re at significant competitive risk. Clients hate responses that are obviously generic at any time, but this is particularly dangerous for you in the lean times. If getting on an RFP list becomes harder, don’t ruin it with a generic response. Instead, put your best minds on it to ensure the response is considered, and inspiring, and is tackled with confidence. This alone will put you head and shoulders above anyone still living in boilerplate land.
In hard times, the largest agencies, especially those owned by advertising holding companies, become political shit-shows, while the small become financially fragile. On balance, however, if you can keep a straight head and sustain your new business muscle and focus, then lean times tend to benefit the smaller, nimbler players with lower costs. Larger agencies are likely to take their eye off the value-creation ball as they infight, accidentally fire their highest performers, rely on lazy boilerplate responses for longer, and struggle to offer high-value teams for reasonable rates. Smaller, hungrier, and smarter teams will win.
Don’t get stuck in stupid internal arguments about things like utilization and recovery. It’s a trap. Utilization doesn’t dictate profitability; it simply shows how efficiently you deliver work you’ve already sold. Only two numbers matter to any agency or consultancy in tough times. 1. How much revenue are you generating? 2. How much are your costs? Your goal is to ensure that revenue exceeds costs. It is that simple. As a result, beware of circular arguments that do nothing to address these fundamental questions. Here’s a sample or two from my own experience: “We offer too much vacation time. If we reduced vacation time, we’d be profitable.” Bullshit. If you reduce vacation time, you just piss people off while doing nothing to impact either how much revenue you generate or how much it costs to deliver. (Especially since your best people often aren’t taking their full vacation allocation anyway) This can only make a difference if you’re being paid for every hour worked and your people are already fully utilized. Here’s another doozy to look out for: “resource xyz is 100% utilized. They’re our most profitable employees, we shouldn’t cut them, or we lose these profits.” Again, this is bullshit. People who might be 100% utilized today but have zero impact on the amount of revenue coming in won’t be profitable when that revenue goes away. In a recession, you’re better off heavying up on practitioners who are killer at winning and growing new business even if it looks like they have lower utilization. Why? Because the reason their utilization on billable clients is low is that they’re out there winning the revenue you need to survive. And finally, beware of the recovery argument because it’s also bullshit. If you’re selling fixed-price projects (often the case), and it costs you more to deliver than you priced it at, then the idea you can go cap in hand to your client and recover the overspend is ridiculous. No client will ever say, “oh, you accidentally charged less than you should have for that project you delivered inefficiently. Here, let me stump up that money for you.” If there’s something egregious going on that caused it, you might have the occasional case, but overall, recovery is likely to be a marginal pursuit. Don’t get derailed by these conversations to nowhere. Instead, get your most senior people laser-focused on generating the revenue you need to cover your costs. And that comes from only two places. 1/ Selling more work to existing clients, and 2/ Selling new work to new clients. Get that right, and everything else falls into place.
Beware burnout. Three years after the financial crisis hit, I quit my job, utterly burnt out. I just didn’t realize it at the time. I’d spent the previous three years pitching my ass off, living on airplanes, flying from my home in NYC to clients in Tokyo, LA, Seattle, and the middle east. I didn’t have a client within 2,000 miles of home, and it simply wasn’t tenable to continue. I knew when I spent my son’s 2nd birthday interviewing a Sheikh in Qatar about a museum that something had to give, and it wasn’t going to be my family. I didn’t have any plans. I just knew I couldn’t keep doing what I was doing anymore. Try not to find yourself in a similar situation. Recessions are hard. They’re emotionally traumatizing. It’s a grind to worry all the time about where the next dollar is coming from, whom you might have to let go next, and whether that person might be you. Find ways to turn off, find ways to spread the burden, and find ways to make sure you’re not spending your entire life on an airplane. Learn to say no occasionally and to take a day off amid the chaos. You’ll thank yourself later.