When Corporate Layoffs Don’t Work

“When downsizing is a knee-jerk reaction, it has long-term costs. Employees and labor costs are rarely the true source of the problems facing an organization. Workers are more likely to be the source of innovation and renewal.” [1]

Case in Point: Circuit City Laid Off Employees for Over-performance

There were a combination of factors that lead to the demise of former electronics retailer Circuit City. A number of these reasons were self-inflicted wounds. The company located its stores in subprime locations, stopped selling appliances to cut warehouse storage and distribution costs and underinvested in its web presence at a time when consumer preferences were beginning to shift online.

However, the company’s biggest blunder was its decision to layoff its most experienced and knowledgeable sales persons while trying to compete in the competitive electronics retail marketplace. In March of 2007, Circuit City announced a scheme to layoff 3,400 hourly workers (roughly 8% of its workforce), while offering a severance package with the ability to reapply to former jobs at a reduced salary. Any reapplications had to occur after a mandatory 10 week cooling off period. Circuit City practiced genteelism by branding its cost cutting and de-skilling scheme a “wage management initiative”.

Management decided to staff its stores with fewer people, with fewer skills, making less money and expected this combination to yield long term positive results. As a result of the layoffs, Circuit City placed knowledgeable, experienced sales staff on a platter and served them to its main competitor, Best Buy. Additionally, where did Circuit City expect to find quality people who would work for a company that did not value loyalty, experience and wage increases?

“From a strategy perspective, customer-facing sales personnel would appear to be a core resource and potential differentiator for a consumer products retailer,” he [Kevin Clark, an assistant professor of management at Villanova School of Business] says. “Especially in an era of rapidly changing and more complex consumer electronics, knowledgeable sales personnel who are perceived by customers as ‘experts’ can be a source of competitive advantage.” [2]

Reportedly, “employees who were paid more than 51 cents above a set pay range for their departments were fired.” [3] However, solidifying the trope of senior executives reaping the gains without the pains, the CEO and Chairman of Circuit City received almost $10 million in various kinds of compensation for steering the company to its imperiled state. [4]

In under two years (i.e., November 2008), Circuit City announced it was going out of business. By laying off its highest paid hourly workers and replacing them with cheaper less skilled workers, in-store customer service levels plummeted which negatively impacted customer perception and sales.

Southwest Airlines Gets it Right

Waving flag of Southwest Airlines editorial 3D rendering

Treating employees as mere cogs and judging employees by costs and not by the overall value they create is self-defeating.

Some companies don’t understand that making workers happy leads to elevated productivity and higher retention levels. High employee morale should be table-stakes, instead it is a strategic key differentiator. Southwest Airlines has never had a layoff in its 47 plus years of existence. That’s laudable when you consider that airlines endured the fallout from 9/11 and the Great Recession (when oil prices spiked over $100 a barrel). As a well deserved consequence, Southwest Airlines routinely leads domestic airlines in customer satisfaction.

Consider this example of how Southwest Airlines treated its recruiting team during the global financial crisis:

“At one point, however, Southwest Airlines was staring at a tough time financially and it did ‘corporate redeployment’. It had 82 employees in the recruiting team. When the company put [in] a hiring freeze, it also wondered what to do with 82 of its employees in this particular team. The company utilised them for customer service. The result: Customer satisfaction went up as a result of this team’s enhanced skill set. When the economy recovered, the team went back to its original job; only this time, they had an additional skill set, which helped the company and the customers alike.” [1]

If you were in the airline industry would you rather work for Southwest Airlines or another domestic competitor (that I mercifully will not name) which embodies layoffs, labor strife and toxic mismanagement of employees?

The Negative Impact of Layoffs

There is a time and place for layoffs. However, more often than not, companies layoff employees during down times in the business cycle to simply lessen the impact on profits, not to avoid a collapse of the business. Against their own best interests, companies also announce layoffs during times of rising profits which causes their best people to head for greener pastures. Any expected cost savings are negated by lower productivity (when the best performers leave), lower innovation and a remaining demoralized workforce subjected to the negative effects of survivor syndrome (i.e., the feeling of guilt after seeing longtime co-workers discarded).

Additionally companies are impacted by “Brand equity costs—damage to the company’s brand as an employer of choice.” [1]. Sites like Glassdoor offer unfairly laid off employees the opportunity to share their sense of betrayal online which can significantly impact a company’s reputation.

Shortsighted management typically operates under the assumption that layoffs will positively impact shareholders. While financial analysts may cheer downsizing efforts, research indicates that layoffs have negative effects on share prices.

“A recent analysis of 41 studies covering 15,000 layoff announcements in more than a dozen countries over 31 years concluded that layoff announcements have an overall negative effect on stock-market prices. This remains true whatever the country, period of time or type of firm considered.”[1]

It should come as no surprise that Circuit City’s stock price fell 4% the day after the company pulled the plug on its most experienced employees. [5]

References:

[1] Employment Downsizing and its Alternatives. Retrieved from https://www.shrm.org/foundation/ourwork/initiatives/resources-from-past-initiatives/Documents/Employment%20Downsizing.pdf

[2] Circuit City plan: Bold strategy or black eye? NBC News. April 2, 2007. Retrieved from http://www.nbcnews.com/id/17857697/ns/business-careers/t/circuit-city-plan-bold-strategy-or-black-eye/

[3] Circuit City Cuts 3,400 ‘Overpaid’ Workers: Washington Post. March 29, 2007. Retrieved from http://www.washingtonpost.com/wp-dyn/content/article/2007/03/28/AR2007032802185.html

[4] Thousands Are Laid Off at Circuit City. What’s New?. New York Times. April 2, 2007 https://www.nytimes.com/2007/04/02/business/media/02carr.html

[5] It’s the Workforce, Stupid! The New Yorker. April 30, 2007. Retrieved from https://www.newyorker.com/magazine/2007/04/30/its-the-workforce-stupid

Circuit City Image Copyright : nazdravie

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Use the Power BI Switch Function to Group By Date Ranges

In this latest video, I’ll explain how to use a handy DAX function in Power BI in order to group dates together for reporting. We’ll examine a dashboard that contains fields corresponding to purchase item, purchase date and purchase cost. We’ll then create a calculated column and use the SWITCH function in Power BI to perform our date grouping on the purchase date.

Watch the video to learn how to group dates into the following aging buckets, which can be customized to fit your specific need.

  • 0-15 Days
  • 16-30 Days
  • 31-59 Days
  • 60+ Days

If you are familiar with SQL, then you’ll recognize that the SWITCH function is very similar to the CASE statement; which is SQL’s way of handling IF/THEN logic.

Even though we’re creating a calculated column within Power BI itself, best practice is to push calculated fields to the source when possible. The closer calculated fields are to the underlying source data, the better the performance of the dashboard.

My Submission to the University of Illinois at Urbana-Champaign’s Data Visualization Class

I’m a huge fan of MOOCs (Massive Open Online Courses). I am always on the hunt for something new to learn to increase my knowledge and productivity; and because I run a blog, MOOCs provide fodder for me to share what I learn.

I recently took the Data Visualization class offered by the University of Illinois at Urbana-Champaign on Coursera. The class is offered as part of the Data Mining specialty of six courses that when taken together can lead to graduate credit in its online Master of Computer Science Degree in Data Science.

Ok enough with the brochure items. For the first assignment I constructed a visualization based upon temperature information from NASA’s Goddard Institute for Space Studies (GISS).

Data Definition:

In order to understand the data, you have to understand why temperature anomalies are used as opposed to raw absolute temperature measurements. It is important to note that the temperatures shown in my visualization are not absolute temperatures but rather temperature anomalies.

Basic Terminology

Here’s an explanation from NOAA:

“In climate change studies, temperature anomalies are more important than absolute temperature. A temperature anomaly is the difference from an average, or baseline, temperature. The baseline temperature is typically computed by averaging 30 or more years of temperature data. A positive anomaly indicates the observed temperature was warmer than the baseline, while a negative anomaly indicates the observed temperature was cooler than the baseline.”

Interpreting the Visualization

The course leaves it up to the learner to decide which visualization tool to use in order to display the temperature change information. Although I have experience with multiple visualization programs like Qlikview and Power BI, Tableau is my tool of choice. I didn’t just create a static visualization, I created an interactive dashboard that you can reference by clicking below.

From a data perspective, I believe the numbers in the file that the course provides is a bit different than the one I am linked to here but you can see the format of the data that needs to be pivoted in order to make an appropriate line graph.

All of the data in this set illustrates that temperature anomalies are increasing from the corresponding 1951-1980 mean temperatures as years progress. Every line graph of readings from meteorological stations shows an upward trend in temperature deviation readings. The distribution bins illustrate that the higher temperature deviations occur in more recent years. The recency of years is indicated by the intensity of the color red.

Let’s break down the visualization:

UIUC Top Portion

Top Section Distribution Charts:

  • There are three sub-sections representing global, northern hemisphere and southern hemisphere temperature deviations
  • The x axis represents temperature deviations in bins of 10 degrees
  • The y axis is a count of the number of years that fall between the binned temperature ranges
    • For example, if 10 years have a recorded temperature anomaly between 60 and 69 degrees, then the x axis would be 60 and the y axis would be 10

UIUC Distribution Focus.png

  • Each 10 degree bin is comprised of the various years that correspond to a respective temperature anomaly range
    • For example in the picture above, the year 1880 (as designated by the tooltip) had a temperature anomaly that was 19 degrees lower than the 30 year average. This is why the corresponding box for the year 1880 is not intensely colored.
    • Additionally, the -19 degree anomaly is located in the -10 degree bin (which contains anomalies from -10 to -19 degrees)
    • These aspects are more clearly illustrated when interacting with the Tableau Public dashboard
  • The intensity of the color of red indicates the recency of the year; for example year 1880 would be represented as white while year 2014 would be indicated by a deep red color

Bottom Section Line Graph Chart:

UIUC Bottom Portion

  • The y axis represents the temperature deviation from the corresponding 1951-1980 mean temperatures
  • Each line represents the temperature deviation at a specific geographic location during the 1880-2014 period
  • The x axis represents the year of the temperature reading

UIUC Gobal Average

In the above picture I strip out the majority of lines leaving only the global deviation line. Climate science deniers may want to look away as the data clearly shows that global temperatures are rising.

Bottom Line:

All in all I thought it was a decent class covering very theoretical issues regarding data visualization. Practicality is exclusively covered in the exercises as the class does not provide any instruction on how to use any of the tools required to complete the class. I understand the reason as this is not a “How to Use a Software Tool” class.

I’d define the exercises as “BYOE” (i.e., bring your own expertise). The class forces you to do your own research in regards to visualization tool instruction. This is especially true regarding the second exercise which requires you to learn how to visualize graphs and nodes. I had to learn how to use a program called Gephi in order to produce a network map of the cities in my favorite board game named Pandemic. The lines between the city nodes are the paths that one can travel within the game.

UIUC Data Viz Week 3

If you’re looking for more practicality and data visualization best practices as opposed to hardcore computer science topics take a look at the Coursera specialization from UC Davis called “Visualization with Tableau”.

In case you were wondering I received at 96% grade in the UIUC course.

My final rating for the class is 3 stars out 5; worth a look.

How to Dynamically Pivot Data in SQL Server

 

SQL is the lifeblood of any data professional. If you can’t leverage SQL and you work with data, your life will be more difficult than it needs to be.

In this video I am using SQL Server Express to turn a simple normalized dataset into a pivoted dataset. This is not a beginner video as I assume you are familiar with basic SQL concepts.

T-SQL is Microsoft’s SQL language that contains additional functions and capabilities over and above ANSI standards. We’ll use some of these functions to turn the following data set that displays average rents in major American cities into a pivoted denormalized dataset.

The City values in the City column will become individual columns in a new pivoted dataset with their respective Average Rent values appearing underneath.

We’re going to transform this:

Normalized Data

Into this:

Pivoted Data

Notice how the city values are now column heads and the respective Average Rent values are underneath.

Make sure you watch the video but here is the code used in the example.

IF OBJECT_ID('tempdb..##TBL_TEMP') IS NOT NULL
DROP TABLE ##TBL_TEMP

--This parameter will hold the dynamically created SQL script
DECLARE   @SQLQuery AS NVARCHAR(MAX)

--This parameter will hold the Pivoted Column values
DECLARE   @PivotColumns AS NVARCHAR(MAX)

SELECT   @PivotColumns= COALESCE(@PivotColumns + ',','') + QUOTENAME([City])
FROM [dbo].[tbl_Rent]

/* UNCOMMENT TO SEE THE NEW COLUMN NAMES THAT WILL BE CREATED */
--SELECT   @PivotColumns

--Create the dynamic query with all the values for
--pivot column at runtime
--LIST ALL FILEDS EXCEPT PIVOT COLUMN

SET   @SQLQuery =
   N'SELECT [City Code],[Metro],[County],[State],[Population Rank],' +   @PivotColumns + '
   INTO ##TBL_TEMP
   FROM [dbo].[tbl_Rent]
   
   PIVOT( MAX([Average Rent])
      FOR [City] IN (' + @PivotColumns + ')) AS Q'

/* UNCOMMENT TO SEE THE DYNAMICALLY CREATED SQL STATEMENT */
--SELECT   @SQLQuery
--Execute dynamic query
EXEC sp_executesql @SQLQuery

/* VIEW PIVOTED TABLE RESULTS */
Select * from ##TBL_TEMP

 

Big shoutout to StackOverflow for help with this example.

 

Calculate Bar Chart Percent of Total in Power BI

The humble bar chart is the heart and soul of any visualization tool and is the most effective way to compare individual categorical values. We as humans are very adept at detecting small differences in length from a common baseline [1].

To quote the Harvard Business Review [2], “The ability to create smart data visualizations was once a nice-to-have skill. But in today’s complex business world, where the amount of data is overwhelming, being able to create and communicate through compelling data visualizations is a must-have skill for managers.”

If you’re going to start learning a new visualization tool, there is no better place to start than with bar chart basics. In this video I will share how to place a “percent of total” measure (i.e. value) on a Power BI bar chart. We’ll also briefly touch upon customizing the chart’s diverging color scheme.

Since Microsoft is basically giving away Power BI Desktop for free, it may become as ubiquitous as Excel. Don’t be left out!

References:

[1] Cotgreave, A., Shaffer, J., Wexler, S. (2017). The Big Book of Dashboards: Visualizing Your Data Using Real-World Business Scenarios. Hoboken, NJ: John Wiley & Sons, Inc.

[2] https://hbr.org/webinar/2018/02/the-right-stuff-chart-types-and-visualization-best-and-worst-practices

Add a “Filters in Use” Alert to Your Tableau Dashboard

In this video we will learn to add a “Filters in Use Alert” to a Tableau Dashboard. If you have a dashboard with multiple filters, apply this quick and easy tip to inform your users that filters are in play. This tip builds upon the dashboard that I showcased recently in a previous post: Add a Reset All Filters Button to Your Tableau Dashboard.

I learned this current tip from a presentation given by Tableau Zen Master Ryan Sleeper, so I have to give credit where credit is due.

If you’re interested in Business Intelligence & Tableau subscribe and check out my videos either here on this site or on my Youtube channel.

You Don’t Need an MBA to Use Net Present Value

Net Present Value (NPV) and Discounted Cash Flow Analysis (DCF) are financial/MBA wonky terms that may intimidate a majority of people. But in actuality they are simple concepts to understand. Once you realize that a dollar received in the future is worth less than a dollar received in the present, you’re halfway home.

In the words of Benjamin Franklin, “One today is worth two tomorrow.”

Why Should You Care?

The basics of NPV and DCF are not just applicable to CFOs and financial analysts, they’re also applicable to the small business deciding whether to purchase additional equipment, or the person deciding whether to lend money to a friend. These tools help you determine if an investment is profitable considering the time value of money.

If someone offers you $10,000 today, you can immediately invest that $10K in order to start earning money. If someone offers you the same $10,000 one year from now, you have missed a year’s worth of time to take that money and start earning interest.

What is the Discount Rate?

Consider if you will the concept of a “discount” interest rate. If you take your cash and simply invest it at this “discount” rate, you will have earned some return.

What is the discount rate you ask? The discount rate (or r) is the minimum rate of return that you require of an investment in order to take action.

  • For example, you believe that $10,000 invested in the stock market today will offer you a 10% return in one year’s time (i.e. $1000)
  • In order for you to consider an alternative option for investing your $10,000, it has to at least return greater than $1,000 in profit (i.e. return higher than the discount rate that you have established)

A Discount Metaphor

In this example, think of money as a collection of items from a high end clothing line that you are considering purchasing. If you buy the clothes today at present value, you are fine with the current price. But if someone tries to offer you the exact same set of clothes 1 year in the future for today’s prices, you would demand a discount to compensate for the indignity of wearing outdated clothes.

You might have paid $200 for a pair of Jordache jeans and a Member’s Only jacket in 1982, but if someone offered you those items for the same price 36 years later, you would demand a steep discount to compensate for the passage of time. Similar to cash received at a future date, the clothes are valued less the more years you move into the future.

Members Only

Are you still a member?

Receiving $10,000 5 years in the future is not the same as receiving $10,000 today. You would need to discount that $10,000 future payment to reflect the passage of time. Applying your selected discount rate of 10% to the $10,000 received 5 years in the future, you would value that money at $6,209.21; i.e. $10,000/(1+0.1)^5. Don’t worry about the math yet.

If someone ever asks you for a $10,000 investment today only to repay you $10,000 in 5 years, please decline because you would be losing money. The $10K received 5 years in the future would be identical to $6,209 received today. This is because you can immediately invest the $6,209 today and let it compound for 5 years at 10% per year, and have the same $10K in 5 years’ time. Hopefully I haven’t lost you.

Here Comes the Math, Don’t be Scared:

Present Value Example:

  • $10,000 in Present Value * 1.1 = Future Value of $11,000
  • This is the same as saying that $10,000 today returning 10% interest is worth $11,000 in one year

Alternatively, to reverse the scenario:

  • $11,000 in Future Value / (1+0.1) = Present Value of $10,000
  • This is the same as saying that $11,000 received in one year has a present value of $10,000 at 10% interest

In both scenarios, receiving $11,000 in one year would be identical to having $10,000 today. Like those 80’s Members Only jackets, you are essentially applying a 10% discount off of the $11,000 received one year in the future, in order to value those future dollars in present terms.

Present Value Formula2

FV = future cash to be received in year n

This formula is simply plug and chug. Remember that FV = the dollars you expect to receive at some point in the future (i.e. a future cash flow).

Years

You don’t have to limit yourself to evaluating a cash flow one year in the future. The variable n is used in this formula to represent the number of years in the future that you wish to evaluate money received.

Present Value with Years:

  • $10,000 in Present Value * 1.1 * 1.1 = Future Value of $12,100 in two years’ time.
  • This could also be expressed as $10,000 * (1.1)^2 = $12,100 where 2 represents the number of years in the future.

This is the same as saying that $10,000 today at 10% interest is worth $12,100 in two years.

Alternatively, to reverse the scenario:

  • $12,100 in Future value / (1+0.1) / (1+0.1) = Present Value of $10,000.
  • This could also be expressed as $12,100 / (1+0.1)^2 = Present value of $10,000

This is the same as saying that $12,100 received in two years has a present value of $10,000 today at 10% interest.

Net Present Value Scenario (Rolling in NPVs)

Now that you have an understanding of Present and Future Value, we can broach the concept of Discounted Cash Flow analysis or DCF. Again, don’t let the fancy wording intimidate you. This is simply a way of applying the Present Value formula we learned above to multiple cash flows (i.e. money that you receive at different years in the future).

Suppose that you are a financial analyst at the very prestigious Wu-Tang Financial investment firm. At this firm, cash rules everything around you so you have to make the right decisions in order to maintain your job. The firm is considering the following option in regards to investing its money and they’ve come to you for a breakdown of the analysis after firing the last financial analyst.

  • Option 1: The firm is considering investing $10K in a Brooklyn Zoo. This option requires a $10K upfront investment and pays out cash flows as follows over the course of 5 years

NPV

In our example, the firm invests $10K today (i.e Year 0) and receives $2K in one year, $3K in two years, $4K in 3 years and a final payment of $3k in 4 years’ time. The initial $10K investment is represented as a negative number to indicate that it is a payment and those funds are no longer available to the investor.

The previous financial analyst would have simply added all of the cash flows together and determined if the sum of those cash flows were positive. He would have recommended that the firm move forward with the Brooklyn Zoo investment because it returned $2K to the firm over the course of 4 years.

You immediately recognized that this approach does not consider the time value of money. You determine that if the firm were to simply diversify its bonds, it could earn an easy 10% per year on that initial $10K investment. You choose 10% as your discount rate and protect your neck by applying a discounted cash flow analysis.

You proceed to calculate the present value of all of the expected cash flows in the year that they are expected.

Cash Flow 2

With an NPV of -$648.18, this investment is a money loser

By taking the Cash Flow numbers in column B and individually dividing them by (1+.01)^Year, (where .01 represents the 10% discount rate) you were able to calculate the present value (column D) of all the cash flows by the year in which they were received.

For example, the expected $2,000 received in Year 2 is only worth $1,818.18 today. That’s because $1818.18 invested today at 10% interest will produce $2,000 in one year. This same concept applies to the cash flows represented for each year.

By adding and subtracting all of the present values in column D, you’ve calculated the Net Present Value of the Brooklyn Zoo investment (considering you could have earned 10% compounded yearly in an alternate investment).

NPV Formula

When calculating NPV, initial investment is typically a negative number

By evaluating the investment in this manner, you’ve easily determined that a potential investment in the Brooklyn Zoo would lead to a loss of $648.18. If the firm were to simply take that initial $10K and collect 10% interest per year compounded for 4 years, it would have collected an additional $648.18 in profit.

You decide to tell management “Shame on you if you move forward with this investment.”

Summary

Hopefully if you made it this far, the following summary will make sense. If you need to analyze the profitability of a potential investment, take the following steps:

  1. Pick an interest rate as your “discount rate”. Investing your dollars at this rate of return will always be your default fallback option
    • The discount rate (or r) is the minimum rate of return that you require of an investment in order to take action
  2. Calculate the Present Value of all cash flows received in the future (i.e. Future Value) with the following formula:

NPV Formula

  • This method is known as a Discounted Cash Flow analysis. Summing all of the Present Values of Future Cash Flows determines the Net Present Value (NPV) of the investment
  1. If the NPV returns a positive number, then this initiative should be pursued as it provides value over and above dollars invested at the discount rate of return
  2. If the NPV returns a negative number, then the initiative should not be pursued as it subtracts value in comparison to the same dollars invested at the discount rate of return. You should instead invest your dollars at your initial discount rate.

Tableau NPV Dashboard

If you follow my blog, you know Tableau has to figure in to my post somehow. Here is the sample dashboard used at Wu-Tang Financial to present the results of our Brooklyn Zoo NPV case. The bar chart discounted values or present values are highlighted in yellow (e.g. $1.8K, $2.5K, etc.), while the expected future cash flows are a muted color and labeled above the present values. As you change the Discount Rate Parameter slide, the NPV is recalculated and the bar charts are updated.

Feel free to download and/or interact with it on Tableau Public.

Dashboard 2

Always remember, as with any analysis, the results are only as good as the inputs!

Header Image Copyright: photonphoto / 123RF Stock Photo