Friday, October 17, 2014

Killer quotes #10

"Between stimulus and response there is space. In that space is our power to choose our response. In our response lies our growth and our freedom" -- Viktor Frankl








Thursday, October 16, 2014

The best sales book of 2014

My new book post on s+b's website is up:

Reframing Sales Effectiveness

I’m calling it early: Aligning Strategy and Sales: The Choices, Systems, and Behaviors That Drive Effective Selling (Harvard Business Review Press, 2014), by Frank V. Cespedes, is the best sales book of the year. I know we’ve got a few months left in 2014, but I’m not too worried that I’ll be proven wrong—I’ve been waiting for a sales book like this one for a long time and the odds that another will appear before December 31 are long indeed.

With rare exceptions, sales books are about one of two things: the sales process or sales skills. The process books are aimed at providing the sales force with a path it can follow to close deals; the skills books are aimed at bolstering an individual salesperson’s results. Good ones of both ilks can be worth their weight in gold. “But,” warns Cespedes, a consultant and senior lecturer at Harvard Business School, “they also treat selling in isolation from strategy, and the focus of much sales training can have a perverse effect: It often leads a company’s sales force to work harder but not necessarily smarter .” Worse, he adds, the sales force can get “better and better at things that customers care less and less about…and the cycle can be self-reinforcing.”
In Aligning Strategy and Sales, Cespedes enlarges the frame in order to show us the bigger picture. That picture reveals a set of linkages:

• A combination of company strategy and market/customer characteristics dictates sales tasks (i.e., the sales process). This suggests it is highly unlikely that a generic sales process will be optimal for your company—unless your strategy is also generic, in which case you’ve got a different problem.

• Sales tasks dictate selling behaviors. You need to know what you are trying to accomplish before you can determine how to accomplish it. This suggests that generic lists of sales traits probably will not be optimal either (and I write this as the coauthor of a book that derived a list of desirable selling behaviors from the correlation between the behavioral traits of several hundred thousand newly hired salespeople and their subsequent performance).

• Sales behaviors dictate sales hiring, sales systems, and the sales environment. The latter three buckets are the levers by which you get the behaviors that you need to execute the sales tasks that enable you to deliver on your strategy in the marketplace.

This type of framework is not rocket science and it shouldn’t be unfamiliar to executives. After all, every function in a company is subject to the same—dare I say it, generic—set of linkages. But they are rarely articulated in a sales context and so one or more of them are often neglected when companies set strategy or seek to enhance sales performance. And, as you might expect, the results aren’t pretty in either case.

What I really like about Cespedes and his book is that he knows achieving success in sales isn’t simple. The parts are always moving. Executives are adjusting their strategies in response to a host of variables. Salespeople are changing their processes and adjusting their behaviors in response to ever-changing conditions on the field. Sales managers are coming and going. Sales incentives are constantly changed based on inventory levels and margins and demand. “In any situation where you have interacting variables like this, you must confront the interactions and diagnose the problem,” he says. “That’s what’s needed to improve selling and strategy.”

(That little italicized and is worth a brief aside: Strategy informs sales, but sales also informs strategy. Your salespeople are in the market and they are tripping over vital strategic intelligence on a regular basis. You might want to start actually listening to their bitching and moaning.)

Back to the business at hand: Let’s say your sales aren’t exactly cause for celebration and, as is their wont, everybody is pointing the finger at each other. How do you fix it? The answer to that question is the core content of Cespedes’s book. Chapter by chapter, the author deconstructs the big picture, explaining how to tell where there are disconnects in linkages and how to approach the job of repairing them. Again, not rocket science—but in a business world where sales is often seen as a black box and sales misses are addressed by firing underperformers, giving big signing bonuses to new managers and salespeople, and chucking money at motivational speakers, Aligning Strategy and Sales is well worth the cover price.    

Thursday, October 9, 2014

Mia Farrow's army

My new book post on strategy+business:

The Price of Privatizing War

My experience with mercenaries extends about as far as Abbott and Costello in the Foreign Legion, a comedy that ran repeatedly on a New York television station when my brothers and I were young and never failed to tickle our funny bones. Yeah, yeah, I know—très sophistiquè. But in those days, private military companies (PMCs) were well beyond the ken of four kids from New Jersey.

These days, on regular drives to the Outer Banks in North Carolina, I pass a turnoff that leads to a 7,000-acre training center belonging to a PMC named Academi.

According to the company’s website, it “boasts many unique training facilities, including 50 tactical ranges, five ballistic houses, multiple MOUT/scenario facilities, four ship-boarding simulators, two airfields and three drop-zones, a three-mile tactical driving track, 25 classrooms, multiple explosive training ranges, a private training center, accommodations for over 300 personnel, and other training support activity centers.” Academi acquired the center from Blackwater, the notorious PMC whose employees killed 17 civilians in Baghdad’s Nisour Square in 2007.

Both companies supply services in the “market for force,” as Sean McFate, an assistant professor at the National Defense University and adjunct social scientist at the RAND Corporation, puts it. They are part of a multibillion-dollar industry (estimates range from US$20 to $100 billion annually) that includes public multinational companies run by veteran Fortune 500 executives and represented by their own trade association.

McFate explores this industry in Modern Mercenary: Private Armies and What They Mean for World Order (Oxford University Press, 2014). And happily, he does it in a way that eschews moral hysteria in favor of a dispassionate, academic approach. That may be because he has worked as a defense contractor (helping Liberia build its army, for example, among other assignments), and studied the industry. No matter what you think about “for-profit killing and the commodification of conflict,” McFate makes a strong case that demand for PMCs will expand in the decades and, perhaps, centuries ahead. The privatization of war is a growth business.

McFate acknowledges that PMCs are an emotionally charged subject. But he also puts them in historical perspective. They’re not a new concept. Xenophon’s Ten Thousand—whose story Peter Drucker said taught him everything he needed to know about leadership—were Greek mercenaries. Mercenary companies (condottieri) were the go-to guys if you wanted to wage war in the late Middle Ages. “By the middle of the seventeenth century,” explains McFate, “the conduct of violence was a capitalist enterprise no different than any other industry.” Around that time, states began to monopolize the market for force by building standing armies, and private armies were outlawed. What better way to guarantee the security of your kingdom than to have the only army in town?

Mercenaries didn’t disappear entirely after that, but the demand for their services was relatively limited, until the United States started hiring PMCs to bolster its downsized standing army in Iraq and Afghanistan around 2003. And it’s unlikely that demand will fall again, even as the U.S. buying binge subsides. The reason, explains McFate, is that we are entering a period of neomedievalism, in which “the world’s order is polycentric, with authority diluted and shared among state and non-state actors alike.”

This means that the market for force is diversifying, with the demand stemming from more and more countries, transnational organizations like the United Nations, NGOs, corporations, and even movie actors. Yep, as McFate reminds us, Mia Farrow approached Blackwater and several human rights organizations in 2008 with a plan to end the genocide in Dafur. She wanted to pay Blackwater to stage an armed intervention aimed at creating protected refugees camps, while the human rights organizations mounted a media campaign to force a U.N. peacekeeping mission. The well-intentioned idea fell through, but could Farrow really hire a private army and invade Sudan? Yes, and successfully “for days and perhaps even weeks,” concluded McFate, who was called on to evaluate the feasibility of the plan shortly after it was conceived.

The Modern Mercenary is filled with fascinating stuff, and its bottom line is that there is no stopping the continuing development of the market for force. So, what—if anything—should be done? McFate says we have to regulate the industry while the free market for its services is still dominated by the demand from a few big customers, mainly the U.S. If we don’t, he warns, the profit motive could cause PMCs to perpetuate armed conflict. And then, we might really get a look at what the world was like in the Middle Ages.

Thursday, September 25, 2014

Killer quotes #9

"They say hard work never hurt anybody, but I say: Why take the chance?"     --Ronald Reagan

Tuesday, September 23, 2014

A foxy approach to global sustainability

My latest book post on s+b:

The Business Approach to Climate Change

We’ve been cautioned—and often berated—about the unsustainable nature of the global economy for several decades now. These days, the warnings of the dire consequences we face seem to be arriving with greater frequency and in ever more urgent rhetoric, but substantive progress is more aspiration than reality.

Witness the environmental efforts of the United Nations. The UN Intergovernmental Panel on Climate Change recently reported that not only have we not been able to reduce greenhouse gases, but emissions have actually risen to record levels, growing at a faster rate between 2000 and 2010 than in any of the three previous decades. Meanwhile, it can’t get Xi Jinping of China and Narendra Modi of India—the leaders of the first and third most prolific producers of these emissions—to attend the UN’s Climate Summit 2014 on September 23, which has been expressly convened to pave the way for a “meaningful, robust, universal, legal climate agreement by 2015.” And an internal review of the UN’s environmental efforts suggested that even as funding for these efforts mushrooms, they are somewhat less than effectively coordinated and organized.

It’s not my intention to pick on the UN—at least its leadership is trying to do something about climate change. Instead, my aim is to illustrate why John Elkington, who 20 years ago popularized the “triple bottom line,” and Jochen Zeitz, who implemented the first environmental profit and loss account (at Puma, with an assist from PwC), have concluded that “business has no option but to take the lead” in the quest for a sustainable global economy. (strategy+business is published by PwC Strategy& Inc., a member of the PwC network of firms.) In their new book, The Breakthrough Challenge: 10 Ways to Connect Today’s Profits with Tomorrow’s Bottom Line (Jossey-Bass, 2014), Elkington and Zeitz argue that “the perfect storm involving globalization, the increasing power of multinational corporations, and the impact of the prolonged economic downturn” makes effective governmental action unlikely.
On its surface, the idea that we need to depend on business for the creation of a sustainable world seems like putting the fox in charge of the henhouse. After all, much of the blame for our troubled outlook rests on the shoulders of the business community, which has vociferously opposed countless solutions to the problem.

But maybe the idea isn’t so farfetched: If we suffer widespread ecological disaster, if people have no jobs, and if financial systems collapse, what happens to corporate profits? It may be that companies will take the lead in creating a sustainable world not because they’re the last ones standing, but because the drive for profit will leave them with no other choice.

Elkington and Zeitz think business can and should take on this challenge. But they don’t underplay its daunting magnitude—a reality that quickly becomes clear when reading their book. The “10 ways” referred to in the subtitle are more like prerequisites.

Business leaders, the authors tell us, must adopt a new and far more ambitious and expansive mindset about sustainability. New structures, like the benefit corporation, are needed. “True” accounting principles must be adopted. True returns must be calculated. Human, social, and planetary well-being must be pursued. The playing field must be leveled: “Subsidies or incentives for practices that are destructive to people and the planet” must be eliminated, they write. Full transparency is required. The way we are educating tomorrow’s business leaders must be changed. Business needs to turn to nature as a model for innovation, following in the footsteps of people like Janine Benyus. Short-termism has to be eradicated. Only when these conditions have been met, can the real work begin.

 This is a tall order and, as quotes from some of the notable figures featured in the book—like former Shell CEO Mark Moody-Stuart and Unilever CEO Paul Polman—attest, it entails overcoming much resistance. On the bright side, the prescriptive solution in The Breakthrough Challenge has already been launched: It is the agenda of the B Team, an organization that evolved from a roundtable convened by Richard Branson’s nonprofit foundation, Virgin Unite. Who knows? In the end, maybe the foxes will save the hens.   

Thursday, September 11, 2014

Virtual markets aren't flat

My latest book post is up on s+b:

Location, Location, Location

As I recall, the Internet was supposed to render location irrelevant. Pioneering dot-com entrepreneurs, as well as more than a few investors, saw the online world as flat and filled with an endless supply of customers. Of course, many of these dot-coms became dot-bombs.

The bursting of the Internet bubble in 2000 has often been blamed on what then Fed chairman Alan Greenspan described as “irrational exuberance,” but that’s only one part of the story. In a new book, David R. Bell, the Xinmei Zhang and Yongge Dai Professor at the Wharton School of the University of Pennsylvania, suggests other reasons for the bust, reasons that should concern anyone with an interest in online commerce. The book doesn’t address the bubble directly, but it does deflate the idea that underpinned much of the exuberance in the second half of 1990s—that the Internet is always a flat, friction-less marketplace.

“The virtual world is flat in terms of the opportunity it delivers to all of us, but it is not flat in the way that we use it,” writes Bell in Location Is (Still) Everything: The Surprising Influence of the Real World on How We Search, Shop, and Sell in the Virtual One (New Harvest, 2014). “Because the way we use it to search, shop, and sell depends on where we live in the real world, which is anything but flat.” If you have a baby, for instance, and you live 10 miles from a drug store, you are going to be a lot more likely to buy diapers online than if you live across the street from a drug store.

This may seem obvious, but according to Bell, very few online businesses fully consider the geographic factors that can make or break them. Among these factors are resistance, adjacency, vicinity, and isolation.

Resistance is the level of difficulty that customers encounter as they buy products and services. There are two kinds: questions regarding where you might buy something are called geographic frictions, and difficulties that customers encounter in making purchase decisions are called search frictions. Furniture e-tailers, for example, had a lot of difficulty with search frictions at one point: It turned out that people wanted to sit on a couch before they bought it.

Adjacency is the direct proximity of customers to each other. This matters because “most people live in locations that contain neighbors who are similar to them in key ways.” We flock to stores—both online and offline—because our neighbors tell us about them or because we see them buying from stores and we simply copy them.

Vicinity is the connection of one community of customers to another that is not physically proximate. “The end result is the Spatial Long Tail,” explains Bell, “in which the head is demand from customers connected through ‘proximity,’ and the tail is demand from customers connected by ‘similarity.’” You need both.

Isolation is an extreme form of geographic friction in which the preferences of a small minority of customers are not being satisfied locally. Bell, a New Zealander who lives in Philadelphia, says he can’t find Vegemite locally. That’s “preference isolation,” and, often, it represents a demand niche that an online seller can profitably fill.

Although Location Is (Still) Everything is worth the read, I doubt you can use it as how-to guide for building a business plan. Bell takes a stab at tying the concepts he describes into a framework that online businesses can use to get location working for them, but it’s not as powerful as his thesis—that geographic factors play an essential role in online success. A thesis, by the way, that may offer some insight into why Amazon (parent company of New Harvest, the publisher of this book) is busy building 300,000-square-foot “sortation centers” that will cut its shipping times, and why Jeff Bezos is dreaming of fleets of delivery drones.

Thursday, September 4, 2014

Three core concepts for social media

My latest blog post on s+b:

Seeking Social Failures

The business shelves are crowded with books on how to promote ourselves and our companies on social platforms like Facebook, Twitter, and LinkedIn. But Mikolaj Jan Piskorski, a professor of strategy and innovation at the International Institute for Management Development (IMD) and formerly the Richard Hodgson Fellow at Harvard Business School’s strategy unit, takes a more robust approach in his new book, A Social Strategy: How We Profit from Social Media (Princeton University Press, 2014). Using three specific social media concepts, he creates a framework that marketers can use to craft an effective and innovative social media strategy.

Piskorski’s analysis of social platforms suggests these three concepts can account for their success and the success of companies that use them: social failures, social solutions, and social strategy. If you want to be tomorrow’s Mark Zuckerberg or piggyback on the triumph of the next big social platform, look for today’s social failures. Before the lunch invitations come flooding in, I should explain that a social failure isn’t a person—it’s an unmet social need, of which there are two categories. “Meet” failures, Piskorski says, represent constraints in our ability to make connections with new people; “friend” failures represent constraints in our ability to connect with people we already know. The first determinant of a social platform’s success is the commercial potential inherent in the social failure it aims to address.

Social solutions remedy social failures. An online dating service, like eHarmony, for instance, is a solution to a meet failure: the barriers to finding that special someone. An online messaging service, like Twitter, is a solution to friend failure: the barriers to communicating efficiently with your social network. Every solution, explains Piskorski, comes with “trade-offs that arise between different ways of helping us interact with people we do not know and with those we already do.” For instance, a company that is designing a social solution to a meet failure must decide whether it will offer its users private interactions with a few strangers, private interactions with many strangers, or unlimited public interactions. Decisions such as this one define the business concept for a social platform and its user base, and establish its competitive differentiation.

A social strategy, the final of Piskorski’s three core concepts, is the means by which a company can tap into the success of a social platform. For instance, how can a company like Ford or Procter & Gamble leverage the popularity of Facebook or Twitter? Too many companies use social platforms in ways that irritate, rather than attract, customers. “These commercial messages interfere with the process of making human connections,” says Piskorski. “To see why, imagine sitting at a table having a wonderful time with your friends, and then suddenly someone pulls up a chair and asks, ‘Can I sell you something?’ You would probably ignore that person or ask him to leave immediately. This is exactly what is happening to companies that try to ‘friend’ their customers online and then broadcast messages to them.” Now, that’s the other kind of social failure.

Piskorski says that an effective social strategy is one that helps “people do what they naturally do on social platforms: engage in interactions with other people that they could not undertake in the offline world.” So, if you want to market on say, Twitter, you need to understand the social solution it offers its users—for most people, the ability to communicate briefly and efficiently with a relatively small number of family members and friends—and craft your messages in ways that are aligned with and enhance their use of the platform. This is the deceptively simple, central idea behind a successful social strategy.

Being a closet Luddite, I’m amazed by the kind of user numbers that social platforms like Facebook, Twitter, and LinkedIn are reporting: 1.28 billion monthly users; 255 million monthly users; and 300 million members respectively. With user bases of this size, the reach of these platforms rivals and, in many cases, exceeds the media giants of yesteryear. Thanks to Mikolaj Jan Piskorski and his new book, companies now have a clear strategic framework for figuring out how to tap into their power.

Friday, August 29, 2014

Canoeing your way to meeting effectiveness

My Q&A with Dick and Emily Axelrod in s+b:

Dick and Emily Axelrod’s Method for Holding Better Meetings

The idea is borrowed from Eric Lindblad, a vice president at Boeing and general manager of its 747 program, who adopted voluntary meeting attendance as a feedback mechanism. He figured that if people didn’t show up for his meetings, the meetings needed to be either canceled or improved.

The Axelrods, a husband-and-wife team specializing in organizational development, wrote the book for executives whose meetings fell into the category of needing improvement. They believe that far too many of the estimated 11 million meetings held daily in the United States are mind-numbing, energy-sapping encounters during which participants are more likely to be motivated to hide from work than to get it done.

If you suspect that people might not show up to your meetings if they had a choice, read the interview here...

What's your error culture like?

My new book post is up on s+b:

Risky Business

In 1934, Max Wertheimer, a pioneer of Gestalt psychology, decided to see if he could stump his pen pal Albert Einstein with a math problem. In a letter, he wrote:

“An old clattery auto is to drive a stretch of two miles, up and down a hill, /\. Because it is old, it cannot drive the first mile—the ascent—faster than with an average speed of 15 miles per hour. Question: How fast does it have to drive the second mile—on going down, it can, of course, go faster—in order to obtain an average speed (for the whole distance) of 30 miles an hour?”

Being a math wizard, who can cypher at lightning speed, the answer immediately sprang into my mind: the downhill run would need to be driven at 45 miles per hour (mph). That’s wrong, of course. It would actually require four minutes to travel the entire two-mile run at 30 mph, but it has already taken four minutes to travel the first mile at 15 mph. By the time the car gets to the top of the hill, it’s impossible to average 30 mph over the whole run, unless some of Einstein’s time-warping ideas have been embedded in the car’s design.

But I feel a little better knowing that the problem initially stumped Einstein, too. As Gerd Gigerenzer, director of the Max Planck Institute for Human Development, tells the story in his new book, Risk Savvy: How to Make Good Decisions (Viking, 2014), “[Einstein] confessed to having fallen for this problem to his friend: ‘Not until calculating did I notice that there was no time left for the way down!’” Gigerenzer uses the anecdote to illustrate an undeniable reality: We all make mistakes, even bona fide geniuses.

Indeed, when it comes to decision making and risk, the real problem isn’t so much making mistakes, but rather the fear of making mistakes. “Risk aversion is closely tied to the anxiety of making errors,” Gigerenzer writes.

When that anxiety is embedded in an organization’s culture, it promotes “defensive decision making”—decisions that seem to offer protection against negative consequences, but can result in suboptimal outcomes and greater risk exposure. A common example offered by Gigerenzer is hiring a large national vendor with a well-known name even though a smaller, local vendor would provide better prices and better service. Just because “nobody ever got fired for buying IBM” (as the old IT axiom went), doesn’t necessarily mean that buying IBM was the best decision for the buyer. 

I asked Gigerenzer how you can tell if your company has a “negative error culture” that’s spawning defensive decision making. “If the leadership in an organization pretends that errors will never occur; if it tries to hide mistakes when they do occur; or if it looks for someone to blame when they can’t hide mistakes, you can bet that you’ve found a negative error culture,” he replied.

Echoing what several other business book authors—including Tim Hartford, Megan McArdle, and Ralph Heath—have told us in the recent past, Gigerenzer recommends that companies, as well as individual professionals, reframe how they view errors. He points to the commercial aviation sector as a case in point. The large-scale tragedies that can result when mistakes are made in-flight have forced the industry, and its regulators, to thoroughly examine every error, using a rigorous and transparent process of analysis and response, often in full public view. Increasingly, the industry is also working proactively to identify potential errors and prevent them. This is a major reason why air travel is the safest form of transportation.

Not all industries require such an intense focus on mistakes. But every company can benefit from what Gigerenzer calls a “positive error culture.” Such a system doesn’t try to make mistakes or even welcome them. But when errors do occur, they aren’t swept under the rug. Instead, they’re treated as valuable learning opportunities that help companies avoid the repetition of similar mistakes in the future.

Thursday, July 31, 2014

Know thyself, negotiator

My new book post is up on s+b:

A New Hat for Negotiators

What hat do you wear when you negotiate? A conservative Homburg, a swaggering Stetson, a gangster’s Fedora? If you’re literal-minded like me, you may say that you don’t wear one at all. But Shirli Kopelman, professor at the University of Michigan’s Ross School of Business and executive director of the International Association for Conflict Management, says all negotiators wear hats of some kind or another.

In Negotiating Genuinely: Being Yourself in Business (Stanford Briefs, 2014), Kopelman explains that when managers and executives enter negotiations, they typically assume a role—the proverbial hat. Wearing it “implies calculated self-interest with a dose of inauthenticity, or walling off vulnerable parts of ourselves.” This description may sound familiar to you. I know I’ve experienced the disconcerting feeling of sitting down with a heretofore friendly client to talk about a contract and finding that the client’s body has been possessed by a hard-eyed stranger who is determined to wring every possible concession out of me.

Kopelman, who broadly defines negotiations, thinks that even more enlightened win-win negotiators can find themselves impaired by the hat they wear. It’s as if the negotiator’s hat includes a set of blinders that artificially limits the options of every party in the negotiation. She says that we all wear multiple hats in our lives, and that each one represents a different role that comes with its own resources and constraints. (For instance, a business executive may also be a parent, a child, a spouse, a soccer fan, a scuba diver, or a church deacon.) But, Kopelman says, if we can integrate our hats, we might be able to use their combined assets to negotiate in a more genuine way and craft superior outcomes.

“Negotiating genuinely—wearing your integrated hat—enhances creativity, draws on diverse strengths, aligns you with your moral compass, and enables you to straddle the complex dualities of negotiations: Focusing on both the task and the people,” writes Kopelman.

How do you go about integrating your hats? In her slim book, Kopelman says to start by listing the names of all the hats you wear (she has 14 on her list). Then, define the domain in which you wear each hat, the people with whom you negotiate when wearing it, and the resources you negotiate for when wearing it. Finally, consider how you can integrate key elements of each hat.

This sounds pretty nebulous, and it does contradict common practice, which says the only hat you need to wear when negotiating is the one that will benefit your side the most. But Kopelman suggests you work through the exercise. “The key is that the process of hat integration transforms your hats into a single integral hat. It is not about impression management, nor is it a façade nor a mask, but a genuine reflection of you as person,” she says. “The integral hat becomes a metaphorical container that symbolically carries your identity as it ephemerally (momentarily), yet repeatedly, comes into being, reflecting you as a negotiator who fully engages with other people.”

It’s an intriguing idea—even if it’s not fully formed in this book. But if trying on your own integrated hat can help you achieve better relationships and outcomes in negotiations, it might be well worth the time.

Thursday, July 24, 2014

Soccer and economics

My new book post is up on s+b's blog:

What the Beautiful Game Reveals about the Dismal Science

A lot of people watched the World Cup in Brazil this past month. The final numbers won’t be in for a while, but with record-breaking viewership for the first round of matches and a big bump in the U.S. audience, it’s a good bet that the 2014 Cup eclipsed the more than the 3.2 billion viewers (nearly half the people on earth) who tuned in at some point or another during the 64 matches in 2010. It’s also a good bet that Ignacio Palacios-Huerta, a professor at the London School of Economics and Political Science, is one of very few soccer fans who watched this year’s matches for insights into perverse incentives, market efficiency, and other economic concepts.

What can the beautiful game tell us about the dismal science? As Palacios-Huerta explains in Beautiful Game Theory: How Soccer Can Help Economics (Princeton University Press, 2014), soccer—and indeed many other professional sports—is a terrific laboratory for testing economic theories. “There is an abundance of readily available data, the goals of the participants are often uncomplicated (score, win, enforce the rules), and the outcomes are extremely clear,” he says. “There is an abundance of data, the goals are uncomplicated, and the outcomes are extremely clear.” 

Take incentives, for instance. We’re often warned that incentives can have unexpected consequences, but it’s tough to isolate the effects of an incentive—such as stock options, for instance—in the business world. Are senior executives neglecting the long-term well-being of their firms to bump up the value of their options in the short term, or is something else going on? Are managers sabotaging one another to boost their own performance in forced ranking systems or not? That’s tough to prove without a smoking gun, and managerial saboteurs tend not to leave that kind of evidence lying around.

For a more rigorous test, Palacios-Huerta and his colleague Luis Garicano examined the outcomes stemming from a 1994 FIFA rule change in which three points, instead of two, were awarded in round-robin tournaments for a win. (It was an attempt to drive up soccer scores and attract U.S. fans, who presumably find the subtleties of the game far less appealing than a Pelé-style bicycle kick into the net.) In doing so, the economists found empirical evidence for the risks attendant in strong incentive plans.

By analyzing the incidence of dirty play before and after the rule change, they discovered that increasing the points awarded for a win caused a rise in sabotage on the field: fouls and unsporting behavior resulting in yellow cards increased. By analyzing the results of matches, they further determined that the rule change did not change the number of goals scored. Teams played more aggressive offense until they got their first goal, then they hunkered down defensively to protect the win. “The beautiful game became a bit less beautiful,” concludes Palacios-Huerta.

In Beautiful Game Theory, Palacios-Huerta also reports on how he used soccer to prove the long-standing efficient-markets hypothesis—a theory suggesting that in the stock market, for instance, information is processed so efficiently that “unless one knew information that others did not know, no stock should be a better buy than any other.” The problem with proving this hypothesis is that you can’t stop time to analyze the effects of a piece of news on the market. But time does stop in a soccer match.

Palacios-Huerta realized that at halftime, “the playing clock stops but the betting clock continues.” So he identified matches in which a “cusp” goal was scored just before the halftime break, and then analyzed the changes in betting odds during the break at the Betfair online betting exchange. He found that Betfair lived up to its name: “Prices impound news so rapidly and completely that it is not possible to profit from any potential price drift over the halftime interval.”

This is good news for sports bettors, but it’s far less reassuring in light of the New York Times exposé that broke on May 31. It seems that some gamblers are allegedly paying off referees to use penalty calls to rig soccer matches. Efficient or not, when it comes to economic markets, it seems like somebody always knows something that no one else knows.

Sunday, July 13, 2014

Killer quotes #8



"Originality is the fine art of remembering what you hear but forgetting where you heard it." -- Laurence J. Peter

Thursday, July 10, 2014

Beating the odds on startup survival

My new book post is up on s+b's blog:

Navigating Innovation’s Perilous First Mile

In the opening paragraph of his newest book, Scott D. Anthony describes being in Bangalore, with a stranger’s razor at his neck. No, it’s not a thriller, at least not of the Ludlum and Clancy variety. The book is The First Mile: A Launch Manual for Getting Great Ideas into the Market (Harvard Business Review Press, 2014), and Anthony, in his capacity as head of Innosight’s venture capital (VC) arm, is considering an investment in a new concept for a chain of barbershops.

Anthony likes the idea—a single-chair kiosk manned by a professional barber in a market where there are few options between a high-end salon and a chair on the side of a road—and he recommends the investment. Four months later, the startup fails: A single-chair shop can’t do the necessary volume, and the best barbers leave to start their own businesses.

It’s just another wreck on innovation’s first mile from idea to reality. According to the statistics Anthony cites, 75 percent of VC-backed startups fail to return their investor’s capital; 95 percent fail to hit their financial targets. Of more than 10,000 VC-financed software startups since 2003, only 40 are worth more than US$1 billion. More than 50 percent of companies don’t survive to their sixth birthday.

I asked the innovation expert to describe the biggest pothole in this stretch of road. “The single biggest challenge facing innovators in the first mile is maintaining the appropriate balance between thinking and doing,” he replied.

“Either end of the spectrum is dangerous. At one extreme is ‘paralysis by analysis.’ Too many innovators create elegant pieces of Microsoft fiction. The Excel spreadsheet features ‘what if’ analyses and pivot tables that would rival those created by a seasoned investment banker. The PowerPoint document is stunning, with charts and visuals comparable to Al Gore’s award-winning presentation on climate change. And the Word memo summarizing it all features prose that is so lucid that somewhere Malcolm Gladwell is shedding a tear. The plan looks airtight on paper, but in reality, it is incredibly brittle. As Intuit’s Scott Cook once quipped, ‘For every one of our failures, we had spreadsheets that looked awesome.’

“The other extreme is doing without thinking. Unfortunately the Lean Startup movement, popularized by Steve Blank and Eric Ries, has been twisted by some of its followers into a viewpoint that all thinking is worthless. That’s dangerous, because innovators can waste a lot of time and money discovering things that the world already knows. Or they can prematurely scale a business before they have figured out key elements of the business model, leading to a deadly spin-out.”

The methodology that Anthony offers in The First Mile is designed to enhance the odds of startup survival. Based on his experiences as an innovation consultant to large companies and as an investor in startups, it’s summed up by the acronym DEFT: document, evaluate, focus, and test. “Innovators should take the time to document and evaluate their ideas comprehensively, while remembering that no business plan survives first contact with the marketplace,” explains Anthony. “They should view themselves as strategic scientists whose job is to focus on the most critical uncertainties, and test rigorously and adapt quickly.” This practical and concise book includes checklists, tools, and tips for each step.

“Success in the first mile comes from striking a balance between the two extremes of thinking and doing,” Anthony concludes. “Innovators should be structured and thoughtful, but with a clear bias to action. The overarching goal is to find the magic ingredients behind every great idea: a compelling solution that targets a deep need in a way that creates value. The first mile can be both promising and perilous. The right approach makes all the difference.”

Tuesday, July 1, 2014

Marketing insights from the art world

My new post on s+b's blog:

What Marketers Can Learn From Contemporary Art

Contemporary art often amuses me. I’m thinking of the 200-lb pile of wrapped candies that’s meant to be “installed” in the corner of a room for your guests to eat—or the waxwork of supermodel Stephanie Seymour made to hang on your den wall like a hunting trophy.

And there’s York University economist Don Thompson’s personal favorite: Yves Klein’s Transfer of Zone of Immaterial Pictorial Sensibility, a conceptual art piece executed and sold between 1959 and Klein’s death in 1962. As Thompson tells the story in The Supermodel and the Brillo Box: Back Stories and Peculiar Economics from the World of Contemporary Art (Palgrave Macmillan, 2014), Klein offered to sell art lovers an “immaterial zone”—that is, empty space. This was truly the emperor’s new clothes of the art world: You gave Klein a specific amount of gold leaf and he gave you a receipt stating you had purchased a zone of your own. But that was just the first step. If you were willing to pony up more gold leaf, Klein would throw half of it into the Seine (keeping the rest as his fee) and burn the receipt. You would receive photographs and an affidavit documenting the act. Apparently, Klein found eight buyers with a hankering for immaterial zones.

Of course, amusement turns to bemusement when you consider that the pile of candy sold for US$4.5 million and the waxwork of Seymour brought $2.4 million at auction. In fact, the market for contemporary art is booming again, after a big dip during the Great Recession. In May, Christie’s had its best auction ever, selling $745 million worth of postwar and contemporary art. Bloomberg reported that 68 lots out of 72 offered found new homes. But what is it that makes a Jeff Koons balloon dog worth $58.4 million and what can marketers learn from that?

Well, for one thing, there’s the power of a compelling backstory. The story of a piece of art—who made it, how it came to be, what happened to it in the past, and who has owned it—“may be more important than the artwork itself,” according to Thompson. That’s why art experts estimated that the value of Picasso’s Le Rêve actually rose after casino owner Steve Wynn accidently stuck his elbow through it.

Another insight relates to the value of reputation. Why did one painting created by Rachel Howard sell for $90,000 in 2008 and, a few months later, a similar painting by the same artist sell for $2.25 million? “The difference,” explains Thompson, “is that while Howard had created both, the second had Damien Hirst’s (indistinct signature) on it.” Howard worked as a technician for Hirst, who is the creator of works such as The Physical Impossibility of Death in the Mind of Someone Living. And Hirst is considered one of the great, if not the greatest of, contemporary artists—a reputation conferred on him by credible third parties, including critics, gallery owners, auction houses, and museum directors.

A third lesson regards the price-boosting effect of the art-buying experience. Paraphrasing Marshall McLuhan, Thompson observes that the “market becomes the medium” when it comes to selling art. Auctions create emotion-laden competitions to buy and be seen buying that drive prices up, even though, says Thompson, “Half of the works purchased at auction in 2013 will likely never again resell at the hammer price.” Art fairs, such as Art Basel Miami Beach and Frieze London, are also vibrant experiences, featuring VIP passes and lavish events that drive up both attendance and sales.

These are the things that distinguish Andy Warhol’s Brillo Soap Pads Box, which sold for $772,500 in a 2012 auction, from a case of Brillo in a supermarket, the design for which, Thompson informs us, was created by abstract expressionist and commercial artist James Harvey in 1961. It would be interesting to hear what Harvey, who passed away in 1965, might have had to say about that.

Friday, June 20, 2014

Will Chinese demand create global shortages in natural resources?

My no-always-weekly blog post on s+b is up:

Understanding China’s Resource Quest

Much has been written about China’s supersized demand for natural resources—oil and gas, metallic ores, and agricultural commodities—and the effects it could have on the global economy, politics, and the environment. Often these prognostications are suspect: It’s only natural to wonder whether self-interest is skewing a metal trader’s prediction that Chinese demand will drive copper’s price to stratospheric levels or a lobbyist’s prediction that a Chinese company’s acquisition of a U.S. oil company threatens national security.

That’s why I was quite interested in By All Means Necessary: How China’s Resource Quest is Changing the World (Oxford University Press, 2014), a new book written by Elizabeth C. Economy and Michael Levi, senior fellows at the Council on Foreign Relations (CFR). Economy is an expert on China and author of the seminal book on that nation’s environmental challenges. Levi is an expert in global politics and energy economics. They make for an authoritative team.

The faintly ominous ring of their book’s title notwithstanding, Economy and Levi are dispassionate and evenhanded. Contrary to many experts, they find that, by and large, China is not trying to secure the resources it needs by buying up ore deposits and oil fields—actions that could lead to a stranglehold on vital material. Instead, it is procuring natural resources mainly through trade. This has contributed to radical price increases and more competitive markets. But, according to the authors, further natural resource price shocks are unlikely because the markets have adjusted to Chinese demand.

In response to political fearmongering, Economy and Levi conclude that “the impact of China’s resource quest on international politics and security has been modest thus far.” They admit that China’s willingness to trade with nations like Iran has “helped blunt the impact of Western sanctions.” But they do not find that China has contributed to wars, like the one waged in the Sudan, where China’s state-owned oil company CNPC plays an instrumental role in extracting and refining oil and where 50 percent of the oil produced annually is exported to China.

The authors are less sanguine about the environmental effects of China’s resource needs, mainly because the same challenges that the nation faces domestically are present when it tries to obtain natural resources overseas. When Chinese companies seek to extract resources in nations with lax environmental regulation, a sort of double whammy can occur because neither party is policing the situation. There is a silver lining though: As Chinese companies interact with other more environmentally responsible multinationals, they are actually improving their practices—either because they’re feeling international pressure to do so, or because they’ve found that being responsible can also be profitable. And with corporate responsibility on the state agenda in China, the authors also expect to see better practices in the overseas ventures of Chinese firms.

The authors of By All Means Necessary also analyze the winners and losers among the main players affected by China’s quest for resources. Resource consumers who must buy in the marketplace will pay more, but the owners of those resources will profit from higher demand. Overseas investors have a major new competitor with which to contend and will need to avoid a “race to the bottom.” Governments, especially the U.S. government, will need to factor China’s resource needs into their actions to maintain their own stockpiles and to avoid igniting resource wars. National security is a two-way street.

None of these conclusions sound particularly dire, especially when you consider that China is simply assuming its place among the rest of world’s most resource-hungry nations. And if you dip back into history and examine the behavior of other nations in their quest for natural resources, such as Belgium in the Congo in the late 1800s and the U.S. and the U.K. in Iran in the 1950s, China looks like a shining exemplar…so far.

Sunday, June 1, 2014

Customer service at Disney: A Q&A with Pulse

I did a Q&A on Be Our Guest: Perfecting the Art of Customer Service, the book I wrote with The Disney Institute, earlier this year for Pulse, the magazine of the International Spa Association. And I didn't even get a massage!

Here's the link to the interview, which describes how Disney delivers the customer experience and service that keeps its theme parks at the top of the industry's rankings decade after decade:

Wednesday, May 28, 2014

Jeremy Rifkin on tomorrow's jobs

My weekly book post on s+b:

The End of Work, Revisited

Jeremy Rifkin’s controversial prognostications on topics such as beef, biotechnology, and business have been sparking debate for at least 40 years. Who knows how far back they go? I picture a family dinner at the Rifkin home circa 1955: Jeremy’s dad, Milton (a manufacturer of plastic bags) is sitting at the head of table, his forkful of pot roast frozen midair, as his 10-year-old son tells him that the family business is going to destroy capitalism.

Rifkin the Younger’s new book, The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism (Palgrave MacMillan, 2014), weaves together many of the threads he has pulled over the years. It is the futurist’s most comprehensive inquiry into business and work yet, and it is built on a thesis that we’ve heard before: Capitalism is tottering and will not last out this century, a victim of “the dramatic success of the very operating assumptions that govern it.” Rifkin says that capitalism’s downfall is inevitable because of its ceaseless quest for productivity and the ever-growing sophistication and power of digital technology. The collision of these two forces is driving down the marginal cost of producing additional units of anything and everything to near zero, a process that will squeeze profits until they scream. (You can hear the argument in more detail here.)

This driving down of marginal cost includes the cost of human labor. Reprising the theme of his book, The End of Work: The Decline of the Global Labor Force and the Dawn of the Post-Market Era (Tarcher/Putnam, 1995), Rifkin explains that digitization is replacing jobs. This creates a situation that economists once assumed could not happen: Productivity will rise, but employment will fall. 

Twenty years ago, Rifkin’s argument was tinged with foreboding: How, after all, would people survive without jobs? But in The Zero Marginal Cost Society, he is far more optimistic. When I asked him why, he said, “There are a few reasons that I am more optimistic today than I was in 1995. First, the nonprofit sector—the social commons—has been growing even faster than I had envisioned. Between 2000 and 2010, after adjusting for inflation, nonprofit revenues in the U.S. grew by a striking 41 percent, more than double the growth in GDP, which increased by only 16.4 percent. 

“The nonprofit community is also the fastest-growing employment sector, outstripping both the government and private sectors in many countries. There are currently 56 million workers employed in the nonprofit sector in 42 countries, and in many of the most advanced industrial countries—including the United States, the United Kingdom, and Canada—employment in this sector now exceeds 10 percent of the workforce, and its trajectory has been rising year over year since 1995. During the Great Recession (2007–09), the nonprofit sector gained jobs at an average rate of 1.9 percent annually, while the private sector lost jobs at a rate of 3.7 percent.

“Second, the creation of social enterprises, some 35 percent of them nonprofits, has mushroomed in recent years thanks to a new generation of entrepreneurs. There are several hundred thousand social enterprises in the United States that employ over 10 million people and that have revenues of US$500 billion per year. These enterprises represented approximately 3.5 percent of the nation’s GDP in 2012.

“Third, what makes the social commons more relevant today than at any other time in its long history is that we are now erecting a high-tech global technology platform—the Internet of Things (IoT)—whose defining characteristics could support and nurture it. The IoT facilitates collaboration and the search for synergies, making it an ideal technological framework for advancing the social economy. Its operating logic optimizes lateral peer production, universal access, and inclusion, and its purpose is to encourage a sharing culture. The IoT will bring the social commons out of the shadows, giving it a high-tech platform to become the dominant economic paradigm of the 21st century.”

Wednesday, May 21, 2014

Gregory Clark on how we get ahead

My weekly book post on s+b:

Does Capitalism Create Social Mobility?

 The storyline of capitalism—and the technological innovation that simultaneously supports and drives it forward—is almost always one of ever-greater personal freedom and opportunity. Slaves and serfs, whose families had been chained to the plows of noble-born landowners generation after generation, are transformed into wage earners who sell their services in demand-driven labor markets. Wage owners pull themselves up by their bootstraps and educate their children, who then enter the professional ranks. With the liberal application of hard work, inventiveness, or entrepreneurial chutzpah, anyone can rise through the ranks of society. The sky is the limit. Or is it?

This is the question that Gregory Clark, economics professor at the University of California, Davis, seeks to answer in his new book, The Son Also Rises: Surnames and the History of Social Mobility (Princeton University Press, 2014). Clark has a predilection for investigating interesting questions, as well as for literary puns. His last book, A Farewell to Alms: A Brief Economic History of the World (Princeton University Press, 2007), sought to explain why the Industrial Revolution sparked and caught fire in England, and not in other parts of the world. His Darwinian answer was that England was peopled by descendants of the upper classes, who over hundreds of years had survived at higher rates than people in the lower classes. As a result, English upper class values, such as hard work, rationality, and education, which were conducive to an industrialized society, also survived.

Clark figured this out by collecting and analyzing data on the English economy from 1200 to 1870. In The Son Also Rises, he uses a similarly data-driven approach. This time, he uses uncommon surnames, such as Pepys, “to track the rich and poor through many generations in various societies—England, the United States, Sweden, India, Japan, Korea, China, Taiwan, and Chile.” Specifically, he matches up the wealth of parents and that of their offspring. The more correlation, the less social mobility.

Just as Thomas Piketty’s Capital in the 21st Century (Belknap Press, 2014), calls into question the role of capitalism in wealth creation, Clark calls into question the role of capitalism in social mobility. But both conservatives and liberals will find justification for their views in the facts uncovered in The Son Also Rises. Clark, who rightfully opens his preface with the words, “This book will be controversial,” found to his surprise that intergenerational social mobility cannot be taken for granted. Industrialization did not move wealth to the wider population, at least not as freely as the prevailing free enterprise storyline would suggest. (Clark basically says that “a hundred years of research by psychologists, sociologists, and economists” into social mobility has all been incorrect.)

Instead, Clark’s research reveals that the global level of social mobility is basically unchanged over the past 800 years. In England, for instance, he finds that the level of social mobility was the same after the Industrial Revolution as it was before it. “The rich beget the rich, the poor beget the poor,” Clark concludes. “Social status is inherited as strongly as any biological trait, such as height.”

But Clark does not say that mobility doesn’t exist, or that social positions never change. Indeed, his research reveals that upward and downward mobility are both continuously at play in human society. One critical factor is the intermarriage between rich and poor, which over time creates a constant regression to the mean. “In the end, the descendants of today’s rich and poor will achieve complete equality in their expected social position,” explains Clark. “This equality may require three hundred years to come about,” but it will inevitably come, unless a family takes dramatic steps (for example, through its choice of marriage partners) to maintain its position in society.

For me, the salient point is that social mobility is being driven by “innate inherited abilities,” not by the ascendancy of capitalism or democracy or any other economic or political ideology. People born rich may go on to be successful, but wealth is not the most important thing they inherit. Far more important are nature and nurture: the genetic abilities they get from their parents (which they will only pass on if they marry people as capable as themselves), and the confidence, education, and connections their families provide.

This is a difficult message for the unlucky people born to less capable parents; they have high barriers to social mobility, as they have throughout history. Capitalism may make it easier for some individuals to realize their potential, but it does not create that potential in the first place. That’s an insight worth remembering when you hear claims to the contrary.

Tuesday, May 20, 2014

Killer quotes #7

"Formula for success: Rise early, work hard, strike oil"

                                         --J. Paul Getty

Christine Bader on Corporate Idealists

My Q&A with Christine Bader is up on s+b's website:

Christine Bader’s Tales of a Corporate Idealist
The former BP policy development manager and U.N. business and human rights advisor on the nuances of promoting social responsibility and sustainability within companies.

Big Oil seems like an odd place for a social responsibility and environmental sustainability advocate to pursue her career, but after Christine Bader heard then CEO of BP John Browne speak at Yale, that was exactly where she went. Browne’s strong message about the social responsibility of corporations—a highly unusual statement from the leader of a major energy company in 1998—intrigued the first-year MBA student. It prompted Bader to intern with BP’s chief policy advisor and then to join the company full time in 2000. Over the next eight years, she was assigned to the development of a natural gas field and plant in West Papua, the planning of a massive ethylene production complex outside Shanghai, and finally BP’s London headquarters—“an MBA working on social issues in a company of engineers,” as she puts it.

In 2006, BP enabled Bader to work part-time, on a pro bono basis, with Harvard professor John Ruggie, who had been appointed by Kofi Annan as the United Nations secretary-general’s special representative on business and human rights. Two years later, not long after Browne resigned and Tony Hayward took over as BP’s CEO, Bader left the company and joined Ruggie full time, helping create the U.N.’s Guiding Principles on Business and Human Rights.

In 2011, after the adoption of the Guiding Principles, “Team Ruggie” split up and Bader began writing The Evolution of a Corporate Idealist: When Girl Meets Oil (Bibliomotion, 2014). The book is a thoughtful memoir of her experiences and a nuanced guidebook with many lessons for aspiring corporate idealists. Bader, who is currently a part-time human rights advisor to BSR (Business for Social Responsibility) and a visiting scholar at Columbia University, recently talked with strategy+business about how dedicated people can guide their companies to protect human rights and the the rest here