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

Wednesday, May 14, 2014

Selling after the unsuccessful close

Here's my weekly blog post on strategy+business:

What Part of No Don’t You Understand?

I have no idea who first snapped off the classic putdown, “What part of no don’t you understand?”
It’s not Shakespeare, but the sentiment is timeless. And I’ll bet that first barb was aimed at a salesman, probably a graduate of Glengarry Glen Ross University.

Until now, I’ve always thought that the correct response to this rhetorical question was to retreat. However, I may be wrong about that.

In their new book, When Buyers Say No: Essential Strategies for Keeping a Sales Moving Forward (Business Plus, 2014), sales consultants Tom Hopkins and Ben Katt parse “no” and find that it has a number of possible meanings. It might indicate that the buyer has unanswered questions and concerns about the salesperson’s offering, or might not be sure how it compares to the alternatives in the marketplace. Or the buyer might not be clear about the benefits of the offering. Or perhaps, the salesperson hasn’t properly qualified the buyer. Or the buyer doesn’t like the timing or features. Or maybe, the buyer just doesn’t like salesperson—a big factor in any sales arena that requires an ongoing relationship.

The upshot of all this, according to the authors, is that if you’re a sales professional, you better figure out exactly what the prospective buyer means by “no” before you head for the door. To paraphrase the great Yogi Berra, the sale ain’t over till it’s over.

The challenge is how you manage a “no.” If you treat it like an objection, and try to overcome it, chances are good you’ll get handed your hat. As the authors explain it, being asked to make a decision at the end of the close creates discomfort in the buyer. And too often, salespeople compound that discomfort by becoming unlikeable in response to a negative answer. “How do salespeople become unlikeable after the close?” they write. “They become tense. Their facial expressions reflect unhappy feelings of disappointment or impatience. Even worse, they become subtly belittling, implying with their nonverbal communication that anyone with commonsense would have said yes by now.”

This jives with something I just read in another new book, titled Conversational Intelligence: How Great Leaders Build Trust (Bibliomotion, 2014), by Judith E. Glaser. “Most people assume meaning is embedded in the words they speak,” Glaser writes. “But according to forensic linguists, meaning is far more vaporous, teased into existence through vocalized puffs of air, hand gestures, body tilts, dancing eyebrows, and nuanced nostril flares.”

When Glaser observed pharmaceutical reps making sales calls, she found that if doctors raised concerns about the products being sold, the salespeople usually communicated their displeasure with nonverbal cues, such as stiffened bodies, pained facial expressions, and tense tones of voice. The doctors, in turn, responded by stiffening up themselves and trying to end the sales calls. By now, it shouldn’t come as a surprise that the company where these reps worked was ranked 39th among 40 pharmaceutical firms in terms of sales effectiveness.

Interestingly, the authors of both books also offer similar solutions to negative buyer responses. Hopkins and Katt say that you should run through the “The Circle of Persuasion” again. That’s their generic four-step sales process: establishing rapport, identifying needs, presenting solutions, and closing questions. So, the first step after hearing “no” is to reestablish rapport by letting the buyer “know that it is okay that he didn’t immediately say yes.” In Glaser’s case, she taught the pharmaceutical salespeople to reframe buyer resistance as “simple requests for more information,” which shifted their focus “to relationship before task” and significantly bolstered sales.

The bottom line: When it comes to sales, whether a buyer’s no really means no depends first and foremost on how you respond to the word.

Wednesday, May 7, 2014

Hoist a mug to craft brewers

My latest book post is up at strategy+business:

A Toast to Industry Disruption

I believe that brewing beer is one of the great humanitarian professions. If you agree, you already know that it’s a terrific time to be a beer drinker. Even the most committed among us are hard-pressed to keep up with the burgeoning numbers of high-quality beers being produced by small, independent breweries from near and far.

Steve Hindy traces the heady explosion of craft brewers in the U.S. over the past 40 years in his new book, The Craft Beer Revolution: How a Band of Microbrewers Is Transforming the World’s Favorite Drink (Palgrave Macmillan, 2014). Hindy is an expert guide: He was a Middle East correspondent in Beirut for the Associated Press when he became interested in home brewing. In 1988, when he was back in New York, he and Tom Potter founded The Brooklyn Brewery, which is now ranked among the top 20 breweries in the U.S. in sales volume—and that’s including the big brewers, like Anheuser-Busch Inc. and MillerCoors. 

The stories of the craft brewers—such as Fritz Maytag of Anchor Steam and Jim Koch of Sam Adams—featured in the book are engrossing, but what I find most interesting about this story is the evolution of the beer industry, and the lessons it might hold for the big players in other industries. Historically, beer was a local product. According to the Brewers Association, there were 3,200 U.S. breweries in the 1870s. Then, over the next 100 years, technological advances and the drive for economies of scale changed all that; by 1978, there were only 89 breweries owned by 42 companies in the United States. Local beers were few and far between, and supermarket beer coolers were boring as well as cold. Now fast-forward to 2013—more than 2,800 breweries were operating in the U.S., 98 percent of which were owned by local brewers.

The big brewers and their now-global brands are still dominant in the U.S. marketplace, and they are fighting over fractions of a point in added market share with US$3 million Super Bowl ads in a market that is slowly shrinking. Meanwhile these pesky craft brewers have grabbed a 10 percent share of market. Their share is growing, and more and more of them are entering the fray every day.

It’s reminiscent of the process described in Clayton Christensen’s book, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (Harvard Business School Press, 1997). In this case, however, technology didn’t play the primary role in the disruption of the beer industry. In the 1970s, at the peak of Big Brewing, the U.S. government reduced the excise tax for small volume brewers and legalized home brewing for the first time since Prohibition.

“At the time,” writes Hindy, “I don’t think any of the players involved imagined that these measures would pave the way for the craft beer revolution. But they did.” The reduction in tax gave a respite to small brewers, who couldn’t compete against the scale and marketing might of the big players. Home brewing eventually brought new brewers into the market as entrepreneurially minded home brewers started new businesses. The stage was set for a “back to the future” scenario, in which the number of breweries in the U.S is approaching levels that haven’t been seen in about 140 years.

The best part is that this process of industry disruption has created a sort of golden era for beer drinkers. Although at the risk of incurring Brooklyn’s wrath, I admit that I haven’t yet acquired a yen for Hindy’s beers. Maybe that’s because I’ve only tried a couple of them, bought in bottles hundreds of miles from the brewery. But I’m a big fan of the packaging, designed by Milton Glaser—and I’ll keep tasting.

Tuesday, April 8, 2014

Why? What if? How?

My weekly post on s+b's blog is about a new book on the questions that drive innovation by Warren Berger:

Innovation Begins with Three Questions

The starting point of an innovative new business or product is often a question. In December 1943, Edwin Land was on a family vacation in Santa Fe, N. Mex. He took a picture of his daughter, who asked why she couldn’t see it immediately. “Why not?” thought Land. “Why not design a picture that can be developed right away?” That was the genesis of the Polaroid camera and a decades-long stretch of serial innovation that earned Land’s company a place among the Nifty Fifty, a group of growth companies that were high-fliers on the New York Stock Exchange in the 1960s.

Land’s story, according to Warren Berger, author of the new book A More Beautiful Question: The Power of Inquiry to Spark Breakthrough Ideas (Bloomsbury, 2014), does not necessarily illustrate the role of questions in spurring creativity as much as it shows that it’s important to ask the right questions. “The old, closed questions (How many? How much? How fast?) still matter on a practical level,” says Berger, “but increasingly businesses must tackle more sophisticated open questions (Why? What if? How?) to thrive in an environment that demands a clearer sense of purpose, a vision of the future, and appetite for change.”

The “old, closed” questions support the status quo. In other words, asking how you can make better, faster, and cheaper widgets assumes that you should be making widgets. This can become a recipe for disaster, as those leaders who came after Land discovered: Polaroid declared bankruptcy in 2001, a casualty of photography’s digital transformation.

Conversely, the three “open” questions—why, what if, and how—represent what Berger calls a “basic and logical progression” that he finds present in many stories of innovative breakthroughs.

“Why” questions—like the one Land’s daughter asked—are the catalyst in this progression. They’re the potential game changers that Berger thinks are not asked nearly enough. Try this: The next time you’re in a staff meeting discussing, for instance, how to raise the margins of a business unit, ask why you’re in that business at all. You’ll probably get a lot of rolling eyes and exasperated sighs, but no answer to your question. “Why” questions are potential game changers that are not asked nearly enough.

“What if” questions signal the beginning of the search for solutions. They prompt unconstrained, blue-sky thinking. For example, Berger imagines Land asking, “What if you could somehow have a dark room inside a camera?”

“How” questions get down to brass tacks. For instance, how exactly do you go about putting a darkroom in a camera? Land said that he went for a walk to ponder his daughter’s question and within an hour he had figured out the “what if” of instant photography. The “how” questions took a bit longer. “Strangely, by the end of that walk, the solution to the problem had been pretty well formulated,” Land later explained in speech cited in Victor K. McElheny’s Insisting On the Impossible: The Life of Edwin Land (Perseus Books, 1988). “I would say that everything had been, except those few details that took from 1943 to 1973.”

A More Beautiful Question does a fine job of exploring how these three questions can be used to create a “culture of inquiry” and drive the organizational innovation process. And as you might expect from such an accomplished writer, the book is an engaging read and well supported by the research and experiences of a veritable who’s who of academic and corporate experts. But as essential as asking the right questions is to the innovation process, it is certainly not all there is to successful innovation. Questions need to lead to answers, and answers to action.

Sunday, March 30, 2014

Killer quotes #6

"There are many pleasant fictions of the law in constant operation, but there is not one so pleasant or practically humorous as that which supposes every man to be of equal value in its impartial eye, and the benefits of all laws to be equally attainable by all men, without the smallest reference to the furniture of their pockets."

             —Charles Dickens, Nicholas Nickleby

Wednesday, March 26, 2014

The d'oh of healthcare reform

In which I publicly complain about healthcare reform on s+b's blog for the first and last time:

The Long Road to U.S. Healthcare Reform

The team keeps sending me emails. The March 31 application deadline for coverage in 2014 is fast approaching and they’re concerned: “Millions of Americans are already benefiting from the quality, affordable health coverage available to them through the Marketplace. We want to make sure you join them.”

I appreciate that. Really. I can’t remember a time in the past 20 years when our health insurer has expressed any interest in whether my wife and I had quality, affordable coverage. Instead, it sent us annual rate increases—usually 15 to 20 percent—accompanied by a generally incomprehensible policy. Every three to four years, as the cost of our policy made the draconian risks of self-insuring start to look good, my wife renegotiated it—that is, she reduced our coverage until it reached a level that we could afford.

Of course, I was gung ho about healthcare reform. For years, I happily anticipated the competitively priced insurance that would be available on the government-run exchanges. In good humor, I waited out the silly death-panel debates and the heroic debugging of And then, finally, I gleefully registered and followed the simple instructions to get my quote. The payoff? Higher deductibles and less comprehensive coverage at a cost approximately US$100 per month more than our existing policy. D’oh!

This is a long-winded explanation for why I wasn’t particularly thrilled to receive an advance copy of the long-titled Reinventing American Health Care: How the Affordable Care Act Will Improve Our Terribly Complex, Blatantly Unjust, Outrageously Expensive, Grossly Inefficient, Error Prone System (Public Affairs, 2014), by Ezekiel J. Emmanuel. The author was a beacon of sanity throughout the battle over reform. He is the chair of the Department of Medical Ethics and Health Policy at the University of Pennsylvania and served as a special advisor for health policy to the director of the White House Office of Management and Budget for a couple years.

In his new book, Emanuel does what he does best—clearly and logically explains the U.S. healthcare system. In doing so, he reprises many of the promises that he and other reform advocates have made before in the guise of six “megatrends.”
  • The Affordable Care Act (ACA) will force a radical restructuring of the insurance industry as providers and payors integrate, and markets become more competitive.
  • The chronically and mentally ill will get better care.
  • The demand for highly expensive acute care will fall.
  • Employer-sponsored health insurance will disappear.
  • Healthcare cost inflation will subside.
  • Changes in medical education will eliminate the shortage of health professionals.
Theoretically, this prescription is just what the doctor ordered. The only problem is that Emanuel’s megatrends are predications about the future, and as he says, “Making predictions is highly risky.” The reality, which Reinventing American Health Care does not shirk, is that the ACA will not deliver the above benefits until sometime between 2020 and 2025 —and there are many ways in which it can go off the rails between now and then.
So, it turns out that quality, affordable healthcare is still quite a ways away for me and my wife. In the meantime, our insurer says that our policy is going to get cancelled next year because it supposedly doesn’t conform to the standards mandated by the ACA, and our choices on are significantly more expensive than the $1200 per month we’re paying now. Good thing we dodged the socialized medicine bullet.