How to make a multi-billion dollar market

Aside from its implications regarding how drug companies manipulate doctors and consumers, Alix Spiegel's terrific story titled "How A Bone Disease Grew To Fit The Prescription" on NPR a few days ago should be required reading in any company that is trying to pioneer a new market.

Spiegel examines how Merck, with the help of a consultant named Jeremy Allen, transformed a new osteoporosis drug named Fosamax into a $3 billion/year blockbuster. Fosamax, it turns out, was a drug without a major market. When Merck launched the drug, osteoporosis was being treated, but it wasn't being prevented -- and that needed to be changed in order to create a really big market for Fosamax. You can learn how Merck accomplished this feat by reading the transcript of the story here.

s+b's Best Business Books 2009

Editing this year's Best Business Books special section for strategy+business was a terrific experience. We had an insightful and articulate team of essayists who winnowed through the stacks, and Guy Billout's illustrations are great. Here's my intro:

No matter what the future holds, the Great Recession of 2008–09 has had a seismic impact on the global business landscape and has called into question its philosophical and systemic foundations.

Certainly, it has been keenly felt among publishers and booksellers. In May 2009, year-to-date sales of professional books in the U.S. were down 6.8 percent from the year before, according to the Association of American Publishers. The recession also colors the writing — and the reading — of this year’s s+b best business books essays in ways both obvious and subtle.

The most direct manifestation is evident in the appraisal by Financial Times commentator Clive Crook of the books that seek to make sense of the recession, its implications, and its ramifications. In barely more than a year, the business section has become crowded with such books, but with the story still unfolding, none of them yet are comprehensive. Crook’s picks provide the multiple levels of perspective needed to appreciate the recession’s many facets.

Ayesha Khanna, managing director of Hybrid Realities, and Parag Khanna, New America Foundation senior research fellow, team up to review books on the changing topology of global business. They find changes in regional trading patterns and increasingly dynamic emerging economies that will challenge any established player — all evidence of an ongoing shift in competitive power that is sure to accelerate if the U.S. economy remains stagnant.

As one might expect, our management and leadership essays are rife with recession links. In the former, Judith F. Samuelson, the founder and executive director of the Aspen Institute’s Business and Society Program, searches out books that reveal the recession’s silver lining: its challenges to outmoded ways of thinking about management and governance. In the leadership essay, Charles Handy, whose memoir was one of 2008’s Top Shelf selections, mines books on topics as diverse as America’s Puritan settlers and the Buddhist Tzu Chi movement for insights into how to begin mending the torn fabric of leadership.

The University of Denver’s Daniels College of Business professor James O’Toole grounds his review of this year’s best biographies in a hefty tome about a 19th-century prime mover, John Stuart Mill, whose advocacy of free markets and private ownership resonates amid the dramatic government response to this economic crisis. IMD professor Phil Rosenzweig returns for an encore performance in the strategy category, pointing us toward books on intellectual property and dynamic capabilities in an effort to identify enduring strategic advantage. Rosenzweig also recommends a new book on Enron that takes us back to the last recession and explores the perils of stretching any strategy too far.

Marketing maven Catharine P. Taylor is back as well, with a proposition that should raise executive eyebrows: Branding is becoming an open source endeavor. She calls out Twitter — the subject of almost as many new books as the recession — as one of the leading technological mechanisms enabling this phenomenon. Steven Levy, senior writer at Wired and newcomer to our pages, broadens the thesis by reviewing books that explore the disruptive power of technology and what happens when companies such as MySpace don’t heed that power.

This year’s best business books help us understand current conditions and chart a secure course forward. With luck, next year’s best books will offer similar insight into a recovery of historic proportions.

Interview: Dick Grote on Employee Discipline

“You can’t punish people into commitment,” says Dick Grote, who first implemented a non-punitive employee discipline system as Frito-Lay’s Director of Training and Development in the 1970s. He is the author of Discipline Without Punishment: The Proven Strategy That Turns Problem Employees into Superior Performers (Amacom) and president of Addison, Texas-based Grote Consulting Corporation.

Why is disciplining employees such a tough job for managers?
This is a difficult thing to do, to sit down with another person and talk about the fact that they are not doing a good job. And when you have to keep on working with that person, the stakes go up. The other thing is all of the concern today about discrimination suits and legal liability. Supervisors are typically scared to death that if they say anything to anybody, then they are going to be facing Johnnie Cochran.

What are the most common mistakes managers make with regard to discipline?
Too often managers think that the purpose of disciplinary action is to terminate the employee in a way that can survive a legal challenge. That point of view is way too limited. I think there are four objectives for any discipline process. The first objective, obviously, is to solve the problem. The second objective is to maintain and enhance the relationship. The third is to build personal responsibility. The fourth is to build compelling defensibility.

You say that termination represents the failure of a discipline system. Why?
What we need to recognize is that the purpose of discipline is to bring about change. Suzie is coming to work late. So we give Suzie a first warning. But Suzie doesn’t change and so we move to a second step. She keeps coming to work late. So we move to a final step and Suzie keeps coming into work late. At that point we realize that our goal of bringing about change has failed and now it’s time for Suzie to find a job where they don’t care about punctuality. That is why termination is a failure of the process.

How does a Discipline Without Punishment (DWP) process work?
The first formal step is Reminder One, a serious conversation that puts the employee formally on notice that change is required. If that doesn’t do the trick, you go to Reminder Two. Another serious conversation, this time formally documented in a memo to the employee. If that still doesn’t work, you move to Decision Making Leave, a one-day, paid suspension where the employee is required to make a final decision either to change or quit. Now, one of two things usually happens: either they change or they don’t and another problem comes up which makes termination very easy.

The point of DWP is that we are eliminating the warnings, the reprimands, and the unpaid suspensions. We are replacing it with something much tougher, the demand that people take responsibility for their own behavior. That puts all the responsibility on the employees’ shoulders and that is where it belongs.

Can a manager use the principles of DWP without organizational support?
Absolutely. I think the first thing is the recognition that you are really trying to bring about a change. Learn how to hold a good performance improvement discussion and gain an agreement to change.

There is another thing. When you are documenting disciplinary action, you are documenting the discussion about the problem. That is why you can only do it after you have had the conversation. The effective way is to talk first, write later.

Grote’s Recommended Reads

A Message to Garcia by Elbert Hubbard. “As far as a general understanding of individual responsibility, there is nothing better.”

Coaching for Improved Work Performance by Ferdinand Fournies. “Very good at providing step-by-step instructions and vivid examples of coaching situations.”

Analyzing Performance Problems: Or, You Really Oughta Wanna--How to Figure out Why People Aren't Doing What They Should Be, and What to do About It by Robert Mager. “Shows that the solutions to a lot of people problems come by providing feedback, arranging appropriate consequences and getting rid of obstacles that prevent people from doing the job right.”

Bread or bullets: MacArthur in Japan

Jed Graham of Investor's Business Daily called last week to do a short interview about General Douglas MacArthur's role in the post-WWII reconstruction of Japan - a topic that Donna and I wrote about in our book, No Substitute for Victory: Lessons in Strategy and Leadership from General Douglas MacArthur (FT/Prentice Hall, 2005). Jed did a great job on the article. Here it is:

Gen. Douglas MacArthur Rose To Put Japan On Its Lofty Path by Jed Graham, Investor's Business Daily, posted 09/25/2009 07:22 PM ET

Three days before he accepted Japan's surrender on the battleship Missouri in Tokyo Bay, Gen. Douglas MacArthur landed at the Atsugi naval air station without big guns to intimidate a still-armed enemy.

Convinced the Japanese would honor the surrender and determined to set the right tone for the American occupation, MacArthur ignored the warnings of his fearful staff that he would be an easy target.

"While conventional wisdom might suggest that the United States enter Japan in force and prepared for treachery, MacArthur felt that peace could be attained more rapidly by a show of confidence," Harry Maihafer wrote in "Brave Decisions: Profiles in Courage and Character from American Military History."

Winston Churchill would later call MacArthur's landing "accompanied by only a small force of troops, and in the face of several million Japanese soldiers who had not yet been disarmed" the most impressive feat by any commander in the war.

MacArthur's strategic gambit reflected a grasp of the challenge he would face as supreme commander of Allied powers (SCAP) in Japan from 1945 to 1951. He knew that occupations rarely went smoothly. Centralized command threatened the people's self-governance and self-confidence.

Uplifting Aim
Upon his arrival after the surrender, the Army five-star assured the Japanese that his top concern was "not how to keep Japan down, but how to get her on her feet again."

And because the locals quickly accepted his word, his direction of the occupation stands out as an unparalleled success.

In a few short years, MacArthur (1880-1964) made changes that would transform Japan from a militaristic society facing economic devastation into a thriving democracy whose nonaggressive posture remains enshrined in its constitution.

MacArthur jumped into action. Contradicting Washington's post-surrender directive to avoid involvement in Japan's economic rehabilitation, he moved fast to ameliorate a rising food crisis.

"One of the first things I did was to set up our Army kitchens to help feed the people," he wrote in "Reminiscences." "Had this not been done, they would have died by the thousands."

His finger firmly on Japan's pulse, MacArthur forbade his forces to eat local food and had 3.5 million tons of Army food supplies in the Pacific moved to the island nation.

"The effect was instantaneous," he wrote. "The Japanese authorities changed their attitude from one of correct politeness to one of open trust," and a once-dubious press voiced "unanimous praise."

MacArthur's tactical moves furthered his strategic goals.

When Congress demanded that MacArthur justify the expense of shifting food to Japan, he said an occupation's goal must be extending victory, not presiding over defeat.

"Starvation breeds mass unrest, disorder and violence," he cabled Washington. Give me bread or give me bullets."

MacArthur understood that the most effective way to maximize his influence was by aligning the interest of potential rivals with his goals.

Unlike the occupation of Germany — divided between Western and Soviet zones of authority — MacArthur had the advantage of presiding over a unified Japan. But that wasn't initially an assured outcome.

When Gen. Kuzma Derevyanko, head of the Soviet mission, insisted that his forces occupy the northern Japanese island of Hokkaido, MacArthur made it personal.

"If a single Soviet soldier enters Japan without my authority, I shall at once throw the entire Russian mission into jail, beginning with you, General," he threatened.

As 1945 drew to a close, MacArthur faced another threat to his sway over the occupation. Pressure from Allies who wanted a say in policy toward Japan culminated in the Moscow Agreement that gave the major powers a veto over directives involving constitutional structure.

At the crux was how to handle Japan's imperial institution. While MacArthur believed that the institution must be reformed and demythologized, the Allies were bent on trying Hirohito as a war criminal.

Going after the emperor, MacArthur believed, would cut to the heart of his strategic approach and fuel a rebellion. He warned Washington that 1 million troops would be needed, not the current 350,000.

Determined to head off a disaster in the making, MacArthur lit a fire under his occupation staffers.

His orders: Draft a Japanese Constitution in six days.

Why the haste? He had to strike before the newly empowered Far East Commission had time to organize and issue demands.

MacArthur outlined key principles for the constitution:
• The emperor would remain head of state, but his duties would be governed by the constitution and be responsive to the will of the people.
• Japan would renounce war as a sovereign right of the nation.
• The budget should be patterned after Britain's system.

Nine days later, Maj. Gen. Courtney Whitney presented to Japan's Cabinet members the document that provided essential freedoms to the Japanese and rendered the emperor "practically unassailable."

Whitney, a tough lawyer, didn't bother with a soft sell. He argued that embracing the American draft was the Cabinet's "only hope of (political) survival," because MacArthur would otherwise publish it and give the Japanese people a choice.

While going public would have sparked a backlash from the Allies, the Cabinet members didn't test whether MacArthur was bluffing. They acquiesced, and the Japanese Constitution that took effect in 1947 with slight revisions has gone six decades without amendment.

In an essay in "MacArthur and the American Century: A Reader," Japanese historian Ikuhiko Hata wrote that radical Japanese military officers organized an underground movement to resist the occupation through guerrilla war once the emperor system was outlawed. With MacArthur keeping Hirohito in place, "they
abandoned the project within a year," Hata wrote.

MacArthur's success depended not only on realpolitik, but also high ideals. The Japanese people "really were impressed with a man who was a man of war, who comes in and says ... 'You must become a nation of peace. This is how you can become a beacon in the world. You can become the Switzerland of Asia,'" John Dower, author of "Embracing Defeat: Japan in the Wake of World War II," told
C-SPAN.

Among MacArthur's earliest initiatives was directing Japan's leaders to enact women's suffrage, freedom of speech, unionization and the release of political prisoners.

MacArthur offered "a higher vision of the nation and what it could achieve that gave the Japanese something to rally around," said Theodore Kinni, co-author of "No Substitute for Victory: Lessons in Strategy and Leadership From General Douglas MacArthur."

At the same time, "he had a very practical approach to getting these things done," Kinni told IBD. "There was always this kind of back and forth."

When newly empowered unions threatened a national strike in 1947, MacArthur prohibited it. When Japanese leaders showed little inclination to reform their constitution, he gave them a shove.

Understanding the limits of his power to change Japan, MacArthur pushed through — but did not order — changes in a way that "reinforced the Japanese government's legitimacy (in) a masterful performance," Lt. Col. David Cavaleri wrote in "Easier Said Than Done: Making the Transition Between Combat Operations and Stability Operations."

Getting Buy-In
Wrote MacArthur: "Nothing that was good in the new Japanese government was going to be done because I imposed it."

He instructed his staff to "scrupulously avoid interference with Japanese acts merely in search for a degree of perfection we may not even enjoy in our own country."

He turned the odds in his favor by giving Japan's citizens a clear stake in the nation's — and the occupation's — success.

One reform MacArthur proposed was to democratize farmland ownership. He required absentee landlords to sell, with the government making the land available at a fixed price with low, long-term interest rates.

"Land reform is seen as the single most important factor for quelling rural discontent and promoting political stability in the early postwar period," James Dobbins wrote in "America's Role in Nation-Building: From Germany to Iraq."

MacArthur's Keys
As Allied commander in Japan from 1945 to 1951, he engineered the country's turnaround from a battered militaristic society into a thriving democracy.

"There is no security on this earth; there is only opportunity."

Derailing healthcare reform

It seems crystal clear that a country that ranks first in healthcare costs and 37th in overall health system performance urgently needs healthcare reform. But based on the spam I've been getting, it's also pretty clear that the so-called debate over reform is setting new lows for public discourse. Death panels? Gimme a break!

The campaign against healthcare reform reminds me of this quote from Richard White's biography of Huey Long, Kingfish: The Reign of Huey P. Long(Random House, 2006):

In order to succeed, a mass movement must be superficial for quick appeal, fundamental for permanence, dogmatic for certainty, and practical for workability.

That seems to define the movement to derail reform in a nutshell and I can't help but believe that it is being orchestrated and financed by commercial interests. Follow the money, right?

By the way, Long's biographer found the quote in a 1935 Saturday Evening Post article published shortly after Long's assassination. It was spoken by a guy named Gerald L.K. Smith, a preacher who had a hankering for political power. He helped Long organize the Share Our Wealth Society, a scheme to take from the rich and give to the poor that Long cooked up during the Great Depression, which Smith tried to take over after Long was killed. Smith was a pro-Nazi white supremacist and a virulent anti-Semite who opposed labor unions. Unfortunately, like insurance companies and healthcare providers, he also knew how to get other people to do his bidding.

The company town

Having read Douglas Brinkley's centennial history of The Ford Motor Company, Wheels for the World: Henry Ford, His Company, and a Century of Progress, as well as several earlier books on Henry Ford and his company, it was great to find a new book that covers a chapter in the story that came as a complete surprise. Greg Grandin's Fordlandia: The Rise and Fall of Henry Ford's Forgotten Jungle City (Metropolitan Books) is the fascinating story of an ill-fated business venture that Henry Ford undertook in the 1920s.

Ever the vertical integrator and never one to brook a monopoly (if it might cost him money), Ford created Fordlandia in an attempt to bypass European control of the rubber market and secure a low-cost source of crude rubber. First, he bought a 2.5 million acre tract of jungle (about twice the size of Delaware) located 600 miles deep in the Brazilian Amazon. Then, he decreed that a rubber plantation and a Midwestern-style town be constructed on the site, which was, Grandin reports, "18 hours on a slow riverboat" from the nearest city. You can guess the hilarity that ensued by the fact that the company simply abandoned the venture two decades later.

The most head-shaking part of the story is the supreme confidence and cultural arrogance that was common among the business moguls and large companies of the early 20th century. Fordlandia was not Henry Ford's first attempt at building communities around his businesses; he founded towns in Michigan's Upper Peninsula and in 1922, tried to convince the U.S. government to give him Muscle Shoals, Alabama so he could build the "Detroit of the South." Milton Hershey, who built the town of Hershey, Pennsylvania around his chocolate factory, built a sugar mill town in Cuba. And Grandin reports that in the 1920s:

"....one could tour Guatemala, Costa Rica, Panama, Honduras, Cuba, and Columbia and not for moment leave United Fruit Company property, traveling on its trains and ships, passing through its ports, staying in its many towns, with their tree-lined streets and modern amenities, in a company hotel or guest house, playing golf on its links, taking in a Hollywood movie in one of its theaters, and being tended to in its hospital if sick."

These men did not simply see their companies as an integral part of society; for better - and often, as Fordlandia reveals, for worse - they saw themselves as society builders.

Speaking of pirates

The movie studios complain bitterly about piracy, but it's hard to sympathize with them when you read a story like this one from Bloomberg:

J.R.R. Tolkien sold movie rights to his “Lord of the Rings” novels 40 years ago for 7.5 percent of future receipts. Three films and $6 billion later, his heirs say they haven’t seen a dime from Time Warner Inc...read the rest here

Tolkien's heirs are suing Time Warner for $220 million and I hope they get it all plus double or treble damages. But I'll give Harlan Ellison, one of the great sci-fi writers who worked in Hollywood for many years, the last word on this kind of piracy. Ellison is the subject of an entertaining documentary titled Dreams with Sharp Teeth that every writer should see. In it, he tells this story, which lo and behold was posted on You Tube.

Posts for writers; Free is taken to task

I've read a couple of blog posts in the past week or so that are worth considering if you're a writer:

David Pogue, posting on the New York Times blog, answers a reader's question: "When will you share your productivity tips with us? Not everyone can write five books a year, file two columns a week, churn out a daily blog, speak 40 times a year and film a video every Thursday. What are your secrets?" Hint: long work hours, speech recognition, and typing short cuts.

In his blog, Wordwork, journalist Dan Baum calls for the elimination of the nut graph. He says having a paragraph that sums up the writer's thesis is a useful convention for news reporters and newspaper readers, but that it's counterproductive in longer works. I tend to agree.

In the business book world, Wired editor-in-chief Chris Anderson's new book Free: The Future of a Radical Price (Hyperion) is attracting plenty of criticism. First, a blogger named Waldo Jaquith at Virginia Quarterly Review discovered that Anderson had lifted passages in the book from Wikipedia without attribution and Anderson apologized, blaming sloppy editing. Then, Malcolm Gladwell, another popular writer in the one-idea-per-book genre, criticized Free for its sloppy thinking in a New Yorker review. And today, Janet Maslin criticized Free as just plain sloppy in the New York Times' Books of the Times column. Hmmm...seems like a theme is developing.

The French are lovin' it

It wasn't all that long ago that the French were up in arms that their nation was being invaded by McDonald's, the poster company for fast food and poor nutrition. Now, there are approximately 1200 McDonald's in France, including a location a block from the Louvre, and that nation is the company's second most profitable market.

Slate wine columnist Mike Steinberger's story, How McDonald's Conquered France, is a fascinating look at how the global QSR giant accomplished this feat. For instance, McDonald's overcame farmer-driven protests by making the French aware that 70 percent of its ingredients were purchased domestically. It took the time to learn French dining habits (eating is a social event; they prefer to dine in rather than take-out) and designed its locations accordingly. It also acknowledged the food preferences of the French by introducing a host of sandwiches and other products designed especially for their tastes. The end result: McDonalds is serving more than a million customers a day in France.

Steinberger sees the success of McDo, as the French call it, as an indicator of the nation's cultural decline, at least in terms of cuisine, and has written a new book about it, titled Au Revoir to All That: Food, Wine, and the End of France. But there is also a bigger business story or a case study here and somebody ought to write that, too. It sounds like McDonald's has figured out how to go global by acting local...for better or worse.

Leading authors on notable books

I've been helping to launch and edit a new book feature on the strategy+business website called Author's Choice. It's a neat concept: we ask leading business book authors to introduce excerpts that catch their eye from works other than their own. The short excerpts, under 1000 words, are self-encompassed and offer a lesson or insight for managers. We've already got a great pipeline in development and the first installment, announced below, is online. Check it out, and if you're a business book author whose found a pithy excerpt that you'd like to introduce, shoot me a line.

The Statistician Who Ate Humble Pie

New York, N.Y., June 30, 2009 - Why are business and economic forecasts so often wrong, and why can't they be improved? In a new feature from s+b -- Author's Choice -- leading writers select and introduce passages from notable books. In this piece, Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable, introduces an engaging lesson in business forecasting from Dance with Chance: Making Luck Work for You, by Spyros Makridakis, Robin Hogarth, and Anil Gaba.

To read it, click here.

When contracts aren't written in stone

George Haley, a professor of marketing at the University of New Haven, was a very helpful source for a cover story I wrote about selling in China for Selling Power magazine a couple of years ago. A specialist in Asia Pacific, George wrote a book in 1998, with professors Usha Haley and Chin Tiong Tan, on the Overseas Chinese -- an insular and powerful business community in Southeast Asia that I had never heard of before that. It is available now in a new, revised edition titled New Asian Emperors: The Business Strategies of the Overseas Chinese (Wiley).

Among many other things, the book explains one of the most disconcerting elements of Chinese business culture for Westerners -- the cavalier attitude to contracts -- as follows:

Many Western businesspeople in Asia have problems with the seeming flexibility of contractual agreements in Asia. The Bundesbank's difficulty in collecting on some of its loans to Chinese companies, including government-owned firms, presents a classic example. When Chinese debtor companies ceased paying in loans, Bundesbank representatives demanded resumption of payment. Their Chinese counterparts responded by arguing that circumstances had changed, and hence the terms of the contract must change. Contractual flexibility follows Chinese custom.

Contractual flexibility took hold among Chinese businesspeople because of the nature of their business. Business-to-business transactions occurred largely between long-time associates at the very least, if not actual family members. Hence, if circumstances changed abruptly in favor of one party to the transaction and to the substantial detriment of the other, they would renegotiate the contract so that neither party would suffer unbearably from changed circumstances. This consideration offered to one's trading partner stemmed from self-interest. An unhappy trading partner might not only refuse to do any further business with the offending individual, but also campaign against him within his network, or even offer evidence against him with imperial authorities.

Welcome to the next depression

Richard Posner isn't afraid to use the "D" word. He says we're in a depression -- as defined by a steep decline in output, a widespread sense of crisis, costly remediation efforts, and long-term impacts.

In A Failure of Capitalism: The Crisis of '08 and the Descent into Depression (Harvard University Press), Posner persuasively argues that this meltdown wasn't caused by rotten financiers or grasping investors. Instead, the depression was caused by a systemic flaw -- everybody acted rationally and that caused an economic bubble that, like bubbles do, popped.

I won't go into the details; you really should read the book - even if it gets a little long as the same basic argument gets recycled through each element of Posner's thesis. But there is one section worth calling out for corporate consideration: it deals with why companies tend to get caught out when bubbles pop and this portion of it adds some fuel to the debate over executive compensation.

Riding a bubble can be rational even though you know it’s a bubble. For you can’t know when it will burst, and until it does it is expanding and that means that values are rising rapidly, so that if you climb off the bubble you will have foregone a large profit opportunity. As Citigroup’s then CEO put it in July 2007, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” (He didn’t know it, but the music had stopped.)

The tendency of corporate management to cling to a bubble and hope for the best – or, equivalently, the tendency to maximize short-run profits – is strengthened if, as on Wall Street during the boom, executive compensation is both very generous and truncated on the downside. For then every day that you stay in you make a lot of money, and you know that when the bubble bursts you’ll be okay because you negotiated a generous severance package with your board of directors. Limited liability is a factor, too; neither an executive heavily invested in his company’s stock nor any other shareholder will be personally liable for the company’s losses should it go broke.

And how do executives get such a sweet deal? Well, the board will have hired a compensation consultant who will have advised generosity in fixing the compensation of senior management and as part of that largess will have recommended that senior executives receive a fat severance package (a “golden parachute”) if they are terminated. The consultant will have told the board this because if the board is generous to senior management, senior management may out of gratitude hire the consultant to do other consulting for the firm. And the board will have listened to the consultant’s recommendation because the board will have been predisposed to be generous with senior executives’ salaries. Most members of a corporation’s board of directors will be senior executives themselves. And because a firm’s chief executive officer has a say in whether board members are reelected to the board, the higher a board member thinks CEO compensation should be, the more boards he will be invited to join.

The more generous an executive’s compensation and the more insulated his compensation package is from any adversity that may befall his company, the greater will be his incentive to maximize profits in the short run – especially in a bubble, where the short run is highly profitable but the long run a looming disaster.

The inscrutable ways of publishers

I stumbled on Ved Mehta's Remembering Mr. Shawn's New Yorker: The Invisible Art of Editing (Overlook, 1998) at a library book sale -- 50 cents, such a deal! This book in Mehta's multi-volume memoir titled Continents of Exile deals with his years as writer for the New Yorker and his experiences being edited by William Shawn, one of the all-time greats. All writers and editors should read it for insights into their work.

It goes without saying that Mehta also has a way with a story, including this vignette about his adventures with book publishers:

I engaged in battles to get jacket designs in keeping with the spirit of the book. The battles eventually resulted in tasteful, if quiet, jackets, but publishers regard presentation as their preserve, and what they saw as my meddling seemed to have the effect of making them feel redundant. My interference was resented even more when it had to do with jacket copy. Yet the jacket copy that each of the publishers provided not only was completely at variance with the character of the book but was so badly written that when I showed an example to a colleague, Renata Adler, she exclaimed," It seems to have been written by a lower form of humanity!" The publishers and I went back and forth on several versions, and finally both just threw up their hands and told me to provide them with something.

This cracked me up because I have yet to get jacket copy from a publisher that looks like it was written by someone who actually read the book. I'm not sure that publishers even try to write good copy; maybe they send drivel knowing full well that the author will be compelled to fix it. I always have and thanks to Mehta, I now know I'm not the only one.

One question: Les Leopold

Les Leopold's readable new book, The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity—and What We Can Do About It is out this month from Chelsea Green. Les directs two nonprofits, The Labor Institute and The Public Health Institute, which are aimed at educating union workers on public policy issues.

The crux of Les' thesis, if I can summarize without subverting, is that the roots of this recession lie in the gap between productivity and real wages, which began growing in the early 1970s. Instead of going to workers in the form of wages, who would have spent the money on real goods and services that grow economies, productivity gains began going to owners and executives, who, having all the stuff they needed, invested the money. All this new money seeking good returns led to risky lending practices and financial instruments, which, in turn, led to the current mess.

This is a provocative and debatable argument, and certainly one that will resonate in pro-labor circles. My question for Les: In pegging the financial meltdown in the U.S. to the decoupling of productivity gains and real wages, the underlying inference is that those gains – or a larger portion of them – were wrongly diverted away from wage earners. What caused this divergence and why are wage earners entitled to a larger portion of productivity gains?

Here's his reply:

There really is no consensus on why productivity and wages diverged so dramatically. I can only give you my read. I think several trends entwined to undercut the price of labor.

First was what we call “globalization” which, in this case, refers to the ability of corporations to move capital quickly to all parts of the globe. The Bretton Woods agreements, which ended in the early 1970s, had previously prevented such rapid movement of investment capital. But after its collapse, corporations could set up shop in low-wage areas and import the final products back into the United States. American labor, in effect, was in direct competition with workers all over the globe.

This led to the second factor: the decline of unions. The globalization process and its impact on U.S. workers could have been mitigated, in my opinion, had the labor movement been stronger. But labor union density had been in a secular decline since the mid-1950s. Why that happened is a much longer story, but the impact was two fold: First, unions could not moderate national policies on deregulation, capital flight and cheap imports; and second, unions could not effectively bargain hard at the workplace.

The third set of factors involved a shift in political power to the upper income brackets. During the Reagan era and beyond, social programs were slashed, taxes on the wealthy were reduced, the minimum wage was not increased to keep up with the cost of living, and labor laws were weakened.

I don't think we can blame new technologies for the transfer of productivity gains. The computer revolution came later as did the Internet. Manufacturing was becoming more and more automated throughout the 1950s and 1960s. In fact, there was much hand-wringing in the late 1950s about the impact of automation on work and the rise of leisure --- what would workers do with all their free time?

That's why my main point is the following: The distribution of the fruits of productivity is more like a tug of war – a genuine struggle between the investor class and the rest of us. It’s not automatic. Policy impacts the division of the pie.

There is, however, an additional and very important factor to consider, no matter whether you favor more money for working people or more for the investment classes. I think we are living through a real life experiment about what happens when you let too much money accumulate at the top: It runs out of tangible investment opportunities in the real economy and much of it ends up in Wall Street’s fantasy finance casino.

There is a relationship between the rising gap between the super rich and the rest of us, and the crashing of the economy. Such were the conditions before the Great Depression and those conditions almost led us there again. I believe that for the sake of the entire economy, it is best to narrow the income/wealth gap.

Strategy when chaos is the new normal

Marketing guru Philip Kotler and business strategist John Caslione say that battening down the hatches in a recession often does more harm than good. The most common mistakes:

• Resource allocation decisions that undermine core strategy and culture
• Across-the-board spending cuts versus focused, measured actions
• Quick fixes to preserve cash flow that puts talent at risk
• Reducing marketing, brand, and new product development spending
• Responding to declining sales with price discounting
• Decoupling from customers by reducing sales-related expenses
• Cutting back on training and development
• Undervaluing suppliers and distributors

So what should you be doing in a recession? The same things you are doing during good times, say Kotler and Caslione, co-authors of the new book, Chaotics: The Business of Managing and Marketing in the Age of Turbulence (Amacom). They say that the nature of the business world has changed in such a way that thinking in terms of cycles is counterproductive - rather, companies must create strategies that are capable of responding and adapting to a continuous stream of "disruptive innovations and big unexpected shocks."

The three keys to such a strategy, according to the authors: early warning systems that alert leaders to sources of turbulence; scenario planning to allow fast, flexible response; and a scenario selection process based on prioritization and risk exposure. Read more at their website...

McIntyre's editing rules

John McIntyre, director of the copy desk at The Baltimore Sun, an affiliate faculty member at Loyola College of Maryland, and a former president of the American Copy Editors Society, pulled together a funny - and informative - list of 25 rules of editing. Here's the first five:

1. The project will require three times the planned time to achieve one-third of the desired result (McIntyre’s Ratio).
2. Writers will never straighten out it’s and its.
3. No matter how many times an article is edited or proofed, some reader will find a mistake in it.
4. To reporters, all deadlines are fungible.
5. Percentages will have been miscalculated 42 percent of the time...read the rest of the rules here.

P.S. I probably violated Rule 20 in the first sentence, but I like the way it looks.

Political risk and the fat tail

Having a degree in poli sci, I've been especially interested in The Fat Tail: The Power of Political Knowledge for Strategic Investing (Oxford, 2009) by Ian Bremmer and Preston Keat of Eurasia Group, a political risk consulting firm. The so-called "fat tail" is a bump in the end of a distribution curve in which the probability rises that something highly unlikely - and therefore often ignored by managers - may actually occur. The book makes a strong case that political risks often reside in the fat tail and that global companies must identify and manage these risks (although the details on how that is done are less well documented). There's a short Harper magazine Q&A with Bremmer posted here.

There's also an article by Andrew Rice on South Africa and Jacob Zuma, who may well become that nation's leader later this year, in the latest issue of Portfolio that reiterates the importance of recognizing and managing political risk. In it, Rice describes Zuma's rise to control the ANC party and the major implications it may have for the business environment in South Africa.

Making sure marketing pays

A lot of what I read about marketing sounds like a lot of baloney. I just can't figure out how a polo sponsorship or a billboard or a storefront on Second Life creates profitable sales - and while marketers can talk a great game, none of them ever seem to have the numbers to prove they actually won it.

That's why I found working with Les Moeller and Ed Landry, partners at Booz & Co., on their book, The Four Pillars of Profit-Driven Marketing: How to Maximize Creativity, Accountability, and ROI (McGraw-Hill), such an enlightening experience. These guys aren't just saying that you should know whether your marketing spend pays off, they show you how to measure marketing ROI and use that knowledge as the basis for enhanced profitability, creativity, and accountability.

The book just came out and here are a few links for more info:

You can read the Introduction and download a chapter at the book's web site. You can also read an excerpt from Chapter 4 in the new issue of strategy+business.

I helped write the book, so I'm biased, but if you're one of the people responsible for allocating or spending marketing dollars or responsible for making sure that those people produce great results, I'd say it's a must read...especially in this economy.

Learning from heretics

I didn't get a chance to post when the new, expanded edition of Art Kleiner's The Age of Heretics (Jossey-Bass), a very readable history of the influence of a handful of radical thinkers on management from the 1940s onward, hit the shelves. But now is as good as time as any, especially since Art will be conducting a free webinar based on the book next week. Here are the details:

The Age of Heretics: Lessons from Three Generations of Management Thinkers with Art Kleiner

Join strategy+business editor Art Kleiner in a live interactive webinar as he discusses the nature of effective leadership in times of change.

The most valuable management principles and practices often started as countercultural – including high performance management, group dynamics, teamleadership, quality, and diversity. In this Webinar, Art Kleiner will discuss the nature of corporations and the role of the heretics – the people who raise difficult questions on behalf of the organizations they work for. These days, with conventional wisdom failing, heretics are needed more than ever. Art will tell the stories of heretics who succeeded (and some who failed), and what we can learn from them.

Date and time: February 24, 2009 12:00 pm, Eastern Standard Time

To sign up: click this link

The Mametian perspective

Figuring it would cut the holiday saccharinity, I picked up David Mamet's meditation on the movie business, the essay collection Bambi vs. Godzilla. And it did, of course; Mamet's take on labor, management, and business is as tough as it gets. I particularly enjoyed this passage on the development path of producers, which if you substitute the word "customer" for "audience," should give every manager pause:

...the young bureaucrat-in-training, as he progresses in the bureaucratic hierarchy, will discover - some quickly; others, their eventual lackeys, with less speed - that success comes not from pleasing the audience but from placating his superiors until that time it is reasoned effective to betray them.

He learns in short to bide his time.

And as time goes by, this suborned young person becomes each day less capable of first uttering and then framing a non-bureaucratic thought.

Impulses of joy, of wonder, indeed, of rage and grief are repressed until they are no longer consciously felt.

This is called "growing savvy."

This person, like a member of a sexless marriage, ceases to feel affection, lust, desire for the permitted object, and, as in that marriage, this energy is diverted into (inter alia) depression, abuse, and treachery.

The successfully matriculated executive, marginally concerned wth art and diminishingly concerned even with "product," devotes his new wisdom and increased leisure to opportunities for trickery, greed, stock manipulation, and merger, as in any business.

Five rules for successful leadership

No matter what the economic climate, there are always plenty of leadership books in the business section of the bookstore. In fact, there are so many leadership titles that it's difficult to parse them to get down to the basics. Into the breach step Dave Ulrich, Norm Smallwood, and Kate Sweetman, who are themselves partly responsible for the crowded shelves.

In their new book, The Leadership Code (Harvard Business Press), the trio, all principles at The RBL Group, seek to boil successful leadership down to five rules. I'm not vouching for the scientific accuracy of the results -- the basis for the five rules is a survey of "hundreds of studies, frameworks, and tools," as well as the expert opinions of 15 leading leadership thinkers and the authors' best judgements. But the rules sound right. Here's the list direct from HBP:

Rule 1: Shape the Future – Strategic leaders answer the question, “Where are we going?” They figure out what direction the organization must take to succeed. They test their ideas pragmatically against current resources and they work with others to determine how to get from the present to the desired future.

Rule 2: Make Things Happen – The “executor”dimension focuses on the question, “How will we make sure we get to where we are going?” Executors translate strategy into action. They understand how to make change happen, how to assign accountability, and how to make sure that teams work well together.

Rule 3: Engage Today’s Talent – Leaders who optimize talent today answer the question, “Who goes with us on our business journey?” Talent managers know how to identify, build, and engage people to get results now. They generate intense personal, professional, and organizational loyalty.

Rule 4: Build the Next Generation – Leaders who are human capital developers answer the question, “Who stays and sustains the organization for the next generation?” Talent managers ensure shorter-term results through people, while human capital developers ensure that the organization has the longer-term competencies required for future strategic success.

Rule 5: Invest in Yourself – At the heart of the leadership code is personal proficiency. Effective leaders learn from success, failure, assignments, books, classes, people, and life itself. Leaders who demonstrate personal proficiency follow rules about developing and increasing personal insight so that they model the change they want to see in others.