A robot ate my job

My latest book post on the strategy+business blog is up:

Automation’s Adverse Effects

 

Nicholas Carr is an every-silver-cloud-has-a-dark-lining kind of guy. In Does IT Matter? Information Technology and the Corrosion of Competitive Advantage (Harvard Business Review Press, 2004), he argued that IT is not a sustainable competitive advantage because new tech can be adopted so quickly by other companies. In The Big Switch: Rewiring the World, from Edison to Google (W.W. Norton, 2008), he articulated the Big Brother–like social and economic consequences of the then-nascent idea of cloud computing. And in The Shallows: What the Internet Is Doing to Our Brains (W.W. Norton, 2010), Carr contended that being online can rewire our brains in harmful ways.

 

I don’t always agree with Carr, but I read his books because they are always timely, thought provoking, and highly useful for puncturing the sometimes irritating claims of digital utopians. His new book, The Glass Cage: Automation and Us (W.W. Norton, 2014), is no exception.

 

The Glass Cage arrives close on the heels of breathless announcements about driverless cars and delivery drones, the kinds of automation advances that promise to take us into uncharted territories. They also prompt Carr to wonder what might happen to us as machines take over more and more of the tasks that once required the human touch. 

 

“If you want to understand the human consequences of automation,” Carr writes, “the first place to look is up. Airlines and plane manufacturers, as well as government and military aviation agencies, have been particularly aggressive and especially ingenious in finding ways to shift work from people to machines.”

 

The silver cloud of aviation automation has been an impressive reduction on accidents: From 1962 through 1971, there were 133 deaths per million passengers on U.S. commercial flights; from 2002 through 2011, there were 2 deaths per million passengers. The dark lining, Carr reports, is that “a heavy reliance on computer automation can erode pilots’ expertise, dull their reflexes, and diminish their attentiveness.” This has resulted in avoidable accidents attributed to pilot error, such as the loss of a commuter flight heading for Buffalo, NY, in which 50 people died, and the downing of a Rio de Janeiro-Paris flight, in which 228 people died, both in 2009.

 

While these are dramatic examples outside the norm, Carr says they show how “automation remakes both work and worker.” They also raise a question that leaders in all kinds of companies might want to keep in mind as they pursue the efficiencies of automation: What will the cost be in terms of human capital?

 

One cost is the possibility that more and more errors will arise from automation complacency, in which the seeming infallibility of computers lulls us into a false sense of security, and automation bias, in which we give undue weight to digital information. Another cost could be the loss of the employee skills that have been automated—and worse, an inability to relearn those skills once they are gone. Yet another, according to Carr, could be a stifling of “curiosity, imagination, and worldliness”—which sounds pretty bad in a time when innovation is often touted as the only reliable competitive advantage.

 

What’s needed to avoid these consequences is an approach to automation that captures the consistencies and efficiencies that it offers without losing the human judgment and intuition that machines can’t replace. This is the goal of human-centered automation. “Rather than beginning with an assessment of the capabilities of the machine,” writes Carr, “human-centered design begins with a careful evaluation of the strengths and limitations of the people who will be operating or otherwise interacting with the machine… The goal is to divide roles and responsibilities in a way that not only capitalizes on the computer’s speed and precision but also keeps workers engaged, active, and alert—in the loop rather than out of it.”

 

The Glass Cage is not as much a solution to automation’s dark lining as it is a reminder that every business decision involves tradeoffs. Nicholas Carr is giving us a look at what those tradeoffs might entail as automation reshapes the world of work. It’s going to be up to the companies that adopt it to figure out how to capture its benefits without succumbing to its deleterious side effects.

Raises by the pound?

My latest s+b book post:

Improving Employee Well-Being by Default

 

Companies are instituting all sorts of health programs aimed at enhancing the quality of life and productivity of their employees, and reducing costs. The other day, for example, a friend showed me her Fitbit—a digital pedometer—provided by her Fortune 500 employer. The company even created a friendly competition around the device that includes healthcare rebates and gift cards for those employees who record a fixed number of steps, and rewards to those who record the most steps.

 

Although these kinds of programs certainly encourage employee fitness and health, Cornell University marketing professor Brian Wansink says that too often “wellness programs are like New Year’s resolutions: They’re enthusiastic and bold, but they never seem to deliver.” The problem, which Wansink explains in Slim by Design: Mindless Eating Solutions for Everyday Life (William Morrow, 2014), is that programs like the one around Fitbit require employees to make a conscious effort to become healthier. As a result, they are easily tripped up by their unconscious behaviors and emotions.

Wansink’s solution, which will sound familiar to readers of cognitive psychologists like Daniel Kahneman and behavioral economists like Dan Ariely, is to make healthy choices the default choices for employees. “Becoming slim by design works better than trying to become slim by willpower,” writes Wansink. “That is, it’s easier to change your eating environment than it is to change your mind.”

That’s why he likes commonsense and easily implementable ideas such as putting free fruit in break rooms instead of donuts; signs that give the number of calories on vending machine choices and loading the least-healthy options in the lowest slots of the machines; and in cafeterias, making salad the standard side dish and offering half-size dessert portions.

These ideas only touch the surface of the many ideas that Slim by Design offers for the workplace, as well as four other “zones that booby-trap most of our eating”—home, restaurants, grocery stores, and school lunchrooms. The basis of these ideas is research that Wansink has conducted over the past quarter-century, most recently at the Cornell University Food and Brand Lab, where he serves as director.

In one of those studies, Wansink and his team discovered that moviegoers not only ate less when snacks were packaged in smaller bags, but that more than half of the subjects said they would willingly pay 20 percent more for the smaller packages. He recalls reporting that counterintuitive finding to a couple of dozen Nabisco executives in 1996, who were “staring at me with their mouths frozen open—like I was Medusa with snakes for hair or like I had just finished yodeling.… Just like in a cartoon, I could see a big collective thought bubble above their heads: ‘SELL LESS AND MAKE MORE?’”

One idea in Slim by Design to improve the health of employees really stood out: Make 10 percent of manager’s pay contingent on improving the health of the employees he or she supervises. “Imagine what would happen if your boss—along with the other managers in your company—were graded, promoted, and paid partly on how she tried to help make you healthier. Again, healthy employees are good for business—fewer sick days, fewer medications, and fewer heart attacks,” says Wansink. “Yet, if even just 10 percent of your manager’s annual salary was based on what she did last year to help improve your health, it would be okay—not weird—for you to sit on a highway-cone-orange exercise-ball chair instead of a black office chair. One-on-one walking meetings would become normal, and desktop lunches might start to look antisocial. You might be thanked when you bring in fruit on your birthday but given the stink eye if you brought two dozen donuts or five pounds of bagels.”

 

What would managers think of such a plan? Wansink asked a group of them if they would rather work for a company that tied 10 percent of their evaluations to employee wellness or one that didn’t. The result: 64 percent said that they wanted to work for the former company, believing it to be “a more dynamic, progressive industry leader, with room for more advancement.”

Sounds like a winning scenario to me, unless you’re the employee who brought in those donuts.

Fast, simple, cheap experimentation

My latest book post on strategy+business:

How to Avoid Bad Investments in Good Ideas

 

In late 1999, while it was still the 800-lb gorilla in the video rental market, Blockbuster Video called in some outside help to address its biggest customer complaint: late fees. One of the calls was to Michael Schrage, then a research associate at MIT Media Lab, whose book, Serious Play: How the World’s Best Companies Simulate to Innovate, had been recently published by Harvard Business School Press.

Schrage’s brief, as he explains it in his new book, The Innovator’s Hypothesis: How Cheap Experiments are Worth More Than Good Ideas (MIT Press, 2014), was simple: “Help Blockbuster transform late fees from a primary pain point into a marginal concern for the company and its customers.” So he did some poking around in Blockbuster’s databases and stores.

Schrage found that the hapless customers who were paying the most in late fees were also the company’s most prolific renters. And even as they continued to patronize the company, these customers were venting their frustration to Blockbuster employees, as well as to other existing and potential customers. Several of them sued the company. (One of them, Reed Hastings, turned out to be something less than hapless. After being charged US$40 in late fees on Apollo 13, he founded Netflix, which had no late fees and played an instrumental role in driving Blockbuster into bankruptcy in 2010.)

“But,” writes Schrage, who has also contributed to s+b, “this seething ‘renters’ rebellion’ coexisted with an irrefutable business fact: The money was great.” In those pre-streaming days, analysts estimated that that 20 percent or more of Blockbuster’s pretax profit came from customers who couldn’t get it together to return rentals on time.

Blockbuster was considering several costly and complicated solutions to the conundrum, but Schrage thought that the company didn’t know enough about its late-fee customers to undertake a major initiative. Instead, in a meeting with management, he proposed a simple, inexpensive experiment in which a dozen or fewer Blockbuster stores would send reminders to customers to return movies before late fees were incurred. “I went down in flames,” recalls Schrage.

Blockbuster wanted to eat its cake and have it, too. The company was looking for a big, strategic-level solution that would eliminate the customer service problem without putting its revenues at risk. The one it adopted—an extended rental period after which the customer was charged the full price of the movie—proved not only unpopular, but illegal. The plan was abandoned, the company reinstituted its original late fee policy, and the downward spiral continued.

In rejecting his proposal, Schrage claims that Blockbuster misunderstood the true nature of innovation: He cites economist Joseph Schumpeter who called successful innovation a feat of will, not intellect. Further, he says the company missed the importance of uncomplicated, cheap, and fast experimentation.

Schrage’s thesis in The Innovator’s Hypothesis is that “creative experimentation, with and within constraints, makes high-impact innovation a safer, smarter, simpler, and more successful investment.” Experimentation weeds out otherwise seductive ideas that can’t be implemented, like the plan Blockbuster adopted . It brings to light insights that lead to unanticipated solutions. It also creates a bias for action: When you run an experiment, you’re actually doing something, not just talking about it.

Accordingly, half of Schrage’s new book is devoted to an innovation methodology called 5x5 that captures the benefits of experimentation. In the 5x5 approach, writes Schrage, “A minimum of 5 teams of 5 people each are given no more than 5 days to come up with a portfolio of 5 ‘business experiments’ that should take no longer than 5 weeks to run and cost no more than 5,000 euros to conduct. Each experiment should have a business case attached that explains how running the experiment gives tremendous insight into a possible savings of 5 million euros or a 5-million-euro growth opportunity for the firm.”

Schrage says that he’s been facilitating these 5x5 exercises in companies, under the auspices of MIT’s Sloan School of Management and the Moscow School of Management since 2009. The results: “There are always—without exception—at least three or four experiments that make top management sit up straight, their eyes widening (or narrowing, dependent on temperament), and incredulously ask, ‘We can do that!?’”

At a time when fast-track innovation is invariably pegged as a prerequisite of corporate success, 5x5 sounds like it might make a pretty interesting business experiment in and of itself. 
 

Of invisible hands and impartial spectators

My new book post is up on strategy+business:

Adam Smith’s Other Book

Adam Smith’s use of the metaphor “an invisible hand” to suggest that the individual pursuit of self-interest could also benefit society as a whole has been embraced as a rationale for unfettered capitalism. But the theory has come under fire in recent years. For one thing, it’s hard to find the societal silver lining in cases like the abuse of subprime mortgage–backed derivatives, which led to the Great Recession.

Before we ride the father of modern economics out of town on a rail, however, we should acknowledge that our current interpretation of his metaphor is an exaggerated one. Smith briefly mentioned an invisible hand only three times in his published works and only once in his 1776 economics classic An Inquiry into the Nature and Causes of the Wealth of Nations—and never did he imbue it with the economic heft it has taken on in the past century or so. We’ve also separated the invisible hand from another essential Smithian metaphor: “the impartial spectator.”

If, like me, you haven’t heard of the impartial spectator, you might find Russ Roberts’s How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness (Portfolio, 2014) enlightening. In it, Roberts, an economist at Stanford University’s Hoover Institution, explores Adam Smith’s other big book, The Theory of Moral Sentiments, which Smith published in 1759 (17 years before The Wealth of Nations) and then substantially revised in 1790, the year he died.

The Theory of Moral Sentiments isn’t about economics. It is, Roberts says, a “road map to happiness, goodness, and self-knowledge.” He explains that while Smith acknowledges that we humans are essentially self-interested, he also says there’s more to us than that. Consider the first sentence in Smith’s book:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.

Further, Roberts explains, Smith argued that there are internal governors of our natural self-interest that stop us from doing harm to others: “Smith’s answer is that our behavior is driven by an imaginary interaction with what he calls the impartial spectator—a figure we imagine whom we converse with in some virtual sense, an impartial, objective figure who sees the morality of our actions clearly. It is this figure we answer to when we consider what is moral or right.”

Roberts goes on to tell us that Smith saw the impartial spectator as neither god nor government. In the fashion of the Enlightenment, Smith believed the impartial spectator to be an internalized representative of our collective humanity—“reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct.” Smith continues:

It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the slightest injury to another, in order to the obtain the greatest benefit to ourselves.

Good stuff, but perhaps it’s a bit too easy to dismiss as classical claptrap. Maybe that’s why so many of us know about Smith’s invisible hand and so few of us know about his impartial spectator. But I know about both now, and I wonder if the former can operate properly without the latter. In other words, is it possible that the benefits of the invisible hand can be realized only in conjunction with the guiding hand of the impartial spectator?

Perhaps the abuse of mortgage-backed collateralized debt obligations (CDOs), as just one of many examples of market failures, was a direct result of the mechanism of the invisible hand operating without regard for the impartial spectator. If mortgage officers had been listening to their impartial spectators, would they have encouraged home buyers to sign for loans they clearly could not service? Would market makers have flogged CDOs that they knew were fatally flawed? Thanks to Russ Roberts, I’m pretty sure how Adam Smith would have answered these questions.

s+b's Best Business Books 2014

It’s striking how quickly and directly the seven reviewers in our 14th annual best business books special section get down to brass tacks. In the opening essay, Strategy& senior partner Ken Favaro picks the three books that offer new thinking about strategy that is practical and compelling. Marketing expert Catharine Taylor peels away the hype and spin of her discipline to identify books that get to the essence of the brand experience. Veteran business editor and author Karen Dillon reviews the books that will help you hone your decision-making chops—with or without an assist from big data. James O’Toole continues his unbroken run of best business books appearances by taking on a perennially relevant topic whose parameters he helped define: organizational culture. Longtime s+b book reviewer and contributing editor David Hurst identifies three books that explore not only the how-to of technological innovation, but also how technology is driving innovation in every sphere of our lives. Triple-bottom-line pioneer and first-time contributor John Elkington reviews books that provide actionable means for dealing with the seemingly intractable challenge of sustainability. And in the final essay, another notable first-timer, economic columnist Daniel Gross, reviews three books that cut through the hot-button issue of global income inequality to get down to hard facts—the Cockney twist on which is sometimes pegged as the origin of the phrase get down to brass tacks. Enjoy the reading—then, put it to work.  --Theodore Kinni

 

INTERACTIVE FEATURE

Best Business Books 2014 – In Pictures

Click here for a slideshow of our picks for the Best Business Books of 2014 in seven categories.

Contents:

s b’s Top Shelf   

Strategy To the Nimble Go the Spoils by Ken Favaro Marketing Brand Diving by Catharine P. Taylor Executive Self-Improvement The Human Factor by Karen Dillon Organizational Culture The Nothing That’s Everything by James O’Toole Innovation Greasing the Skids of Invention by David K. Hurst Sustainability Tomorrow’s Bottom Line by John Elkington Economics All Things Being Unequal by Daniel Gross

Killer quotes #11

 

 

 

"Long live freedom and damn the ideologies"

 

-- Robinson Jeffers

 

 

The joke's on Richard Branson

My new book post is up on strategy+business:

The Virgin Chronicles

 

It wouldn’t surprise me to look up “entrepreneur” in the dictionary and find Richard Branson’s picture next to the definition. Heck, given his success at promoting himself and the Virgin brand over the past five decades, his picture could be there instead of a definition.

Branson founded Virgin in 1970 as a small mail-order business that sold discount records. Following a strategy that he describes as “screw it, let’s do it,” he went on to build eight billion-dollar companies in eight different sectors. Today, the Virgin Group employs more than 60,000 people in more than 100 companies. Its revenues are somewhere in the neighborhood of US$24 billion annually.

 

Branson has written seven books recounting his adventures in business and elsewhere. From Losing My Virginity: How I've Survived, Had Fun, and Made a Fortune Doing Business My Way (Crown Business, 1998) to his newest effort, The Virgin Way: Everything I Know about Leadership (Portfolio, 2014), they’re all pretty much the same—humorous descriptions of Branson’s romps through a bewildering array of businesses, many of which were in mature industries with what were once deemed high barriers to entry, like airlines, telecom, banking, railroads, and soft drinks.

The Virgin Way and the books that came before it don’t contain blueprints for building and leading your own business empire. Indeed, they strongly suggest that it might be better to chuck all your well-laid plans out the window and just say “yes” to the next business idea you hear…and the next…and the next. (Branson’s staff nicknamed him “Dr. Yes” for good reason.)

But therein lies the real value of the peripatetic entrepreneur’s oeuvre: Branson’s books reveal how passion, imagination, a sense of fun and adventure, and just plain ballsiness can trump not only the status quo, but also everything they teach you in business school. You can hire plenty of people who will talk about the way things are and the way things should be done, but the qualities that a guy or gal like Branson brings to the table are much harder to come by.

There are also lots of great stories and some surprising lessons in Branson’s books. In The Virgin Way, he tells us about his love of elaborate April Fools’ Day pranks. In 1986, for example, when Virgin Megastores were popping up throughout the United Kingdom, Branson decided to play a joke on the music industry: He did an exclusive interview with Music Week, the industry’s leading trade publication at the time, in which he announced that his company had been “secretly developing a giant computer, on which we had stored every music track we could lay our hands on.” For a small fee, he said, consumers would be able to download any song or album they wanted.

The story, headlined “Branson’s Bombshell: The End of the Industry,” broke on the morning of April 1 and Branson’s phone started ringing off the hook as music executives called “to beg, threaten, and plead with me not to go ahead with such a crazy scheme.” At noon, he held a press conference revealing that “Music Box” was a prank.

Years later, Branson met Steve Jobs who said that he, too, had been taken in by the Music Box story, and that the idea had stuck in his head. The real punchline came later still, when Apple launched iTunes and the iPod, which sounded the “death knell” for Virgin Megastores—which now only operates in the Middle East.

“Clearly the moral behind this story,” explains Branson, “is that if you’re going to let others know—even as an April Fool’s joke—how you think your industry might look in the future, then you had better make sure that your company has a plan already in place to get you there first. If you don’t, then the joke could very easily be on you!”

Killer quotes #10

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

 

 

 

 

 

 

 

The best sales book of 2014

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

Reframing Sales Effectiveness

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

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

 

In Aligning Strategy and Sales, Cespedes enlarges the frame in order to show us the bigger picture. That picture reveals a set of linkages:

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

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

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

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

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

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

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

Mia Farrow's army

My new book post on strategy+business:

The Price of Privatizing War

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

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

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

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

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

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

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

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

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

Killer quotes #9

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

A foxy approach to global sustainability

My latest book post on s+b:

The Business Approach to Climate Change

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

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

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

 

On its surface, the idea that we need to depend on business for the creation of a sustainable world seems like putting the fox in charge of the henhouse. After all, much of the blame for our troubled outlook rests on the shoulders of the business community, which has vociferously opposed countless solutions to the problem.

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

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

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

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

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.

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.

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

There’s an idea in Dick and Emily Axelrod’s new book, Let’s Stop Meeting Like This: Tools to Save Time and Get More Done (Berrett-Koehler, 2014), that’s sure to raise the eyebrows of managers around the world: Make meeting attendance voluntary—no strings, no reprisals. That’s right. Leave it totally up to the invitees to decide whether it’s worth their while to show up… or not.

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.

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.

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.

Killer quotes #8

 

 

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

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.”

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.

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.