Episode #93 - Creating Customer Choices

A story

Parent A: “We are leaving 2 minutes

Parent B: “Would you rather leave now, or in 2 minutes?”

Humans are predisposed to idea of choices.

Why do car wash establishments have more sophisticated pricing than professional knowledge firms?

How you price more important than how much you price.

Sell insurance for things people don’t want, e.g., concierge medicine, dentists, termites, etc.

Sell Access-Level Agreements (Assurance) for things people want, e.g., hairstylists, lawyers (accessibility retainers), CPAs, IT firms—keep systems running.

Ed’s Sage white paper: Creating Access-Level Agreements. Download here.

Items to use to build pricing fences:

  • Response time
  • Meetings
  • IRS Representation

“No Plan Level” puts a price on individual items, e.g., $500 per meeting, etc.

Black Card Level is by invitation only, and if your firm’s highest level of exclusivity.

The Seven Ts Model

  1. Timing
  2. Terms
  3. Technology
  4. Talent
  5. Tailoring
  6. Transference
  7. Travel (out-of-pocket expenses)

Ad Agencies can use these additional fences

  • Key elements of program
  • Degree of customization
  • Number of elements
  • Number of revisions
  • Degree of client help/involvement
  • Data archiving

Example

CS3 Technology SERV Access Plan.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #45 - Interview with Brad Smit

Brad Smith, CXO, Sage

Brad Smith, CXO, Sage

Ed and Ron interviewed Brad Smith, Global EVP of Customer Experience at Sage.

Brad is responsible for developing all aspects of the Sage customer experience, from product design to the invoice experience and all points in between. As Ed said by way of introduction, "What Joe Pine theorizes, Brad Smith materializes."

He has nearly 20 years of leadership in web consumer, enterprise software, and communication service provider industries. Brad is on the board of the Consortium for Service Innovation and loves talking about customer experience. "My job is to deliver what other people promise." 

We had a wide-ranging discussion on customer service, customer experience, airline loyalty programs, the Sage RV Tour, Sage City, and the experiment at Zappos with Holacracy.

You can read three of Brad’s articles on customer experience.

You won’t want to miss this interview. Brad is a fount of wisdom when it comes to instilling customer loyalty, value, and service into your organization.

Additional resources:

Ed's Blog post on his visit to Zappos.

Episode #44 - Public Choice Theory

Winston Churchill said,

Democracy is the worst form of government, except all those other forms that have been tried from time to time.

Public Choice Theory describes the extension of analysis to the political alternatives to markets. Many commentators talk about "market failure," but far fewer ever mention government failure. Public choice theory sheds light on how government employees face incentives as much as employees in the private markets, and how these incentives can create bad policies, costly regulations, and other negative consequences.

Identify a problem to be “solved” by government. But there are no solutions, only tradeoffs.

Nobel laureate James Buchanan and Gordon Tullock, founders Public Choice Economics, insisted:

Any formula for government intervention that ignores political realities is unscientific.

Gordon Tullock wrote that public choice was “politics without romance.”

Economists are often blamed for having a religious faith in markets, but no one has pointed out more market failures than economists.

We underestimate how well markets work and over-estimate how well democracy works.

Four Insights from Public Choice Economics

1. Special-interest-group effect (concentrated benefits, diffused costs)

  • Sugar program cost each American $9.24 yet it raised each sugar grower’s annual income by an average of $617,000 in 2012

2. Rational ignorance—your vote won’t determine election

  • Put more time into developing your job skills, or a major purchase then into an election. You’ll only get small amount of benefits, or pay small amount of costs

3. Rent-seeking—lobbyists wasteful to society, redistribution transfers slices of the pie, does nothing to increase pie

4. Bundling effect—Example: shopping supermarket

  • Imagine having to pick between two shopping carts pre-filled with food. You could look, put not move items from one cart to the other
  • Outside observers cannot know that you chose that Cart A despite its offering of diapers and dog food rather than because of them
  • We can say nothing about the majority’s preferences for any individual policy
  • So politicians don’t know why they won (or why opponents lost)

The Myth of the Rational Voter by Bryan Caplan

Why are voters predictably irrational?

H.L. Mencken: “Democracy is a pathetic belief in the collective wisdom of individual ignorance.”

Voters are asked to do brain surgery and they can’t pass basic anatomy.

Democracy is a relatively inferior way of making decisions: marriage, career, state to live, home to buy, etc.

Most voters are worse than ignorant, they are irrational, according to Caplan. He claims democracy fails because it does what voters want—a built-in externality.

Wisdom of the crowds doesn’t work with voting because of systematic errors

Most voters have four biases:

  1. Antimarket bias––tendency to underestimate the benefits of the market mechanism
  1. Antiforeign bias––a tendency to underestimate the economic benefits of interaction with foreigners
  • Incessant worry about the “trade deficit”
  • Ideological purity is free! Severe biases can’t exist in betting or prediction markets, but can in voters
  1. Make-work bias––a tendency to underestimate the economic benefits of conserving labor
  • China excavating land with shovels; Milton friedman asks, why not tractors? Need jobs. Oh, then use spoons
  • We wouldn’t think this way in our household, where we love labor saving devices
  • You don’t worry how to spend the hours you save buying a washing machine
  • Saving labor is progress and responsible for our ever-increasing standard of living!
  • Illusion that employment, not production, is the measure of prosperity
  1. Pessimistic bias––a tendency to overestimate the severity of economic problems and underestimate the recent past, present, and future performance of the economy.
  • Pessimism sells: Club of Rome, peak oil, Malthus, etc.
  • As you do better, your children have to do even better, optimism declines

Analogy between voting and shopping flawed. You don’t “buy” policies with votes.

Democracy let’s people with severe biases continue to participate at no extra cost.

If people are rational consumers and irrational voters, it’s a good idea to rely more on markets and less on politics.

Other Books and Resources

An unhealthy Alliance video

Episode #43 - Interview with Dan Ariely

Dan-Ariely.jpg

Ed and I were honored to have the opportunity to speak with Dan Ariely, James B. Duke Professor of Psychology & Behavioral Economics at Duke University, and New York Times best-selling author of four books. Dan has had a major influence on the thinking of both of us in economic matters, especially in the areas of pricing, decision making, and choice architecture.

We asked Dan

  • Burning Man, which he tries to attend every year. He explains it's a "gift economy," not a barter economy.
  • Whether or not he was comfortable with the term "behavioral economics," given that Austrian economist Ludwig von Mises argued that animals behave, but humans act (with a purpose or objective in mind), and they also learn. Dan uses the term "Judgment and Decision Making (JDM) in his first book, Predictably Irrational.
  • David Friedman says economists assume rationality because it's useful and can predict human behavior about 50% of the time. Dan disputes the 50% figure, and explains why we need to explain failure points and mistakes in human decision making.
  • The "placebo effect" (Latin for “I shall please"). The term originally explained 14th century sham mourners. People get a larger placebo effect when the price of a pill was communicated to be higher than average.
  • Do the questions on the hospital in-take forms influence a patient's ability to get well quicker?
  • The Economist subscription example Dan uses in his book and TED talk, with two and three choices, respectively. Is the "decoy" (or "dominated") option manipulative?
  • Does Dan believe in the Subjective Theory of Value? He does say that value will never be perfectly objective, but we can do better at measuring it than we do now.
  • The backwards bicycle video. Dan hadn't seen it, but discusses the power of habits and how hard they are to change.
  • In The Upside of Irrationality, Dan writes about the concept of "Hedonic adaption": we humans adapt far more quickly than we think.
  • He also wrote in that book that "the market for single people is the most egregious market failure in Western society." How has Internet dating has influenced this failure? Dan explains since it's based on searchable and quantifiable aspects of people (height, income, etc.) it may not be very predictable of compatibility, like trying to understand how a cookie will taste by reading the ingredients. Humans are not algorithms.
  • Now that you've studied all of this irrationality, are you more rational? He focuses on habits, traps, and tries to establish rules (e.g., no eating bread).
  • In The Honest Truth About Dishonesty Dan explains "the fudge factor": people's ability to cheat, up to a point where they can still feel good about their own sense of integrity. He discussed how signing your tax return first would reduce cheating, and gave empirical evidence of how this worked with odometer mileage declarations for auto insurance (people declared 15% more miles when signing the form first).
  • His latest book, due out May 19th, Irrationally Yours, based on his popular Wall Street Journal advice column, and a new movie on dishonesty coming out May 22.

We highly recommend all of Dan's books, blog, advice column and research.

Dan's Books

Episode #42 - Best Business Books - May 2015

Thousands of business books are published each year. Some are worthless, others have merit, fewer still have lasting value, but a handful possess the ability to transform your business (and possibly, your life).

Yet with today’s busy and demanding schedules, do you feel you don’t devote enough time to reading and absorbing new ideas? Then this show is for you. Ed and Ron will explore the best business books ever written, selecting their favorite all-time business books.

Ed and Ron discussed four of their all-time favorite business books. Stay tuned for further shows in this series where we will share more of our favorites.

Minding the Store, Stanley Marcus, 1974

Ron believes Stanley Marcus is the true grandfather of the customer service revolution. This is the single best book ever written on customer service, and the autobiography of a remarkable man who had a remarkable life.

“There is never a good sale for Neiman Marcus unless it’s a good buy for the customer.” Herbert Marcus, 1926, to Stanley Marcus on his first day working at the store.

Neiman Marcus (NM) was established (September 8, 1907) as a result of the bad judgment of its founders, Herbert Marcus, his younger sister, Carrie Marcus Neiman, and her husband, Al Neiman.

They established a sales promotion business in Atlanta, GA, and received two offers to sell out, one for $25,000 and the other for an exclusive franchise for the state of Missouri or Kansas for a relatively new product called Coca-Cola.

Stanley Marcus’s innovations:

  • First weekly fashion shows/bridal fashion shows
  • His and Her Xmas Gifts
  • Christmas Catalog
  • Fortnight (themes) to overcome October bus lag!
  • Personalized gift wrapping

Stanley took over store in 1950, after death of his father.

Women’s Wear Daily hung “the melancholy Plato of retailing” label on him.

People liked what they didn’t find at NM. Stanley wrote:

It’s up to management to decide, not whether the article will sell, but whether it should be sold.

Another excellent book on Marcus is Stanley Marcus: The Relentless Reign of a Merchant Prince, by Thomas E. Alexander.

Stanley wrote four books during his lifetime but this one of the only ones I've seen written about him by an insider, Thomas E. Alexander, who met Stanley in 1965 and served nearly 20 years as his Executive Vice President of Marketing.

This was an incredibly demanding job, since Marcus was the consummate marketer, and many previous men failed at in this role.

Alexander gives you an insider's view of the famous Neiman Marcus Fortnights, a Dallas institution until they were discontinued in 1986.

Many of the pictures come from the Stanley Marcus Collection at South Methodist University, DeGolyer Library.

You'll read about the first out-of-state store in Bal Harbour, Florida, opened in January 1971, and also the controversy of the San Francisco store opening at Union Square. Herb Caen was an incredible critic of Neiman Marcus opening there, and the irony was that Stanely Marcus was farther to the left than Caen ever dreamed of being.

One very amusing anecdote about Marcus are the two things that exceeded his expectations, which were very high. One was Sophia Loren, and the other was the Bohemian Grove in San Francisco.

Another is the story of Marcus's falling out with the world famous architect, Frank Lloyd Wright. Upon hiring another architect and Wright seeing his drawings, sends Marcus a letter and under his signature writes, "Looks to me like you dropped big money to pick up small change."

In the final chapter, "Saying Goodbye," Alexander tells of Marcus, age 95, reflecting: "Without change, there is no challenge, and without challenge there is only the status quo but no progress." Wise words.

Other books by Stanley Marcus

The Halo Effect…and the Eight Other Business Delusions That Deceive Managers, Phil Rosenzweig

Ed’s Summary:

  • Tom Peters gets destroyed.
  • Jim Collins gets destroyed.

Halo Effect: the tendency to look at a company’s overall performance and make attributions about its culture, leadership, value, and more.

Business books: scientific rigor or storytelling?

Do business questions lend to scientific investigations? Rosenzweig says, in many instances, yes. He believes there’s no need to veer between extremes: humanities and science.

We have no satisfactory theory of effective leadership that is independent of performance

Does strong financial performance creates employee satisfaction, or vice versa?

We yearn to find out how we can avoid the seemingly inevitable fate of decline and death.

Nothing recedes like success.

The book really debunks the work of Jim Collins, especially his book Good to Great.

Physics envy: we can predict the movement of planets, so why not the performance of companies?

Collins book offered a picture of business somewhere between Norman Rockwell and Mister Rogers

Profit Beyond Measure: Extraordinary Results through Attention to Work and People, H. Thomas Johnson and Anders Broms, 2000

In 1987, as mentioned before, H. Thomas Johnson and Robert S. Kaplan published Relevance Lost: The Rise and Fall of Management Accounting, which was named in 1997 one of the 14 most influential management books to appear in the first 75 years of Harvard Business Review’s history.

The book is credited with launching the activity-based costing revolution. Yet, these two thinkers have gone down very different paths since then: Kaplan going on to pioneering work in the field of performance measurement, creating the Balanced Scorecard, and Johnson moving on to what he calls “management by means.”

In fact, they are now feuding with each other, and have not spoken in years.

Johnson’s book Profit Beyond Measure is a seminal work, although not yet fully developed. And while I have severe misgivings about some of his environmental rants in the book, when he profiles Toyota and Scania—the latter now owned by Volvo—as two manufacturers that do not have a standard cost accounting system, he is on firm ground.

It is hard to argue with results, and Toyota is one of the most respected companies in the world, and has produced one of the highest-quality products at the lowest cost in the industry for years, dating back to 1926 when it started as a weaving machinery manufacturer.

As Glenn Uminger, a financial controller at Toyota Motor Manufacturing-Kentucky (TMM-K)—which Johnson studies in depth in his book—since 1988, says, “TMM-K has never had a standard cost system to track operating costs, and we probably never will.”

So how do they do it? How can a manufacturing company run without a standard cost accounting system? Toyota understands price drives costs, not the other way around. Here is how Johnson explains it in his book, Profit Beyond Measure:

None of these comments is meant to imply that Toyota does not have accounting and production planning information systems. Of course it does. Toyota has a comprehensive array of information systems, accounting and otherwise, with which to plan, in advance of operations, and to report results of operations after the fact. But information from such systems is not allowed to influence operational decisions.

Toyota management discharges its responsibility for costs not by taking arbitrary steps to manipulate operations, but largely in the vehicle planning stage. During the design stage, long before the first penny has been committed to making a vehicle, Toyota has always placed enormous importance on setting and achieving cost targets. To do so, over the years Toyota has developed a famous technique for target costing. Simply stated, target cost is the maximum cost the company can afford to incur to produce and sell a vehicle and still earn a required profit at the price customers are expected to pay.

Johnson goes on to explain his theory that Toyota operates under “management by means” rather than “management by results.” It is an interesting viewpoint because it views the organization as a living system, based on interdependent relationships, and those are nearly impossible to quantify.

He notes Dr. Edward Deming’s observation that over 97 percent of the events that affect a company’s results are not measurable, while less than 3 percent of what influences final results can be measured:

Because cost and profit are not objects, but are properties that emerge from relationships, quantitative measures can only describe them, they cannot explain them. Quantitative measures, unlike art, music, or the stories and myths that humans fashion with words, cannot convey understanding of the multidimensional patterns that shape the relationships from which results, such as cost and profit, emerge in a living system.

If Andrew Carnegie said, “Watch the costs and the profits will take care of themselves,” Johnson is saying, “Nurture the means. The results will take care of themselves.” Kaplan would say, “Measure the result and the means will take care of themselves,” and I say, “Watch your value, and the profits will take care of themselves.”

Turning to One Another: Simple Conversations to Restore Hope to the Future, Margaret Wheatly, 2009

Ed shared the ten questions from this book:

  • Do I feel a vocation to be fully human?
  • What is my faith in the future?
  • What do I believe about others?
  • What am I willing to notice about my world?
  • When have I experienced good listening?
  • Am I willing to reclaim time to think?
  • What is the relationship I want with the earth?
  • What is my unique contribution to the whole?
  • When have I experienced working for the common good?
  • When do I experience the sacred?

Episode #41 - Free-Rider Friday - April 2015

Welcome to “Free-Rider Friday.” Most of our shows are “topic” driven, where we dive deep into one subject. Free-Rider Fridays are designed to be “event” driven—whatever issues are in the news that we (or you) find worthy of commentary.

In economics, free riding means reaping the benefits from the actions of others and consequently refusing to bear the full costs of those actions. This means Ed and Ron will free ride off of the news, and each other, with no advanced knowledge of the events either will bring up.

You can also comment on Twitter at #ASKTSOE.

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Ed’s Topic - More on the “one-percent”

The top 1% of income earners in the USA pay nearly 40% of federal income taxes. You can see another breakdown here, based on 2012 IRS data, from the Tax Foundation.

Ron’s Topic - Net Neutrality Regulation Update

Ajit Pi (pronounced “Ah-JEET Pi”), FCC Commissioner, was interviewed in the April Rush Limbaugh Newsletter (no link available). Here’s some of what he said:

The FCC is wielding a regulatory sledgehammer to pound down a nail that simply doesn’t exist. Innovators, engineers, and technologists have decided how the Internet works—but now it’s going to be regulators, politicians, and lawyers.

He also mentioned how Netflix’s CFO said: “We didn’t really like Title II. We would have preferred a non-regulated solution.”

Allegations Netflix (1/3 of all traffic at peak) purposefully sends traffic on worse roads; refused open video standards to intentionally worsen the experience of users to gin up support for net neutrality regulation.

There’s no regulation of content contained in the 400 pages, which is good news. But Mr. Pi says it’s possible.

The “Universal Service Fee” (USF) now applies to broadband, not just voice. So expect to see this on your broadband bill.

Mr. Pi believes these regulations will help big companies at the expense of smaller ones—less competition, less choice, etc.

Ed’s Topic - AppleWatch

The Apple Watch pre-sold 2.3 million units. We discussed the blog post by pricing consultant and author Rafi Mohammed, who grades Apple an A for ambition, but a D in pricing strategy. Here's why:

Problems

  1. Upgrades
  2. No carrier subsidies
  3. Price range too wide ($349 to $17,000)

Should have

  1. Narrow price range $249-$2000
  2. Offer a monthly payment plan
  3. Trade-in program
  4. Bundle watch with iPhone

It remains to be seen if the most profitable company on the planet really launched with a sub-optimal pricing strategy.

This is wonderful thing about enterprise: all value is subjective, and subject to the test of the market—that is, the preferences of individuals.

Ron’s Topic - Peter Drucker and 2020

An HBR blog post by Rick Wartzman, “What Peter Drucker Knew About 2020,” was discussed.

Here’s the article on the company that introduced a $70,000 minimum wage for its 120 employees.

Ed’s Topic - Learn Liberty and the TIP Story

Many great educational videos on economics, different schools of thought of classical liberalism, etc., at LearnLiberty.org.

Ron would also recommend Milton Friedman’s “Free to Choose” TV series, both the original 1980 series as well the updated series done in for 1990.

You can watch both for free at freetochoose.tv, along with other excellent content.

Ed also asked Ron about the TIP Clause used in some professional firms when they are delivering extraordinary value.

Here’s the story, as told in Ron’s Book, Implementing Value Pricing: A Radical Business Model for Professional Firms:

In 1997, Tim was the managing partner of top accounting firm, and his best, long-term customer (of 20 years) had come to him wanting to sell his $250 million closely held business. He told Tim (and I am paraphrasing here), “You’ve been my CPA for 20 years and I trust you with my life. It is time for me to sell my business and enjoy my golden years. Here is what I want you to do:

  • Update our business valuation to maximize the sales price.
  • Fly with me anywhere we have to go to meet with potential buyers.
  • Be actively involved at every stage of the sales negotiation.
  • Perform the due diligence, along with the attorneys, of the qualified buyers.
  • Work with the attorneys on the sales contract to make sure my interests are protected.
  • Perform tax planning and structure the deal in such a manner as to maximize my wealth retention.”

Obviously, this was a very sophisticated customer and it is true Tim had no idea, at the outset of this engagement, how long it would take to close the deal, and how much firm capacity (his and his team members) it would require. But he did know more than an average salesman would know, which is one of the enormous advantages professionals possess when it comes to pricing the customer, not the service. He knew the customer’s business was well niched, profitable, and growing. This would indicate a very high probability of success.

He also knew this customer was an audit customer of the firm’s and therefore he would not be able to charge a contingency price based upon a financial outcome (such as a percentage of the sales price, or of any tax savings), since that would impair independence, which is illegal for an auditor.

When I asked Tim how he priced this engagement, he proudly proclaimed that every hour charged to this project was at his highest consulting rate of $400 per hour, indicating, right from the start, Tim knew there was more value on this project than he would ever be able to pad on a timesheet.

He further explained how he had updated the business valuation, negotiated with two buyers, and did all of the other tasks requested by the customer. As a result of Tim’s work, the customer received (and saved in taxes) an additional $15,000,000, and acknowledged Tim was directly responsible for this outcome. In Tim’s own words, the customer was “elated.”

Tim then told how he priced the engagement. He reviewed all of the hours from the work-in-progress time and billing system, believed it did not adequately reflect the value he provided, and marked it up an additional 25 percent over the $400 hourly rate. He then sent out an invoice for $38,000, which the customer promptly—and happily—paid.

He believed he was value pricing. He was not—he was value guessing, since the customer had absolutely no input into the price up front, and only a customer can determine value.

When I asked Tim what he thought the customer would have paid if he had utilized a TIP clause (also referred to as the retrospective price, or success price), such as the following:

In the event that we are able to satisfy your needs in a timely and professional manner, you have agreed to review the situation and decide whether, in the sole discretion of XYZ [company], some additional payment to ABC [CPAs] is appropriate in view of your overall satisfaction with the services rendered by ABC.

The TIP is being based on the “overall satisfaction with the services rendered,” and not any financial contingency, which is the origin of the acronym TIP—to insure performance. This TIP clause would be discussed with the customer before any work began. If needed, you could put a minimum price on the engagement (such as $40,000) to cover immediate firm capacity.

But in this case, given the 20-year relationship with the customer, even a price solely determined by a TIP would have been acceptable, since the customer was not likely to take advantage of Tim after the services he rendered and the long-term relationship they had.

In answer to my question, Tim said his customer would most likely have paid him $500,000, a sum I believe to this day is below the real number—but at least better than the $38,000 he finally charged. Nevertheless, since Tim knows the customer better than I do, let us take his number as correct.

I informed Tim he had made the Ultimate Accounting Entry:

Debit Credit
Experience $462,000
Cash $462,000

Tim was providing extraordinary value to this customer yet his cost-plus pricing theory prevented him from capturing a fair portion of it. Are we not ruled by our theories? This is why it is imperative to extinguish the cost-plus mentality from your firm.

No one in any seminar I have shared this story with believed Tim would have received less than $38,000 for his services on this engagement. In effect, Tim paid a reverse risk premium—he was assured he would not go below his hourly rate, but in return he gave up the added value the customer already believed he had created. This is not a risk worth taking if you want to maximize your firm’s profitability.

The deleterious effects of this are deeper than just being deprived the value from the work you provided on any one engagement. The problem lies at the very core of a firm’s measurement system and points out how it does not offer the opportunity to learn from lost pricing opportunities, or pricing mistakes.

In his inimitable way, Yogi Berra explains this situation with his quip, “We made too many wrong mistakes.”

When it comes to pricing, the wisdom from Yogi is profound. Tim made the wrong mistake, and here is why: He will not learn anything from it because the firm’s primary assessment is billable hours—once again the billable hour is the incorrect measuring device for value. When the partners review the realization report on this engagement, they will see 125 percent, which is excellent when you consider most firms realize between 50 and 95 percent overall on each hour.

Most likely, Tim will get nothing but accolades and praise from his fellow partners. No one will ask where the $462,000 is because the billable hour metrics do not have a way to capture that type of information, which is precisely why pricing is more of an art than a science.

This is an excellent example of a wrong mistake for another reason: Tim (or the firm) will not learn anything from this lost pricing opportunity. The $462,000 simply vanishes into thin air (or, more precisely, the consumer surplus remains on the customer’s income statement).

No knowledge was gained by the firm on how to price the next similar engagement in accordance with value—it will simply perpetuate the same mistake, over and over. Being a more accurate activity-based cost-accountant, or even excellent project manager, would also not have helped Tim to capture the value.

This is not meant to imply with value pricing you will never make mistakes. You certainly will. The difference is they will be the right mistakes, because with value pricing, as opposed to cost-plus pricing, you are forced to receive input from the customer as to your value, and have in place pricing strategies that will capture more of that value (like the TIP clause).

If you engage in After Action Reviews (AARs), which perform value assessments on each engagement, and elicit feedback from your customers, you will learn from your mistakes and become better at pricing in the future.

Most feedback firms receive on pricing is negative: “Your price was too high.” Or it is ambivalent: “Your price was just right.” No customer ever discloses how much money your firm left on the table. Since humans emerged from the cave and began to barter, it is the customer’s job to do everything in their power to push down prices. There is nothing new about this, and it should not surprise any executive. Your firm’s job, however, is to push back. The only effective way to accomplish this is by emphasizing value.

Ron was also interviewed for an article on the TIP clause, which you can read here.

Episode #40 - We're All Consultants Now!

Ed discussed how we are all consultants now. This material is based on Peter Block’s seminal book, Flawless Consulting.

Consulting Definitions

A consultant is a person in a position to have some influence over an individual, group, or organization, but who has no direct power to make changes or implement programs.

A surrogate manager is a person in a position who acts on behalf or in place of a manager. If you are being asked to “complete this report,” “design this system,” or “figure out what to do,” you are in the position of surrogate manager.

Consultants and surrogate managers are two distinct roles. You cannot be both because that would be a contradiction. It is irrational.

Consulting Assumptions

Whenever performing in a consulting role, it is important that the consultant must be clear about one’s own basic beliefs. Our own behaviors must be consistent with what we recommend.

It makes sense to spend some time thinking about what your personal beliefs are about what makes for good management and leadership. To this end, presented below are three assumptions about consulting for the purposes of our dialogue.

Problem solving requires valid data. This data not only includes objective or hard data, but personal or soft data. Hard data are not only computer system data, but other hard facts such as events or situations. Soft data are also facts, but relate to the personal feelings of those involved. If people feel that they have not been trained effectively on a new system, then this is a fact, even if we have a sign-off sheet saying they were trained. Throwing away this data because it is soft, puts actual problem solving in peril.

Effective decision making requires free choice. If a decision is to be truly implemented, the people involved in carrying out the decision must feel that they were a part of the decision. When they do not feel a part of the decision, they have a tendency to get defensive. If “no” is not a choice, than it is not really a decision.

Effective implementation requires customer commitment. If a customer is not fully committed to the implementation of a decision, it will fail. Support is not enough, commitment is required. In order to gain commitment, people need to clearly see the benefit this will have for them.

Consulting Levels: The FORD Model

Customers desire consultants to work on many different levels within an engagement. Often times the desired consultant level is not effectively communicated by both parties.

It is critical to the success of any engagement that both the consultant and the customer are clear about the desired level. These levels are:

  • Findings
  • Options
  • Recommendations
  • Decision

See Ed’s blog post on the FORD Model.

Chris Marston’s Concentric Circles blog post.

Consulting Goals

Along with consulting assumptions, a consultant should have some basic goals. These goals may not always be attained, but they should indicate your preference. Like assumptions, presented below are three goals for this material.

To establish a collaborative relationship. Collaboration is proven to be the most effective way to maximize both the consultant and customer’s resources. Secondarily, it provides a model for the customer to see and use to solve problems in the future.

To solve problems so they stay solved. Many consultants act in a way so as to fix the immediate problem. This is what has given consulting a bad connotation. Solving problems so they stay solved is a key differentiator. Teaching customers to solve problems on their own in the future requires a higher level of skill.

To ensure attention is given to both the technical problem and the relationship. Most organizations pay attention only to their technical problems. Consultants are in a unique position that allows them to see the people and process issues that surround the technical problem.

To develop customer commitment. As was stated earlier, without customer commitment the consultant has no chance to succeed. Therefore, the underlying goal of every action is to develop customer commitment to a solution to the problem.

To quote Peter Block:

We may cling to the fantasy that if our thinking is clear and logical, our wording eloquent, and our convictions solid, the strength of our arguments will carry the day. Clear arguments do help, but they are not enough. The customer will experience doubts and dilemmas that block commitment. Flawless Consulting, p 21.

Positive Deviance

I also asked Ed about Peter Block’s concept of “positive deviance”: Are we here to merely solve a problem, or create a new future for ourselves?”

Peter Drucker thought we should pursue opportunities, not just solve problems. Solving problems, at best, only returns us to the status quo. Executives need to spend the majority of their time—and allocate their best talent—to the opportunities of tomorrow.

Ed’s Statement of Intent

“It is my intention to help you and your organization make the best possible decision.”

Not Final Thoughts

What I love about Ed’s concept that we are consultants now is that is positions professionals at the top of Joseph Pine’s Progression of Economic Value Curve—that of transformations.

For if consulting is done right, you are transforming a person, a group, or an organization, rather than just delivering services.

This is one of the most effective strategies to de-commoditize your offerings!

Episode #39 - For Good and Evil: Taxes and Civilization

There have been great and powerful men who have moved civilization, but most of the time no heroes can be found, and the world is led by scoundrels, fools, and second-stringers. Taxes, however, are ever present, often making a strong impact upon our lives—for good and evil. The prosperity as well as the decline of nations has always had a tax factor, and this we will see time and again throughout history –Charles Adams, For Good and Evil

For Good and Evil by Charles Adams is the most comprehensive book on the history of taxation throughout civilization that I have ever read. Adams is an international tax attorney who offers a refreshing perspective on taxation, one you will not find among most practicing tax professionals.

It is a lively book that takes you from Ancient Egypt, Greece, Rome and the Middle Ages, all the way up to present day. It offers a perspective on taxation that you will not find in the current debates surrounding tax reform, and offers some very compelling alternatives and improvements to our existing system.

In order to tempt you to buy a copy of this book and read it, we offer the following tidbits of knowledge you will learn from Adams:

  • Taxpayers from the beginning of time have reacted to oppressive taxation in three ways: 1) rampant tax evasion and flight to avoid tax; 2) riots; 3) violence;
  • The first casualty of “dumb taxation” has always been liberty; the second casualty has been the wealth and strength of a nation;
  • The origins of Hanukkah are rooted in the tax struggles of the ancient Hebrews;
  • The Ancient Greeks extracted large amounts of wealth from rich private citizens through the liturgy—the voluntary alternative to progressive taxation. Enforced by tradition and strong public sentiment, most gave three to four times more than what was expected from them;
  • Plane Geometry was not invented by Euclid, but rather by ancient tax collectors determining land size for harvest taxes;
  • One of the causes of the fall of the Roman Empire was tax evasion;
  • William Tell refused to acknowledge the Austrian Hapsburgs and their gang of tax collectors. For this defiance he was ordered to shoot an apple from the head of his son with a crossbow;
  • The American Revolution was probably more the consequence of the oppressive administration of taxes than the taxes themselves. Taxation with representation has proven more expensive than taxation without representation;
  • In 1787 no citizen of the United States could vote who was not a taxpayer;
  • Was the Civil War fought over slavery or Northern Tax policy?
  • In 1816 Britons put a tax on newspapers (the “knowledge tax”), designed to curb the opposition press. The tax was levied by the page. Papers today continue to print large pages, which were initiated for tax avoidance;
  • Tax laws have taken away liberty more often than foreign invaders;

And ultimately,

  • All good tax systems tend to go bad.

As Adams Points out: “Polybius, considered the greatest historian of the ancient world, said that the best preparation for politics was the study of history in order to avoid the disasters of others.”

With respect to taxation, there have been plenty of disasters. If enough of us educate ourselves, it may be possible to avoid those historical debacles. Adams reminds us of the wisdom from past thinkers that we have foolishly forgotten.

The Lost Legacy: The Enlightenment Thinkers on Taxation

It is vain to say that enlightened statesmen will be able to adjust these clashing [tax] interests, and render them all subservient to the public good. Enlightened statesmen will not always be at the helm

–James Madison, The Federalist, No. 10, 1787-1788

It has been noted that the principal trouble with the contemporary generation is that it hasn’t read the minutes of the last meeting. With respect to tax policy, this is an understatement. The Enlightenment period (1650 to 1700) was the high watermark for tax wisdom, ethics, jurisprudence and plain common sense, according to Charles Adams in For Good and Evil.

The Enlightenment thinkers knew their history; they searched the world’s governmental systems for what worked and what didn’t, and took the best of many. With regard to taxation, they frequently spoke of the relationship between taxation and despotism and prosperity. Their primary insight was that government exists to maintain our liberty—not our prosperity.

The legacy they left us has largely been forgotten. Listen to the present tax reform debates and you will not hear the ideas and ideals of the Enlightenment thinkers, especially amongst the media and the “tax experts.” Instead, they report on any changes as if it were a sporting event—who wins and who loses, rather than what is good for the whole country.

This is tragic. It is amazing that in a society such as ours—with instantaneous access and ability to transmit information far and wide—we have forgotten the wisdom of these thinkers. It proves that information does not equate to wisdom.

Charles Adams points out:

Perhaps this is an example of the simple truth about life—what comes easy is taken lightly. Our liberty and freedoms were handed down to us by generations past that had to fight for the liberty we now enjoy. Liberty to us is an inheritance, not something we earned or achieved on our own. We take liberty lightly, and we don’t seem to realize how hard it is to get it back once it is lost.

The following is the “priceless legacy” the men of the Enlightenment passed on to us, adapted from For Good and Evil (first edition), Chapter 26.

  1. Government is at best a necessary evil

Thomas Paine in Common Sense (1776): “Government, even in its best state is but a necessary evil, in its worst state an intolerable one.”

Paine said that taxation was tyranny, and a great destroyer of liberty as well as of property and industry, and it impoverishes the people more than foreign enemies do.

  1. The imaginary wants of the state

“Baron de Montesquieu in his The Spirit of Laws (1751), a book which greatly influenced the Framers of the U.S. Constitution, explained this problem:

                  The revenues of the state are a portion of that each subject gives of his property in order to secure or to have the agreeable enjoyment of the remainder.

To fix these revenues in a proper manner, regard should be had both to the necessities of the state and those of the subject. The real wants of the people ought never to give way to the imaginary wants of the state.

Imaginary wants are those which flow from the passions, and from the weakness of the governors, from the charms of an extraordinary project, from the distempered desire of vain glory and from a certain impotency of mind incapable of withstanding the attacks of    fancy. Often has it happened that ministers of a restless disposition, have imagined that the wants of the state were those of their own little and ignoble souls.”

  1. Government should stay out of business

Adam Smith in The Wealth of Nations:

Princes, however, have frequently engaged in many other mercantile projects, and have been willing, like private persons, to mend their fortunes by becoming adventurers in the common branches of trade. They have scarce ever succeeded. The profusion with which the affairs of princes are always managed, renders it almost impossible that they should. The agents of the prince regard the wealth of their master as inexhaustible; are careless in what price they buy, are careless in what price they sell; are careless at what expense.

Two words: Post Office.

  1. Liberty carries the seed of its own destruction

          Montesquieu noted that people living in a state of liberty tend to let their guard down and tolerate great taxes, but once granted they discover they cannot take a backward step: “Liberty produces excessive taxes; the effect of excessive taxes is slavery.”

  1. Direct taxes are the badge of slavery, and indirect taxes the badge of liberty

         Again Montesquieu: “Capitation [direct taxes on the individual] is more natural to slavery; a duty on merchandise is more natural to liberty, because it has not so direct a relation to the person.”

Recall that the Supreme Court ruled the 1894 income tax unconstitutional because it was a direct tax (thus had to be apportioned amongst the states).

  1. Tax evasion is not a criminal act

            Tax evasion is the consequence of excessive taxation, it’s a “positive offense” because it’s one manufactured by the state, not worthy of being called a true crime.

Taxation means forced exaction. Taxes aren’t debts, no principle of fair value received, which is basis for legally enforceable debt.

The US Treasury Department defines a tax as: “A compulsory payment for which no specific benefit is received in return.”

A tax is owed because the government says so, nothing else is required. You can’t be put in prison for not paying your VISA bill.

  1. Liberty’s most dangerous foe: arbitrary taxation

          David Hume:

“But the most pernicious of all taxes are the arbitrary. They are commonly converted, by their management, into punishments on industry...It is surprising, therefore, to see them have place among any civilized people.” If any of the following three principles are violated, the taxation was considered arbitrary:

  1. Taxation must be with consent.
  2. Have to be apportioned among the people by a definite standard or rule.
  3. Must be equal, counter to the inclination of everyone to push their taxes off onto someone else.
  1. Common sense economics: the supply-siders

            Not a new theory at all, goes back into antiquity.

  1. The marks of a bad tax system: Adam Smith’s four points:

1. A tax was bad that required a large bureaucracy for administration.

2. A tax was bad that “may obstruct the industry of the people, and discouraged them from applying to certain branches of business which might give maintenance and employment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so.”

3. A tax was bad that encouraged evasion. “The law, contrary to all the ordinary principles of justice, first creates the temptation, and then punishes those who yield to it.”

4. A tax is bad that puts the people through “odious examinations of the tax-gatherers, and exposes them to much unnecessary trouble, vexation, and oppression...It is in some one or other of these four different ways that taxes are frequently so much more burdensome to the people than they are beneficial to the sovereign.”

  1. What a good tax system should be: Lord Kames’s six rules:

            Lord Henry Home Kames, a scholar of that era, published his Sketches on the History of Man (1769), which analyzed tax issues and greatly influenced Adam Smith. Here are Kames’ “Rules to be observed in Taxing”:

  1. “When the opportunity for evasion exists, taxes must be moderate. It is unjust for a legislature ‘first to tempt and then to punish’ for yielding to temptation.”
  1. Taxes that are expensive to levy should be avoided.
  1. Arbitrary taxes are “disgustful to all.” The amount paid is determined by the “vague and conjectured opinion of others.”
  1. To remedy the “inequity of riches,” the poor should be relieved of any significant tax burdens.
  1. Taxes that sap the strength of a nation should be avoided. Such taxes “contradict the very nature of government, which is to protect not oppress.”
  1. Taxes that require an oath are to be avoided. Said Kames:

Perjury has dwindled into a venial transgression and scarcely held an imputation to any man’s character...Lamentable indeed has been the conduct of our legislature: instead of laws for reforming and improving morals, the imprudent multiplication of oaths [for tax enforcement] has not only spread corruption through every rank, but by annihilating the authority of the oath over conscience, has rendered it ineffectual.

The U.S. Supreme Court condemned the use of oaths for tax administration as late as 1885, Boyd v. United States, 116 U.S. 616, 631.

How many of these tests would our present-day tax system meet?

Very important question:

                        Have we squandered our inheritance?

Those who have no concern for their ancestors will have none for their descendants

–Edmund Burke

To know nothing of what happened before you were born is to remain ever a child

–Cicero

You can watch an hour long interview with Charles Adams from Booknotes here.

Episode #38 - Entrepreneur Heaven: Thomas Edison, Henry Ford, Walt Disney, J.W. Marriott

They say you can’t turn back the clock and go back to the good old days. Yet this is precisely what is happening with the total quality service movement, the customer loyalty movement, CRM, and other philosophies that put the customer at the center of the business organization. Millions of dollars are being spent on consultants to relearn what was once common sense, practiced by the great entrepreneurs from the turn of the century to the mid-1950s. This show, the first in our Entrepreneur Heaven Series, will explore the wisdom of Thomas Edison, Henry Ford, J.W. Marriott, and Walt Disney. Wisdom is timeless, and occasionally turning back the clock is the wisest course of action. Sometimes history is our best teacher.

Thomas Edison (Feb 11, 1847 – October 18, 1931)

Born in Ohio, died 1931, at 84. Scarlet fever as boy may have contributed to him being deaf.

Before age 40: invented the phonograph, electric light, and improved the motion picture camera.

World record of 1,093 patents over lifetime; first at 21; last one granted ten months before his death, and four posthumously.

Sign in Edison’s laboratory:

            Hell! There ain’t no rules around here! We are tryin’ to accomplish somep’n.

Notable Quotes

It is too much the fashion to attribute all inventions to accident, and a great deal of nonsense is talked on that score.

Asked if the age of invention was passing in 1908: “Passing? Why, it hasn’t started yet.”

He loved silent films (he was deaf), but didn’t think there was any money in talking movies. He believed talking films would never supplant silent films (“The public does not want talking movies”).

He also thought films would completely supplant books in schools.

When will you retire: “A few days before the funeral.”

There is no free lunch. 2/22/1929, Fort Myers Press

If you want to succeed, get some enemies.

Most assuredly I do believe in God. Nature and science both affirm His existence, and where the layman believes the man of science knows. 1890 [You could argue he believed in Intelligent Design]

I am at work on an invention which will enable a man in Wall Street not only to telephone to a friend near Central Park, but to actually see that friend while speaking to him…Of course, it is ridiculous to talk about seeing between New York and Paris; the rotundity of the earth, if nothing else, would render that impossible. --September 1, 1889, Levant Herald

Henry Ford on Edison: “It might be said we live in the age of Edison…in many ways, the greatest man since the world began. March 7, 1929, NYT

Henry Ford (July 30, 1863 – April 7, 1947)

Ford’s father: “Henry worries me. He doesn’t seem to settle down and I don’t know what’s going to become of him.”

William Ford died in 1905, before Ford achieved great success.

There’s no record of Ford personally meeting Hitler. But Ford was awarded the Grand Cross of the German Eagle, highest honor in Nazi Party (July 1938).

Revolutionized: $5/day, 8-hour day; five-day-week, as a tool to induce his employees and their families to better living; and profit-sharing.Yet very few employees were paid $5/hour (the average pay was $2.34/hour); efficiency experts set unachievable standards; Ford had the reputation as the worst sweatshops.

He established a “Sociological Department” to monitor his employees behavior on and off the clock. (closed in 1920, when he distanced himself from this view).

He believed in reincarnation; was raised Episcopalian; and was an anti-Semite. He bought the Dearborn Independent in 1919, which ran anti-Semitic articles, and was closed in 1927.

He didn’t believe in charity, which is interesting since the Ford Foundation has given millions. He believed charity “Lowers the self-respect of receiver and deadens the conscience of the giver.”

He had a Puritan streak, disliking jazz, consumer debt, and supported Prohibition.

Thomas Edison was his idol, and they each had a vacation home in Ft. Myers, Fl.

The Model T came only in black because paint dried faster—a case of efficiency over effectiveness. Ford said of the Model T: “The only thing wrong with that car was that people stopped buying it.”

GM started GMAC in 1919 to begin financing cars, which is what really grabbed market share from Ford, who didn’t start a financing arm until the late 1920s. Ford didn't think people should go into debt.

He also believed in abolishing patents, since he thought they killed competition.

Notable Quotes

Visitors often ask me what the car of the future will be. I don’t know. If I did I would be making it now. Feb 1936

Business men go down with their businesses because they like the old way so well they cannot bring themselves to change. Circa 1923

[Sound business] is to provide a service. Try to run a business solely to make money and the business will die. Circa 1932

A manufacturer is not through with his customer when a sale is completed. He has then only started with his customer….If the machine does not give service, then it is better for the manufacture if he had never had an introduction, for he will have the worst of all advertisements—a dissatisfied customer. Circa 1923

Profits are merely what we think we work for…The real profit is not what the promoters get, but what the country gets. July 7, 1929 NYT

Walt Disney (Dec 5, 1901 – Dec 15, 1966)

One estimate, in 1966 alone, the year of his death, 240 million people saw a Disney movie, a weekly audience of 100 million watched a Disney television show, 80 million read a Disney book, 50 million listened to Disney records, 80 million bought Disney merchandise, 150 million read a Disney comic strip, 80 million saw a Disney educational film, and nearly 7 million visited Disneyland.

NASA acknowledged that Disney’s early drumbeating for its program was instrumental in generating public support for space exploration.

During London blitz, children’s gas masks had Mickey on them.

Disneyland was just a modern variant on the old Puritan ideal of a shining City on a Hill. “Why should I run for Mayor [of Los Angeles] when I’m already king”

The Walt Disney Family Museum, Park Presidio, San Francisco display over 900 awards for artistic work and service, including his Presidential Medal for Freedom, presented by Lyndon Johnson in 1964.

In 1955, Walt paid $4,000/acre for Disneyland property; 4 years later it was valued at $20,000/acre.

Walt’s good friend, Art Linkletter, refused to invest in Anaheim, and he figures the tour of the property with Walt cost him $3m per step!

Walt Disney World is even more dramatic (27,400 acres bought for $5m = $185/acre. Worth well over $2 million per acre today.

Realtors axiom: Location, location, location. Bunk! It can be trumped with intellectual capital.

Late 1930s, Mickey lost his tail. Thousands saved not drawing it! It was restored. Effectiveness over efficiency.

Paul Anderson, a Disney Historian at BYU lists six characteristics to describe Walt’s success:

  1. Curiosity
  2. Knowledge
  3. Experimentation
  4. Quality at all costs
  5. Control—delegate to good people
  6. Vision

Every theme park operator told him he’d go broke with Disneyland within one year. Ward Kimball, one of the famous Disney animators:

            If you want to know the real secret of Walt Disney’s success, it’s that he never tried to make money.

Ron’s favorite Disney line:

            I could never convince the financiers that Disneyland was feasible, because dreams offer too little collateral.

J. Willard Marriott (Sept 17, 1900 – Aug 13, 1985)

Started a Hot Shoppe $3,000 in 1927 (A&W Root Beer).

First hotel was Twin Bridges, Arlington, VA, Jan 1957.

In-Flight catering started by JW visiting Hot Shoppe in 1937 next to airfield, watching customers buy food for airplane flight.

Had an “employees-first philosophy. Knew human touch was all-important for guests staying away from home.

Diversified into catering, cruise ships, theme parks (1972)—got out of all of them eventually.

Rule of decision making: Listen to your heart (research & data only get you so far).

Recommend Books and Readings

Obviously, there are lot of books written on each of these men. The following are the ones Ron has particularly enjoyed, and found to be reliable as to the actual history of their lives.

The Quotable Edison, edited by Michele Wehrwein Albion

The Quotable Henry Ford, edited by Michele Wehrwein Albion

The Animated Man: A Life of Walt Disney, by Michael Barrier

Walt Disney, by Neal Gabler

How to Be Like Walt, Pat Williams

Marriott: The J. Willard Marriott Story, by Robert O’Brien

Earning My Mouse Ears, Part I, by Ron Baker

Earning My Mouse Ears, Part II, by Ron Baker

Earning My Mouse Ears, Part III, by Ron Baker

 

Episode #37 - Free-Rider Friday - March 2015

Welcome to “Free-Rider Friday.” Most of our shows are “topic” driven, where we dive deep into one subject. Free-Rider Fridays are designed to be “event” driven—whatever issues are in the news that we (or you) find worthy of commentary. In economics, free riding means reaping the benefits from the actions of others and consequently refusing to bear the full costs of those actions. This means Ed and Ron will free ride off of the news, and each other, with no advanced knowledge of the events either will bring up.

You can also comment on Twitter at #ASKTSOE.

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And Please leave a review of the show on iTunes.

Ed’s Topics

Ed read an email from Jay, a listener in San Antonio. Jay asked Ron when he was introduced to the big libertarian thinkers, including Ludwig von Mises.

Jay also asked Ron about Edmund Burke and natural rights, and how long Ed has been a Libertarian.

Ed discussed the Tinder Plus App, and how it’s priced.

Ed mentioned how Salesforce reacted to a proposed law in Indiana that allows businesses to discriminate against gay and lesbian couples, and also Audra McDonald's reaction to it.

Ron’s Topics

Bob Cross, our guest on the March 13, 2015 show, told a story of how Marriott did a primitive form of Revenue Management in the 1950s. It turns out, so did my Dad in the barbershop, with respect to kids haircuts on Saturday’s, the busiest day of the week.

An article in the January 19, 2015 issue of The Economist, “When the chips are down,” about McDonald’s sales being down 4.6% year-over-year as of November 2014.

In contrast, fast-casual restaurants such as Shake Shack, Nando’s, Chipotle Mexican Grill, and Panera Bread, are up 10.5%. Four reasons are cited:

  1. Fresh food
  2. High-level customization of your order
  3. Clever pricing, some dishes same price as fast food, but better at nudging to pricier dishes and extras, get an extra 40% out of each diner’s wallet
  4. Each outlet offers a touch of distinctiveness (better before cheaper)

Other random topics

We discussed the concept of “Nudging,” and the book by Cass Sunstein and Richard Thaler, Nudge.

We also discussed an email question from listener Buyan:

Hi Ron,

I am an active listener on your books and podcasts. I currently lead an IT consulting company where we do custom development and CRM implementation projects. I have several questions on the business model which makes sense from your podcast.

  1. From a consulting company perspective, I am struggling with defining value for my customers. Most of our clients use our services for complex, integration needs of their business. Do you have some examples of how other professional service firms define value or create value ?
  2. I am now implementing the 3 price point approach which you had suggested instead of the previous one price which did not work for us. I would like to differentiate our firm with a zappos like service experience but our struggle is communicating that as a value to our clients. Are there any pointers on how that would work for an IT consulting company?

So please let me know.

Thanks,

Buyan

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Episode #36 - Interview with Anthony Clark

Ron and Ed interviewed Anthony Clark, author of the new book, The Last Campaign: How Presidents Rewrite History & Enshrine Their Legacies, available on Amazon. During the interview we discuss the economics of Presidential Librairies and how they rarely bring the promised revenue to the cities and towns that compete to host them.

Anthony also reveals the secret plan of Richard Nixon to build his library on land already owned by the Federal Government. This plan included plucking 4,000 acres of pristine seafront land from Marine base, Camp Pendleton.

In the last segment, Anthony, a former staff member of a Congressman from Missouri, explains how Hillary Clinton’s actions regardin her use of a personal email server were clearly a violation of federal policy.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #35 - Interview with Pricing Legend Robert G. Cross

PWP Studio photographers specialize in corporate event photography, decor, details, incentive travel, conventions, and on-location photography in Atlanta, Georgia
PWP Studio photographers specialize in corporate event photography, decor, details, incentive travel, conventions, and on-location photography in Atlanta, Georgia

What a treat it was to have the chance to interview Bob Cross, an absolute legend in pricing circles, and a mentor to me since reading his book, Revenue Management: Hard-Core Tactics for Market Domination, back in 1997. It really opened up the world of Revenue Management (especially in airlines) to me, and had a profound impact on my pricing future.

I got to hear Bob speak, and then meet him, at a Professional Pricing Society Conference back in 2000. You’ll want to listen to this entire interview, as his story of how he got into pricing is fascinating.

Biography

Robert G. Cross is the Chairman and CEO of Revenue Analytics.  He is widely recognized as the foremost expert in the field of Revenue Management. Robert G. Cross guides Revenue Analytics’ strategic vision and provides a wealth of industry expertise. He is actively involved in client work, and his leadership has been instrumental in helping develop leading Revenue Management capabilities for Revenue Analytics clients, including Coca-Cola, Marriott International and InterContinental Hotels Group. Labeled the “Guru of Revenue Management” by The Wall Street Journal, Robert G. Cross, prior to Revenue Analytics, founded Talus Solutions, Inc., a company credited with creating billions of dollars in value for clients such as Delta Air Lines, Ford Motor Company and UPS. Talus was acquired by Manugistics Group, Inc. in December of 2000 for $366 million.

Delta Story

Bob explains how a chemistry major, then a lawyer, ends up in Yield Management at Delta Airlines.

Bob tells the story of how Delta was leaving $200 Million on the table by misallocating seats (selling too many discount seats too soon, thus sacrificing last-minute full-fare seats, and having planes leave ½ empty that could have been sold out with discounted seats).

Revenue management accounted for $300 million in incremental revenue gain, ½ of Delta’s turnaround gain $600 million in 1984.

Bob left Delta and started the first company entirely devoted to the art and science of Revenue Management.

Bill Marriott, Jr. Story

One of my favorite stories Bob told at his PPS speech was how Bill Marriott, Jr. did Revenue Management back in the 1950s, before sophisticated software was available.

I reminded Bob that revenue management is not new, recounting this story from my book, Pricing on Purpose:

Indeed, it may be entering its third millennium as a management technique. We are told that Joseph and Mary had to be accommodated in a stable two thousand years ago because there was no room at the inn. But perhaps the innkeeper had identified them as customers who could not afford a premium rate on a night of peak demand and had decided to hold out for better business. After all, he might have known that there were three kings in town who had yet to find accommodation.

Revenue management strategies add $150M-200M in annual revenue at Marriott.

It uses a “Revenue Opportunity Model,” which measures actual revenue against a theoretical optimal.

Revenue management has spread to Hilton, Holiday Inn, Sheraton, Disney, golf courses, sports, entertainment, operas, retailers, and it literally saved National Car Rental from bankruptcy.

Revenue Management: Hard-Core Tactics for Market Domination, 1997

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I read this book in May 1997. There are blurbs from Robert Crandall (American Airlines Yield Management pioneer), Bill Marriott, Jr., and Herb Kelleher from Southwest Airlines fame.

In the Acknowledgements, Bob talks about his late barber, Carol Meinke, who operated a one-chair Barbershop. He tries to convince her to manage supply and demand using pricing!

My father, Sam Baker, was also a barber. Saturday’s were his busiest days, and the last thing you wanted to do was turn away a working gentlemen who would pay full price, and only has weekends to get his hair cut.

So the barbers used to tell the moms bringing in kids on Saturday that the price is cheaper if they come in on Tuesday! This is revenue management in action!:

            Sell the right product to the right customer at the right time for the right price.

Excellent Articles on Pricing by Bob

Milestones in the application of analytical pricing and revenue management,” September 25, 2010

This is an excellent article if you’re interested in the history and diffusion of Yield Management, how it started in the airlines, and diffused into hotels, transportation companies, among others.

Over past few decades, revenue management has added tens of billions to net profits of hundreds of firms.

In 1991 UPS built a pricing department—Using "Target Pricing" it increased its profits in the first year by $100 million.

Fred Smith FedEx attributes 10% revenue growth and 33% profit growth to revenue management and a more “disciplined pricing approach.”

In the early 1990s, Canadian Broadcast Corporation, then ABC, NBC began revenue management to sell advertising.

Ford Motor realized cost-cutting was not the answer, and from the mid-1990s to the end of decade earned $3 Billion in additional profits thanks to better pricing.

Revenue Management’s Renaissance: A Rebirth of the Art and Science of Profitable Revenue Generation,” February 2009.

Customer-Centric pricing: The Surprising secret for profitability,” 2005.

Questions

We asked Bob if he sees a trend away from cost-plus pricing? Yes, he does.

Which industries were the best pricers? Used to be airlines, now he’d say hotels.

Which country leads the world in pricing? The United States.

Other Resources

Pricing on Purpose: Creating and Capturing Value, by Ronald J. Baker

Ron is honored to keynote at this year's Professional Pricing Society Conference in Dallas, Texas, on May 7, 2015: “Top Ten Business Myths.”

Episode #34 - Interview with Joseph Pine

JOE PINE PIC
JOE PINE PIC

Ed and I were honored to interview B. Joseph Pine, author of one of our all-time favorite business books: The Experience Economy: Work Is Theatre & Every Business a State, Updated Edition.

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bookspine

Joe Pine is an internationally acclaimed author, speaker, and management advisor to Fortune 500 companies and entrepreneurial start-ups alike. Joe’s published work has changed how the business world thinks. His best-selling book The Experience Economy: Work Is Theatre & Every Business a Stage was the first to articulate the potential of experiences as a distinct economic offering, and literally began the worldwide shift to experience strategy. His latest work Infinite Possibility: Creating Customer Value on the Digital Frontier, explores how to use digital technology to stage experiences that fuse the real and the virtual, offering powerful new insights to address digital technology in customers’ experiences. He has consulted with hundreds of companies, bringing value to tactics, strategies, and game-changing, industry-disrupting innovations. Joe’s discoveries, the new frontier, the new economy, the new consumer sensibility, and now the new ways digital technology enables us to fuse the real and the virtual, make him one of the greatest business landscape explorers of our time.

We had an interesting discussion with Joe on The Experience Economy, and especially how professional firms are poised at the top of his Economic Value Progression graph, providing transformations for their customers.

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We also discussed the concept of multiverse from Infinite Possibility, and some of the concepts from his book The Laws of Managing.

We highly recommend all of Joe's books if you're interested in peering into the future and discovering the landscape where the future of business, and economic value creation, will be created.

Episode #33 - Free-Rider Friday - February 2015

Welcome to this week's “Free-Rider Friday.” Most of our shows are “topic” driven, where we dive deep into one subject. Free-Rider Fridays are designed to be “event” driven—whatever issues are in the news that we (or you) find worthy of commentary. In economics, free riding means reaping the benefits from the actions of others and consequently refusing to bear the full costs of those actions. This means Ed and Ron will free ride off of the news, and each other, with no advanced knowledge of the events either will bring up.

The Soul of Enterprise: Dialogues on Business in the Knowledge Economy is now available on Amazon Kindle

Cover
Cover

Ed and I are pleased to announce the publication of our first book together, based on the topics from our show.

The book is available exclusively on Amazon Kindle. You can download the Kindle app for free to read the book on a device other than a Kindle.

The book contains six chapters, which are from our show, combined into logical topics. We also added an Introduction and Epilogue.

Further, we’ve added links to many of the ideas, definitions, books, and other interesting things we cite. It’s a complete digital experience.

The Foreword was written by VeraSage Instiute’s G. Robert Newhart Non-Value-Added Fellow, Greg Kyte, and it does not disappoint. There’s also some funny illustrations by the cartoonist, caricaturist and illustrator Andrew Fyfe from Australia, a pure genius.

Here’s a more detailed description of the book:

The world’s economy has been transformed from a twentieth-century materials-based economy to the Age of the Knowledge-Based Economy — and the currency of this realm is ideas, imagination, creativity, and knowledge. According The World Bank, 80% of the developed world’s wealth now resides in human capital.

Perhaps President Ronald Reagan said it best in his address to Moscow State University on May 31, 1988:

Like a chrysalis, we’re emerging from the economy of the Industrial Revolution — an economy confined and limited by the Earth’s physical resources — into, as one economist titled his book, “the economy in mind,” in which there are no bounds on human imagination and the freedom to create is the most precious natural resource.

Written by Ronald Baker and Ed Kless, hosts of The Soul of Enterprise: Business in the Knowledge Economy, the popular radio show on Voice America’s Business Channel, The Soul of Enterprise: Dialogues on Business in the Knowledge Economy sounds the clarion call that organizations can no longer ignore this seismic shift that has occurred in the economy since 1959. The Soul of Enterprise introduces the three components of Intellectual Capital — human capital, social capital, and structural capital — and how to leverage them to create wealth in today’s economy, by revealing:

  • The physical fallacy — why wealth no longer consists of tangible things, but of ideas, imagination and knowledge from human minds
  • The best learning tool ever invented: After Action Reviews
  • Why Frederick Taylor and the Scientific Management movement was a fraud and the wrong focus for knowledge workers
  • The fact that effectiveness always and everywhere trumps efficiency
  • The First Law of Pricing: All value is subjective
  • The Second Law of Pricing: All prices are contextual
  • The Morality of Markets: Doing well and doing good
  • Why your organization — and you — need to be driven by a higher purpose than profit

The Soul of Enterprise will inspire and challenge readers to unlock the enormous financial and competitive power hidden in the intellectual capital of their organizations and knowledge workers.

Bill Gates Doesn’t Understand Wealth Creation

Ron mentioned an article from The Economist’s The World in 2015, written by Bill Gates. Some excerpts:

…disease and extreme poverty are not inevitable. In the past 25 years, the number of children who die has dropped by a half. …The number of extremely poor people has been going down at roughly the same rate.

We also know why people are escaping poverty: it is thanks to more productive agriculture, better access to financial services, and the spread of functioning health systems that prevent expensive medical emergencies.

Is he kidding? What’s caused people to escape bone-crushing poverty is the spread of capitalism. Free markets are the cause of all the results he cites, yet he doesn’t seem to understand how markets work.

This never ceases to amaze me. Some of the most successful entrepreneurs, and wealthiest, have no idea how capitalism works. They were able to practice it, but they can’t explain it, or offer a theory in its defense.

It validates William F. Buckley Jr.’s quip: “ The problem with capitalism is capitalists.”

Net Neutrality

Next we discussed the thorny issue of net neutrality. We are both against the recent regulations from the FCC that reclassifies the Internet from an “information service” to a “telecommunication service.”

Can you point to one innovative, heavily regulated industry? Had the government regulated the early days of the computer revolution, we’d probably have Vacuum Tube Valley, most likely in West Virginia.

Even The Economist likes broad rules (fast lanes can’t exceed slow lanes by a certain amount), rather than blanket regulations.

There’s an excellent article by Nick Gillespie at Reason magazine on this issue.

In all fairness, no one has seen the regulations yet. But is there any doubt that once regulation starts, it expands?

Could it be used to require all websites to have a license? Or control content?

I’m sure we will discuss this topic in future shows.

Greg Kyte

Greg Kyte called for the latter half of the show, discussing his work, videos, the Foreword he wrote to our book, and his new business: ComedyCPE.com.

Watch some of his hilarious videos at GregKyte.com, including the above infamous series of queuing up for the Blackberry, Bob’s BBQ, Great Moments in Value Pricing History, Parts I and II, and Billable Hour Scratch & Win.

Episode #32 - Innovating Your Business Model

Andy Grove, founder of Intel said in a meeting with Clayton Christensen:

Disruptive threats come inherently not from new technology but from new business models.

He also defined an Inflection Point as:

A time in the life of a business in which its fundamentals are about to change.

Just think about the following business model disrupters from the past decade:

  •             Craigslist (Pew Research, 2008: more people read news online than paid newspaper subscribers)
  •             Napster
  •             Google Books
  •             Uber
  •             Driverless cars

Defining Business Model

Ed and Ron discussed the book by Alexander Osterwalder and Yves Pigneur, Business Model Generation, wherein they define business model as:

A Business model describes the rationale of how an organization creates, delivers, and captures value.

Notice that a business model deals with capturing value, which is the company’s pricing strategy.

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When you see a business model, you will probably see a pricing change (from CDs to iTunes .99¢, from Blockbuster video rental to Netflix, etc.).

In the book, the authors explore nine building blocks of the business model:

  1. Customers segments
  2. Value Proposition
  3. Channels
  4. Customer relationships
  5. Revenue streams—customer is heart, RS are its arteries (RM, Dynamic pricing, etc.)
  6. Key resources
  7. Key Activities
  8. Key partnerships
  9. Cost structure

You can find more information about the book, and accompanying App, here.

Disruption Comes from the Outside, and Non-Experts

The daunting task for many companies is:

How to implement and manage new models while maintaining existing ones.

Harvard business professor Clayton Christensen wrote:

Generally, the leading practitioners of the old older become the victims of disruption, not the initiators of it.

Steve Ballmer, former CEO of Microsoft once said:

Google is not a real company. It’s a house of cards.

Michael Dell, when asked what Steve Jobs should do with Apple when he returned in 1987, said:

He should just shutter its doors.

Experts rarely innovate. G.K. Chesterton wrote:

The argument of the expert, that the man who is trained should be the man who is trusted, would be absolutely unanswerable if it were really true that the man who studied a thing and practiced it every day went on seeing more and more of its significance. But he does not. He goes on seeing less and less of its significance.

Consider this, from the book, The Experts Speak: The Definitive Compendium of Authoritative Misinformation (1998):

  • 1986 Gottlieb Daimler predicted auto market would never exceed 1Million because you couldn’t train that many chauffeurs
  • Robert Milikan, Nobel Prize, phyics, 1920: “There’s no likelihood man can ever tap the power of the atom.”
  • “We don’t like their sound. Groups of guitars are on the way out.” Decca Records, turning down The Beatles a second time, 1962

Kodak engineer Steve Sasson invented “filmless photography” in 1975, but Kodak’s business model wasn’t designed to deal with any thing but film.

Xerox’s PARC Labs Xerox invented the interface on computers, but Xerox couldn’t figure out how you put a meter on a computer. It just didn’t fit with their business model. Steve Jobs had a different business model idea.

Creativity is Always a Surprise

In The Black Swan, Nassim Nicholas Taleb wrote:

We do not know what we will know. Invention and creativity is always a surprise. If we could prophesy the invention of the wheel, we’d already know what a wheel looks like, and thus we could invent it.

Friedrich Hayek wrote:

The mind can’t see its own advance.

Another book Ron likes on this topic is Seizing the White Space by Mark W. Johnson (2010).

The white space is not uncharted territory or an underserved market, but rather a range of potential activities not defined or addressed by the company’s current business model. It requires a different model to exploit.

Johnson points out that more than 30% of the 350 Business Model Innovations he studied in the past ten years were enabled by internet technology. So it’s not just about technology, but rather a fundamental change in creating and capturing value.

Peter Drucker on Business Models

One of Peter Drucker’s (1909–2005) many articles published in the Harvard Business Review (September-October 1994) was entitled “The Theory of the Business,” which laid out what he considered to be the essential elements executives would have to define in order to create wealth:

Not in a very long time—not, perhaps, since the late 1940s or early 1950s—have there been as many new major management techniques as there are today: downsizing, outsourcing, total quality management, economic value analysis, benchmarking, reengineering. Each is a powerful tool. But, with the exceptions of outsourcing and reengineering, these tools are designed primarily to do differently what is already being done. They are “how to do” tools.

Yet “what to do” is increasingly becoming the central challenge facing managements, especially those of big companies that have enjoyed long-term success.

What accounts for this apparent paradox? The assumptions on which the organization has been built and is being run no longer fit reality. These are the assumptions that shape any organization’s behavior, dictate its decisions about what to do and what not to do, and define what the organization considers meaningful results. These assumptions are about markets. They are about identifying customers and competitors, their values and behavior. They are about technology and its dynamics, about a company’s strengths and weaknesses. These assumptions are about what a company gets paid for. They are what I call a company’s theory of the business.

In fact, what underlies the current malaise of so many large and successful organizations worldwide is that their theory of the business no longer works.

It usually takes years of hard work, thinking, and experimenting to reach a clear, consistent, and valid theory of the business. Yet to be successful, every organization must work one out.

What are the specifications of a valid theory of the business? There are four:

  1. The assumptions about environment, mission, and core competencies must fit reality.
  2. The assumptions in all three areas have to fit one another.
  3. The theory of the business must be known and understood throughout the organization.
  4. The theory of the business has to be tested constantly. It is not graven on tablets of stone. It is a hypothesis. And so, built into the theory of the business must be the ability to change itself.

Even if a particular business did not follow Drucker’s sage advice and postulate a theory of its business, one could certainly argue that since the macroeconomic environment of nearly any developed country is comprised of millions of businesses, the aggregate marketplace is a testable hypothesis in its own right, whereby customers spending their own.

George Gilder on Innovation

In his book, Wealth and Poverty: A New Edition for the Twenty-First Century, George Gilder weighs in on business models and event the efficiency vs. effectiveness debate:

Firms at the top of their S-curves of growth: the time when innovation dwindles and heavily bureaucratized companies seek minor new adaptations, packaging changes, and manufacturing efficiencies in order to wring the last gains of productivity from an essentially static industry that has already long passed its phase of ‘fast history.’

Auto companies at the very pinnacle of productivity had lost all room to maneuver. New developments almost never emerge from the leading companies in an industry. None of the carriage makers and buggy whip producers could create a salable automobile, and the gaslight and candle businesses neglected the promise of electricity; slide rule people at Keuffel and Esser succumbed without response to the handheld calculator; just as IBM lagged behind other companies in adopting most major innovations in business machines, from copiers to word processors; and as even Texas Instruments finally became relatively rigid and uncreative in the microprocessor field.

The very process of rationalization and bureaucracy by which a company becomes the most productive in an industry tends to render it less flexible and inventive. An exclusive preoccupation with statistical productivity—simple coefficients between inputs and outputs—can lead to a rigid, and in the long run, unproductive economy.

Here's a matrix that explains this phenomenon, from Ron’s book, Implementing Value Pricing: A Radical Business Model for Professional Firms:

History of Innovation
History of Innovation

Luddites: Firms that resist technological advances and other innovations that are merely table stakes risk being Luddites. They have both low efficiency in doing things right, and low effectiveness at doing the right things—not a bright future. Fortunately, not many firms are in this category. If you are here, you are dead already and the funeral is a mere detail.

Buggy Whips: Usually when an industry is at the apogee of its efficiency, it is at risk of being made obsolete by new technologies or business models. As Peter Drucker said, no amount of efficiency gains would have saved the buggy whip manufacturers from the automobile.

Innovators: As George Gilder wrote in Forbes, “Knowledge is about the past; entrepreneurship is about the future. If creativity was not unexpected, governments could plan it and socialism would work. But creativity is intrinsically surprising and the source of all real profit and growth” (“The Coming Creativity Boom,” November 10, 2008). Innovators are firms that are willing to invest some of today’s profits into tomorrow, while at the same time sacrificing efficiency for effectiveness. Innovation, creativity, and Total Quality Service are the antithesis of efficiency—ideas such as Google Time, experimenting with new ideas, investing in education, all reduce efficiency metrics. But if firms do not make these essential investments they are simply coasting on their existing intellectual capital, and in today’s economy, knowledge becomes obsolete more rapidly.

Humpty Dumpty: This is a precarious future. This represents firms that are highly efficient and effective. I am arguing if you are here, you better be sliding back to the Innovators position and start sacrificing some of that efficiency for innovation and making the firm more valuable to its customers. Humpty Dumpty eventually falls and ends up like the industries mentioned under Buggy whips. Efficiency is not the answer. Effectiveness is. This is precisely why we warn companies to avoid putting efficiency ahead of effectiveness. Any industry at the apogee of efficiency is an industry in decline.

Parting Thoughts

Embracing a new business model requires leadership and vision. It requires knowing you are doing the right things, not just doing things right. It requires focusing the firm on the external value it creates for the customer and simultaneously building the type of firm people are proud to be a part of and contribute to—the sort of organization you would want your son or daughter to work for. It requires a sense of dignity and self-respect that you are worth every penny you charge, and you will only work with customers who have integrity, whom you enjoy, and respect. It requires an attitude of experimentation, not simply doing things because that is the way it has always been done. It requires less measurement, less fear, and more trust. It requires boldness and risk-taking—there has yet to be a book written titled Great Moderates in History.

Episode #31 - Who Is in Charge of Value?

We have had the privilege of posing this question—Who’s in charge of value in your organization?—to thousands of leaders around the world. We're usually met with a momentary staring ovation, and then someone will inevitably shout out, “Everyone!” Really? Ron lives in California, where he's told everyone “owns” the Golden Gate Bridge. He would like to sell his portion; unfortunately he encounters what economists call the tragedy of the commons.

If everyone owns something, no one does. No one has an incentive to protect and maintain the value of the asset in question. Think public toilet.

Pricing is far too important to the viability of the company to be left to mediocre pricers. No other area—not cost cutting, efficiency increases, or growth—can have as large an impact on profitability as does pricing.

It is time for organizations to recognize that if they are serious about pricing commensurate with the value they create, they need to establish a core group of enthusiastic pricers to make pricing a core competency within the firm.

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value

Appoint a Chief Value Officer

To understand value, we have to understand the customer. This is not accomplished with more accurate cost accounting, better project management, or any other internal initiative. Companies have a wealth of information on how long things take and what they cost; they have a paucity of metrics on the value they create for customers.

Someone needs to be in charge of value. BMW has a Customer Experience Officer, responsible for the entire BMW experience, from decision to purchase, to service and trade-in. Many professional firms have now created this position, with the CVO overseeing a value council.

One question that continually comes up is what are the traits of a successful CVO, or value council member? The acronym LACEY is a useful framework for identifying what characteristics are essential for a successful CVO:

  • Leadership
  • Attitude
  • Commitment
  • Experimentation
  • Youth

Leadership

An organization will never rise above its leadership. CVOs implicitly and explicitly understand that the firm’s prices are the language in which they strategically communicate value to customers.

Perhaps the first important characteristic of a successful CVO is high self-esteem; they believe that their company’s services are worth every penny they charge. There is great nobility in being paid what you are worth.

A CVO must have demonstrable leadership skills, while commanding respect and creditability across multiple functions within the firm. She will be responsible for communicating the importance of pricing and value to the media, thereby negating price wars within the industry.

Since competitors tend to judge a firm’s pricing behavior based upon its most ruthless actions, think of the message appointing a CVO would send to others in your industry about how committed you are to price for value and not engaging in self-destructive price wars.

Leadership is essential, and leadership demands tough decisions (the word decision comes from Latin decidere, meaning “to cut off”), and some times individual opinions have to be sacrificed for the good of the organization. Margaret Thatcher, former Prime Minister of Britain, was fond of pointing out: “Consensus is the negation of leadership.”

Attitude

The CVO and members of the value council have to view pricing as an enormous opportunity for the firm to create and capture value, rather than a limitation imposed on them by the market, which they have no control over, like the weather. Pricing is far too important to assign to narrow minds. Pricers have to be intellectually curious, constantly learning, reading, and studying why humans behave the way they do.

Look for a CVO who is moving through the five levels of learning: awareness, awkwardness, application, assimilation, and art. Pricing is an iterative process of the mind and it will always require human judgment.

Commitment

A CVO and value council that does not have the support of the CEO are destined to be feckless. Effective centralized pricing has to have total authority, which needs to be vested in one individual so there is one throat to choke.

Taking it a step further, the CVO should report directly to the CEO. This will send a powerful message throughout the organization that the leaders are serious about value and pricing, as well as to competitors, thereby possibly reducing the threat of price wars. This also provides a competitive advantage, since competitors can only monitor historical pricing, not value.

Perhaps the largest commitment required will be in the area of pricing talent. Since this is a relatively new skill in the marketplace, talent is presently hard to find, and firms will have to develop it internally.

If resources are limited, the best advice is: Read, read, read. There are many more books out there on pricing than there were even ten years ago. Assign the council a reading list, and make every member teach what they learned, and what they think the firm should do differently as a result, to their colleagues.

There are also graduate level courses on pricing taught at many universities’ executive education divisions, which are worth the price of admission. Be sure to join the Professional Pricing Society, which provide seminars, workshops, and a chance to share intellectual capital with other pricers.

As Professor Ernest Rutherford, the man who split the atom, said: “It’s true we don’t have much money so what we have to do is think.”

Also, as with any new initiative there is bound to be inevitable mistakes, failures, and setbacks. The CVO must be committed to the process. Pricing is hard, but so is training for the Olympics, or anything else worth doing. Obtaining a competitive advantage is never free. Determination and commitment defeats diffidence.

Experimentation

The CVO has to take a stand for the customer, constantly asking how the company can provide more value. They have to be willing to experiment and cannot be prisoners of the past. “That is the way we have always done it,” should inspire nothing but contempt from CVOs.

Soren Kierkegaard wrote, “Purity of soul is to will one thing.” What is more important than to champion the cause of value creation within today’s organizations? A CVO is never satisfied with the status quo because they will constantly be on the search for new ways of doing things, all the while eliminating procedures and processes that do not add value to the customer. This is the CVO mandate.

Youth

Out of all of the characteristics in LACEY, we will admit a certain amount of uncertainty as to the implications of this last one. We are not suggesting you cannot teach an old dog new tricks. Instead, research on age and innovation suggests you should not expect an old dog to innovate a new trick to add to the repertoire.

If organizations want innovation and dynamism, they will have to give more authority and responsibilities to their youthful team members. At the least, some people in their twenties or thirties should be on the value council. Organizations, like people, tend to calcify with age, and youth can keep the blood pumping at a more vigorous pace.

No doubt they will make more mistakes and incur more failure, yet risk is where profits come from. What is the alternative? Ossification is not an option.

Not Final Thoughts

It is often said we get what we measure. If this is true, isn’t it time we measure what we want to become? Who in your company is measuring value? Unless someone in your organization owns the value function, it will not get the proper executive attention, respect, and resources it deserves.

If you are competing against a firm with a CVO—either for customers or talent—you may well be at a severe competitive disadvantage. The Roman God Janus had two sets of eyes, one to see what lay behind and the other to see what lay ahead. A CVO is an outward-looking position, with duties carried out in a world of risk, uncertainty, innovation, and faith in the future, where value is solely arbitrated by the customers your firm is privileged to serve. If the only set of eyes you possess look behind you—at historical costs, hours, activities, and efforts—you are destined for a perilous future.

So, who is in charge of value in your company?

Other Books and Resources

Pricing on Purpose: Creating and Capturing Value, Ron Baker.

Human Accomplishment, Charles Murray (for the link between youth and innovation)

To Be or Not to Be: The Customer Experience Officer.

Marriott on Pricing

Episode #30 - Crafting the Value Conversation with Dan Morris

Ed and I had the pleasure of interviewing Dan Morris, co-founder of VeraSage Institute, and one of the world’s leading experts on crafting the value conversation. Dan did a video for the AICPA on the value conversation, which is well worth watching.

We’ve also included an excerpt from the value conversation chapter of Ron’s latest book, Implementing Value Pricing: A Radical Business Model for Professional Firms, as well as some additional books and resources mentioned during the show:

The Value Conversation

Language was invented to ask questions. Answers may be given by grunts and gestures, but questions must be spoken. Humanness came of age when man asked the first question. Social stagnation results not from a lack of answers but from the absence of the impulse to ask questions.

––Eric Hoffer, Reflections on the Human Condition, 2006

Any company that establishes prices based upon value will agree that the conversation with the customer is the most important part of the process. Skipping an in-depth conversation is similar to a contractor attempting to build a customer’s dream home without any architectural plans. The better your firm comprehends the customer’s value drivers, the more likely you will be able to create and communicate maximum value, convince the customer they must pay for that value, and capture that value with an effective pricing strategy custom tailored to the customer.

This is an opportunity for you and the customer to create a shared vision of the future, to analyze where the customer is at this point, and to develop the necessary action plan to move them to where they want to be.

This focus is crucial, because if you do not discus value with the customer, you will be forced into a discussion of costs, efforts, activities, and deliverables, usually by procurement, or some other professional buyer within the customer’s organization. Remember that the customer is trying to maximize the value they receive while attempting to minimize your price. It is far more strategic to engage in a discussion over what the customer is trying to maximize rather than what they are trying to minimize. If all you focus on is price, it can never be low enough. If the customer says your price is too high, what they are really saying is, “I don’t see the value in your offering.” It is not a question of money; rather, it is lack of belief.

Naive Listenting

When I am getting ready to reason with a man I spend one-third of my time thinking about myself and what I am going to say, and two-thirds thinking about him and what he is going to say.

––Abraham Lincoln

Questions require doubt, something salespeople who are experts in what they sell are not comfortable with. After all, we are paid to have the answers, not express doubt; and if you already know the answers there appears to be no need to gather any more information from the customer, chaining ourselves to the limits of our existing knowledge.

For this reason, during the conversation the customer should talk at least twice as much as the salesperson. This is incredibly difficult because it requires self-restraint. Naïve listening is difficult because you think much faster than people talk. While someone is talking, you are usually listening with one-half of your brain and formulating your answer with the other. Active listening is a skill that needs to be developed.

Talkers may dominate a conversation but the listener controls it. Taking notes conveys to the customer that what they are saying is important and that you care enough to record it. It also helps you remember exactly what they said. But most of all—and this is precisely why psychiatrists and psychologists take notes—is the person will provide much more detail. The more you know, the more value drivers you will be able to uncover, and the higher prices you will command.

You also want to deal with the economic buyer—the person who can hire and pay you. Many consultants believe you are wasting your time if you cannot get in front of this person, because most likely you will be dealing with gatekeepers who can only say “no,” never “yes.” This may take a few iterations, but the customer is sending a signal they are not serious if they deny you access to the economic buyer, and you may want to invest your resources in more profitable opportunities—such as servicing existing customers.

Avoid the ever-present temptation to provide solutions to the customer’s needs and wants. That is not the purpose of the conversation at this stage. You are on a value quest with the customer, not in a venue to begin providing solutions. Your role at this point is to ask questions and have the customer formulate—or at least articulate—a vision of the future. Before doctors prescribe, they must diagnose, which is the role you must assume at this stage in the conversation. Anything less is malpractice.

Starting the Conversation

This is one of the most effective statements to utilize somewhere near the beginning of the value conversation, regardless of whether you are meeting with a new or current customer:

Mr. Customer, we will only undertake this sale if we can agree, to our mutual satisfaction, that the value we are providing is greater than the price we are charging you. Is that acceptable?

This establishes the right tone near the beginning of the conversation that yours is a firm obsessed with value, along with the willingness to demonstrate the economic impact that your products and/or services can have for the customer—how it will improve the customer’s life or business. It also subtly suggests that you will not enter into relationships that do not add value for both parties—the exact tone you want to set, as both sides to a transaction must profit if it is to be sustainable.

Questions You Should Ask the Customer

If all patients were the same, medicine would be a science, not an art.

––Sir William Osler, one of the fathers of modern medicine

Something similar to Osler’s statement can be said of questioning—it is an art and skill, not a science. Each customer is unique, and so must be your approach to questions. Just as with naïve listening, one should not be afraid to take the Lt. Columbo approach and ask simple questions. As English mathematician and philosopher Alfred North Whitehead wrote, “The ‘silly question’ is the first intimation of some totally new development.”

Peter Drucker also taught an effective approach to assignments: approach the problem with your ignorance:

I never ask these questions or approach these assignments based on my knowledge and experience in these industries. It is exactly the opposite. I do not use my knowledge and experience at all. I bring my ignorance to the situation. Ignorance is the most important component for helping others to solve any problem in any industry.

There are questions you should ask every customer to assist you in determining just where on the value curve your customer is located. The more information you seek from customers, the better equipped you will be to assess their price sensitivity. Always ask open-ended questions to engage the customer in discussing goals, aspirations, fears, desires, and dreams of the future. This has a tremendous psychological impact, because most people’s favorite topic is themselves. Start with the following questions:

  • What do you expect from us?
  • What is your business model? How do you make profit?
  • What are your company’s critical success factors and Key Predictive Indicators (KPIs)
  • How will the services we provide add value to your customers?
  • Which of our company’s offerings is of the highest value to you?
  • Who is the next best alternative (competitor) to our company?
  • What characteristics do they have we do not, and vice versa.
  • What is your current pain?
  • How do you see us helping you address these challenges and opportunities?
  • What growth plans do you have?
  • If price were not an issue, what role would you want us to play in your business?
  • Do you expect capital needs? New financing?
  • Do you anticipate any mergers, purchases, divestitures, recapitalizations, or reorganizations in the near future?
  • We know you are investing in Total Quality Service, as are we. What are the service standards you would like for us to provide you?
  • How important is our service guarantee to you?
  • Why are you changing suppliers? What did you not like about your former supplier that you do not want us to repeat?*
  • How did you enjoy working with your former supplier?**
  • Do you envision any other changes in your needs?
  • If we were to attend certain of your internal management meetings as observers, would you be comfortable with that?
  • How do you suggest we best learn about your business so we can be more proactive in helping you maximize your business success?
  • May our associates tour your facilities?
  • What trade journals do you read? What seminars and trade shows do you regularly attend? Would it be possible for us to attend these with you?
  • What will the success of this engagement look like?
  • What is your budget for this type of service?

*Do not denigrate the predecessor supplier. First, this insults the customer and reminds the customer of a poor decision. Second, it diminishes respect and confidence in the industry as a whole.

**Even though the customer is changing suppliers, almost certainly the customer liked some characteristics of the predecessor. Find out what these were and exceed them.

Believing Your Worth

There is great nobility in getting paid what you are worth. Nothing is more satisfying than customers who believe—and act on the premise—that they get what they pay for. The best way to achieve this is to have a value conversation.

Book and Resources

Episode #29 - First-ever Free-Rider Friday - January 2015

Welcome to “Free-Rider Friday.” Most of our shows are “topic” driven, where we dive deep into one subject. Free-Rider Fridays are designed to be “event” driven—whatever issues are in the news that we (or you) find worthy of commentary. In economics, free riding means reaping the benefits from the actions of others and consequently refusing to bear the full costs of those actions. This means Ed and Ron will free ride off of the news, and each other, with no advanced knowledge of the events either will bring up.

If you’d like to call-in during the live show, the listener line is: 866-472-5790. You can also participate on Twitter at #asktsoe.

Tip of the Day: Names

First, we’d like to thank Ron’s dad, Sam Baker, for the suggestion that we look at race horse names for ideas to name this show. It’s a great resource if you’re trying to name a product, service and so on.

Ed’s Item

Ed has been on a Mac for over three years, abandoning the Windows platform in December of 2011, but he admitted that Microsoft’s new Outlook program for Mac and iPhone is pretty dang good. "Apple should do hardware and operating systems, Microsoft should do application software. “He likes it, hey Mikey.”

Ron’s Item

On our September 5th, 2014 Show: Corporate Social Responsibility: Progress or PR? One of the issues we discussed was the Bill and Melinda Gates foundation.

In the October 11, 2014 issue of The Economist the article “A New Challenge” assessed the performance of the Gates foundation last ten years.

It’s “14 grand challenges” from vaccines to incapacitate disease-transmitting insect populations, were bold ideas—allocated $200 Million—and perhaps bordering on the “naïve,” a word used more than once in a speech by Mr. Gates.

This collaborates Milton Friedman’s point about entities not having specific knowledge on how to solve problem, despite the best of intentions, and it’s why we believe CSR is more PR than real progress.

Even Bono gets that capitalism is the only real antidote to poverty.

Ed’s Item

The TV show Shark Tank had an entrepreneur who invented the tree teepee. This is a great example of why Ed believes that entrepreneurs continue the work of creation.

Dawn: Listener Question

We had our first live caller, Dawn from Austin, TX. She asked what economic effect the innovations such as Uber, CarsToGo, and other transportation services will have on the economy.

She also commented that her favorite guest so far was Dr. Jules Goddard.

Ron cited an article that discusses this very issue, from January 3rd, 2015 The Economist, “There’s an app for that.” It points out that some 53 million Americans now work in the “On-demand economy.”

Ron’s Item

On our September 19, 2014 Show, we dealt with The Seven Moral Hazards of Measurements.

In the November 8, 2014 issue of The Economist, “Ranking the Rankings,” it pointed out that international comparisons are dodgy, including rankings of freedom, economic freedom, etc.

Andrew Forest, one of Australia’s richest men, decided to take on modern-day slavery, Bill Gates gave him this advice:

Find a way to quantify it, because if you can’t measure it, it doesn’t exist.

Of course, Dark Matter can’t be measured, but physicists know it’s there.

Result: Global Slavery Index, ranks 160 countries, 30 million slaves? It’s probably overstated to hype the cause, raise money, etc.

Ed’s Item

Uber is not a car service, it’s a software company. Also discussed was Uber’s surge pricing policy, which causes a backlash against the company.

Get over it, folks. You don’t have to pay the “surge prices.” Walk.

Read Russ Robert’s book, The Price of Everything, for an explanation of why price signals are so important for allocating resources to their highest use.

Ron’s Item

On our January 16th, 2015 show we interviewed Dr. Jules Goddard, he made a comment that the “jury was still out on long-term vs. short-term outlook of companies.”

In the November 22, 2014 issue of The Economist, Schumpeter, “The tyranny of the long term,” was the Schumpeter column.

The debate between long-term vs. short-term is not easily settled. A long-term outlook is no guarantee of success: Look at Japan. They were held up for looking out 50-100 years, yet they’ve been in the economic doldrums for decades.

Built to Last authors Jim Collins and Jerry Porras, profiled 18 companies, yet a follow-up study 5 years later only 8 that had out-performed market

Long-term and short-term views are both a virtue and vice, it depends on context: stable, mature industries are wise to take the long-term, but hi-tech and social media companies have to much shorter time horizons.

Amazon, Facebook, Twitter, among others, all have paltry profit performance, but investors appear to be committed for the long run.

The Google founders issued a letter with its Initial Public Offering that is worth reading on this very issue. Google is in it for the long run, and they suggest you don’t buy their stock if you disagree.

Ed’s Item

What if businesses were allowed at their discretion to expense all items that by law now they must capitalize. Well according to a Mercatus Center study full expensing might increase GDP 5 percent or more, and raise wages by 4 percent or more. Oh by the way it would likely create 885,000 jobs.

Ron’s Item

The 55% plunge in the price of oil is an unambiguous economic positive. The USA is now producing some 9 million barrels per day, approximately 1 million less than Saudi Arabia.

The losers: Russia, Nigeria, Venezuela, Iran, and OPEC.

The lost point in the media: This is a technological revolution, not an energy discovery (we’ve known of some of these shale basins for decades).

Historically, when price dropped, exploration actually decreased.

Today, however, when price drops, exploration actually increases, just like Moore’s Law (the number of transistors in a dense integrated circuit doubles approximately every two years).

The Economist has a great article on this from its December 6, 2014 issue, “Sheikhs vs shale.” (Please note articles from The Economist are sometime behind a pay wall.)

OPEC has also been rendered feckless since the USA’s energy revolution. For a cartel to be effective cartel, it needs three things: discipline, dominant market position, and barriers to entry. OPEC lacks all three. It now supplies only 30% of the world’s oil.

This also destroys the whole notion of “Peak Oil,” as energy is now in abundance given our technological sophistication and reduced cost of finding it, and extracting it.

Net Neutrality?

How different from air mail, 1st class and 3rd class mail, or coach, bus class, first class?

Won’t one-size fits all regulation stifle innovation?

We’ll return to this issue in another show.

Episode #28 - There's no such thing as a commodity

There is no such thing as a commodity. All goods and services are differentiable.

—Theodore Levitt, Harvard Business Review

G.K. Chesterton once wrote, “Competition is a furious plagiarism.” Yet the fact of the matter is there is no such thing as a commodity. Anything can be differentiated, which is precisely the marketer’s job.

Believing that your company—and the products and services it offers—is a commodity is a self-fulfilling prophecy. If you think you are a commodity, so will your customers. How could they believe otherwise?

This notion of selling a commodity is one of the most pernicious beliefs, which leads to price wars, incessant copying of competitor’s offerings, and lack of innovation, creativity, and dynamism. Consider this story from The Tom Peters Seminar:

Transformation. Breaking the mold. Anything—ANYTHING—can be made special. Author Harvey Mackay tells about a cab ride from Manhattan out to La Guardia Airport: First, this driver gave me a paper that said, "Hi, my name is Walter. I'm your driver. I'm going to get you there safely, on time, in a courteous fashion." A mission statement from a cab driver! Then he holds up a New York Times and a USA Today and asks would I like them? So I took them. We haven't even moved yet. He then offers a nice little fruit basket with snack foods. Next he asks, "Would you prefer hard rock or classical music?" He has four channels. [This cab driver makes an above-average amount per year in tips.]

If a taxi cab driver can establish a rapport with a complete stranger in a 15-minute ride to the airport, what is possible with a customer relationship over the course of a lifetime?

The potential for competitive differentiation is only limited by your company’s imagination. Many leaders lament that since their industries are mature, commoditization is inevitable, despite all the empirical evidence surrounding them that this is simply not so.

Commodity + Creativity = Differentiation

Consider candles, an industry literally in decline for the past 300 years. Yet Blyth Industries custom tailors its candles for the specific location, companion, and occasion, growing from $3 million in sales in 1982 to nearly $1 billion in 2010.

Even the declining lettuce business has been differentiated by prewashing it, cutting it up and packaging it—along with some salad dressing on the side—for the customer in order to save time. As a result, from the late 1980s a billion dollar industry was created.

Imagine investing $1 million of your own money into a start-up company selling dolls to girls. Most people would be deterred from facing Mattel and its flagship Barbie doll, but not former elementary school teacher Pleasant T. Rowland, creator in 1985 of The American Girls Collection.

Inspired by a trip to Colonial Williamsburg, she reflected on what a poor job schools do of teaching history, and how sad it was that more kids could not visit this fabulous classroom of living history. In 1998 Rowland sold the company to Mattel for $700 million.

Would you ever pay more for a share of stock—whose price is publicly listed and traded on the New York Stock Exchange—to one broker over another? After all, how can a share of stock be differentiated?

Before you answer, visit www.oneshare.com, where you can only purchase one share of stock at a time, valued primarily as gifts for babies and teenagers. Included in the ten best-selling shares, which you can have framed for an additional price, are Disney, Harley Davidson, Coca-Cola, and Facebook.

Starbucks. If coffee beans and water can be differentiated—not to mention command a premium price—what is the excuse from your marketing department?

Basic economics teaches that it is very difficult to sell something someone else is giving away for free. Yet notice bottled water. Water covers nearly three-fourths of the earth’s surface. Could there be a larger commodity than water? Perhaps this is why Evian is “naïve” spelled backwards?

Charles Revson, founder of Revlon and a man who understood exactly what his customers were buying, illustrated in his famous saying, “When it leaves the factory, it’s lipstick. But when it crosses the counter in the department store, it’s hope.”

Revson refused to believe that what he sold—a relatively straightforward concoction of chemicals—was a commodity, and reportedly spent 45 minutes in front of a seminar of his international marketing executives having a dialogue with a glass of water, attempting to illustrate the meaning of product differentiation. As explained by his unauthorized biographer Andrew Tobias in Fire and Ice:

. . . [T]he water glass caught his eye. He picked it up, held it out in front of him, and said, in his friendliest way, “Hello, glass. What makes you different? You’re not crystal. You’re a plain glass. You’re not empty, you’re not full . . .” and then he began telling the glass how it could be made special . . . by changing the design, changing the color of the water, giving it a stem, and so on.

Avoiding the Commodity Tax

So many companies are prisoners of their past, assuming that the way they have always done it is the only way. Yet it takes creativity and innovation to separate yourself from the competition. Offering only a cheap price is the last refuge of a marketing department out of ideas for creating value for customers.

There is absolutely no excuse—none—for businesses to think of themselves as commodities. Any company can compete on price; it is truly a fool’s game. The commodity trap is a self-fulfilling prophecy, breeding cynicism and stifling creativity, dynamism, and innovation.

Robert Stephens, founder of Geek Squad, said, “Advertising is a tax for having an unremarkable product.” Commodity thinking is the same type of tax.

Do not let your company acquire a core competency in cutting prices by falling into the commodity trap.

Episode #27 - Interview with Dr. Jules Goddard

Jules Goddard
Jules Goddard

Ed and I were honored to interview Dr. Jules Goddard, author of Uncommon Sense, Common Nonsense: Why some organisations consistently outperform others (co-authored with Tony Eccles).

Biography

Dr. Goddard earned his MA at Oxford, an MBA from Wharton, and his PhD from London Business School. He's a Guest Lecturer at INSEA and formerly Gresham Professor of Commerce and Mercers School Memorial Professor at The City University. He is currently Research Associate of the Management Lab (MLab) at London Business School. He's a teacher, writer and consultant in the areas of business creativity, strategic thinking, leadership and corporate transformation. Lead designer and director of senior-level, high-profile development programmes for many companies, including BP, ICL-Fujitsu, Rolls-Royce, Orange, Prudential, Ericsson, BG Group, Rio Tinto, Mars, Smith and Nephew, SCA, Danone, and Volvo. Over the last 10 years, he has worked with a third of the FTSE 100 companies.

Specialist advisor on strategic issues facing professional services firms, including Freshfields Bruckhaus Deringer, Smith System Engineering, Conran Design Group, Braxton, Banque Paribas, Lazard Brothers, PricewaterhouseCoopers, J Walter Thompson, Benfield, Deloittes, SHL, and Credit Suisse.

Recent publications include articles on futuristic models of management (Sloan Management Review), the economic crisis (Business Strategy Review), cost strategy (Business Strategy Review), a new definition of accountability (Interconnections), as well as a monograph on employee engagement, social media and management innovation (CSC Leading Edge).

My book on organisational strategy, co-authored with Tony Eccles and entitled Uncommon Sense and Common Nonsense, was published by Profile in 2012. He is married, with 4 children, lives in London and Provence.

The Best Business Book Ron Read in 2014 (and Ed's read in 2015)

Uncommon Sense Book
Uncommon Sense Book

His book is the best business book I read in 2014, and Ed says the same so far in 2015! There are so many quotable and profound insights in this work it’s hard to do it justice in a short review.

We highly recommend you read this work, especially if you’ve enjoyed some of the topics we’ve discussed on The Soul of Enterprise. Our thinking seems to be very much aligned with Dr. Goddard’s views on business.

He’s working on a new book on behavioral economics and we will definitely have Dr. Goddard back on the show!

Here are some of our favorite points from the book, sorted by topic.

Purpose of book?

We believe that most enterprises today are insufficiently entrepreneurial.

The great virtues of markets is that they disproportionately reward firms that have the creativity to see the world differently from their rivals.

The book’s thesis is that: market-based competition is a discovery process; that asymmetric knowledge is the object of the search; the business strategist is the intrepid explorer; the effective organisation spurs such exploration.

THE PRINCIPAL ARGUMENT of this book is that profit is a return on knowledge and that therefore decision-making in business should be modelled on problem-solving in science, which is the most reliable and productive form of knowledge acquisition so far invented.

In place of dogmatism, science injects a healthy dose of critical inquiry.

Scientists do not argue from facts to theories, except by showing that some of these facts falsify or refute some of these theories. Facts are used by scientists not as the source for their ideas but as the test of their ideas.

Uncommon Sense, Common Nonsense Defined

The basic law of wealth creation: principle of asymmetric knowledge – that is, any situation when somebody in a market knows something that nobody else in the market knows, and then has the courage to act on that knowledge.

We call this type of knowledge “uncommon sense.

When the same sources of error unite all the competitors in a given space, they become what we call “common nonsense.” Most management theories are little more than sophistry or folk wisdom.

Austrian Economics Influence?

The Austrian rather than the neoclassical tradition of microeconomic theory competition is modeled as a discovery process where the rewards flow to entrepreneurs possessing valuable new insights or unique data rather than as a state of equilibrium.

Strategy

Strategy is less about the application of theory than the activity of theorising.

Chess masters do not achieve their mastery through the application of “best practice.” They are their own masters.

Scientific discovery or a work of art, it is a unique, non-repeatable event. It resists generalisation or theoretical explanation.

Strategic solutions do not generalise. They are built on insights, not rules or principles.

Businesses decline as the production of new insights dries up. A theory of business therefore cannot be a substitute for insight.

Any theory that puts forward a winning recipe for commercial success is a fraud. There cannot be an algorithm for making scientific discoveries or creating artistic masterpieces.

Firms outperform their competitors by aiming to be different, not better

“Strategy is about setting yourself apart from the competition. It’s not a matter of being better at what you do – it’s a matter of being different at what you do.” ––Michael Porter

“You don’t want to be the best of the best. You want to be the only one who does what you do.” ––Jerry Garcia

Budgeting – the undisputed champion of managerial nonsense. Balanced scorecards—the bureaucrat’s revenge.

Markets are battles between belief systems.

Ideas vs. Execution?

Aiming to be “better at implementation” is no more a recipe for success than aiming to be better generally.

Efficiency vs. Effectiveness? The Effing Debate

Russell Ackoff, “The righter we do the wrong thing, the wronger we become. Therefore, when we correct a mistake doing the wrong thing we become wronger. It is better to do the right thing wrong than the wrong thing right.”

Our favorite insight in the book!

Strategy is the rare and precious skill of staying one step ahead of the need to be efficient.

The true test of the innovative capability of a firm is that it never needs to worry about, let alone wrestle with, the cost competitiveness of its business model. An example is Apple. Immunised it against ever having to resort to such mundane and demoralising activities as operational excellence or change management.

Over the life cycle of a business, efficiency is usually exchanged for effectiveness, as focus is sacrificed for scale.

The pharmaceutical industry, more than any other industry, perhaps, understands the importance of “inefficiency” to innovation.

Best Practices/Benchmarking

Losers look to competitive benchmarks rather than to their own imagination for their model of success

The concept of best practice is perhaps the single most value-destructive idea to have come out of business schools and management consultancies over the past 20 years. All they have achieved is to urge the laggards to catch up with the herd.

The lead indicators of strategic failure are typically three: the firm benchmarks its costs against competitors; managers are set targets to close the gap on the most efficient competitor; managers seek solutions among the latest management fashions, with the result that the half-life of each new panacea gets shorter and shorter. Toyota did not get to outperform General Motors by emulating GM practices.

Business is not about best practice. It is about unique practices.

The day that Google starts to take an interest in competency profiling or balanced scorecards or corporate social responsibility or some other form of management sophistry is the day to sell Google stock.

Accounting Profession

I argue that the accounting profession is suffering from what philosophers call a “Deteriorating paradigm”—that is, as accounting gets more complex as it explains less and less.

It seems Dr. Goddard agrees, quoting James Noble of the FCA:

“Over the past decade the [accounting] profession has completely lost any sense of what accounts are for. …Accounts do not reflect reality. They reflect an extremely complex set of standards comprehensible to a tiny minority of professionals, if that. They are full of weird conventions such as goodwill write-offs, share options accounting and revenue recognition that I defy anyone to call reality…If accounts reflect reality and accounting standards are just fine, how is it that every bank in the UK has in effect become bankrupt when every single one received a clean audit opinion, including a going concern test [within a year of going broke]?” James Noble FCA

Small Visions

ASK CEOS TO NOMINATE the business leaders they have most admired, Richard Branson, Warren Buffett, Bill Gates, Steve Jobs and Alan Lafley. They’ll point to their bravery, decisiveness, boldness of their vision, contrarian beliefs, the originality of their strategies, the courage of their convictions, their self-confidence and willpower.

Now inquire into what strategies and policies they themselves are advocating in their own businesses, the answers that you get are depressingly familiar: cost reduction, 360-degree feedback, outsourcing, downsizing, margin improvement, shared services, process re-engineering and change programmes. Actions of most executives fall far short of their aspirations and ideals.

Simplicity is always the result of design

“There seem to be many people making things more complex but very few people trying to make them simpler.” Edward de Bono

Perhaps we should be as worried by complexity as we are about cost. TSM (total simplicity management).

“Black Belts” in simplification.

Many people in an organisation have a vested interest in making things complicated and keeping them that way. No one cuts costs by eliminating their own job.