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

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

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.

Episode #26 - Interview with Adam Davidson

On Friday, January 9, 2015, Ron and Ed interviewed Adam Davidson, a journalist focusing on business and economics issues for National Public Radio. He is currently one of the co-hosts of the Planet Money podcast. Previously he has covered globalization issues, the Asian tsunami, and the war in Iraq, for which he won the Daniel Schorr Journalism Prize. His work has won several major awards including the Peabody, DuPont-Columbia, and the George Polk Award. Adam came to our direct attention when he mentioned the VeraSage Institute in his New York Times Magazine article, Welcome to the Failure Age!We discussed that article along with another one he wrote for The Atlantic, Making It in America, which profiles Standard Motor Products.

He did an interview with economist Russ Roberts on this article as well.

Learn more about Adam at his Wikipedia page.

We had an interesting discussion on innovation, manufacturing jobs, the history of accounting, failure, business models, creative destruction, and the Stan Shih Smile Curve.

smile-curve

Adam also discussed a book he's working on, and hopefully he'll return when it's published.

Thank you, Adam, for a fascinating discussion!

Here is Adam's TEDtalk on What we learned from teetering on the fiscal cliff.