Episode #63 - Entrepreneur Heaven - October 2015

On this show, Ed and I profiled four entrepreneurs:

1. George Eastman        

2. James Cash Penney

3. The Wright Brothers

4. Anita Roddick

George Eastman

Eastman (July 12, 1854 – March 14, 1932) was an American innovator and entrepreneur who founded the Eastman Kodak Company and popularized the use of roll film, helping to bring photography to the mainstream.

He was a major philanthropist, establishing the Eastman School of Music, and schools of dentistry and medicine at the University of Rochester and in London.  

1976 Kodak = 90% of all film sold in USA, 85% of all cameras. The irony is Kodak invented digital camera!

January 2012 Kodak filed bankruptcy.

Make the Camera as Convenient as the Pencil, 1920 Essay

“You press the button and we do the rest.”

“What we have made an advertised and sold has always been the embodiment of an idea rather than a piece of photographic apparatus.”

He was a pessimist at heart: “Tell me the worst you know,” his approach to getting at problems.

He liked the letter K, strong, incisive. Start and end with K: Kodak.

First Kodak on market July, 1888—10 years after start of business.

100 Exposures, 2.5” picture diameter, $25 = $700 today. New roll = $10, but you had to develop pictures with Kodak.

Eastman Kodak lost major antitrust suit: “he did not understand the antitrust laws and did not know anyone who did.”

He did believe business was war, but no trace of cruelty (unlike Charles Revson).

1925, final year of active engagement, told employees:

“What we do in our working hours determines what we have in the world. What we do in our play hours determines what we are.

In his final two years, Eastman was in intense pain caused by a disorder affecting his spine.

On March 14, 1932, Eastman shot himself in the heart, leaving a note which read, "To my friends: my work is done. Why wait?"

James Cash Penney

James Cash "J.C." Penney, Jr. (September 16, 1875 – February 12, 1971) 1902, founded the J. C. Penney stores.

First venture: butcher shop failed.

He refused to supply meat to hotels that sold liquor.

Penney’s father was a Primitive Baptist preacher, Missouri farmer with 12 children.

Insisted his employees never touch tobacco/alcohol.

Why a Buyer’s Market Hasn’t Changed Our Plans, 1921 essay

Store managers had to own 1/3 of the store.

In 1918, he personally interviewed 5,000, hired 100

Centralized bookkeeping, cash receipts @ Mother Store. Easier to teach a man merchandising than finance

After the 1929 stock crash, Penney lost virtually all his personal wealth, and borrowed against his life insurance policies to help the company meet its payroll.

The financial setbacks took a toll on his health. Penney checked himself into the Battle Creek Sanitarium, where he was treated.

In 1940, during a visit to a store in Des Moines, Iowa, he trained a young Sam Walton on how to wrap packages with a minimal amount of paper and ribbon.

He remained as chairman of the board until 1946, and after that as honorary chairman until his death in 1971.

The Wright Brothers

Born:

• Orville: August 19, 1871, Dayton, Ohio

• Wilbur: April 16, 1867, Millville, Indiana

Died:

• Orville: January 30, 1948 (aged 76), Dayton

• Wilbur: May 30, 1912 (aged 45), Dayton

Education: Orville 3 years high school; Wilbur 4 years

The Wright Brothers, David McCullough. This is a fantastic, short volume on their lives, extremely well-written.

Fascination started with toy helicopter brought home by father, Bishop Milton Wright.

Orville was more cheerful, optimistic, mechanical ingenuity.

Lifelong bachelors, Republicans. Two older brothers married, had families.

Spring 1893 opened Wright Cycle Exchange, earned $2-3K/year ($55K today).

Answer to inquiry from Wilbur to US Weather Bureau in Washington, DC, about prevailing winds around country: Outer banks of North Carolina, Kitty Hawk, 700 miles from Dayton.

December 17, 1903: flipped a coin to see who’d fly. Wilbur won. Four flights that day.

May 1912 Wilbur typhoid fever, died May 30 at 45.

Orville flew 1910 at 80MPH, had to give up flying in 1918.

July 20, 1969, Neil Armstrong carried small swatch of the muslin from a wing of the 1903 Flyer.

“The best dividends on the labor invested have invariably come from seeking more knowledge rather than more power.”

Anita Roddick

23 October 1942 – 10 September 2007

Founder of The Body Shop, a cosmetics company producing and retailing natural beauty products that shaped ethical consumerism.

Ron read Body and Soul, 1991, on Paul Dunn’s recommendation.

The company was one of the first to prohibit the use of ingredients tested on animals and one of the first to promote fair trade with third world countries.

In 2003, Queen Elizabeth II appointed Roddick a Dame Commander of the Order of the British Empire.

In 2004, Roddick was diagnosed with liver cirrhosis due to long-standing hepatitis C.

By 2004, the Body Shop had 1980 stores, serving over 77 million customers throughout the world. It was voted the second most trusted brand in the United Kingdom, and 28th top brand in the world.

On 17 March 2006, L'Oréal purchased Body Shop for £652 million. This caused controversy, because L'Oréal is involved in animal testing.

Four-Letter Words! (essay), 1998

Love, give, care, feel, hope, fair, soul, and true all found in my work (my all-time favorite word).

We can bring our heart to work.

For me, the workplace is an incubator for the human spirit.

Enthusiasm cannot be managed; it cannot be taught.

Sign above her office door: “Department of the Future”

Allowed ½ day per month for community service.

Merged politics and business—activism must be incorporated.

Quotes:

If you think you're too small to have an impact, try going to bed with a mosquito.

If you do things well, do them better. Be daring, be first, be different, be just.

I want to work for a company that contributes to and is part of the community. I want something not just to invest in. I want something to believe in.

Episode #62 - Free-Rider Friday - Septemeber 2015

Ed's Topics

The song "Happy Birthday" is now in the public domain, and you get to hear Ed sing happy birthday to Ron royalty free!

Price Gouging for Drugs

Turing Pharmaceuticals and its CEO Martin Shkreli clearly made a serious mistake in pricing, but chalking it up to gouging and greed missed a large part of the story. 

The Freedom Report, Fraser Institute

The index published in Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, free- dom to enter markets and compete, and security of the person and privately owned proper

Ron's Topics

Airplane Space is a Human Right?

The Washington Post, September 17, 2015: "Airplanes' space wars are shifting to the human rights front, by Christopher Elliott.

KPMG Australia: Disruptive Innovation?

Hat tip to our good friend Brent Uken at EY for passing this along.

"KPMG Australia disrupts itself with online marketplace for idle staff hours KPMG has launched a new online marketplace to offer the down-time of staff to clients for short term jobs at a discount. Like Airtasker.com or Freelancer.com – but for KPMG clients and staff only. 

Martin Sheppard, KPMG Australia's lead brand and innovation partner, likens KPMG Marketplace to an airline maximising "yield" by selling last-minute seats cheap. The idea grew from a response to an in-house ideas competition. "Relationship partners" don't get to sign off on KPMG Marketplace assignments bought by "their" clients. A start-up built the platform, not a big IT house. 

Some partners bristled at the idea of discounting charge-out rates. But the marketplace meets more business needs than optimising revenue from highly paid workers. Traditional professional services firms like KPMG don't turn a dollar of revenue online. That leaves them ill-equipped to exploit the boom in use of contingent labour by pared-to-the-bone clients struggling with peak workloads. 

KPMG Marketplace can also be used to sell other services. KPMG generated ideas from its staff via an internal competition, dubbed iTiger (i is for innovation). The idea that became KPMG Marketplace started as an idea for overworked KPMG staff to farm out batches of work internally. Others gave it a client focus, and KPMG Marketplace was born. Gestation was 18 months from "lightbulb moment" to launch. 

KPMG Marketplace works like this: Clients struggling with short-term peak seasons or workloads submit assignments online – for example, in foreign exchange reconciliation, financial modelling, data or business process analysis or project administration. They might get three CVs back – and choose one, who comes to work for them for up to 10 days. Longer secondments – say for a stand-in chief financial officer – will continue to be dealt with by the traditional process of speaking with a partner and signing an engagement letter setting out terms and conditions. Engagement online via KPMG Marketplace is more efficient, which explains part of the discount."

We discuss why we believe this is a flawed strategy for a so-called professional knowledge firm (and my Alma Mater).

Question & Shout Outs

Tim Rodman (@TimRodman) asks: If using timesheets means you are "a practicing Marxist", how bad would a Bernie Sanders win be for the @VeraSage mission?

To BJ Lee (@bj_lee_), a vocal coach, who asked us about pricing. We suggested he offer options, which he did, and the customer selected the highest priced option. Congratulations, BJ!

Thanks for Justin Royer (@justin_royer) for letting Ron know he will have to get his check book out to purchase the Apple car, scheduled to be released in 2019. Read about it here.

Episode #61 - Pricing on Purpose: Price Sensitivity Factors

The following is excerpted from Chapter 14 of Ron’s book, Pricing on Purpose: Creating and Capturing Value.

Price Elasticity vs. Price Sensitivity

Certainly mathematics has its place in pricing, allowing us to test, predict, and determine elasticity. Yet, since pricing is an art more than a science, judgments are also vitally important and cannot be substituted with mathematical precision.

Even if a company possesses a precise elasticity calculation it knows is accurate, it would only be part of the puzzle of pricing. Since elasticity normally lumps “consumers” together, it does not help us in segmenting customers into different value propositions, thereby offering individuals different bundles in order to maximize profit.

Ten Factors of Price Sensitivity

In order to assist those who are in charge of Pricing On Purpose in ascertaining and judging price sensitivity, the following ten factors should be examined to see which apply to your particular customer circumstances.

Thomas Nagle identifies ten factors affecting price sensitivity in his book, The Strategy and Tactics of Pricing.

1. Perceived Substitutes Effect

This effect states that buyers are more price sensitive the higher the product’s price relative to its perceived substitutes. New customers to a market may be unaware of substitutes, and thus pay higher prices than more experienced buyers. Restaurants in resort areas face less pressure to compete based on price (which locals may describe as “tourist traps”).

Branding can also overcome, to a certain extent, the substitute effect. Woolite, for example, has maintained a relatively expensive price because it positions itself as an alternative to dry cleaning, not a substitute to regular laundry detergent.

Customers have a reference price when there are many substitutes, and as long as the offering is within that range—sometimes referred to as a zone of indifference—it will be considered acceptable, the point being your marketing can influence which products customers will compare yours with, possibly pushing up the price they are willing to pay.

2. Unique Value Effect

Buyers are less price sensitive the more they value the unique attributes of the offering from competing products. This is precisely why marketers expend so much energy and creativity trying to differentiate their offering from that of their competitors.

Heinz ketchup, for example, developed a secret formula for making its product thicker and was able to increase its market share from 27 to 48 percent while maintaining a 15 percent wholesale price premium.

Auction houses rely on the unique value effect in order to command the prices they do among their bidders. Rare artifacts from the John F. Kennedy estate are known as “positional” or “expressive” goods, since the people who purchase them are trying to position themselves in society, or express who or what they are (art collectors, for example).

3. Switching Cost Effect

Buyers will be less price sensitive the higher the costs (monetary and nonmonetary) of switching vendors. Airlines that have a fleet of Boeing airplanes may be reluctant to switch to Airbus because of the enormous investment they have in their pilots, flight crews, parts inventory, and the mechanics of operating a certain plane.

Many people are unwilling to give up certain software products due to the learning and familiarity they have with their existing product. Personal relationships are most susceptible to this type of perceived cost, due to the emotional investment the customer has made in the relationship. Childcare providers, doctors, lawyers, veterinarians, and accountants all can benefit from this effect.

4. Difficult Comparison Effect

Customers are less price sensitive with a known or reputable supplier when they have difficulty in comparing alternatives. People eat at McDonald’s, continue to use AT&T, lodge at Marriott and shop at JC Penny because they are familiar with these offerings and perceive them to be less risky than unknown alternatives.

Stockbrokers price based on different criteria (shares of stock traded, or value of shares traded), making it difficult for the customer to compare one with the other. Cellular phone companies employ this strategy by offering different features among their myriad calling plans, making it very difficult to compare one company’s offering to another.

5. Price Quality Effect

Buyers are less sensitive to a product’s price to the extent a higher price signals better quality. These products can include image products, exclusive products, and products without any other cues as to their relative quality.

It is said that only 15% of Rolls Royce customers ask about price before purchasing. These types of prestige products are an important form of marketing. Witness designer clothing and accessories, along with American Express’ Gold, Platinum, and Black credit cards, which command enormous premiums over alternative cards.

Many customers still have a common visceral reaction that high price equates to high value (and quality). Marketers have discovered that utilizing a high price for new products is quite effective for signaling quality to the marketplace. Other marketing research has shown that while discounting familiar brands can increase sales, the same strategy for unknown brands can actually reduce sales.

6. Expenditure Effect

Buyers are more price sensitive when the expenditure is larger, either in dollar terms or as a percentage of household income. A one-office accounting firm may not pay much attention to the price of paper clips, but an international firm that buys in large quantities will.

Business purchasers look at the total amount of the purchase, while households will compare the expenditure to total income. Many people will not expend much energy shopping for the lowest price of soft drinks, but they will put more effort into searching for an automobile or a home. Higher-income customers often will pay higher prices because they do not have the time to shop as thoroughly as low-income individuals.

7. End-benefit Effect

This effect is especially important when selling to other businesses. What is the end-benefit they are seeking? Is it cost minimization, maximum output, quality improvement? The fulfillment of the end-benefit is often gauged by its share of the total cost.

For instance, steel suppliers selling to auto manufacturers know that the price of the steel comprises a large component of the cost of the car; on the other hand, when steel is sold to a luggage manufacturer, the steel cost is relatively minimal compared to the other material used.

The end-benefit effect is also psychological. Think of going out for a romantic anniversary dinner and paying with a two-for-one coupon. Most people view price shopping as tacky when the purchase involves something emotional. Wedding florists, caterers, and bands certainly understand this principle.

The larger the end-benefit, the less price sensitive the buyer. Think of the Michelin tire ads showing a picture of a baby in diapers next to its radial tire proclaiming, “Michelin. Because so much is riding on your tires.”

8. Shared-cost Effect

When you spend someone else’s money on yourself, you are not prone to be price conscious. This is one reason airlines, hotels, and rental car companies can all price discriminate against business travelers, because most of them are not paying their own way.

This also explains some of the success of the frequent flyer and other reward programs. Many business travelers value these rewards and will not accept alternative offerings, especially since they are reimbursed anyway. Also, publications, educational seminars, and other business expenses are tax deductible, and this also reduces the buyer’s price sensitivity relating to various business expenses.

9. Fairness Effect

Notions of fairness can certainly affect customers, even when they are not economically (or mathematically) rational. If a gas station sells gas for $2.30 per gallon and gives a $0.10 discount if the buyer pays with cash, and another gas station offers the same gallon at $2.20 but charges a $0.10 surcharge if the customer pays with a credit card, which station will sell more gas to credit card users?

The economic cost is exactly the same, but most people will psychologically prefer to deal with the first station and not the second because there appears to be something inherently unfair about being assessed a surcharge.

10. Inventory Effect

The ability of buyers to carry an inventory also affects their price sensitivity. Amateur cooks with large pantries will stock up on a good deal, but a single person living in a small apartment will not. The perishability of the item in question is another factor to consider.

Centralized vs. Decentralized Pricing

We discussed the debate between having pricing centralized versus giving pricing authority to the field. We are advocates of a centralized pricing function, since someone needs to own this function, study it, and turn it into a core compentency.

See our show from February 13, 2015, Who’s In Charge of Value?, for our discussion of the role of the Chief Value Officer.

Episode #60 - Interview with George Gilder

Includes our conversation during commercial breaks which are not heard in the audio above.

From George Gilder's appearance on Uncommon Knowledge (click for interview)

George Gilder is the author of 18 books: Bitcoin & Gold: Information Theory of Money (forthcoming); Knowledge & Power: The Information Theory of Capitalism; Men & Marriage; Wealth & Poverty (new edition 2012); The Spirit of Enterprise; Life After Television, Microcosm, Telecosm, The Silicon Eye, and The Israel Test.

Microcosm and Telecosm both listed among the era's top 10 technology books by VentureBeat in 2012 and Microcosm ranked among the era's top two technology books by Wired. Knowledge & Power was libertarian "book of the year" at FreedomFest 2013. George is a contributor to Forbes, National Review, and the Wall Street Journal.

He is also a venture capitalist (angel) specializing in U.S. technology companies. He wrote and edited the Gilder Technology Report, is number 27 Management Guru in Clayton Christensen's Top 50, and is founder and fellow of the Discovery Institute, and was the most quoted living author by President Ronald Reagan.

His specialties: Long distance running, chiefly trail and hill races, and Nordic skiing.

Why Gilder is Ron’s Mentor

Ron’s Dad read the Playboy interview with George Gilder in August 1981, and insisted he read Wealth & Poverty.

The rest is history. You can read more about this here.

I wrote Mind Over Matter: Why Intellectual Capital is the Chief Source of Wealth, inspired by Gilder, which he included in the bibliography to The Israel Test, and quoted from it in Knowledge & Power (page 145).

We discussed with George some of his books, and his profound speech before the Vatican in 1997, The Soul of Silicon.

Below are some excerpts from these works, most of which were not covered on the show.

Ed and Ron recommend you read anything by Gilder.

Wealth & Poverty, 1981 [updated 2012]

This book grew out of Gilder’s Visible Man book, which was ahead of its time on welfare reform.

Gilder makes the moral case for capitalism, as well as supply-side economics. Ronald Reagan was so impressed with Wealth & Poverty, he gave a copy to each of his Cabinet members.

Gilder went on to become Reagan’s most quoted living author.

Joshua Gilder, George’s cousin, was the main speechwriter on Ronald Reagan’s Moscow State University speech, which we use a clip from to open The Soul of Enterprise show, and discussed in our book, The Soul of Enterprise: Dialogues on Business in the Knowledge Economy. 

One of the key insights in Wealth & Poverty: Greed leads, as by an invisible hand, to an ever-expanding welfare state.

Ayn Rand attacked Gilder, in her last speech in 1982, “The Age of Mediocrity.”

George’s response: “Her atheism blinded her to the spiritual dimensions of capitalism.” Indeed.

The Spirit of Enterprise, 1984 [updated 1992]

Entrepreneurs accelerate creative destruction. Economists measure the destruction and doubt the creativity.

“It is the spirit of enterprise—the mysterious workings of creativity and faith—that can surmount all the material scarcities of human life.”

“Entrepreneurship can no more be reduced to a model of money and markets than poetry can be explained by the rules of grammar and vocabulary.”

“Capitalism offers nothing but frustrations and rebuffs to those who wish—because of IQ, birth, credentials—to get without giving, to take without risking, to profit without sacrifice, to be exalted without humbling themselves to understand others and meet their needs.”

The Israel Test, 2009

The Israel test is a moral challenge, and can be summarized by a few questions:

1. What is your attitude toward people who excel you in the creation of wealth or in other accomplishment?

2. Do you aspire to their excellence, or do you seethe at it?

3. Do you admire and celebrate exceptional achievement, or do you impugn it and seek to tear it down?

Israel’s per-capita innovation dwarfs all nations, so much so that American technology could display the emblem: Israel Inside.

Golden Rule of Capitalism: That the good fortune of others is also one’s own. No one can be rich alone.

Envy of excellence leads to perdition, the love of it leads to the light.

What matters in human accomplishment not average performance, but exceptional performance. Charles Murray’s book, Human Accomplishment, documents extraordinary accomplishments have been made by 4,002 people from 800 B.C. to 1950.

The Jewish world population is approximately .3%, yet they comprise 25% of notable accomplishments. Inequality is the answer, not the problem.

Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing Our World, 2013 

The key issue in economics is not aligning incentives with some public good but aligning knowledge with power.

The key force of economic advance is the entrepreneur, who creates new goods, services, business plans and projects.

Proposition: Capitalism is not chiefly an incentive system but an information system.

It lacks a science of disorder and randomness. Until now.

Gilder uses Claude Shannon’s information theory to explain innovation and creativity. Essentially all information is surprise, according to Shannon.

Creativity always takes us by surprise, otherwise we wouldn’t need it, and socialism would work

This is a new way to think about human creativity, not simply invisible hands responding to incentives, but visible hands creating entire new markets.

Information wants a low-entropy carrier to provide demand and predictability for high-entropy signals of supply and surprise.

Gilder’s examples of Low-entropy carriers: rule law, maintenance of order, property rights, reliable regulation, light taxation, transparency, monetary stability, and family life.

Excessive Government regulation creates noise in the channel, distorting the signals of markets, inhibiting learning, growth, discovery, surprise, and thus wealth.

Expansion of wealth happens through learning and discovery through falsifiable experiments.

Knowledge is about the past, entrepreneurship is about the future.

One of the books key insights:

•          Wealth = Knowledge

•          Growth = Learning  

Capitalism is more about ideas than incentives. It’s a “noosphere” (mind-based system) and can revive as quickly as minds and policies can change.

Adam Smith was to assume that the entrepreneur was the tool of the market rather than its creator. This is the original sin of demand-side economics.

“The grander vision of economics fails because it subordinates a higher and more complex level of activity—the creation of value—to a lower level, its measurement and exchange.” 

The Soul of Silicon, May 1, 1997

We believe this is the most profound moral defense of capitalism ever written.

The 21st Century Case for Gold: A New Information Theory of Money, 2015

Click for access to the book

Economist Richard Thaler: “Why tie to gold? Why not 1982 Bordeaux?”

In this monograph, Gilder argues Milton Friedman was wrong on monetary policy. Floating currencies have been an utter. Failure.

Steve Forbes says that floating the currency is as senseless as floating the clock. A measuring stick cannot be part of what it measures, which is what makes time a perfect external measurement unit.

Gilder’s main argument is that while time is not money, money is time. The source of the value of money is time:

• As economy grows, only time remains scarce

• Money succeeds not because it measures value but because it obviates the need to perform impossible calculations Value > Price (consumer surplus)

• Money facilitates exchange, making it an information system

• Austrian subjective theory of value functions within objective time

• Money isn’t the content, it’s the carrier of transactions

Gilder replaces the quantitiy theory of money with an information theory of money.

The old monetary equation: Money supply x Velocity = GDP, always held Velocity constant (this made it a theory, otherwise it would be just an identity equation, like accounting).

But velocity is not a constant 1.7, as Friedman assumed—it has varied from 3.1 to 12. Gilder defines velocity as freedom.

He further argues that if Government guarantees investments, mortgages, banks and auto companies to big to fail, then no learning will take place and you’ll destroy wealth.

Bitcoin not a competitor to gold, but a gold inspired standard for the Internet

Outsider trading scandal—the government doesn’t want you to buy anything you know—buy the lottery where no one knows more than you!

When a company goes public, its information goes private:

• Berkshire/GE, private equity, and venture capitalists are all really inside traders

• Venture capitalists have the most valuable money—less than .2%, yet they have seeded companies that comprise some 21% of GDP, 65% of market          capitalization, and 17% of jobs created

Speaking of George Gilder, by Frank Gregorsky, 1988

This is an excellent compendium of Gilder’s thinking on a wide-range of topics. Well worth reading.

Thank you, George, for appearing on The Soul of Enterprise, it was an honor and privilege!

Episode #59 - Best Business Books

Ron's Books

The Future of Management, Gary Hamel (2007) 

Your company is being managed by a small coterie of long-departed theorists who invented the rules and conventions of ‘modern’ management back in the early days of the 20th century. Management is out of date. Like the combustion engine, it’s a technology that has largely stopped evolving, and that’s not good.

Your company has 21st-century, Internet-enabled business processes, mid-20th century management processes, all built atop 19th-century management principles.

Types of innovation:

• Management Innovation

• Strategic Innovation

• Product/Service Innovation

• Operational Innovation 

Management Ideas 1900—2000 (most born after Civil War!)

• Scientific management

• Cost accounting and variance analysis

• The commercial research laboratory

• ROI analysis and capital budgeting

• Brand management

• Large-scale project management

• Divisionalization

• Leadership development

• Industry consortia

• Radical decentralization (self-organization)

• Formalized strategic analysis

• Employee-driven problem solving

Made organizations more efficient, not more ethical

Our organizations are less human than the people in them—people are amazingly adaptable and creative, our organizations are not.

Put efficiency ahead of every goal, since most management was invented to solve the problem of inefficiency.

1917 Henri Fayol, early management theorist, described the work of management as, "Planning, organizing, commanding, coordinating, and controlling." Sounds familiar, no?

From Hamel again, “Today the most valuable human capabilities are precisely those that are the least manageable. While the tools of management can compel people to be obedient and diligent, they can’t make them creative and committed.”

Management Innovation is defined as anything that substantially alters the way in which the work of management is carried out, or significantly modifies organizational forms, and, by so doing, advances organizational goals.

Management Innovation yields a competitive advantage if:

1. Is a novel management principal, challenges long-standing orthodoxy

2. Is systemic, encompassing a range of processes and methods

3. Is part of an ongoing program of rapid-fire invention where progress compounds over time

Most managers find it easier to acknowledge the merits of a disruptive business model than to abandon the core tenets of their bedrock management beliefs. "What management practice or behavior does most to drive really great people out of our company? Or, which of our management practices does the most to destroy employee initiative?"

Examples of Management Innovations

• Results Only Work Environment

• Prediction markets

• Internet, all periphery and no center

• Knowledge Worker

• Strategic Pricing (C-Suite)

• Our Firm of the Future (not just a business model change!!) It’s an End, not just a means. It’s a Management Innovation as well:

  • Intellectual Capital leverage, not time leverage

  • Effectiveness over efficiency, efficaciousness

  • Value Pricing, not hourly billing

  • No timesheets

  • After Action Reviews

Positive deviants (management mutants), examples of companies that innovate management itself

• Toyota (USA automakers thought it was  their paternalistic culture; then Toyota opened plants in USA and got same results)

• Whole Foods

• GoreTex

• Google

• Semco

• Morningstar

• Linux

The real reason it takes a crisis to provoke big change:  too much authority has been vested in too few people.

A Class with Drucker: The Lost Lessons of the World’s Greatest Management Teacher, William A. Cohen, PhD, 2008

William Cohen was Drucker’s first Graduate PhD Student (1975-1979), Claremont Graduate University.

Drucker called himself a social ecologist in that he believed the human condition could be advanced by more effective management and more ethical leadership.

Some of Drucker’s Lessons

What everybody knows is frequently wrong. For example, the demise of Tylenol (Johnson & Johnson) was predicted, but failed to occur.

If you keep doing what worked in the past you’re going to fail. Organizations  should make revolutionary change itself, even though it means obsolescing products of its current and past success

GE’s Jack Welch, CEO 1981 $12B value. 25x that when he left

            Drucker’s two questions:

1.    If you weren’t already in the business, would you enter it today?

2.    What are you going to do about it?

Approach problems with your ignorance—not your experience.

Ignorance is the most important component for helping others to solve any problem in any industry.

Henry Kaiser’s Liberty Ships, built 1500 in 2/3 the time and ¼ cost! He knew nothing about ship building.

Develop expertise outside your field to be an effective manager.

Outstanding performance is inconsistent with fear of failure.

The objective of marketing is to make selling unnecessary. Selling and marketing are neither synonymous nor complementary. One could consider them adversarial in some cases. There is no doubt that if marketing were done perfectly, selling, in the actual sense of the word, would be unnecessary. Marketing is not a business function, like manufacturing, because it permeated every aspect of the business. 

You can’t predict the future, but you can create it.

A Model organization that Drucker Greatly admired. The Army trains and develops more leaders, with a lower casualty rate. George Patton: “A pint of sweat in training is worth a gallon of blood in combat." Training is Army’s most important investments, not an expense.

How to motivate the knowledge worker

• Theory X/Y not the answer

• There is a responsible manager in authority

• Workers are led, not managed

• Workplace is participatory, but not “free-wheeling”

• Workers are not motivated by money alone

• Each worker is motivated differently, according to the   individual and the situation

• Workers can leave = volunteers, treated with respect

• Volunteers don’t need contracts, they need covenants

Drucker’s principles of self-development

Not up to others after we leave home/school—up to ourselves!

• Reading

• Writing

• Listening

• Teaching

Ed’s Books

A Failure of Nerve, Edward H. Friedman

Ed opened by quoting from the Preface of Friedman's book, here is blog post about the quote. TCMOOTITATIWWWPWAUTC

In short, Friedman's belief is that leaders do not need to be empathetic, but self differentiated and compassionate. They need to be step down transformers who seek to lower the level of anxiety around them, by simply self regulating their own anxiety. 

As an example of this, Ed cited the work of Captain Chesley Sullenberger of the ill fated, but not deadly, Flight 1549. When asked by Katie Couric if as any point he prayed, he replied, “I would imagine somebody in back was taking care of that for me while I was flying the airplane.”

Friedman also points out that data in business is like alcohol or other additive drug. It can be used in moderation, but many leaders are ensnared in its addictive properties and become dependent on it.

Wealth and Poverty, George Gilder (1981 Edition)

In addition to changing the lives of both Ron and Ed, this book influenced Ronald Reagan to implement supply-side economics during his first administration. 

Ed made two basic points about the book. First, that Keynesians, according to Gilder, have "hopelessly and irrevocably" confused cause and effect. Their mantra on demand causing supply is akin to saying demand or need and it will be given unto you.

Second, supply side economics is not about "trickle down." This notion was used to spurn the ideas of the book by its opponents, but in truth, Gilder makes a completely different point. He is saying that in order to receive one must first give, create or give and it will be given unto you. 

In other words if you want a meal/car/house, you don't go about demanding a house, you first give, in most cases to your employer who in turn trades money for your talent. You then can use that money to buy a meal/car/house. 

Note: there has been an update to this book, in 2012, but Ed was discussing the 1981 edition.

Episode #58 - Free-Rider Friday - August 2015

Ed's Topics

More misunderstanding of price theory.

Another example of how the belief that price is exclusively a function of costs: Why Starbucks' Prices Went Up, as Coffee Beans Got Cheaper (New York Times).

Big Brother Boss

Also from the Times: Data crunching coming your way so your boss can manage your time. Great, sign my up for this... NOT!

Froggy Went A-Courtin' But Lady Frogs Chose Second-best Guy Instead (NPR)

Thanks for our listener Mike Natolli for sending the link to this one. The framing effect (or decoy effect, if you prefer) is part of the reptilian brain, not only in retiles, but in we humans as well. 

Apple working on a car.

Ron needs to start saving his money as he is on record as saying that if Apple made a car, he would buy it.

More abuse of intellectual property law.

LMFAO, The Band, Sends Cease And Desist Over LMFAO, The Beer

Ron's Topics

"What If Stalin Had Computers?" (New Republic, August 18, 2015). 

Postcapitalism: A Guide to Our Future, by Paul Mason.

Postcapitalism argues that we are on the brink of a change so big and so profound that this time capitalism itself, the immensely complex system within which entire societies function, will mutate into something wholly new.

At the heart of this change is information technology, a revolution that is driven by capitalism but, with its tendency to push the value of much of what we make toward zero, has the potential to destroy an economy based on markets, wages, and private ownership.

The Black Book of Communism: Crimes, Terror, Repression, 1999:

French scholars tally up the deaths under communism:

• USSR = 20 million

• China = 65 million

• Vietnam = 1 million

• North Korea = 2 million

• Cambodia = 2 million

• Eastern Europe = 1 million

• Latin America = 150,000

• Africa = 1.7 million

• Afghanistan = 1.5 million

• Communists not in power = 10,000

• Total = Nearly 100 million.

There is no good way to implement a bad idea!

Dan Price, CEO, Gravity Payments

120 employees, paid each $70,000 (“Happiness Salary”). He sank last year’s profits $2.2M into higher wages and slashed his salary $1M to $70,000. His two best employees quit, as well as customers who feared less service from non-motivated employees.

His brother Lucas, co-founder in 2004, filed a lawsuit, accusing Dan of paying too high a salary to himself.

This illustrates the perils of "Bubble sheet research," which attempts to measure "happiness" and its link to income.

Distributive fairness:

1.   Equality (everyone gets the same).

2.   Proportionality (all receive rewards in proportion to their inputs).

“There is nothing more unequal than the equal treatment of unequal people.” ― Thomas Jefferson

At least he used his own resources. Imagine a $70,000 federal minimum wage?

Dodd-Frank Rule

SEC requires companies to reveal median pay and compare to CEO pay, starting in 2017, passed 3-2 on party lines on August 5th.

Multinationals can exclude 5% of foreign employees.

Lobbying trade unions believe this rule will shame bosses into paying themselves less and workers more. “It will allow investors to see," says Commissioner Kara Stein, "how a company manages human capital.”

But labor unions don’t have a history of caring about protecting investors!

An investment bank with high pay can look more egalitarian than a cleaning company with low paid workers and a moderately paid CEO.

This rule hijacks the SEC for political purposes, unrelated to SEC’s mission, which is:

To protect investors, maintain fair, orderly, and efficient          markets, and facilitate capital formation.

A company’s pay ratio is not material information! Moreover, the ratio has no bearing on whether or not the CEO's pay is appropriate. Executive pay is already disclosed under current regulations.

Companies will try to goose the ratio from the other direction, by shedding its lowest-paid employees (utilizing contractors and temps).

Cost of implementation: $1.3 Billion upfront, $526million afterwards.

One way of course to "fix" the appearance of a "bad" ratio would be outsourcing, but as Ed points out, another court ruling in California is trying to stop that from happening.

Uber in Las Vegas

Surge pricing = bad when Uber does it.

Congestion pricing when government does it, celebrated by urban planning policy wonks.

North Korea

On August 15th, it turned clocks back ½ hour to establish its own time zone and reverse the imposition of Tokyo time in 1912.

It established the "Juche calendar," from 1912, the birth of Kim Il Sung.

Hugo Chavez turned clock back ½ hour in 2007 (a fairer distribution of sunrise?).

What is it with dictators and time?

Episode #57 - The Experts Speak

On this episode, Ed and I discussed the book, The Experts Speak: The Definitive Compendium of Authoritative Misinformation, Christopher Cerf and Victor Navasky, expanded and revised edition, 1998.

The two authors are interesting—a National Lampoon Contributing Editor, and a  Sesame Street contributor (Cerf) and editorial director of The Nation, Navasky.

They created The Institute of Expertology, a group of scholars who record sayings from experts for posterity.

The book describes three kinds of experts: past, present and future. Also, three type of expertise: descriptive, prescriptive and predictive.

Richard Feynman reminds us, “Science is the belief in the ignorance of experts.”

Samples from the “Experts”

Politics

WSJ Editorial, “Bill Clinton will lose to any Republican who doesn’t drool on stage.”

“FDR will be a one-term president.” Mark Sullivan, New York Herald Tribune columnist and political commentator, 1935.

"The race will not be close at all. Landon will be overwhelmingly elected and I’ll state my reputation as a prophet on it." William Randolph Hearst, August 1936. [FDR in 1936 won 523 electoral votes to Alf Landon’s 8, 11M vote margin].

"And while I'm talking to mothers and fathers, I give you one more insurance. I have said this before but I will say it again and again and again: Your boys are not going to be sent into any foreign wars.” FDR October 30, 1940.

"It is highly unlikely that an airplane or a fleet of them could ever think of fleet of navy vessels under battle conditions.” FDR as Secretary of the Navy 1922.

"I have no political ambitions for myself or my children.” Joseph P Kennedy.

---

"I favor the civil rights act of 1964 and it must be enforced at gunpoint if necessary.”1965.

"I would have voted against the civil rights act of 1964.” 1968. 

Both Ronald Reagan.

---

"There are only two ways to reduce the budget deficit. We must do both.” April 1987.

"There are only three ways to reduce the budget deficit. We must do all three.” September 1987.

"There are only four ways to reduce the federal budget deficit. We must do all four.” August 1988.

All Michael Dukakis.

---

Economics

“Stocks have reached what looks like a permanently high plateau.” Irving Fisher, Yale Economist, October 17, 1929 [one week prior to the $6 billion stock market crash].

“1930 will be a splendid employment year.” US Dept of Labor, New Year’s Forecast, December 1929.

“In all likelihood world inflation is over.” Managing Director, IMF, 1959.

Hitler

“There is no doubt that he [Hitler] has become a much more quiet, more mature and thoughtful individual during his imprisonment than he was before and does not contemplate acting against existing authority.” Otto Leybold (Warden of Landsberg Prison), letter to the Bavarian Minister of Justice, Sept 1924.

“Hitler is a queer fellow who will never become Chancellor; the best he can hope for is to head the Postal Department.” Paul von Hindenburg, President of Germany, 1931.

War

“The Hawaiian Islands are over-protected; the entire Japanese fleet and air force could not seriously threaten Oahu.” Captain William T. Pulleston, former Chief of US Naval Intelligence, “What Are the Chances?” The Atlantic Monthly, August 1941.

“Among the really difficult problems of the world, the Arab-Israeli conflict is one of the simplest and most manageable.” Walter Lippmann, April 27, 1948.

Invention

“The phonograph is not of any commercial value.” Thomas Edison, 1880.

“For God’s sake go down to reception and get rid of a lunatic who’s down there. He says he’s got a machine for seeing by wireless! Watch him—he may have a razor on him.” Editor of the Daily Express, London, refusing to see John Logie Baird, the inventor of television, 1925.

“There is not the slightest indication that nuclear energy will ever be obtainable. It would mean that the atom would have to be shattered at will.” Dr. Albert Einstein, 1932.

“What, Sir? Would you make a ship sail against the wind and currents by lighting a bonfire under her deck? I pray you excuse me. I have no time to listen to such nonsense.” Napoleon Bonaparte, to Robert Fulton, inventor of the steamboat, c. 1805.

“God himself could not sink this ship. Titanic Deckhand, responding to a passenger’s question, “Is this ship really unsinkable?” Southampton, England, April 10, 1912. [Sunday, April 14, 1912 it struck an iceberg].

“This is the biggest fool thing we have ever done…The bomb will never go off, and I speak as an expert in explosives.” Admiral William Daniel Leahy, advising President Truman on the impracticality of the US atomic bomb project, 1945.

"X-rays are hoax.” Lord Kelvin

"Radio has no future.” Lord Kelvin

"My dynamite will sooner lead to peace." Alfred Bernhard Nobel, founder of the Nobel Prizes.

Ed’s Favorite

"I have often thought that if there had been a good rap group around in those days I might've chosen a career in music instead of politics.” Richard M Nixon.

Ron’s Favorite

“Nothing of importance happened today.” George III (King of England), diary entry, July 4, 1776.

Episode #56 - Interview with Jennifer Warawa

Ed and I had the pleasure of interviewing his Sage colleague, Jennifer Warawa, the Global Vice President, Product Marketing–Accountants.

Jennifer's passion is to partner with consultants, accountants and bookkeepers to provide solutions that make a difference in their business or firm, and support them in delivering an extraordinary experience to their clients.

Prior to working with Sage, Jennifer owned her own firm for 12 years providing accounting, bookkeeping, and consulting services, software training, as well as business/ financial planning and marketing.

In addition to being a regular speaker at accounting conferences, Jennifer was also listed as one of the “10 Tweeters Worth Following” by Accounting Today and is an avid blogger, which includes being a featured writer on the Virgin Entrepreneur website. Jennifer made the Accounting Today Top 100 Most Influential People in Accounting and CPA Practice Advisor’s Top 40 Under 40 lists consecutively for the last four years.

Some of the issues we discussed with Jennifer

• What is Sage’s Strategy to add value in the future?

• How is the Cloud adoption coming along among firms?

• The gap between what customers want and what firms think they want.

• What things should business owners look for in selecting a CPA firm?

• What’s the number one issue facing the accounting profession?

• Is this different in different countries?

Sage's New Products to help firms be more effective

• Sage Impact

• Sage View

• Sage Value - coming soon! 

Thanks for sharing your insights and knowledge on the state of the professions, as well as businesses, Jennifer!

Episode #55 - Entrepreneur Heaven - August 2015

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.

On this third installment of our Entrepreneur Heaven Series, we will explore the wisdom of Sam Walton, P.T. Barnum, Andrew Carnegie, and Conrad Hilton, and.

Wisdom is timeless, and occasionally turning back the clock is the wisest course of action. Sometimes history is our best teacher. 

Sam Walton (March 29, 1918- April 5, 1992)

Three weeks before his death, President George H. W. Bush awarded him the Presidential Medal of Freedom.

Graduated with a B.A. in economics, 1940, University of Missouri.

1940, starts work at J.C. Penney, stays 18 months.

Sept 1, 1945—opens first variety store.

1950, starts over in Bentonville with Walton’s .05¢ and .10¢.

July 2, 1962, Opens Wal-Mart, in Rogers, Arkansas.

Oct 31, 1969 Wal-Mart incorporated.

Battle over “fair trade,” whereby manufacturers could determine the price at which their goods could be sold. Benefited inefficient retailers since it protected them from low-price retail competition.

State by state, these laws were repealed in the 1950s, 1960s, and in 1975 Congress passed legislation ending the practice.

On the corporation’s organization chart, Walton was listed as: Chief Spiritual Officer.

In his book, Made in America: My Story (1992), Walton writes that his  single biggest regret in his whole business career: that he didn’t include the associates in the initial, managers-only profit-sharing plan.

Walton’s great insight: replacing inventory with information!

“Job security lasts only as long as the customer is satisfied. Nobody owes anybody else a living.”

Six ways Wal-Mart thinks small:

1.    Think one store at a time

2.    Communicate, Communicate, Communicate

3.    Keep your ear to the ground—no computer can tell you how much you could have sold

4.    Push responsibility—and authority—down

5.    Force ideas to bubble up

6.    Stay lean, fight bureaucracy

Sam’s Rules for Building a Business:

1.    Commit to your business

2.    Share your profits with associates

3.    Motivate your partners. Encourage competition, set high goals, keep score, switch jobs

4.    Communicate

5.    Appreciate everything associates do.

6.    Celebrate your successes

7.    Listen to everyone in the Co.

8.    Exceed customer expectations

9.    Control your expenses better than competition

10.  Swim Upstream. Ignore conventional wisdom

“In this free country of ours, the shopkeeper’s success is entirely up to you: the customer.”

Phineas Taylor  Barnum (July 5, 1810 – April 7, 1891)

He never said: “There’s a sucker born every minute.”

Human oddities on display, but never gross—women and children could attend.

He just wanted to entertain an America he thought worked too hard and laughed too little

He wrote, “The American Museum” in 1869.

His circus was sold to Ringling Brothers on July 8, 1907 for $400,000 (about $8.5 million in 2008 dollars). The Ringling Brothers and Barnum & Bailey circuses ran separately until they merged in 1919 forming the Ringling Bros. and Barnum & Bailey Circus. 

Andrew Carnegie (November 2, 1835–August 11, 1919)

Born: Nov 2, 1835 in Dumferline, Scotland.

Immigrated at age 12 from Scotland.

In 1870, Britain produced more steel rest of world combined. By 1900, year Carnegie retired, US producing twice as much as UK, highest-quality, lowest-priced:

            $160/ton in 1875 to $17/ton by 1898

            Sold holdings to JP Morgan $480M (his share $300M)

Carnegie: optimist, thirst for public approbation, wrote nice things about unions, who lionized him.

Homestead Steel Works strike of 1892, Carnegie in Scotland, 300 Pinkerton guards hired crushed the workers, black mark on his legacy.

He was fanatical about controlling costs: “Cut the prices; scoop the market; run the mills full…watch the costs and the profits will take care of themselves.”

Railroads developed cost accounting, and Carnegie brought it to the steel industry

Committed himself to world peace from two decades from retirement to death, a complete failure. Actually worse, he was a fool (Richard S. Tedlow, Bus Historian, Giants of Enterprise). He was fond of Kaiser Wilhelm II of Germany (“I think he can be trusted and declares himself for peace.”)

He wrote “The Crucial Question,” (1896) advice to young people on how to become business owners.

“And here is the prime condition of success, the great secret: concentrate your energy, thought, and capital exclusively upon the business in which you are engaged.”

 “The only irreplaceable capital an organization possesses is the knowledge and ability of its people. The productivity of that capital depends on how effectively people share their competence with those who can use it.”

“Take away my people but leave my factories, and soon grass will grow on factory floors. Take away my factories but leave my people, and soon we will have a new and better factory.”

“The man who dies rich dies disgraced.”

“Man must have an idol—The amassing of wealth is one of the worst species of idolatry. No idol more debasing than the worship of money.”

Carnegie gave away $332M, including 7,000 church organs, while Rockefeller gave away $175M.

Conrad Hilton (Dec 25, 1887–Jan 3, 1979)

Grew up New Mexico, father ran a general store. He married and divorced Zsa Zsa Gabor, and had a son with her.

First bus venture managing the Hilton Trio, musically inclined ladies (including his sister), but it flopped.

Then worked in a bank, and then manager of father’s store, but father kept meddling. He served in the Army WW I.

While trying to find a hotel bed first night in Cisco, TX, he couldn’t. The owner gave him one week to come up with $40K buy the hotel. He scraped together the money from family and friends. By 1921, he added two more hotels.

He wrote “A Million-Dollar Mountain and a Red Hat” (1957) to explain how he raised the money to build his first million dollar hotel on the corner of Main and Harwood in the Dallas bus district and Be My Guest, which used to be found in the drawer of every Hilton hotel next to the Bible.

He leased the land for 99 years, at $31,000/year, from the owner, and negotiated a clause in the lease to allow him to pledge the land as collateral to lenders, enabling him to build the hotel.

Episode #54 - Free-Rider Friday - July 2015

We discussed the following topics on this episode of Free-Rider Friday.

Sage Summit 2015 Recap

Our thoughts on Sage Summit in New Orleans, where we also broadcasted The Soul of Enterprise live, over three days with an array of guests.

You can listen to each day’s shows here:

• Tuesday, July 28, 2015

• Wednesday, July 29, 2015

• Thursday, July 30, 2015

Ed’s Topics

Uber delivers a passport and launches a “De Blasio Feature” in New York City, which shows what your wait would be in the absence of Uber. How about Uber for flights?

Cato Institute: One idea for how states could effectively end the federal income tax: Texas could refund everyone’s federal income tax, and then increase the state sales tax. Effectively converting to a pure consumption tax.

The CEO of the private company that makes WD-40 said: “Profit is the applause of doing good work and having engaged employees and that’s what I’m most proud of.”

Jet.com plans to compete against Wal-Mart, Costco, Amazon, etc. by charging $50 per year, and sell everything at cost. Will this business model succeed?

Ron’s Topics

American Enterprise Economist Kevin Hasset, says if you confiscate 100% of all after-tax US corporate profits, and redistribute them to wage earners, you would add roughly $7.50 per hour to wages.

Compare this to the $15 minimum wage some cities have implemented, and you don’t have to be an economist to predict what will happen to employment.

Accenture will get rid of annual performance appraisals. Deloitte is doing the same thing, as reported in detail in the Harvard Business Review, which you can access here: Reinventing Performance Management.

Airline profits have soared to record heights, even as fuel prices have dropped recently, as explained in this article.

Episode #53 - VeraSage Laws

Ed and I discussed the upcoming Sage Summit in New Orleans, where we will be broadcasting three live shows on VoiceAmerica.com on Tuesday-Thursday, from 2pm-3pm (CT).

We announced the winners of the VoiceAmerica contest to attend Sage Summit:

• Virginia Colin

•          Ann Beal

•          Barbara Young

•          Lindsay Boyd

•          Prudence Gensman

•          Simran Singh

VeraSage Laws

Baker’s Law: Bad customers drive out good customers

All customers are not equal.

Whenever anyone said, “All men are created equal.” Federalist Fisher Ames, an ardent opponent of Thomas Jefferson would retort:

            And differ greatly in the sequel.

Usually, the price isn’t wrong—the customer is!

We discussed the VeraSage Adaptive Capacity Model, whereby, similar to an airline or hotel, you reserve capacity for your best customers.

Also, this caveat before firing customers: your customers won’t get better until you do.

It’s axiomatic: You’re as good—or as bad—as the character of your customer list. How does that make you feel.

Kless’ First Law: He who liveth by the discount, shall ye also perish by the discount.

Kless’ Second Law: All measurements are judgments in disguise.

VeraSage adoption of the Second Law of medicine: Prescription before diagnosis is malpractice.

The Military has a great saying: “Time spent on             reconnaissance is never wasted.” 

VeraSage Axiom: Ideas are always and everywhere more important than their execution.

This one is counterintuitive, but true. There’s no good way to execute a bad idea, and good ideas are not everywhere. Thomas Sowell discusses this concept in his books, Knowledge and Decisions and Basic Economics.

Peter Drucker’s Law: Marketing and selling are not complementary, but adversarial.

Another counterintuitive point from Peter Drucker. In a perfect world, you wouldn’t need salesman, because your marketing would be so effective customers would line up to purchase your wares. Apple?

Episode #52 - Interview with Greg Tirico

Ron and Ed interview Greg Tirico who is responsible for Advocacy Solutions and Services at Sprout Social. He has spent the majority of his career leading digital marketing initiatives in Fortune 500 organizations. Today we will speak to him about Mary Meeker's annual Internet Trends report. Greg's insight when added to Mary's will guide your social strategy for the next 12 months. Personal note on Greg: When not espousing the benefits of employee advocacy, he can be found searching for the perfect Pinot Noir.

2015 Internet Trends Report from Kleiner Perkins Caufield & Byers

Episode #51 - Best Business Books

Ron’s Book Selections

Business as a Calling: Work and the Examined Life, by Michael Novak.

The economic and ethical responsibility of a business is to serve others, and increase the wealth of its customers.  The business world instills, and requires, the practice of a number of virtues:  diligence, industriousness, prudence in risk taking, reliability, kindness to strangers (customers), and fidelity in personal relationships.  Are not these the same virtues parents try to teach their children?  As Michael Novak explains in Business as a Calling:

My general position on these three questions has two parts.  First, business is a morally serious enterprise, in which it is possible to act either immorally or morally.  Second, by its own internal logic and inherent moral drive, business requires moral conduct; and, not always, but with high probability, violations of this logic lead to personal and business disgrace.  Immoral acts do occur in business. But to behave immorally is neither necessary to nor conducive to business success (Novak, 1996: 8-9).

These men [industrial barons] did more than make money; calling them “money-makers” trivializes what they accomplished.  Nor does the word greed capture their state of soul.  “Greed” does not explain why Andrew Carnegie gave virtually all his money away.  Instead, he poured [profits] back into his firm as an investment in its future.  In other words, he put it at risk.  “Greed” is for the impoverished socialist imagination a term of art; its purpose is neither descriptive nor analytical.  Its purpose is moral denunciation, for ideological reasons (Ibid: 75).

The Seven Internal and External Responsibilities

The moral case for capitalism needs to be made, and fortunately it has been.  Nonetheless, most popular culture and institutions, from movies and television shows to research organizations and universities, villainize businesspeople and business firms, endlessly portraying them as power-hungry, stop-at-nothing-to-get-ahead, ruthless members of society.  This view is pernicious, not to mention entirely out of touch with how the world works.  A business, in its essence, is a moral institution because it requires moral conduct to succeed in the long run.  As Novak explains:

It may help to divide these responsibilities into two different sets.  The second set will easily be recognized as “ethics,” since the source of their authority comes from outside business––from religious conviction, moral traditions, humane principles, and human rights commitments.

The first set [Internal Responsibilities] consists of the moral requirements necessary for business success.  One way to see that they are ethical is to ask yourself what happens when they are violated (Novak, 1996: 135).

Seven Internal Responsibilities:

1) To satisfy customers with goods and services of real value.  Like other acts of freedom, launching a new business is in the beginning an act of faith; one has to trust one’s instincts and one’s vision and hope that these are well enough grounded to build success.  It is the customers who, in the end, decide.

2) Make a reasonable return on the funds entrusted to the business corporation by its investors.  Is it moral to lose other people’s money?

3) To create new wealth.  This is no small responsibility.  If the business corporation does not meet this, who else in society will? 

 4) To create new jobs.  You cannot create employees without creating employers.                 

 5) To defeat envy through generating upward mobility and putting empirical ground under the conviction that hard work and talent are fairly rewarded.  The founders of the American republic recognized that most other republics in history had failed and that the reason they failed was envy:  the envy of one faction for another, one family for another, one clan for another, or of the poor toward the rich.  ...The best way to conquer this is to generate economic growth through as many diverse industries and economic initiatives as possible, so that every family has the realistic possibility of seeing its economic condition improve within the next three or four years.  Poor families do not ask for paradise, but they do want to see tangible signs of improvement over time.  When such horizons are open, people do not compare their condition with that of their neighbors; rather, they compare their own position today with where they hope to be in three or four years.  They give no ground to envy.   ...Only then can people see that hard work, goodwill, ingenuity, and talent pay off.  When people lose their faith in this possibility, cynicism soon follows.

6) To promote invention, ingenuity, and in general, “progress in the arts and useful sciences” (Article I, Section 8, U.S. Constitution).  All wealth comes from intellectual capital and the human mind, or caput, Latin for head.  The great social matrix of such invention, discovery and ingenuity is the business corporation.

7) To diversify the interests of the republic.  Crucial to preventing the tyranny of the majority.  The interests of road builders are not those of canal builders, or of builders of railroads, or of airline companies.  The sheer dynamism of economic invention makes far less probable the coalescing of a simple majority, which could act as a tyrant to minorities.  The economic interests of some citizens are, in an important sense, at cross-purposes with the economic interests of others, and this is crucial to preventing the tyranny of a majority (Ibid: 138-45).

Seven Responsibilities from Outside Business:

1. To establish within the firm a sense of community and respect for the dignity of persons.

2. To protect the political soil of liberty.

3. To exemplify respect for law.

4. Social justice.  To be good citizens of the community.  Like other forms of justice and love, social justice begins at home.

5. To communicate often and fully with their investors, shareholders, pensioners, customers, and employees.

6. To contribute to making its own habitat, the surrounding society, a better place.

7. To protect the moral ecology of freedom (Ibid: 146-51).

Bad Medicine: Doctors Doing Harm Since Hippocrates, by David Wootton

Bad Medicine is one of the most important books I have read in a long time. David Wootton is a historian at the University of York. He’s no medical profession basher, thanking modern medicine for saving his life and also proudly announcing his daughter is a doctor.

Not only is the book incredibly well written—even if, like me, you have no particular interest in the history of medicine—it is a mesmerizing look at how a supposedly scientific and evidence-based profession rejected new innovations, knowledge, and theories while stubbornly clinging to their old—and completely ineffectual, if not down right lethal—therapies.

Bad Medicine Drives Out Good Medicine

The history of medicine begins with Hippocrates in the fifth century BC. Yet until the invention of antibiotics in the 1940s doctors, in general, did their patients more harm than good. In other words, for 2400 years patients believed doctors were doing good; for 2300 years they were wrong.

From the 1st century BC to the mid-nineteenth century, the major therapy was bloodletting, performed with a special knife called a lancet. Interestingly enough, that is the title of today’s prestigious English medical journal, The Lancet. Bad ideas die hard.

The Case Against Medicine

The author makes three devastating arguments. First, if medicine is defined as the ability to cure diseases, then there was very little medicine before 1865. Prior to that—a period the author calls Hippocratic medicine—doctors relied on bloodletting, purges, cautery, and emetics, all totally ineffectual, if not positively deleterious (no matter how efficiently they were administered).

Second, effective medicine could only begin when doctors began to count and compare, such as using clinical trials.

Third, the key development that made modern medicine possible is the germ theory of disease.

We all assume that good ideas and theories will drive out bad ones, but that is not necessarily true. Historically, bad medicine drove out good medicine, as Wootton explains:

We know how to write histories of discovery and progress, but not how to write histories of stasis, of delay, of digression. We know how to write about the delight of discovery, but not about attachment to the old and resistance to the new.

The cultural obstacles, Wootton believes, are based on a somewhat counterintuitive observation: institutions have a life of their own. All actions cannot be said to be performed by individuals; some are performed by institutions. For instance, a committee may reach a decision that was nobody’s first choice.

This is especially true for institutions that are shielded from competition and hermetically sealed in orthodoxy. In a competitive market, germ theory would have been tested in a competing company, diffusing into the population much faster than it did within the institutions of the medical community. Wootton also cites Thomas Kuhn’s book, The Structure of Scientific Revolutions, wherein he distinguished between periods of “normal science” and science that takes place during periods of crisis. Germ theory was adopted because the medical profession knew it was in crisis.

Why is this Relevant to Business?

The similarities between bad medicine, the billable hour, timesheets, Frederick Taylor’s efficiency metrics, and value pricing are illustrative.

In physics the key barriers to progress are most likely theoretical. In oceanography they might be practical. What are the key barriers to progress in the professional knowledge firm?

If a supposed scientific and evidence-based profession is this slow to change, what chance do lawyers, CPAs, and other professionals have to move away from the discredited labor theory of value—the modern-day equivalent of bloodletting?

Ed’s Book Selections

The Trusted Advisor, by David H. Maister, Charles H. Green and Robert M. Galford

 

 

 

 

 

Beautiful Evidence, by Edward R. Tufte

The best graphic ever! 

Episode #50 - Free-Rider Friday - June 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.

The song lyrics for “Free Ride” by The Edgar Winter Group. 

Ed’s Topic

The driverless car conundrum: should the car be programmed to swerve and kill 5 people, or to kill the driver? It’s a version of “Trolleyology” that we discussed on our August 22, 2014 show, Everyday Ethics: Doing Well and Doing Good.

It’s a fascinating question, and we discussed the ethics and legal implications of the driverless car.

Ron’s Topic

One traditional definition of “management” in older English dialects was, according to the Oxford English Dictionary, “to spread manure.”

According to David Whyte, a self-described corporate poet, in his book, Crossing the Unknown Sea:

Manager is derived from the old Italian and French words          maneggio and manege, meaning the training, handling and          riding of a horse.

It is strange to think that the whole spirit of management is          derived from the image of getting on the back of a beast,          digging your knees in, and heading it in a certain direction.

The word manager conjures images of domination, command, and ultimate control, and the taming of a potentially wild energy. It also implies a basic unwillingness on the part of the people to be managed, a force to be corralled and reined in. All appropriate things if you wish to ride a horse, but most people don’t respond very passionately or very creatively to being ridden, and the words giddy up there only go so far in creating the kind of responsive participation we now look for.

Sometime over the next fifty years or so, the word manager will disappear from our understanding of leadership, and thankfully so. Another word will emerge, more alive with possibility, more helpful, hopefully not decided upon by a committee, which will describe the new role of leadership now emerging. An image of leadership which embraces the attentive, open-minded, conversationally based, people-minded person who has not given up on her intellect and can still act and act quickly when needed.

Also, on work-life balance, our VeraSage colleague Dan Morris wrote a post back in 2006, “Work-Life Balance is PC for Slacker.”

On this topic, David Whyte also provocatively points out in his book The Three Marriages: Reimagining Work, Self and Relationship:

Poets have never used the word balance, for good reason. First of all, it is too obvious and therefore untrustworthy; it is also a deadly boring concept and seems to speak as much to being stuck and immovable, as much as to harmony. There is also the sense of unbalancing that must take place in order to push a person into a new and larger set of circumstances.

My mentor, George Gilder, says this with respect to work/life balance:

One of the things that really makes me laugh is when I hear about the “workaholic.” Workaholics are what the make the world go. Show me a success in any field, and I’ll show you an obsessive. If your life is “balanced” by languid afternoons at the museum, you cannot develop a new business, break an important story, or make a contribution to the world. …Our task on earth—laboring in the service to others—can only be satisfied thru hard and unbalanced work.

Balance is for ballerinas and tires.

Ed also talked about his new favorite word: Floccinaucinihilipilification, meaning “the estimation of something as valuless.” 

Ed’s Topic

Donald Trump announced his candidacy for US President to Neil Young’s song “Rockin’ in the Free World,” which created a controversy since Young doesn’t support Trump.

Ron’s Topic

We discussed The Economist May 23, 2015 article, “Democratising medicine: The crowd will see you now,” which talks about CrowdMed to diagnose rare diseases.

Ed’s Topic

The California Labor Commission ruled that Uber’s “independent contractors” are actually employees. This is an insane ruling, and another regulatory burden that the disrupter Uber will have to deal with.

Ron’s Topic

We discussed The Psychology of Pessimism, by Steven Pinker, from Cato’s Letter, Winter 2015. You can check out more of Steven Pinker’s work at Humanprogress.org.

If you are listening to this show in the year 2115, you will be worried about declining population! We don’t have an economic model for what happens when worldwide population declines, since it’s never happened in history.

Ed’s Topic

Since we pre-recorded this show before the Supreme Court ruling on the ObamaCare case, we discussed how might the court rule. Ron thought the court would let it stand, but tell Congress to fix it. Ed thought they’d overturn it, but tell Congress to fix it.

We were both wrong. Ed was wronger!

Ron’s Topic

We discussed price-match guarantees, since they prevent rather than provoke price wars, from The Economist, Free Exchange, February 14, 2015.

It’s a pre-emptive defense as it persuades customers they don’t need to shop around, since they can invoke the guarantee instead of switching.

The result: tacit collusion, without any explicit communication between firms.

Episode #49 - Interview with former Disney Executive Lee Cockerell

Lee Cockerell is the former Executive Vice President of Operations for the Walt Disney World® Resort. "As the Senior Operating Executive for ten years Lee led a team of 40,000 Cast Members and was responsible for the operations of 20 resort hotels, four theme parks, two water parks, a shopping & entertainment village and the ESPN sports and recreation complex in addition to the ancillary operations which supported the number one vacation destination in the world."

One of Lee's major and lasting legacies was the creation of Disney Great Leader Strategies, which was used to train and develop the 7000 leaders at Walt Disney World. Lee has held various executive positions in the hospitality and entertainment business with Hilton Hotels for 8 years and the Marriott Corporation for 17 years before joining Disney in 1990 to open the Disneyland Paris project.

Lee has served as Chairman of the Board of Heart of Florida United Way, the Board of Trustees for The Culinary Institute of America (CIA), the board of the Production and Operations Management Society and the board of Reptilia a Canadian attractions and entertainment company. In 2005 Governor Bush appointed Lee to the Governor's Commission on Volunteerism and Public Service for the state of Florida where he served as Chairman of the Board.

He is now dedicating his time to public speaking, authoring a book on leadership, management and service excellence titled, Creating Magic…10 Common Sense Leadership Strategies from a Life at Disney, which is now available in 13 languages and his latest book, The Customer Rules…The 39 Essential Rules for Delivering Sensational Service. Lee also performs leadership and service excellence workshops and consulting for organizations around the world as well as for the Disney Institute. Lee has received the following awards: 

• Golden Chain Award for Outstanding leadership and business performance from the Multi-Unit Foodservice Operations Association (MUFSO).

• Silver Plate Award for Outstanding Operator in the foodservice industry from the International Foodservice Manufacturers Association (IFMA).

• Excellence In Production Operations Management and Leadership (POMS) from the Productions and Operations.

• Grandfather of the year from his three grandchildren, Jullian, Margot and Tristan.

Lee and his wife Priscilla live in Orlando Florida.

Topics discussed with Lee

1.    Ever meet J.W. Marriott? Yes.

2.    Joined Disney 1990, to open Disneyland Paris? (Euro Disney), which in the early days lost $1 million per day.

3.   Creating Magic: 10 Common Sense Leadership Strategies from a Life at Disney (2008) 

The Customer Rules: The 39 Essential Rules for Delivering Sensational Service (2013)

Time Management Magic (Jan 2015)

4.    Walt Disney World = size of San Francisco, or 2x Manhattan, 59,000 Cast Members

a.    Mickey = Teamster (13 or 14 unions in WDW)

b.    70% return rate

c.     Lowest turnover in hospitality industry

5.    Formula: Committed, responsible, inspiring leadership create a culture of care, which leads to quality service, which leads to Guest satisfaction, which leads to measurable business results and a strong competitive advantage.

6.    “Because all business problems boil down to leadership problems. The soft stuff is actually the hard stuff."

7.    Strategy #1: Remember, everyone is important: Cast was given freedom to set it’s own productivity targets. They set them very high!

8.    Feelings are never translated or passed on properly in a command chain

9.   No micromanagement = Trust!

10. Disney Institute Definition of Culture: “The system of values and beliefs an organization holds that drives actions and behaviors and influences relationships.” Established by design, not chance.

11.  You mentioned no price consistency at Disney’s food and beverage, because no one person in charge. How has pricing improved?

12.  What do you think of Disney’s new surge-pricing scheme?

13.  Your response to 9/11: evacuate 50,000 from theme parks; free hotel rooms; food vouchers; suspend charges for phone calls anywhere in world; costumed entertainers to occupy frightened children.

14.  Structured interviews by psychologists over the phone, create detailed profiles, powerful tool 1994?

15.    ¼ of the 25,000 Sommeliers work at WDW, sells more wine than any single site in the world (Vegas)

16.    Magical Moments and Take 5

17.    25 steps between trash containers!

18.  Sacrifice efficiency for safety and security (or Take 5, and MOMs). Snow White and Four Dwarfs

19.  Customers are human beings = Guestology

20.  Trading Pins! Two guys got idea at Olympics = millions dollar business!

21.   20% = active change agents; 30% = resist change; 50% on fence

Thanks to Lee for sharing how Disney spreads Pixie Dust, and how your organization can do it, too. 

Episode #48 - Interview with Kevin Mitchell, President PPS

Note: We had some technical difficulties during this show due to the State Wide Fiber Optic Network outage in Arizona, where Voice America is located. Thus, we go to the first break very soon, and the sound quality isn’t very good since we were on mobile phones. Sorry for the inconvenience.

Ed and I were honored to interview Kevin Mitchell, president of Professional Pricing Society (PPS), which is the premiere pricing organization in the world.

PPS was founded by Kevin’s father, Eric Mitchell, in 1984. Eric was a pioneer in the pricing field, having worked at Xerox, Intel, and Ford in the 1970s as a pricer, became a consultant in the field, then launched PPS.

Kevin recounted his work experience, including Colgate-Palmolive and General Electric, and how he returned to the family business of PPS in 2007. He has BA degrees in Economics and English from Duke University and an MBA in Marketing from The William E. Simon Graduate School of Business at the University of Rochester. Kevin lives in Atlanta, Georgia, USA and his hobbies include music, cooking, and sports.

He discussed the growth of the pricing field, not only in organizations, but also more women in the field (25% of PPS members are women, and between 30-40% of younger pricers are now women). Pricing has grown within academia as well. It’s much easier now to earn a degree in pricing, including an MBA in pricing at Kevin’s alma mater, University of Rochester.

I asked Kevin if he thought pricing is now a profession, and like Reed Holden, he thinks it is. We discussed how multi-disciplinary pricing is, and Kevin think an effective pricer has to be part artist and part scientist (this is also the view of Robert Cross).

Kevin also gave some of the demographics of PPS’s 5,000 members worldwide: North America comprises approximately 60% of members, with western and northern Europe comprising approximately 18%, 5% from Latin America, 5% Asia Pacific, and the rest from Australia, Africa, Middle East and other regions.

There’s no dominate industry among the memberships. Members come from these various industries:

•             Heavy goods

•             Industrial concerns

•             Hi-tech

•             Telecom

•             Retail

•             Life Sciences

•             Chemicals

•             Energy

Ed asked Kevin how organizations make the transition to value pricing, and discussed the 1% Windfall: how a 1% price increase, with no change in demand, can have more impact on profit than any other lever a business can pull, such as increasing efficiency, cutting costs, or even new customers.

Ed then asked Kevin about “charm pricing” (odd-number pricing) and how it applies to small business. Even-numbered pricing does send a signal that this is higher quality, such as Apple’s $17,000 watch. But why does Apple use charm pricing on its other products? Perhaps to convey a best of both worlds: you get Apple’s prestige and you’re also getting a deal.

And finally, Ron asked Kevin which industry he thought were the best pricers. Airlines and hospitality was his answer, along with heavy goods (Caterpillar is known for its pricing competence), and electronics. Robert Cross answered hotels.

We recommend you become a member of Professional Pricing Society, attend their conferences and webinars, and become a Certified Professional Pricer. It’s a fantastic organization, and thank you Kevin for being a guest on The Soul of Enterprise.

Episode #47 - Entrepreneur Heaven - June 2015

Ed and I discussed four legendary individuals in our second installment of Entrepreneur Heaven: Steve Jobs, Thomas Watson, Sr., Charles Revson, and Mary Kay Ash. We also answered a listener question.

Steve Jobs (1955-2011)

In 1975, Jobs sold his VW microbus and Wozniak his scientific calculator, raised $1300.

Steve Jobs 7 Principles of innovation

1. Do what you love

2. Put a dent in the universe

3. Kick-start your brain (creativity = connection)

4. Sell dreams, not products

5. Say no to 1,000 things—I’m as proud of what we don’t do as I am of what we do

6. Create insanely great experiences

7. Master the message—story telling (“You’ve baked a really lovely cake, but then you’ve used dog shit for frosting”)

Other thoughts

• "Customers don’t innovate; they iterate."

• “Innovation distinguishes between a leader and a follower.”

• Apple Store NYC (opened 2001): Sales: $4,032/sq. ft vs. Tiffany’s $2600.

• Retail consultant David Goldstein: “I give them two years before they’re turning out the lights on a very painful and expensive mistake.”

• “Commentary: Sorry, Steve: Here’s Why Apple Stores Won’t Work,” BusinessWeek, May 21, 2001

• Made sense on spreadsheet; but emotional experiences are not well captured on Excel spreadsheets.

• Jobs benchmarked Four Seasons hotel for the store! Genius bar, concierge, etc.

• Stanford University, “You’ve Got to Find What You Love” June 14, 2005

• Oral History Interview with Steve Jobs, Smithsonian Institution, April 20, 1995

Thomas Watson (1874-1956)

Ed and the Think Pad He still has from IBM

See Richard S. Tedlow’s book, Giants of Enterprise: Seven Business Innovators and the Empires They Built.

Also, The Book of Entrepreneurs’ Wisdom: Classic Writings by Legendary Entrepreneurs, edited by Peter Krass.

Charles Revson  (1906-1975)

“The reason women by cosmetics is because they buy hope.”

Born Somerville, MA in 1906, father was a cigar roller.

No formal education, tough childhood, parents both Russian-born Jews (Revson = rabbi’s son).

With brother Joseph and Charles Lachman, formed Revlon, March 1, 1932 (Charles was 25)

Used to recall products based on just a complaint or two.

Did not want to compete on price, and he knew his company was not efficient!

Fashion accessory, not a beauty aid (selling turn of a head, touch of class).

Different shades for different outfits, moods, occasions.

Great admirer of GM—brand for each purpose and purse.

Fire and Ice: incredibly successful advertising campaign.

See one of Ron’s all-time favorite business books, the unauthorized biography of Charles Revson: Fire and Ice: The Story of Charles Revson—the Man Who Built the Revlon Empire

Mary Kay Ash (1918-2001)

Mary Kay Ash authored three books:

• Her Autobiography: Mary Kay

• Miracles Happen

• You Can Have It All

Listener Question

Jacqui Brauman

1 May 2015

I've been listening to you guys for a few months now. I came across Ron Baker's work in a workshop I did called "Law Firms of the Future". I Realised now that the facilitator has ripped off most of the content, but it was valuable. I've tried introducing a version of value billing to my law firm. I bought it as a sole practice 2 years ago. I now have one employee solicitor who has complete autonomy (except that I pay his professional indemnity insurance, so he won't really have full responsibility for his mistakes). What I really hope is that Ron is wrong when he says that economy of scale doesn't apply to a law firm. I hope it applies up to a point, say maybe 5 to 10 solicitors, which I hope to have? I'm still struggling with the old fashioned business model for law firms though, and am trying to think of a way to introduce some subscription service or retainer system for the ordinary mum and dad client. Love to hear a brief comment on this in one of your Free Rider Fridays.

Jacqui: There is a difference between leverage and economies of scale. I think at the level you are shooting for (5-10 employees), leverage can add to profitability.

For a study of this very issue, albeit done on accounting firms, check out this wonderful whitepaper by our friend Ric Payne: The Performance Characteristics of Accounting Firms that are Sending Their Owners Home with at Least $1 Million.

Episode #46 - Free-Rider Friday

May 29th was “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.

We also had a special guest: John Chisholm, senior fellow at VeraSage Institute, and recovering lawyer.

John Chisholm’s Biography

My life changed when he met the late—and great—Paul O’Byrne in Sydney in 2005.

Until then, I had always struggled with the concept of billing clients in 6 minute increments even though, as managing partner and CEO of large law firms in Australia, this was for all intents and purposes a pretty successful business model which I embraced.

When I left mainstream law firms in 2004 and set up my consultancy practice I was determined not to price my services by time (perhaps I was just too lazy/too old to record time in my own consulting practice?) but really had no idea how I would price myself. That is until I met Paul.

The rest as they say is history. Initially through Paul and then Ron Baker and the whole VeraSage family I have become an advocate, zealot and many of my colleagues would say a terrorist for the destruction of time based billing in professional firms in Australasia.

Viva la revolution!

John’s Background

John Chisholm was previously a partner and managing partner at Maddocks, chief executive of Middletons and executive chairman Melbourne PKF Chartered Accountants.

John established his own consultancy, John Chisholm Consulting, in 2005 to share his expertise and experience with professional service firms in Australia, New Zealand and worldwide who look to maximize their business performance. He now speaks, trains, facilitates, coaches and consults.

As a practicing lawyer, managing partner and chief executive John was well placed to experience first hand both the benefits but also the drawbacks of the profession pricing their services solely by reference to time. He now works with many professional service firms (and their clients) around Australasia assisting them with both a mindset change, and the practical implementation and application of, moving towards value based pricing.

John has studied and works with professional firms in UK, US and Australia who no longer bill their clients in 6-minute increments of time. He has written numerous articles on value pricing and has presented and spoken to over a 1000 lawyers and accountants in the past three years on this topic. He is regularly invited as a keynote or guest speaker at legal industry events including for the Law Council of Australia, Australian Legal Practice Management Association, Law Institute of Victoria, Law Society of Queensland, CPA Australia and Leo Cussen Institute.

Free-Rider Friday Topics Discussed

An article on the Results Only Working Environment from Personnel Today, May 22, 2015, by Vicki Arnstein, and how the idea is starting to take root in the UK.

Daimler showed off its autonomous lorry, in the first state to license it on public roads: Nevada. Daimler believes that self-driving commercial vehicles will come to market before driverless cars. Here’s a CBS news story and a video from Daimler.

Schumpeter’s Creative Destruction Applies to Taxi Medallions. Excellent article on how taxi medallions are losing their value due to the competition from Uber, etc.

Episode #45 - Interview with Brad Smit

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.

• How to Turn Those Holiday Shoppers into Loyal Customers

• Excelling Customer Service: Understanding What Makes or Breaks a Brand During a Crisis

• Turn Crisis into Opportunity with Superior 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

• The Myth of the Rational Voter
  

• Bootleggers and Baptists
  

• Abilene Paradox
  

An unhealthy Alliance video