A distilled MBA

A stroll through an MBA - I'm going to the lectures so that you don't have to!

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Stars in my Eyes or has Arsene Wenger got it right?

Great people are essential in any business.  We need talent and we need capability.

However, it's not always easy to get great people - so how do the best companies do it?

One way might be to hire the 'stars' - but it turns out that people that out-perform in your competitor's company may easily not perform in yours.  A recent study showed that pretty much all of the best paid 'star' equity analysts who moved, saw a drop in performance and ended up moving again; hardly good financial sense to do that then.

It seems then, that it is 'home-growing' talent that really helps.

Look at Barcelona.  Probably the best football (soccer) team in Europe if not the world.  How many stars have they bought, well a few, but on the whole, there are still a lot of Spanish players and most of them studied at the Barcelona football academy.

Chelsea set a new record in English football - buying an entire team and while they won a few trophies, they didn't sweep the board and are yet to win the European Championship.  Manchester City have taken over from Chelsea as the spenders supreme, and a similar fate has fallen on them.

It's not that their football team hasn't improved, it absolutely has.  But, it has probably seen a cut in performance from each of the players to about 60% of how they used to play.  They may well win the league this year, but only because they have a huge depth to their squad, and while each of them is playing at 60% greatness, that 60% * 11 men on the pitch still equals a brilliant team.

Arsene Wenger, on the other hand, resolutely refuses to buy anyone from anywhere at any price.  He believes in growing people through the system.  Risky, but rewarding.  Have we seen Theo Walcott really perform and pay off the amount of time and training effort that he must have seen over the years? Lots of potential, but none that really came to pass.  Maybe Arsene Wenger knows something that we don't - i.e. don't buy stars - they're far too much trouble and you get better success from home-grown teams.  

Well, Arsenal have managed to qualify for the Champions League (which means they have been in the top 4) for 14 seasons in a row, while spending less than pretty much every other team in the Premier League (in fact, Arsenal have a net surplus of about £5m per year vs a net spend of £75m by Manchester United).  

Or, as the Arsenal faithful would say:

In Arsene We Trust

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The Rise, Rise and then Fall of the Great Corporation

So why is it that some companies grow and grow and become great, only to fail later?

How did Kodak, inventor of the digital camera, as big a brand name as Google is today, seemingly unassailable as a market leader lose so much money that it has had to file for bankruptcy?

So, it seems that it's down to a mix of luck and psychology.

Luck in that sometimes a strategy pays off - and psychology in that we all think that we're much better than we really are...

Just like in organisational behaviour, we tend to ascribe great things happening to our own fair hand, but blame bad luck on bad stuff that happens.

This means that when there is a paradigm shift in the industry (the advent of digital, online selling, etc.) we can get stuck viewing the world through our own set of frames and miss the chance to change and adapt.

So, the near death of the Swiss Watch industry was rescued through a Eureka moment by Nicholas Hayek (of Swatch) - who realised that watches didn't need to be about expensive items of jewellery that should be handed down from father to son, or given out as a retirement gift, they could be fashionable items, worn to complement a shirt or a bag.  

So, when you're running a global multi-national, look over your shoulder, don't sit still, and if it ain't broke, well, try and fix it anyway - otherwise it might be too late.

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Das Kapital or the Hare and the Tortoise

It turns out that the economy is made up of three things.

1. Capital (i.e. the buildings and machinery that makes stuff)

2. Labour (i.e. the people that make the stuff make stuff)

3. Other stuff (i.e. everything else that can't be explained by making or doing stuff)

Back to the age old question, how has the average Japanese person increased their income by about 5 times in 50 years and the average Ghanaian has seen pretty much no change in the same time?

Lower GDP, higher infant mortality, lower literacy, lower access to drinking water.

What happened to Ghana or what happened to Japan and what can we learn about both?

In the beginning, a country doesn't have much investment.  It's like a company with one machine making stuff.  If we increase the machines to two, the company is going to start growing quickly.  Soon, however, growth will slow, the relative increase in output from 1 to 2 machines is much larger than from 10 to 11 which is in turn much larger than from 100 to 101 - would anyone even notice?

It turns out, that when countries are just starting out on their development journey, they need investment in machines.  If they don't get that, then they won't be able to grow. If they're not careful, like Ghana, they may not be able to pull themselves over the 'poverty line' which means that investors or lenders won't give the country money because they're nervous it won't get paid back.

Once they're on their merry way, then there's a big spurt of activity and the country reaches what's called a 'steady state' whereby their investments just about replace all the duff machines and still pay just enough to the owners to pay the bank.

Where #3 (above) comes in, is during a technical revolution.  Suddenly that company producing with their machines gets a new software update and the machines can work twice as fast.  Great, more output.  More GDP and everyone's happy.

Because of this, there tends to be convergence between western countries as the slowest one gains most from new investment on the steep bit of the curve.

So, no need to worry about not being a Tiger economy, the Tortoises get there in the end.

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“GIVE me a one-handed economist. All my economists say, ‘on the one hand...on the other'”

Harry Truman (American President)

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It's the economy, stupid

So, the first question is why is it that rich countries are rich and poor countries are poor?

Answer?

Who knows.

But, in economics, they can give it a try.  

First, we have to work out what 'rich' means.  This is our concept of GDP - a combination of how much people have to buy stuff, how much companies invest in new machinery, how much the Government puts into infrastructure and how much we sell to other countries (minus how much we buy).

But, is it as simple as that?

Not when it comes to economics, more an art than a science.  At least that's what Harry Truman thought...

Why do we care about countries being rich? Well, we use 'rich' as a proxy for welfare.  Why do we care about welfare? Well, we want people to live longer and have the kinds of lives that we generally take for granted - as I sit here in my sheltered warm box - using electric light and knowing that if I need a dr. I just pick up the phone or if I'm thirsty I just get myself a glass of water.

Maybe we should worry about being happy? 

It turns out that as GDP/capita goes up, there's a slight drop in people feeling happy.  Perhaps that's why Western Governments are trying to make us stop and think a little bit more.  I think that we should all be more Germanic, work less, enjoy more.  

Recognising that it's not all about a country's wealth, some clever people put together the HDI - the human development index.  This compares countries on three main criteria:

1. Life expectancy

2. Literacy & School enrollment

3. GDP

Which is great, but ultimately, it's quite similar to GDP.  So, when all's said and done, that seems to be what economists are most comfortable with

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Who, what and how?

So, how do you make a business successful?

First of all, we must get the business model right.

How do we do that?

By answering the three questions:

1. Who is the customer?

2. What are you offering them?

3. How will you do it?

All seems sensible enough - but even when you get the business model right, how can you be sure that the industry that you're in is a good one? 

Why is it that the pharmaceutical industry has been one of the most profitable industries since the 1980s and airlines has consistently underperformed as an industry (although Ryanair has managed to be the exception)?

Michael Porter surmised that there are five main forces behind the differences:

1. The strength of suppliers

2. The strength of buying power

3. How many and how closely related are substitute goods

4. What are the barriers to entry like

5. How fierce is the existing rivalry and competition?

Not surprising that the pharma industry, using basic supplies, selling to buyers who are desperate, often with a monopoly in their particular illness, long-lasting patents and a very high cost of R&D are very rich...

interestingly enough, even though Porter's five forces are pretty standard strategic fare these days, the influence of industry on profitability is about 20% versus about 40% for management and about 40% for the unknown X-factor.

So, if you're thinking of starting an airline, don't worry, you can still make it work.

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Another year another term

So, exams over, Christmas over, New Year hangover all but gone, that must mean one thing: back to the MBA.

Pause for reflection.  First things first, we were asked to revisit our PDP - the piece of paper which helps us shape our journey through the MBA.

PDP stands for Personal Development Plan.  Our roadmap to peace, love, happiness, but most importantly, helping the school stay high in the rankings.

We had done our first PDP's back at the start of the first term.  My first impression of my own is that on the whole, I had managed to tick quite a few things off.  Ok, so the readings I'd promised to undertake hadn't quite got there - but at least I had managed to set a few of the other things into action.  It was interesting reading.  

Our most interesting hour was spent giving each other feedback.  Ok, so it wasn't all pretty.  Like:

"you should remember that a conversation involves two people and that the other person needs to participate"

or

"look for facial expressions when you are talking and see if they look bored"

However, it made it ok when I got

"you've made big improvements over the first term"

and even

"you can be the most successful entrepreneur in the world"

now that's what I call positive feedback 

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Women matter

Or so say McKinsey.  But, being McKinsey, they have the data to prove it.

Apparently, top companies perform better if they have 3 or more women on the board.

Return on equity is on average 22% vs. 15%

EBIT margin is 17% vs 11%

I'm interested, let's hear some more:

well, successful companies are about performance and health - there are lots of ways to think of the health of a company - but broadly it is the ability to design, execute and renew sustainably.

Getting women on board makes intuitive sense: 

85% of creatives are men

yet 75% of purchases are made by women.

hmmm. Time for a corporate revolution?

Problem is that companies are not that friendly to women wanting families, so by a process of elimination and not through merit, men seem to be left (not) holding the baby.

Perhaps with a critical female mass, corporates would change and the world would be a better place.  But, that still sadly seems a long way off.

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Dream a little dream...

I've been trying to keep up - but the last month has seen an acceleration in our work load.

Our first exams, lots of assignments and the readings keep coming.

In the meantime, there's still people to see, people to hear and other people to talk to.

Went to an interesting talk by a venture capitalist.  Key message is that it's all about the team.  

A great idea being implemented by a mediocre team is destined to fail.  A mediocre idea implemented by a great team will find a way to succeed.

I asked what a good CEO did - very simple - 2 things: 

1. Motivate the team and hire great people

2. Raise money

That sounds ok - I think I could do that - now, how to find that good idea?

well, went to see a very inspirational social entrepreneur (it's a big buzzword these days - see other posts)

So, he had a view on what a good idea was.  Sorry, not just good, great.

1. Meet's a need

2. Creative/innovative

3. Creates impact

4. Changes attitude

5. Enterprising

6. Involves users and has reciprocity

7. Has the Wow factor

8. Can do something to make it happen

Well, those seem pretty good to me as a guideline - not sure that any of my ideas could really tick all of those boxes, but it's a great starting point.

But, the most important thing of all is to actually DO SOMETHING

Learn along the way, journey and engage with new experiences and set out on a dream (even if you don't get there you will be going somewhere).

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Go boldly in love unapologetically with truth

This week we heard all about the Westons.  A story of modern morality.

By all accounts, the Westons seemed pretty normal successful white-collar workers working in a family business in mid-town America.

The opportunity arose for them to make some extra money from the company that Mr. W was working at.  Not in an obviously devious way, but in a way which made perfect moral sense to them both.

This was a perfect example of moral disengagement.

I believe in humanity.  On the whole, humans are designed to be co-operative and ethical in nature.  This may be unconscious and there are obviously exceptions, but if you think about it, it has to make sense.  How can we live as a race if we are constantly trying to outdo each other.  We are all naturally eco-centric of course, but we live in a world of rules and regulations that reflect what we all know intuitively.  

Ethics is an unwritten rule (which often has legal support) that we will do to others what we are happy to be done to ourselves.

So, how do we explain the unethical behaviour that we see so often?

There are basically 8 main ways to justify unethical behaviour to ourselves (because deep down, we know it's wrong - but it may be too deep to notice):

1. We're doing this for the greater good (often used for war)

2. Calling our behaviour by some euphemistic title to psychologically sanitise

3. We're doing this because it's the best of a bad choice

4. It's us versus them, and they are wrong and therefore normal ethics don't apply

5. I was asked to do it (therefore blame the authority not me)

6. Everyone does it (why single me out?)

7. It's not that bad (distorting the reality)

8. It's the victim's fault (they deserved it)

Having dissected the reasons that the Westons gave for defrauding the company to the tune of over $1m we were humbled and amazed to find them standing in front of us ready to take questions.  I felt amazed that they had the courage to hear us talk about them - I'm not sure that I would.  

After several years in prison and having found a way through for their own relationship and their own philosophy, Mrs. Weston gave me her mantra:

Go boldly in love unapologetically with truth.

I hope that come the hour and the day, I can find my own truth and courage.

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Go, team, go!

How do we get a team to work and perform?

First of all, we must work out what kind of team we have:

Is it pooled: split by task?

Is it sequential: where the team relies on every member to do a different bit? this team will get held up by the slowest person 

Is it reciprocal: where everyone helps out but there is one hero in the team who brings it all together? (this is a common structure)

Or is it networked: where every member adds to the output? great in theory, rarely happens in practice

Once we've worked that out - we then need to think about how to incentivise them.

Sales people tend to want money & commission to drive them on.  Accountants tend to want titles.

In my mind, this is all about our place in society.  We want to fit in and be better.  Money is a good comparable as we can compare it across jobs and functions (it's also quite useful when we want to buy stuff!).  Titles are great within an organisation but not so great to compare across industries.  An MD of a small start up is not the same as one of a FTSE 100 company.

We also know that sharing information tends to improve performance, so a key task is always to incentivise teams to share information.  One way to do this is use 'Kudos' points - where teams get bonuses on the back of how they have helped other teams to the benefit of the company overall.

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Decisions, decisions, decisions...

How do we make good decisions?

In business and in life, we have to make decisions the whole time - so how do we do it and how do we try and get it right?

There are two fundamental theories: the linear and the probability models.

The first was put forward by Ben Franklin back in 1772.

Effectively it's the pro's and con's method.  We've all done it and it doesn't need explaining.  However, what I don't do (and I haven't seen anyone else do either) is weight the answers.  

What's interesting is that our weighted pros and cons are done well, this method will outperform everything else.  This is, for example, why Hollywood movies all look the same.  Apparently it's also the reason why Hollywood movies have set amounts of explosions and deaths and love scenes.  They've found a formula and they're sticking to it.

However, it isn't as simple as that - because while the formula might work well in theory, we have to actually arrive at one before we use it.

On a personal level, then, we don't quite get it right because of our weighting errors - we tend to assume that some things are more important than others without real reason (but biased due to our own frameworks and experiences).  We also get errors in our thinking of the actual pro's and con's (for example, we can generally only hold about 6 to 7 pieces of information in our heads at any one time).

The other way to look at decision making is through probability.  What is the likelihood of success or failure?

Of course, the problem with this is that we are terrible at assessing risk accurately.

First of all there is bias towards events: if we meet our neighbour while trekking in the Himalayas, we think it an amazing coincidence, but, in reality, we forget all the times where we don't meet our neighbour.

Second of all, there is a bias towards the way we approach risk.  We tend to be risk adverse when we are in the positive and risk seeking when we are in the negative.  

When we are losing, we tend to ask for 'double or quits'.  When we are losing in a poker game we are keen to keep going.

This is to do with 'escalation of commitment' - where we keep going - believing that we can win eventually.  It's the reason we throw good money after bad.  One reason to use groups to make decisions, is that groups tend to stop the escalation.

So, if you've got a tough decision to make, post it on twitter and let the group respond.

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Reinventing the wheel

Companies have long recognised the importance of innovation.  Innovation breeds success.  

So, how to keep innovating? Simple, hire creative people.

How do we make sure our hires are creative? 

Not so simple.

The only thing we do know is that there are lots of myths around creativity:

It's a rare gift

Creatives are geniuses

Creatives are courageous

The reality is that we just don't know.  Arguably, we're all creative, but in different ways.

One thing we do know, however, is that creativity is not money-orientated.

The dilemma for organisations is that creatives tend to be exactly the kind of people you wouldn't really want to hire:

non-conformists

risk-takers

overly persistent and overly-flexible

very hard working

anti-rules

We see lots of companies trying and failing.  

I think that ultimately, creativity is something which is either in the value-set of the company or not.  It is set by the CEO and permeates through the organisation.

If innovation and creativity are not there from the start, buying it in will just cause clashes of culture.

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Come on - you can do it...

The theory goes that motivation comes in two flavours: from others and from ourselves. Or, extrinsic and intrinsic.

One extrinsic measure is money.

All around us we see the theory of the money-motivator put into practice.  Sales people on their commission or bankers with a bonus.  

We often read how ridiculous it is that the CEO is paid 100 times the lowest workers salary and yet is seen jetting around, on a golf course hanging out with his cronies.

There is in fact method to this madness - the theory goes that if lower paid workers see the higher paid CEO - they are motivated by what is called 'the lottery effect'. They see the easy life that the CEO has and aspire to be that person - driving them on to work harder and push through the ranks.  A dubious sales company selling total tat used to have a brand new £250,000 car outside the door as people walked in.  That's the lottery effect in action.  

On a larger, macro level, nations have played with the disincentive of tax rates - and on a global level, tax rates have been largely brought down by anything from 10-50% between 1975 and today.  In the UK, we have accepted that the 50% tax rate does nothing but take people who can afford it to other tax regimes.  

However, while we often think of money as a good motivator, and give people pay rises when we want them to stay, or get promoted, the reality is that pay rises have a short term motivational effect.  In truth, it matters more how much you get paid over and above your peers.  We also know that there are several professions that traditionally don't get paid very well - often in the creative industries: artists, writers, architects etc. People don't often undertake these professions without a love of the job itself.

Initially, (corporate) motivation was said to be a progression through five levels, starting with the very basic level of hunger, thirst etc., moving to safety, then to social acceptance, next to status and respect and finally to ultimate self-fulfillment.  Problem is, while this felt intuitive, none of the studies seemed to support it.

The latest theory is that there are two (corporate) levels:

Hygiene: these are the general office 'environment' - the bureaucracy, peer-to-peer and supervisor relationships.

Motivators: Things such as status, meaning and general enjoyment.

What is interesting, is that people tend to quit their jobs because of the 'hygiene' factors, and tend to love their jobs because of the 'motivating' factors.  

On the whole, then, people stay because of their sense of achievement and leave because of their sense of the company bureaucracy.

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Golllllllllllllllllllll!!!!!!!!!!!!!!!!!!!!!!

The question put to us this week was:

How do you motivate someone to perform?

The best answer seems to be with goal-setting.  These goals need to be:

Specific and hard, and the individual needs lots of feedback to keep them motivated whether or not they're on the right track.

I've just recently come across SMART goals - Specific, Measurable, Achievable, Reasonable, Time-bound.  These two seem to add up to more or less the same thing.

In a study, they got people to sit on an imaginary chair (it's a very tough type of physical exercise - imaginatively called 'the chair').  The first group of people were told to 'do your best' and the next group told to get to one or two minutes. The second group did significantly better than the first.

However, it's not always that easy (it never is...).  A few years ago, a French train company won the contract to build some US trains.  A year down the line, the French train company went back to the US company and said that they couldn't do it - the goals were too hard.  At this point, the French company gave up and both companies are still in court.

It also seems that without commitment goals are irrelevant.

"The difference between a successful person and others  is not a lack of strength, not a lack of knowledge, but rather a lack of will." Vincent Lombardi

Studies indicate that we need motivation to achieve our goals or we may as well sit in front of the TV eating popcorn.

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When you see a nice girl for two hours, it feels like two minutes. When you sit on a hot stove for two minutes, it feels like two hours. That's relativity

Albert Einstein

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If the facts don't fit the theory, change the facts.

Albert Einstein