Feb 26

internet

Billions of bits yearning to be free!

 

kids-sharing-cone

Last week I saw this pro consultant on Linked In … a colleague, you might say, in the great consulting constellation … trying to do a take down of Uber, Airbnb, Instacart, etc. The influencer, Victoria Pynchon, was essentially ripping off that great font of economic misunderstanding, Robert Reich, who’d published this absurdity on Salon.com the week before.

This discussion just cries out to be swatted. The reason is that if we even begin to accept the premises, we are sunk … our understanding of economics and business -human organization, for that matter- will be hopelessly flawed.

These pieces make the argument that proprietors of software driven business models that create liquid marketplaces where none existed before (think eBay) are the new “exploiters”, busily destroying the “middle class” and sowing alienation among the proletariat.

Apparently, Uber, Airbnb and Instacart are stealing the real value of participant’s assets and time. The math is a bit fuzzy, but according to Pynchon and Reich, there is no way you are getting fair recompense from Uber for picking up someone at the airport, or renting out your guestroom on Airbnb.  At least give Ms. Pynchon props for trying to unpack the economics (even if she demonstrates she slept through the concepts of sunk costs and opportunity costs in Econ 101).

Contrary to the argument that Uber, Lyft and Airbnb are taking a free ride on your assets, they are actually helping you recover a portion of the sunk costs of owning a car or home. Meanwhile they remove the opportunity cost of deciding whether or not to open a Bed & Breakfast or buy a Taxi Medallion. How good is that?!

Underlying both arguments is another, more pernicious idea that the participants in these schemes -the drivers, shoppers, and room renters- are desperate, Skid Row types who’ve been cashiered by the modern economy and left to the scraps thrown them by the fat cats who run Uber, Airbnb, Amazon and others.

Let’s dissect Reich for a minute. He thinks these businesses represent a new low in the history of capitalism because they don’t provide full time jobs. These firms, in his little mind, are immoral because they don’t make you an employee, give you healthcare benefits and a full pension. So, even though they create a market for your talents and assets that NEVER existed, they actually destroy things.

Say what? Dude, I’m just trying to rent my cottage! Or make a few bucks between client gigs driving people to the airport!

Apparently, I’m too stupid to make these choices and understand the deal. Thank goodness Father Reich is there to save me. Thank goodness Ms. Pynchon is there to suggest these businesses need to be regulated so as to protect the “laboring classes.” And the sooner the better! (By the way, who in the world calls people the “laboring classes” anymore?)

I’m never quite sure how we come to ascribe the term “liberal” to these points-of-view. They are actually Luddite … the height of reactionary response to innovation.

Folks like Reich and Pynchon appear stuck in a frame of mind that seeks a corporatist future as the ultimate objective and end state for modern society: Government elites lording over an assemblage of giant corporations. The elite know-it-all’s direct the operation and “the people” all have safe, little, life-time jobs in the corporations.

The corporations translate the will of the elite and transmit the benefit package. Shut up and take your medicine!

This kind of sharing is somehow good. Your kind of sharing … one that is unregulated, free, full of trade-offs, successes and failures … is very bad. Got it?

Friends, this isn’t progressive, this is fascist … and the true road to the middle class (i.e., all of us) becoming peasants.

price-cut

Continuing the bad strategic advice theme, here’s another questionable bit of counsel: “Avoid competing on price.”

Most strategy consultants will tell you that price competition “destroys value” (i.e., upsets Wall Street), diminishes brand equity or “sends the wrong signals” to competitors.  (The attorneys usually get agitated by the word “signal”, so then the consultants correct themselves and say “sets a bad precedent”.)  And besides, you can’t win!

Well, tell that to Wal-Mart. Or Apple. Or any number of firms that have created, disrupted or transformed markets. Price is one, if not the, most powerful strategic weapon in the arsenal.

A case can be made that northern New Jersey owes much of its character to a price war. When Commodore Vanderbilt cornered the ferry boat market in New York in the early 19th century, he substantially cut the fare to cross the Hudson. Yes, he did it to beat competition … that terrible old “robber-baron”. But he also did it to drive revenue. “Cut the price and pack ‘em in!”

Low ferry prices made the very idea of “suburban living” on the hills and meadows of the Garden State possible.

So why again is price competition such a no-no?

Obviously, short term and financially driven reward structures penalize price moves … whether up or down. Price moves untether most, if not all, the budget assumptions.  One might say it is a case where “strategic planning” (read “budgeting”) kills strategy.

Another reason is price moves are hard. They require careful reasoning and foresight. Price competition is a chess match. The near and long term objectives of price moves have to be considered together with both the probable and improbable reactions of rivals and customers.

Rival (and customer) behavior are uncertainties. And these uncertainties have to be addressed both conceptually (i.e., cost or profit outcomes) and practically (i.e., “How are we going to sell this?”). New product introductions can be project managed and stage-gated into the market. Price moves require a bit more jujitsu.

But what about that classic Michael Porter argument against price competition? Students of Porter will quickly note that price competition is a mark of instability and value destruction. In Peter Thiel’s recent book Zero to One, he talks about how he avoids these markets as he seeks to invest only in ideas that provide monopoly pricing power.

Well that’s great for the first mover, but pricing power is rarely durable.

Over the last decade or so, large parts of the consumer goods industry came to believe they had solved the pricing power conundrum. Brand marketing combined with high churn of product upgrades supposedly enabled consistent and regular price increases forever and a day. Further, high profit margins and financial market expectations forced rivals to always behave properly … to follow price increases even when they might not be able to match the other guy’s latest features or upgrades.

Ah, halcyon days! Price stability and consistent results as far as the eye can see.

Which turns out to be not quite as far as the strategic planners thought. Ask the good people at Energizer or Procter & Gamble about Dollar Shave Club.

Remembering his Adam Smith, Micheal Porter also noted that stable and substantial profitability attracts newcomers to markets, like bees to the flowers. The higher the profitability, the more entrepreneurs and innovators are inclined to scale entry barriers. And, typically, once the newcomers get past the barricades, it’s the prices that come crashing down.

So, rather than avoid price wars, the wiser course of action may in fact be to precipitate price competition. Doing so from a position of strength raises the cost for newcomers. Taking advantage of market position allows you to set the terms of price versus value in the minds of customers. You reap the benefits of increased volume and consumption. And you earn the goodwill of customers.

When seeking strategic advice, be careful about buying into myths about price stability. The most stable looking markets may, in fact, have targets painted on their backs. We should be careful not to make those targets any bigger.

Sooner or later, price competition is going come to your market. The question is, who is going to lead it?

Another great and pithy clip for your Friday…

The data demonstrating the fundamental unfairness and regressiveness of the US tax system never fails to amaze. And yet mindless “eat-the-rich” propaganda continues to rule the debate.

However, the sad truth of the matter is that reform is now near impossible. A simplified system would unemploy far too many influential people and obliterate bureaucratic power. Think of the army of accountants, attorneys and civil servants who depend on the heinously complex US tax code for their livelihood. They simply aren’t going to lay down and take a wholesale “your income times x percent and send it in” kind of reform that could end the corruption and bizarre incentives inherent in the current system.

Welder-011

“I think a trillion dollars of student loans and a massive skills gap are precisely what happens to a society that actively promotes one form of education as the best course for the most people. I think the stigmas and stereotypes that keep so many people from pursuing a truly useful skill, begin with the mistaken belief that a four-year degree is somehow superior to all other forms of learning.”  Mike Rowe

A friend and I were having lunch the other day and getting caught up on the comings and goings in each other’s families.

My friend has three remarkable, talented daughters who have fled the nest and are busy taking the world by storm. All three are degreed engineers and off to fast starts in the oil and gas industry.

My friend’s son, on the other hand, has struggled with college and is not on an engineer’s career path into the halls of corporate America. His father is worried and wonders how to help his boy get off the starting line. But the answer was right there.

His son is not going to be a doctor, engineer or mathematician. He is affable and engaging but tends to talk too much, so a sales or retail environment might not work out.

But he can weld! He’s good at it AND he likes it.

Demand for welders is high. If you are willing to go to remote places or take on difficult conditions, six figure incomes are readily attainable.

Which brings me to this remarkable post from Mike Rowe of Dirty Jobs fame. He sets out to comment on Howard Dean’s foot-in-mouth incident where he attempted to belittle Wisconsin Governor Scott Walker for lacking a college degree. He ends up illustrating the crucial difference between competence and qualification.

Truly worth a minute of time to read and consider!

quick-snellen-type-eye-chart

A friend chided me the other day about some of my musings about strategy. To paraphrase, “all that strategy stuff is nonsense.”  Well, she might not be far off the mark.

Writing about the most overused word in business can be a tricky affair. So instead, let’s talk about the some of the most overused and worst bits of strategic advice out there.

My all-time favorite? FOCUS.

“Focus, focus, focus!” Two oft-repeated syllables that are supposed to cut through the complexity and ambiguity of markets and point directly to a pot of gold. Simple, epiphany inducing clarity. “If we just focus on the widgets, all will be well!”

Well, for one, it’s the wrong word. Focus is about clarity NOT concentration or narrowing of tasks. The opposite of focus is blurry.

While no one wants things to be blurry, blurry is the nature of life and a prevalent feature of our markets, customers and competitors. 20/20 vision is only available for looking backwards. Sadly, there are no corrective lenses that give us this clear a view into tomorrow.

Second, the idea of concentrating and narrowing of tasks can be great for improving an activity, work process or system. Concentration may be essential to bring off a strategy. But as a strategy itself, it is fairly close to useless.

Most of us do not operate in a narrow world or market. And most of our businesses grew and prospered because we broadened, expanded and made our propositions more complex.  We made benches. Customers liked them and started to ask for tables. Then they wanted more colors. And so on.

Complexity is, in fact, what makes the whole ball of wax work. Because we humans CAN walk and chew gum at the same time, and because eons ago we learned how to harness the division of labor, we don’t do narrow particularly well. We are wired to multi-task, to expand, to experiment, to broaden, to increase, to decentralize, to dis-aggregate.

So why, in a room of 6 and 7 figure executives, does the word “focus” cause such a flutter?  Why is the winning advice always “stop chewing gum, and concentrate on walking”?

Step back and think just how impossible this really is.

In the real world of uncertainty, ambiguity and complexity, to not undertake experimentation, prospecting, or leading an increase in complexity –in a phase, “risk taking”- is actually to surrender. Who wants to do that?

Further, we build organizations full of talented individuals based on the premise of the division of labor, believing their talent and ambition is a foundation of “capability.” These people don’t want to “focus on the widgets.” They have dreams, abilities and desires to “make a difference.” They want to “find, fix or change” the problem.

The logical requirement of “focus” strategies is “fire everyone” not making the widgets. But typically those executives who jumped on “focus” shrink from this task. What too often follows is a sad, inexorable march through disappointing results and restructurings. Those not making the widgets end up losing their jobs anyway … just in a more painful and exhausting way.

Think about poor Radio Shack. Choice is the often cited “essence of strategy,” and Radio Shack faced a difficult one: liquidate or do something very different. Instead, they chose to focus. Under-performing stores were shuttered. Inventories and product selection were reduced. Technically skilled employees were cut.

But no amount of focus or narrowing could save an idea that’s time had passed us by. The end was delayed, but it has come nevertheless.

You might blame Wall Street for the popularity of “focus” as a strategic answer. After all, the financial markets can be pushy about getting their returns. But I’m not sure that’s quite fair.

Financial discipline can be cruel and motivated by wrong or ill-informed expectations. But the problem is deeper. Rather, it has to do with that opposite element of our nature. Despite our unstoppable urge to do, to expand and to change our world, we seem equally drawn to the idea of permanence.

Permanence, of course, is a chimera.  So when someone sells you on the idea that “focus” will preserve and extend your franchise, I suggest you say “no thanks.” Instead, it is time to roll up your sleeves and look for a more exciting, even risky, course of action.

No matter how bad your week was or how challenged you think you are, take a minute to step away and consider things. Then listen to this story from my friend Paul Smith. It will do you good!!

You might also consider this famous man’s words, write them on a scrap of paper and stick them to your wall.

You’ve all seen those bumper stickers and tee shirts that say “I’m With Stupid”. Well, it’s a time for choosing, and we should all consider stepping away from STUPID.

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Daniel Henninger’s column in today’s Wall Street Journal does an excellent job describing the crazy world we have come to inhabit where we grant Jenny McCarthy and Al Gore scientific authority. He also highlights the dangerous risk that comes from tying your wagon to causes promoted by celebrities and politicians…

The people doing basic science should learn a well-proven truth about basic politics: Any cause taken up by politicians today by definition will be doubted or opposed by nearly half the population. When an Al Gore, John Kerry or Europe’s Green parties become spokesmen for your ideas, and are willing to accuse fellow scientists of bad faith or willful ignorance, then science has made a Faustian bargain. The price paid, inevitably, will be the institutional credibility of all scientists.

While Henninger is describing what is happening to the credibility and authority of the scientific community, the same problem occurs when businesses “take up the cause”. Once you take sides based on sentiment you are committing your organizations to out-sized risk.

If the cause turns out to be wrong, you look stupid. If the arbiters of the cause change the rules you might go from cherished supporter to rich target faster than you can say “GMO”. Better to adopt a stance of skepticism and disbelief.

The rise of the vaccine doubters proves that, in the Internet age, all authority can be turned overnight into a house of cards.

So when public figures come asking for support or money or to protest your business practices, you will likely be better off to say “no thanks” and shut the door. If your employees want time off occasionally to save whales, fine. But don’t commit the company. Commit the company to its products, services and customers and leave the Zeitgeist to others.

Here’s a little advertising for the upcoming Reconverge:G2 conference in Madison, Wisconsin, April 14-16. These are great events. You’ll meet talented and interesting folks. And you’re sure to learn a lot … practical things that you can put to work in your business the Monday morning you get home. Consider joining in the fun … I guarantee it will be worth it!

happy-hour  For those in the area, come enjoy a pint this Thursday at The Brazenhead Irish Pub, either in Mason, Ohio or Columbus, Ohio, from 5 to 7 pm. Shake off the snow, warm yourself by the fire, and enjoy good fellowship with your SCIP colleagues and other intelligence mavens.   Hope to see you there!