HBR Blog Network has an interesting article today, "Capitalism’s Future Is Already Here". The thesis of the article is that we should reject Milton Friedman's dictum,"the purpose of the corporation is to maximize shareholder returns", which first appeared in the New York Times in 1970. This type of thinking lead to a now outdated set of management practices according to the author because Friedman does not recognize the growing needs of society.
The focus of management should now be the customer and by serving the customer well, you serve the shareholder's best interest. This concept was first presented by Roger Martin, an academic who I have a great deal of respect for. Martin's special talent, in my opinion, is that he always finds the perfect balance between sound theory and workable practice. However, this time I think he got it wrong. Yes, a corporation should always make the customer the priority and the focus of management. (As I tell my students, if it does not affect the customer or put you out of business, it is not an important decision.) Focusing on the customer gives the corporation the flexibility (opening) to consider societal issues, but what is the framework for selecting the issues. Simon Synek of Golden Circle fame would probably say to pick the societal issues and let the customers pick your corporation/product to identify with. The problem with this logic is that homeless dogs and homeless children would be equally valid social objectives for a corporation. Perhaps we should have corporations commit to the UN Millenium Development Goals (UN MDG) or at least one goal. Probably no large corporation would have the courage to pick "human rights" but maybe startups could make that commitment and eventually we would have large corporations committed to human rights. Corporate support in the U.S. for the UN is almost non-existent so the UN MDG is probably not a workable model, but it points us in the direction to address Martin's shortcoming.
This closing comment from the article sums up the important point very well:
"It’s a shift in what society demands of the managers of its most powerful institutions: from narrow definitions of their owners and decisions that serve their short-term interests, to broad acceptance of the responsibility that comes with power and leadership concerned with what is best for society. In the shift, we are learning that an argument about the proper activities of managers can be logical, can be strongly argued, can influence decades of practice in the world’s largest corporations – and can still be plain, flat, dead wrong."
Changing the way that corporate managers think about society in the context of their decisionmaking is one of the objectives of the modern business education. Eventually everyone will realize that Friedman actually did leave us the room to be good corporate citizens.
HBS Working Knowledge has an interesting article today, "Food Stamp Entrepreneurs: How Public Assistance Enables Business Bootstrapping". A controlled study shows that people on public assistance opt for self-employment, start new businesses and increase family income from such activities in greater numbers than another group of equally poor people that do not qualify for government assistance.
One's first reaction might be that government assistance has a real economic and social value, as shown by this study. However, a study in Sweden shows that undergraduate students who exit an entrepreneurship program where venture funding is guaranteed for selected businesses are more likely to opt to start new businesses. Do you recognize the similarity between U.S. public assistance and the program in Sweden?
In each case the program reduces the economic risk of cash flow uncertainty sufficiently for the individual to start a new business. Government assistance is not really relevant. Any program that reduces cash flow risk is likely to spawn new business entrepreneurs.
Recently I met some "do gooders" who advocate for "social entrepreneurship" to solve social problems. In their minds the term looks like this.
They believe that social entrepreneurship is the solution to the lack of morality in capitalism. I prefer to think about the shortcomings of capitalism, whatever they might be, as an education problem. If we train the next generation of capitalists and business owners to be more socially concerned in their business decisionmaking, the supposed shortcomings of capitalism may not be so onerous. If we merely taught a framework wherein the bottom of the pyramid was just considered a high growth market where returns needed to match risks, many social problems would be quickly addressed by those capitalist "dogs". Such a framework would probably mobilize a much larger group of problem solvers than the small current group of social entrepreneurs and the new entrants would bring their own capital and access to capital markets.
Just one more observation. In the 1960s the best business school graduates went into manufacturing and the economic growth in the U.S. was spectacular. In the 1980s the best business school graduates went into banking, investment banking and hedge funds and they nearly wrecked the world financial system in 2008. The good news is that the best B school grads today are starting new technology companies, which hopefully means that the dummies will become the bankers as it was in the prosperous period starting in 1960. Many B school grads are interested in social entrepreneurship, which is a great temporary soloution until we educate enough people to realize that capitalism and social responsibility are not mutually exclusive.
There are two ways to improve your Excel skills:
The annual Financial Modeling World Championships (www.modeloff.com) start first round competition October 25. To practice for the competition they make available a series of questions and answers called the Modeloff Questions. These are Excel questions that appeared in prior year competitions.
Over 3,000 students and young finance professionals are expected to compete in Hong Kong, London, NY, Sydney and other regional cities for the US$ 100,000 first prize.
The Modeloff folks asked me to support their worldwide competition by promoting the event on this blog. Happy to do it.
If you teach entrepreneurship, Dropbox is a great case because it illustrates the startup concept that some ideas are features, some ideas are products and some ideas can be companies. The Brooks Review re-opens this question with a recent article, "Dropbox is a Feature".
The article mentions Steve Jobs' comment during his attempt for Apple to acquire Dropbox:
"Jobs smiled warmly as he told them he was going after their market. “He said we were a feature, not a product,” says Houston."
Jobs post-acquisition integration of Dropbox clearly saw it as a feature, similar to iCloud on steroids. If Microsoft had bought Dropbox they would have seen it as a product, similar to SharePoint. However, products or features do not make companies and Dropbox, to date, has become a successful company with a multi-billion dollar valuation.
Dropbox now faces much intense competition from Google, Amazon and Microsoft. This competition has encouraged Dropbox to offer new lower prices for certain services. Always concerning when a company is forced to lower prices due to competitive pricing. Such reaction suggests that the product has become an undifferentiated commodity.
If I was at Dropbox I would be thinking about how they built a company and did not get trapped as a feature or a product. The vision that overcame feature or product should be restored. Just competing on price is insufficient to keep building a company.
Also, I think I signed up for Dropbox the very day it launched and have now used it for all my file storage for years. Effectively my digital life is on Dropbox. I sure hope Dropbox can figure out its path to continue as a company and not get caught up in "feature" or "product" or competitive pricing.
Previous stories on Dropbox are in the Related Articles below.
Quick, tell me the difference between poverty capitalism and social entrepreneurship. Have not heard of poverty capitalism, then read this opinion piece from The New York Times, "The Expanding World of Poverty Capitalism". NYT approved for-profit services provided to the poor are probably social entrepreneurship. When the NYT does not approve, the services are poverty capitalism.
This morning I met with a company considering an IPO who thought they needed some help. Instead of the storied high tech high growth startup type company, the company was a mature company looking to "spinoff" a division as a publicly traded company. This division had grown to be a large business and the shareholders were looking to take some money off the table. After they described in more detail their objectives, I made several points:
This new article from HBR,"When a Spinoff Makes Strategic Sense", basically argues that spinoffs do not make sense. The HBR article looks at spinoffs strategically but fails to consider financial benefits, such as proceeds could be deployed in a better business. In the case of the company I visited, a spinoff allows them to realize value from an underappreciated asset. Spinning it off makes it easier to understand and value.
One of the most effective ways for children to learn is by doing, by doing something they enjoy and are passionate about. Some subjects like math and writing are easy to teach in a hands on fashion. For example all of introductory math can be taught through fishing and texting or blogging easily develops writing skills. However, how do you get a student interested in learning a foreign language? Show travelogues?
Professor Ann Abbot at the University of Illinois teaches Spanish to children through lessons in entrepreneurship. "Video Lessons about Entrepreneurship that Spanish Students Will Love". Native speakers who are reportedly entrepreneurs present a short explanation of a key point in entrepreneurship, which is followed by a lesson the students complete. This may not be at the standard of HBS but it definitely would engage a child's interest. The videos are here on Medium.
Thanks to @Mariana_lud for the reference to this article. Mariana is a voracious reader and social media enthusiast on children, learning and home schooling. She is also emerging as a leading bi-lingual health and nutrition coach.
By choice I read about 200 blogs every day. My reading has grown from about 100 blogs three years ago probably because my interests have increased. After Google reader died I have been very happy with Feedly to manage my blog reading. I also use Google+ to get a more international perspective on my interests and I use Facebook to get a local perspective on entrepreneurship and social entreprenership. I only use Twitter to distribute my content and rarely read it, although the Spanish language content on entrepreneurship is excellent.
There are two content providers that I read on their blog, Google+ and FB:
My experience is that I find different articles on different sites for each of these sources. In other words to get all the content from either one I have to go to three places on the web (or maybe more). No one "channel" offers all the content for either publication. In fact I stay on FB because I like the SSIR articles and one person who posts interesting stuff on local Miami entrepreneurship.
My question is "why can I not find all the SSIR or HBS content in one place with an RSS feed"? Why do I have to go to three sites? The answer is that HBS and SSIR are tailoring their content to the distribution channel--FB, Twitter, LinkedIn, etc. in the mistaken belief that the users are different on the channels. This is a mistake. I am the same person with the same interests whether I am on FB, Google + or LinkedIn. World class publications such as SSIR and those from HBS need to put all their content in one place to make it easy for the user. They can still duplicate all their content on FB, Google+ or LinkedIn, but I will follow them in only one place.
As content increases and the hosting sites multiply, world class publications will be better off to concentrate all their content to make it easier for the user. A better user experience will be appreciated.
It has been awhile since I did a summary post of the most popular recent articles here at Sophisticated Finance. Please see below.
This list is fairly representative of the major themes here at SF. I am thinking a lot about market opportunity and considering a book on the subject, so we might see more on the subject in the future.
The all time most popular posts at SF are the series, "Excel models and tips".
If you lost count, this is the 1127 post since SF began in 2007.
For a long time I have thought that lawyers and accountants were going to be disrupted by technology. The value of such a professional service has been reduced in many cases to a license issued by a state government . The recent controversy surrounding Airbnb and the car sharing services is similarly a regulatory issue. Technology is allowing for not only services to be provided in new ways but for trust to be established between user and provider without the need for government licensing.
Banking is a highly regulated industry where I think alternative service providers are emerging. Several examples support this trend.
Stellar makes it possible for anybody to take deposits using their open source code. Such an organization could then lend the money to a hedge fund to lend to small businesses. We just duplicated most of the value of a bank with out any regulation. Imagine if Google or Facebook took the deposits in Gibraltar or Cayman islands and promised significant new jobs there in return for no local regulation. Perhaps we have more confidence in those organizations than in Citibank or Wells Fargo.
A related HBS Working Knowledge story, "Why Small-Business Lending Is Not Recovering".
Thankyou to @john_menezes for the Stellar heads up.
Ars Technica had a fascinating article today, "Algorithm predicts US Supreme Court decisions 70% of time". Ars reports that "Josh Blackman, a South Texas College of Law scholar, wrote on his blog Tuesday":
"While other models have achieved comparable accuracy rates, they were only designed to work at a single point in time with a single set of nine justices. Our model has proven consistently accurate at predicting six decades of behavior of thirty Justices appointed by thirteen Presidents. It works for the Roberts Court as well as it does for the Rehnquist, Burger, and Warren Courts. It works for Scalia, Thomas, and Alito as well as it does for Douglas, Brennan, and Marshall. Plus, we can predict Harlan, Powell, O’Connor, and Kennedy."
What the model can do is to determine with 70% accuracy how former Chief Justice Earl Warren (1953-1969) would have voted on a recent Supremem Court Decision such as "AMERICAN BROADCASTING COS., INC., ET AL. v. AEREO, INC., FKA BAMBOOM LABS, INC. "
So here is what we could do. No longer does the President nominate and the Senate confirm Justices and Chief Justices of the Supreme Court. Instead we have an election where citizens can pick any of the 30 Justices in Blackman's study for the eight Justice positions and any former Chief Justice could be picked for Chief Justice. Then for a new Supreme Court case we run the algorithm against the Justices picked by the people. One benefit is quicker decisions by the Supreme Court. Not sure we would get opinions but at least the decisions would be made. (No further updating of the algorithm.)
The fun would be in the campaigning for mostly dead justices to serve on the new Supreme Court. I suppose that someone like the ACLU or Heritage Foundation would propose their slate of extremist liberal or right wing Justices and nobody would advocate for a collection of centrist Justices. And there in lies the problem with politics today. Most advocates support positions at the edges of the political spectrum and nobody represents most of us who are liberal on some issues, conservative on other things and "don't care" about a third group of issues.
Vivek Wadhwa's Washington Post op-ed piece, "We’re heading into a jobless future, no matter what the government does", has gotten a lot of pick up on the Internet. Wadhwa is a professor at Stanford with a distinguished academic career. The article basically discusses the dramatic decline in employment opportunities due to technologies such as AI, automation and robots. I particularly like the joke about a factory:
“The factory of the future will have only two employees, a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment.” Carl Bass, CEO Autodesk
Wadhwa makes a more serious point when he discusses the role of government in addressing the lack of future jobs. In the industrial age government could manage policy to create enough work for people to provide for their families and maintain self-respect. Wadhwa believes that government can no longer manage policy to create sufficient jobs. The current efficiency of production and the expected increase in productivity will result in government policy being ineffective to create new jobs faster than existing jobs are eliminated.
If Wadhwa is correct, which I think he is, then what is the role of government. If government cannot manage the economy to satisfy individual economic needs then what role is left for government. This is perhaps the bigger question raised by Wadhwa. Why do we need a government with 2.7 million government employees, excluding the military, if the government cannot satisfy the most fundamental economic well being of people. Maybe government should be re-thought.
Of course, many, including Hayek and Wadhwa, have said that government cannot manage complex problems. Doubtful government will redefine its role and equally unlikely government will develop economic policies that counterbalance the natural job loss from new technologies.
Image credit: http://markingourterritory.wordpress.com/2013/06/04/my-favorite-quotations-about-dogs/
Last night and today I have been inundated with capital raising decks for early stage companies. Each one was just terrible and these were not student powerpoints. My students do much better decks than were prepared by mature executives some of whom are "serial entrepreneurs". These weak decks had several characteristics in common:
Below are three recent links to good advice on how to do an investor pitch and the fourth one is my all time favorite from Sequoia Capital.
I teach the Sequoia deck in all my entrepreneurship classes. I like the simple but elegant approach. Suggests that someone put real thought into the document.