SOPHISTICATED FINANCE

The Military View of Management and Leadership

I have written frequently about the military (~20 posts) for their insights into management, leadership and the difference between the two disciplines. Previous posts include here and here. The quote below comes from an interview with General Russell L. Honore in Gallup Business Journal. (General Honore took over the management of relief after Hurricane Katrina.)

"GMJ: What do you do when people buck the arrangement? How do you motivate them to do what they don't want to do?

Gen. Honoré: There's a construct for that. You've got three groups of people in your organization. First, you've got the people who, when you say it, will get it done. Those are the people who want to replace you.

Then you've got the people who are on the team but aren't necessarily motivated to get the task done. Those people are in the middle. You can't run the organization without them, so you take them as they are. They are committed to the company, they're committed to the unit, but they don't work with the enthusiasm of that first group.

And then you have the third group. They're very effective, but they don't seem motivated. They argue with you. What you must decide is, is it OK to have a person from the third group on the team, or should you get rid of him? Members of that third group can be very competent, and many leaders let them go because they aren't jumping up and down every time the boss walks in.

So an art of leadership is to sort those three groups out. You don't have to worry about the ones who want your job. They're clapping every time the boss says something, and they're willing to do whatever it takes to be on the team and be solid key players. Then you've got those who don't cheer, but they get it done. But the third group could be the most productive, because sometimes the least conformist member of that group can say, "Yeah, this is what the boss says, but this is what the organization needs." Some of your best innovation may come from the mavericks."

Read the whole article. I should give a quiz on the article. Maybe only the mavericks will read it without a quiz.

Image credit: Wikipedia

Infographic: The Psychology of Social Networks

Lately I have gotten a lot of requests for guest posts. The recent post "Apple Retail Store Statistics" was particularly popular, in part because it was a well done infographic. Today's infographic comes from Sarah Wenger at PsychologyDegree.net.

 

Smart Cities--Smart People?

The "smart city" project is designed to introduce better, more environmentally friendly technology into larger urban areas to improve the overall quality of life. Much of the early work was done in Europe but now the movement is spreading to lesser developed areas including Latin America. This story from Co.EXIST, "Filling South America With Smart Cities", highlights a project in Santiago, Chile.

I think the "smart city" project is a great idea particulalrly given the dramatic growth in urban population. Free ubiquitous Internet access, solar powered everything and better mass transportation all sound attractive. I have only one question? Where are the smart people who will inhabit the the smart city? Without equal emphasis on improving education for the poor and disenfranchised, smart cities will only further exacerbate the class discrimination so prevalent in Latin America and other parts of the world.

Previous thoughts on urbanization are here, here, here, and here.

Image credit: faculty.fairfield.edu

The Future of Streams

RWW has an interesting post on streams, as in information not fishing. Streams are defined as:

"A constant flow of information ordered chronologically and (ideally) topically too. In the near future, the theory goes, it won't matter where you enter content - a blog platform, Facebook, Twitter, Tumblr, etcetera - because all of it will be accessible to other people as a stream."

The Wall Street Journal is an early adopter in the use of streams. Formating and style of their streams suggests that streams will look particularly good on mobile devices.

I have been intrigued by the idea of streams since this SF post in 2010, which I quote below:

"I think that where the web will evolve is toward a model where all your content will be generated from a single web-based app and you will merely choose what distribution channels you want to use (public, private, group, company, etc.), similar to the Google Reader feature "share". As soon as you can choose easily where content is distributed, Facebook and Twitter become much less valuable."

As I correctly predicted, Twitter and Facebook are fighting streams according to RWW.

AI May Replace Your Job

For the last 50 years computer automation and other IT technologies have replaced many jobs. Most of the jobs were low value-added positions. In the next 50 years many jobs that required a college education will be replaced by the same computing technology applied in new areas.

This story from Wired, "Can an Algorithm Write a Better News Story Than a Human Reporter?", illustrates the point. Narrative Science, a company based on AI technology developed at Northwestern University, is developing high quality news stories without reporters. Can lawyers or accountants be far behind.

We can argue about the pace of this trend and what jobs will be replaced, but students should be considering fields that cannot be duplicated or replaced by AI. Should I mention entrepreneurship?

The last post on Narrative Science eleven months ago is here.

Incentives for Social Responsibility

If you have ever designed a compensation scheme for a sales force, you know that frequently there can be unintended consequences. The sales people find the way to maximize their income regardless of what the corporate objectives were intended to be. The best sales people appear to be the most insightful in identifying the unintended income consequences. While this example might suggest more careful development of salesperson compensation schemes, the other thing it points out is that people behave in ways to maximize their compensation. That might be described as human nature, to state it politely.

Recently I was talking to a senior executive from a Fortune 500 company about their social responsibility programs. They confirmed that each project has to satisfy an ROI target and that the company could afford to do more social projects if leadership was so inclined. As a way to incentivize top management, I suggested that senior manager bonuses be broken down into two parts:

1. 50% of bonus based on financial results such as profit, cash flow or stock performance;
2. 50% of bonus based on the scope and quality of social programs

The executive thought such a scheme would definitely change executive behavior even if evaluation of No. 2 was purely subjective. The definition of "social" could be defined by the board or we could use a concept like Michael Porter's "shared value". I do not think such a scheme would have much negative effect on stock price and might even attract a new group of investors.

Just an idea but if you want to change behavior, change the incentives.

 

A Perplexing Issue about Note Taking

I recently attended an important meeting where the host asked everybody to turn off their phones and computers. The objective was to insure everyone paid attention. The problem was that everyone was reduced to taking notes with pen and paper. Half the people had no pen and half had no paper. Result almost no one took any notes.

Roll forward two days. Gentleman is giving someone advice on a complex subject. One of the attendees starts taking notes on their smart phone. Another attendee asks the person to stop texting and pay attention. When it was pointed out that it was note taking and not texting everyone was noticeably pleased.

We need new rules of behavior but dictating those rules will not work. Perhaps we should trust people to pay attention to what is important and perhaps just discourage multi-tasking. Multi-tasking has been shown to reduce productivity and effectiveness.

Another point. When everyone is ignoring the speaker it is the speaker's fault.

I was tempted to put in a link to explain "pen and paper", but I will refrain.

Donor-sponsored Classes at Universities

With reduced federal and state support for higher education, higher operating costs (which I do not understand) and the in roads being made by online courses, universities face many challenges. One would hope for some innovative solutions.

A story in The Chronicle of Higher Education reports that Las Positas College in California is seeking donors to underwrite classes at $5500 per class. Maybe a professor could fund their class using Kickstarter. Maybe Walmart would like to underwrite a business class with all the cases based on Walmart. Ahh...the opportunities are endless. 

If anyone has a donation and no professor, let me know. I know a few great professors.

The views expressed herein are solely my personal views and are not intended to represent the views of any client, organization or university with whom I am affiliated.

Classes Start Monday

I am still new enough to teaching that I look forward to each new semester. As I frequently say, "teaching is the most fun I have". I have been forced to think through quite a few concepts over the last eight years and some I can even explain. The most satisfying part of teaching is when a student extends a concept or applies it in a new way. The other part that is fun is when students actually start a business.

This semester at FIU I will be teaching a course in social entrepreneurship. Students will be preparing to enter the Hult Global Challenge, which I judged last year in Shanghai. As preparation they will prepare solutions for each of the cases in the 2011 competition, which included OLPC.

I will also be teaching an entrepreneurship course in the graduate College of Engineering. Will be interesting to see how many repeat students from the technology entrepreneurship course in the spring term. I average about 5 repeat students per semester...the ones that really want to start their own business. 

Looking forward to giving a new lecture this semester on Clayton Christensen's "disruptive innovation". Also have an interesting lecture on risk-return in social entrepreneurship, which I may give at the MIT Sloan School before I do it at FIU.

Let the fun begin.

 

 

Another Benefit of Women

Fast Company has a great post today on some research by Credit Suisse. Key findings:

1. "Only 41% of companies on the MSCI World Index, a collection of global stocks, had any women on their boards at the end of 2005. By the end of 2011, it had increased to 59%."
2. "Between 2005 and 2007, when economic growth was relatively robust, there was little difference in share price performance between companies with or without women on the board."
3. "From 2008 onwards, as volatility increased, the companies with female board members outperformed the others."

So when times get tough in the business, look to women...which you should have learned from your mother at about age 3. Credit Suisse's conclusion: "More women in the group signaled a greater collective intelligence."

 

Black Swans Explained

Nassin Taleb's bestseller "The Black Swan" popularized the notion of statistically improbable outliers. Benoit Mandelbrot's "The Misbehavior of Markets" explained the math behind black swans and took away the mystery.

Studies have shown that the more often we succeed in risky behavior the more likely we are to repeat it. "For ego protection reasons, we like to assume that past events are a product of what we controlled rather than chance", according to Georgetown business professor Catherine Tinsley (Wired Aug 2012). Effectively, success encourages a tendency to ignore the black swan event(s). However, neuroscience may explain this irrational behavior.

In John Coates new book, "The Hour between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust", the "irrational" exhuberance of financial traders is explained. "The euphoria, overconfidence and heightened appetite for risk that grip traders during a bull market may result from a phenomenon known in biology as the ‘winner effect.’" The winner effect is brought on by an increased flow of testosterone. Effectively human biology may take precedence over the more rational analysis Mandelbrot made possible.

Image credit: Wikipedia

Education Does Not Produce Innovation

The It's Good blog has a short story on Daphne Koller's recent Ted talk about Coursera. The writer makes the following argument about online education:

1. Online education makes it possible to offer a "top quality education to everyone around the world for free."
2. Which goes a long way toward "making education a fundamental human right"
3. Which may make 'lifelong long learning the norm"
4. .... and paves "the way for a new era of innovation"

Nice argument with many themes I support. Only one problem...education does not produce innovation. Innovation is brought about by access to information. Yes, one needs to be literate to interpret information but access to information is equally important to spawn innovation. The computing device connected to the Internet and all its information is more powerful than the "top quality education" in spawning innovation. 

Innovation is defined as the commercialization of invention. Neither commercialization nor invention requires a top quality education, as evidenced by the very large number of entrepreneurs without such an education. However, every entrepreneur started with access to the information that enabled them to draw the insight which spawned their commercial venture (Kirzner).

I occassionally teach and lecture at some of the highest quality educational institutions in the U.S. I obviously believe in such a high level of education. However, I believe that access to information through connected computing devices combined with basic literacy training may be a more effective way to help the greatest number of people in the world.

One might also suggest that this view contradicts the premises of OLPC. I would point out that the 4Cs and the 300 Sugar educational apps on the XO laptop are provided at no marginal cost. Basic literacy and access to information are necessary but a higher quality education at little or no marginal cost is the ideal, which of course is the attractiveness of online education.

Apple Retail Store Statistics

Some amazing statistics on the Apple retail stores courtesy of Onlinemba.com.

Economics as Moral Science

Having taught entrepreneurship now for eight years, I find that many students use words that they cannot actually define. Such a word is "economics". Every business student takes macro and micro-economics, but how many students can give a concise definition. Fortunately Ben Bernanke, Fed Chairman, provides an elegant definition.

In a speech reported in Businessweek, Bernanke defined economics as " the allocation of scarce resources". Bernanke then went on to ask why we do economics, which lead to a discussion of the close relationship between economics and government policy. Bernanke believes that all the focus on economic indicators masks the real objective of economic policy and government. Quoting Adam Smith, Bernanke stated that government should provide "secure tranquility", what some would call happiness. Bernanke then went on to describe the Bhutan government index of happiness as possibly a better way to measure economic performance because it moves away from materialistic measurements in favor of more personal benefits. This concept moves us closer to Robert Schiller's (Yale economist) view of economics as a "moral science" where economics is “driven by the broad moral purpose of improving human welfare.” I like this concept because I find it hard to believe that the great (economic) thinkers have consistently ignored morality. I believe that even Milton Friedman, the "bad boy" of 20th century economics, recognized the need for morality in economic systems.

If we accept this concept of economics, the distinction, for example, between social entrepreneurship and traditional entrepreneurship may become trivial. The implied normative judgment in social entrepreneurship is not necessary if economics is a "moral science". Need to read more Schiller.

This is the link to the full Businessweek story. The story has many other interesting points on the history of economic thought and the changes in economics in periods of crisis.

Student Use of Time

I really like the blog Concurring Opinions. It is a combination of good academic and practical thinking on legal issues and related themes. The latest story is entitled What Could Law Students Do With 2 Million More Hours a Year? Setting aside advocacy for all academic and law journal articles to be published on SSNR, which is a no brainer in my opinion, the article poses the question of what law students could do with their time if they were not working on law review. There must be a better use of this time, especially when it totals an estimated two million hours per year.

Makes one ponder what other student activities could be re-directed to more productive or socially useful activities.

Married Humor--II

A surprising number of readers come to Sophisticated Finance for the humor. As I always say, life is funnier than anything else. Today's true story:

A long married couple are walking on the beach and encounter a statuesque young woman in a small bikini.

Husband to wife: why don't you wear a bikini like that?
Wife: Forget that ...you get to see me nude

September Miami Workshop--Business Concept Development

On September 7 I will be giving a workshop for the Pino Entrepreneurship Center at FIU. The theme of the workshop is "business concept development". The workshop closely follows my book (link above) and details how to think through a business model.

The workshop is open to the community. Registration details are here . Proceeds from the 4 hour workshop go to Pino.