SOPHISTICATED FINANCE

A Review of the McKinsey "Strategy Building Blocks"

Strategic planning for business was first formalized in the 1970s with new processes from McKinsey (the customer-market matrix), the BCG matrix (cash cows, dogs and stars) and the ground breaking books of Michael Porter on competitive analysis as the basis of strategy. This shift to formal processes followed the move in economics from more philosophical writings (e.g. the Austrian School) to a "scientific" approach (e.g. the Chicago School). As is the case with all new movements, intellectual or otherwise, the move toward scientific approaches was probably overdone. 

In the last few years there has been a change in strategic planning for business. In part the change recognizes the simple fact that a process is only as good as the thinking of the people using the process. The increased focus on the quality of thinking is demonstrated in a new article in the McKinsey Quarterly,"Mastering the Building Blocks of Strategy". McKinsey describes the building blocks and the process as shown below.

The "Frame" building block demonstrates the change from a purely analytical approach to a more contemplative approach of "framing the question" or as McKinsey describes it "what are the right questions". As McKinsey states:

"That’s why taking some time to frame issues at the outset is so important. When strategists do so, they are better able to identify the real choices and constraints facing their organizations and to see which building blocks are likely to matter most given the situation at hand."

I disagree with McKinsey and believe that the environmental analysis and problem identification precede the "framing" step. How do you frame a question if you have not collected current data and information (Diagnosis and Forecast).

McKinsey offers no advice on how to "frame the question" in the article, which is perhaps why two Paris-based Partners from BCG, Luc de Brabandere and Alan Ivy, wrote "Thinking in New Boxes". This book offers an approach to bring greater creativity to thinking and strategy development. The example that illustrates the approach is a story about Bic, the French manufacturer of disposable pens, razors, etc. When pen sale revenues started to flatten out, the company explored what other kinds of disposable pens they could offer and realized there where no good opportunities. Presumably with the help of BCG, Bic realized that they were in the disposable business and not in the pen business. With this realization they launched many successful disposable products. The Bic story is an excellent illustration of framing or re-framing the question, but I found little really new in the book for anyone familiar with design thinking, "impossible" problems or the writings of Marvin Minsky.

For new thoughts on thinking and strategy development, I recommend William Duggan's book, "Strategic Intuition". Duggan draws a distinction between "expert" and "strategic" intuition. Expert intuition is the "technically" grounded, repetitive analysis of the familiar. Strategic analysis is the slow, iterative exploration of the "new", what Einstein called "combinatorial". Duggan devotes 100 pages to describing strategic intuition and making it user friendly. One example from the book shows Napolean's strategic intuition and how he came to a successful new military tactic. What Napolean, an expert in military strategy and tactics, realized was that he had been taught to fight battles where the enemy was located. What Napolean realized (the strategic intuition) was that he would be more successful if the battles took place where he wanted. Duggan does a beautiful job of using many illustrative examples, such as Napoleon, to make clear and usable the concept of strategic intuition. Strategic intuition is an approach that implicitly relies on "framing the question" properly. 

A last thought on strategy, which is also inspired by the military. Something that I have been thinking about for awhile is why snipers were so effective in Iraq but were not used more in previous conflicts by the U.S. military. I think Duggan's Bonaparte example provides the answer. Snipers allowed the U.S. military to pick where they wanted to fight in a conflict without a lot of set piece battles. Snipers also had a special expertise and were available in large numbers compared with the insurgents. The psychological benefits of snipers against an informal opponent were an added plus. 

If you do not like books on strategy, creativity or "framing the question", the snipers provide three easy to use lessons about strategy:

1. Pick the part of the market you want to dominate rather than fighting with the entrenched competition (Napoleon)
2. Execute a strategy that plays to your special strengths and expertise (snipers)
3. Bring sufficient resources to succeed (lots of special operations and conventional military snipers)

If you want to know why snipers are so effective, early man had no enemies that swooped down from the sky to eat them. Therefore, man evolved with a two dimensional field of vision that really ignored looking up (where the sniper lives). Increasingly, it all comes back to neuroscience.

 

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Motorola's Project Ara Joins Phonebloks Movement.

About a month ago I wrote a story,"Phonebloks: Absolutely the Coolest Geek Idea of 2013". Today Fierce Wireless published a story that Motorola's project Ara is joining the Phonebloks' movement. Setting aside poetic license, I love the idea of a Phonebloks "movement". Every great idea should target the status of a movement. Martin Luther King, One Laptop per Child and the early days of PCs, to cite a few examples, all achieved the status of a movement. Perhaps Google's ownership of Motorola was all that it took to go from "crazy idea" to a community and soon a movement.

For those of you who do not memorize SF blog posts (which you should), let me remind you of Phonebloks. Phonebloks is built on the idea that instead of upgrading a phone by buying a new one, one could merely purchase upgaded components (screen, processor, wi-fi antennae, etc.) that would snap on to what Motorola calls an endoskeleton. Every phone would become reparable or upgradeable at a fraction of the current cost. 

Now that Google has announced replaceable component phones, Samsung will soon come out with their take on the Phonebloks concept. Like the popularity of open software, perhaps this new variation of open hardware will inspire upgradeable TVs and printers. Just the reduction in carbon emissions from shipping parts rather than new units should motivate us to support the Phonebloks idea. Perhaps we will even see the return of electronics repairmen to swap out compnents for those of us challenged in the physical world. Turning IT into a components design and manufacturing business (ignore operating systems for the moment) would probably lead to the breakdown in the industrial clusters in China and the return of manufacturing jobs to the U.S. If most applications move to the web because of ubiquitous Internet connectivity, the complexity of computing devices including phones could be simplified. This would result in the simplification of operating systems and a reduced requirement to re-write for new components.

I pre-ordered a Palm Pilot and the first Blackberry with voice. I think a phone based on the Phonebloks concept could be a change of similar proportions.

 

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Emotional Engagement is the Key to Sales

This post is a synopsis of my lecture today in my three entrepreneurship classes.

It is widely recognized that a product/service must induce emotional engagement by a customer for a sale to occur. Seems simple enough an idea, but in practice it is quite challenging to achieve. Many would say that if you solve a customer problem, you will generate sufficient emotional engagement for a sale. Solving the customer problem is necessary, but not sufficient--especially in a competitive market.

One way to think about emotional engagement is the increasingly popular Golden Circle. Simon Sinek popularized this technique in his Ted Talk in 2009 where he discusses a three-part communications strategy of why-how and what. Personally, I like the fact that a process was being applied to understand emotional engagement and communicate it, but the talk, despite its popularity, was insufficient for me to be able to apply it until recently.

The hard part of the Golden Circle is picking the "why". Everybody can answer the "what"--the product or service--and "how" is also straight forward. The "why" is the key to achieving that comparative advantage in emotional engagement.

Fortunately a recent Fast Company story, "Want Your Kickstarter To Work?", provides such an excellent example of the "why" that even I now get it. Make sure to watch the video in the article, where the concept of "why" is beautifully illustrated.

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The Future of Urbanization

About 40,000 years ago the human brain changed and for the first time we could use representational art to mirror objects in the physical world. Representational art is the foundational concept of innovation Not surprising was that at this time the first cave drawings appeared. What also happened, which is surprising, is that the exchange of goods, the predecessor to business as we know it, appeared. Innovation gave man the ability to manage abundancy and scacity, which lead to the division of labor and the ability to enter into exchanges of goods.

With the advent of innovation and business, man was no longer trapped in the hunter-gatherer life style and cities first emerged. Cities basically were organized because they provided certain efficiencies which fostered the division of labor and exchange. With each major introduction of new technology thereafter (agriculture, steam engines, electricity, etc.), the number of people in cities as a percentage of the total population increased. Today many authorities expect 70 percent of the world's population to live in cities by 2050, or approximately 7 billion people.  

Of course most cities were planned and organized when people road horses or used trolley cars for public transportation. Little attention was paid to air pollution, mortality rates or supply logistics. Basically no large city in the world was designed for the expected scale of urbanization by 2050. Government, almost always focused on maintaining the staus quo, has given little attention to the issues related to urbanization. 

Fortunately, the Santa Fe Institute (SFI) and some other leading think tanks and universities are studying the problem. SFI focuses on complexity research "where physicists, biologists, mathematicians and the like congregate in attempts to decipher how the world works". (More on complexity.) This article from Big Think,"The Science of Cities: Is Urbanization Sustainable?", describes how SFI is approaching cities as large biological organisms as a way to better understand them. The Great Reset, by Richard Florida, does an excellent job of explaining the inevitability of increased urbanization as a result of the advent of computerization.

While everyone is focused on social media and big data to find the next Google, the bigger opportunities may lie in addressing the issues of urbanization. The first response may be "who wants to deal with the government". Recent events have surely reinforced such feelings, but I think that we will increasingly see the private sector take over traditional government services. Government lacks the resources to address social problems. According to HBS professor Michael Porter in a recent Ted talk (6.43 minutes in), government and foundations combined have annual revenues of of $4.3 trillion in the U.S. and the private sector has revenues of $20.1 trillion. The private sector will use these funds increasingly to fund privatization because they will no longer be able to tolerate government shortcomings in transportation, food, energy and health infrastructure.

So, the good news is I think future urbanization entrepreneurs ("urbaneurs") will have to deal less and less with government. The bad news is the problems are very near and inadequate resources are being directed to corrective action.

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American Made

Last Thursday I was in New York on the way to a board meeting at South Kent School. Passing through Grand Central I noticed a fair for products made in the U.S.A. The fair was sponsored by Martha Stewart, someone who I am not fond of, but most people deserve a second chance.

The one product in the fair that stood out was lighting fixtures from Lindsy Adelman Studio. The merchandise is high end, interior designer type merchandise. This is not what caught my attention. This company posts on its website full plans for some new designs that they will not sell and anybody can build themselves. The "you make it" products are very popular as evidenced by the product pictures received by the company. 

There are several things I like about the "you make it":

1. The lighting fixture designs are "open source" and follow the increasingly popular trend for open source hardware
2. High end manufacturers expand the number of people who can use their products with no brand issues related to lower price goods
3. Such an approach would be a good corporate social responsibility project, where school children could make Bose speakers or Ethan Allen furniture and perhaps compete for prizes for their school (hands on learning)

Another company I liked is Shinola, a company that makes watches in Detroit, and is probably the only watchmaker manufacturing in the U.S. I have not worn a watch in at least ten years, but I still enjoy window shopping for them.

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Leadership Requires Wisdom

Smart Blog had a post yesterday,"What is the most important trait a leader must cultivate?". The article had a list of ideas from successful tech CEOs under the age of 40. The list included passion, perseverance and other frequently mentioned qualities. After I read the list I was bothered. What was missing from the list was any mention of the importance of wisdom in a leader. In fact, wisdom may be all a leader needs to be successful, but that idea requires further thought in a later post.

Google (with no attribution) defines wisdom as:

"The quality of having experience, knowledge, and good judgment; the quality of being wise."

This is not a bad definition, but I think it focuses more on how to become wise rather than how to be wise. The relatively small number of people who are wise have three characteristics:

1. Focus
2. Fair
3. Calm

Focus

Focus means that one is always considering the overall mission of the organization. Every decision is considered in the context of what it does to further or achieve the mission or sustain the organization so that it can achieve its mission. Essentially, focus means that the wise leader always frames the question properly so that it is considered in terms of the mission. Identifying the problem or question properly is the hard part. Solutions are comparatively easy. By framing the question properly the leader demonstrates good judgment, a type of perseverance and communication skills sufficient for an organization to move forward effectively.

Fair

While focused on the mission, the leader is always fair to all stakeholders--shareholders, employees, suppliers, community, etc. Good decisions are always beneficial to all stakeholders. To demonstrate fairness, a wise leader is always moral and legal in their behavior. The wise leader is not political because the concept of fairness, by definition, has no need for politics. Some might argue that a leader needs to be compassionate, but I think that fairness is sufficient. Transparency and open communications are part of fairness.

Calm

In times of crisis, the leader needs to be the unemotional, deliberate one who  insures that everyone remain focused. By being deliberate the organization has time to properly frame the question and increase the likelihood that the organization survives. At other times even wise leaders may show certain emotions that are not constructive, but as long as they are fair to stakeholders they can still be effective leaders.

 

"Not all smart men are wise, but all wise men are smart"

Anonymous

I will refrain from using the current mess in Washington to further illustrate the points in this post. Suffice it to say, read the quote immediately above.

 

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It's Always About More Than the Numbers

In this day and age of big data, computerized trading, huge derivatives markets and legendary financial whizes, we can easily lose sight of fundamentals in finance. The fundamentals are not just about the numbers, as this story about Steve Jobs makes clear. As reported in Business Insider, "Hedge Fund Legend Dumped Apple Shares After Reading The Steve Jobs Biography And Deciding Jobs Was A 'Really Awful' Person", Julian Robertson of Tiger Management sold all his shares after discovering what an awful person Jobs was. His logic was that the Apple culture had to be questionable given Job's management style. Business Insider appears shocked by Robertson's decision, but I had dealings with Tiger. Robertson built his reputation in Asia starting in the 1980s where financial reporting has never been the best and successful stock picking relied a lot more on the style and integrity of the controlling shareholder. 

Robertson is not alone in focusing on the character of the top executive. Walter Wriston, the legendary CEO of Citibank who built the bank into a global financial services provider, had an insightful saying--"balance sheets don't pay you back, people do". 

A reliable source told me a story that illustrates the same point about the importance of people. A tycoon with over 20 publicly traded companies had dinner with five fund managers from Fidelity that owned shares in his companies. In the course of the dinner the tycoon mentioned that he never worried about legal issues because he could always "fix" them. The next morning when trading opened, Fidelity sold every share they owned in every one of the tycoon's companies, a sale of approximately $300 million. 

Good numbers are necessary, but it is the people involved that really determine the good investments.

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The Policy Debate Washington Needs to Have

Last night 60 Minutes had an investigative report on the federal disability payment program. The theme of the report was that approximately 50 percent of the people on the program are not disabled. The argument is that many people enter the disability program when their unemployment benefits expire. 

The story also focused on the investigations of the federal program by Oklahoma Republican Senator Tom Coburn. Amongst all his comments about waste and fraud, he made one thoughtful remark. He basically said that Congress needs to have a debate on the nature of social services in the U.S. This idea echoes a similar thought from Warren Buffett, who advocates for support and services for the dienfranchised. I think that 99% of Americans would agree that a country as rich as the U.S. should take care of those who cannot care and provide for themselves. Whatever the reason for their situation, they should be provided for. While there are many views on how to address current high unemployment, Obamacare and services for veterans, none of these issues are new and they are not going away. Reduced blue collar jobs and an aging population might suggest that the urgency of the problems is increasing.

Fortunately we have a federal program as a model that is successful and widely used. The GI Bill is a program that provides monies to armed forces veterans that wish to study at schools to improve themselves and their lives. The simple idea underpinning the program is that the veteran has to take action, be enrolled in a school and continue to matriculate to receive future benefits. The lessons to be learned are:

1. The funding is linked to something that benefits all of U.S. society by increasing the educated population
2. The veteran has to maintain their status as a student (through passing grades) to receive future benefits (performance based funding) 

From the lessons of the GI Bill, the answer on social services might center on a federally paid work program, which would address in unemployment, disability and welfare programs. If people want to receive social benefit payments they have to work on projects for which the federal government pays them. For example, using charter schools as a model, private sector companies could provide more day care, transportation for the elderly and cleaning services for roadways, parks, etc. The employees would be the people who currently are receiving social services payments. 

I am not advocating that homeless children or the severly disabled would have to work to receive benefits, but the able bodied would have to work. The much smaller percentage that cannot work we could handle in the more traditional ways. The simple rule would be that you have to prove you cannot work to receive payments without work. 

Under such an approach I think many people would opt to work out of pride and some would just lose their benefits. Also, I think fraud would decline because the number of people in the "cannot work" category would decline. The savings on fraud might offset the perceived increase in federal spending. 

I think we need to address the problem of the disenfranchised, which is a number that is increasing in the U.S. primarily due to unemployment. I just think that most of these people should have to work to receive benefits beyond a short transition period.

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40th Anniversary of Black-Scholes

Perhaps only MIT would celebrate the anniversary of a theory. This week MIT Sloan School of Management celebrated the work of their faculty members for the Black-Scholes formula to price options. In the story, "Celebrating Black-Scholes-Merton", it is interesting to note that the original paper presenting the theory almost went unpublished because the theory was deemed too "arcane". Eventually the paper was published and Robert Merton and Myron Scholes won the Nobel Prize. Also of interest are the new areas where the inventors believe the theory will be applied, such as central bank management and the management of risk in emerging markets.

Given the world wide, popular use of Black-Scholes to price options, I would point out again the applicability of "academic" theory to real world problems. 

For more about MIT, you might enjoy this post, "Inside MIT".

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Knight Foundation Leading Miami Entrepreneurship

The Miami Herald blog, The Starting Gate, written by Nancy Dahlberg provides the best coverage of the Miami tech scene. The Starting Gate has excellent coverage of events, company fundings and infrastructure development. Infrastructure would include new incubators, new venture capital funds and the other types of organizations required to support entrepreneurship. 

Yesterday's article in The Starting Gate, "A closer look at four organizations nurturing the ecosystem", highlights four infrastructure projects:

1. The Lab Miami
2. Venture Hive
3. eMerge Americas
4. Endeavor

Lab Miami (an incubator) and Endeavor (a venture capital fund) have backing from the Knight Foundation. The Knight Foundation also has a program to provide seed funding to early stage companies. The program, Knight Prototype Fund, provides grants up to $35,000 for companies to develop demos. In a perfect scenario, a company could be awarded a grant from the Knight Protype Fund, move into Lab Miami to work on its demo and then be funded by Endeavor. Effectively,the Knight Foundation has funded all the key parts of the startup ecosystem in Miami. Particularly insightful on their part is that each piece of the ecosystem is a private sector type initiative, which is the same way that Israel successfully launched itself as a high tech hub.

I commend the Knight Foundation. 

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