SOPHISTICATED FINANCE

Maybe Airbnb should Buy and Sell Hotels

What does a hotel chain do well?

1. Operate a reservation system to sell room nights
2. Provide housekeeping (debatable)
3. Identify convenient locations
4. Design locations with the appropriate services

Everything else in hotel management is not a core competency or outsourced.

What does Airbnb do well?

1. Operate a reservation system to sell under utilized assets as accomodations

What would happen if Airbnb bought a hotel?

1. They should sell the rooms to individual investors
2. They should outsource all of the required services
3. They  should cancel the franchise/brand agreement with the hotel chain
4. They would be the exclusive provider of the reservation system for the "hotel"

Following this strategy, Airbnb would strip out much of the "overhead" in hotel operations. This additional cash flow could flow to the investor and/or to the guest in reduced room rates. Such a strategy would also give Airbnb better control over its available room inventory and the ability to predictably grow that "asset".

Selling services to consumers using under utilized assets (rooms, cars, etc.) may just be in its early stages. But selling off all those hotel rooms to investors suggests that investment bankers may become the driving force in this trend. 

Also, the investment bankers need a new class of real estate asset--hotel rooms--to play with.

 

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Another Example from Mathematics of the Study of Creativity

Many genius and near genius people have studied thinking and creativity. Another example is the work of the mathematician Jacques S. Hadamard.

In this post from Farham Street, "Einstein on The Essential Feature of Productive Thought", the correspondence between Einstein and Hadamard is discussed. Hadamand went on to publish "An Essay on the Psychology of Invention in the Mathematical Field".

This quote of Einstein from the correspondence is well known but still interesting.

"The words or the language, as they are written or spoken, do not seem to play any role in my mechanism of thought. The psychical entities which seem to serve as elements in thought are certain signs and more or less clear images which can be “voluntarily” reproduced and combined."

 

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Hot Topics in Social Entrepreneurship

Recently there have been some significant changes in the way people think about social entrepreneurship (SE):

1. The CEO of Ashoka is encouraging social organizations to focus more on entrepreneurship as a means to create scalable solutions to problems
2. The Skoll Forum is advocating " “Good enough” solutions are worth pursuing" (looks a lot like MVP-minimum viable product)
3. Clayton Christensen's "disruptive innovation",which involves developing products for unserved or underserved markets, is the new mantra to solve social problems

All of this talk would make one think that the do gooders have become entrepreneurs. However, these folks still miss one important concept--focus. If you read an article say about solving world hunger, somebody always mentions:

• natural fertilizer
• non-paper food packaging
• seeds of a certain type
• the CO2 issues in transporting the food
• abusive labor practices

None of these issues actually put any food in anyone's stomach, but the do gooders seem to think they are equally important...at least to them. To avoid this recurring lack of focus in social organizations, I have found a solution. No, it is not robots. The solution is rocks. Yes rocks.

After researching over 120 countries I cannot find one NGO, non-profit foundation or government agency that cares about or advocates for rocks. Therefore, I am starting a worldwide movement "Rock the Rock". Here's how the movement works. Whenever you have a problem in your social project, consider rocks.

• Need a non-wood packaging, consider rocks
• Need re-useable dishes for food, consider rocks
• Violence against women, consider rocks
• Reduce CO2 emissions, use rocks (no CO2)
• Need to create jobs, switch to rock mining (of course with no machinery)

Rocks are extremely flexible in their application to social problems and they will allow you to focus on the real problems-- hunger, healthcare and education. 

So to understand where social entrepreneurship has evolved to, we just need to remember "Rock Entrepreneurship" or "focus" in other words.

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My very old friend @suzyhut sent me this article from HBR Blog Network, "The Two Questions Every Manager Must Ask". The article discusses Aravind Eye Care in India, an organization that specializes in cataract surgery and treats 70% of the patients for free. Aravind is a classic example of  “doing well by doing good”. 

The article explains that because of the large number of patients, Aravind has broken the entire procedure of outpatient services and surgery into steps, developed experts to deliver each step and tasked everyone to focus on ways to reduce cost in each step of the procedure. Effectively, the scale of the operation, which is largely free patients, prompts a focus on efficiency that enables Aravind to succeed financially with only 30% paying patients. 

The lesson to be noted here is that every medical services company should constantly be working to reduce costs, especially marginal costs, because an Aravind-like competitor could be right around the corner. Labor costs as a percentage of medical revenue are much higher in the U.S., but if we substitute robots for medical technicians Aravind could be done in the U.S.  Just the process of designing and developing the robots would probably improve medicine and lower costs in the U.S. 

Maybe this is the solution to robots replacing human workers. Free medical care for 70% of the people who no longer have jobs. Seems fair that the robots should provide free medical care. Haha.

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Physics and Economics

A story at the Santa Fe Institute led me to this fascinating article, "Arrogant physicists — do they think economics is easy?". A few quotes from the article.

1. "This is precisely why many physicists, myself included, are convinced that modern economics is indeed, in an important sense, “held back because of a deficiency of mathematical tools and techniques”
2. "The economy is a vast and complicated set of arrangements and actions wherein agents—consumers, firms, banks, investors, government agencies—buy and sell, speculate, trade, oversee, bring products into being, offer services, invest in companies, strategize, explore, forecast, compete, learn, innovate, and adapt. In modern parlance we would say it is a massively parallel system of concurrent behavior. And from all this concurrent behavior markets form, prices form, trading arrangements form, institutions and industries form. … One of the earliest insights of economics—it certainly goes back to Smith—is that these aggregate patterns form from individual behavior, and individual behavior in turn responds to these aggregate patterns: there is a recursive loop. It is this recursive loop that connects with complexity. Complexity is not a theory but a movement in the sciences that studies how the interacting elements in a system create overall patterns, and how these overall patterns in turn cause the interacting elements to change or adapt. … Complexity is about formation—the formation of structures—and how this formation affects the objects causing it." Brian Arthur Complexity Economics
3. "To look at the economy, or areas within the economy, from a complexity viewpoint then would mean asking how it evolves, and this means examining in detail how individual agents’ behaviors together form some outcome and how this might in turn alter their behavior as a result. Complexity in other words asks how individual behaviors might react to the pattern they together create, and how that pattern would alter itself as a result. This is often a difficult question… And so economics early in its history took a simpler approach, one more amenable to mathematical analysis. It asked not how agents’ behaviors would react to the aggregate patterns these created, but what behaviors (actions, strategies, expectations) would be upheld by—would be consistent with—the aggregate patterns these caused. It asked in other words what patterns would call for no changes in micro-behavior, and would therefore be in stasis, or equilibrium." Brian Arthur Complexity Economics

Interesting notion that economics was in part defined by the math available at the time.

I also find the description of economics as a complex system one of the better descriptions of complex systems. This could, however, just be explained by the fact I understand more about economics than physics or quantum mechanics.

A related article from Santa Fe Institute.

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Computational Creativity

You may recall last week's post, "An Observation on Thinking", in which I speculated on the way thinking evolves. My hypothesis was mathematics--computer science--artificial intelligence--cognitive learning, based on examining the lives of several great thinkers.

Today I came across this story, "What is Computational Creativity?" The author defines "computational creativity" using a definition from the Computational Creativity Conference Steering Committee :

"Computational creativity is a multidisciplinary endeavour that is located at the intersection of the fields of artificial intelligence, cognitive psychology, philosophy and the arts....The goal of computational creativity is to model, simulate or replicate creativity using a computer, to achieve one of several ends.."

Not surprising, the computers are being programmed to think in ways very similar to the founders of AI, Minsky and Simon.

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Managing Consumer Response--Mozilla, Dropbox

The economics blog Marginal Revolution recently had a good article on the resignation of the Mozilla CEO. In the story they talked about how easy it is for consumers to change products when the original product is free. Therefore, companies such as Firefox are more susceptible to public campaigns, boycotts, etc. 

Now Dropbox is under attack for its Director nomination of Condoleezza Rice, Secretary of State under President George W. Bush. The protestors call into question Ms Rice's involvement in Iraqi torture and widespread wiretapping. Dropbox is initially free until a certain amount of storage is reached.

Short of companies hiring convicted felons or their equivalent, I see no need for social/political views and consumer purchasing decisions to be inter-related. Let business be business and let Washington and their ilk be whatever Washington has become. Everyone has their right to free speech, but the social critics should be ignored by the businesses on these matters.

On the issue of data privacy, I would rather have Ms. Rice on my side of the table advising me on the options for dealing with the NSA. The issue of data privacy has really only just emerged and there will be many more events forthcoming. 

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Leadership and Management

I recently heard a story first hand where HBS staff visited a high school in Mexico to evaluate how effective the case method was for younger students. To evaluate the students' learning, the HBS staff first question to the students was "what is the difference between leadership and management?" I wonder how many of the MBAs in the U.S. could provide as good an answer as the Mexican high schoolers who had been using HBS cases with their non-business teachers for five years.

According to an excerpt from a new book by John Kotter at HBS, "Accelerate: Building Strategic Agility for a Faster-Moving World",

• Leadership is "about setting a direction. It's about creating a vision, empowering and inspiring people to want to achieve the vision, and enabling them to do so with energy and speed through an effective strategy." Vision-Empowering-Strategic
• Management is "a set of well-known processes that help organizations produce reliable, efficient, and predictable results. Really good management helps us do well what we more or less know how to do regardless of the size, complexity, or geographic reach of an enterprise. These processes include planning, budgeting, structuring jobs, staffing jobs, giving people time-tested policies and procedures to guide their actions, measuring their results, and problem solving when results do not fit the plan. Process-Scale-Results

The theme of Kotter's book is that we have perfected management over the last century, but that leadership has not kept up with the changes in technology, information, globalization, etc. The vision and mission of organizations need to be update by the leaders to recognize the new environment. 

How do leaders deal with complex problems might have been a better theme. Management has advanced sufficiently to deal with simple and complicated problems, but it is not suited for complex problems. That is one reason that scenario planning and design thinking have emerrged as "new" processes. A comprehensive presentation of the various techniques and processes to deal with complex problems would have been interesting contribution to the leadership literature.

For the difference between complex and complicated problems, see this post.

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An Observation on Thinking

I just found a link to Alan Kay's reading list. He is one of those legendary people at MIT and is credited with inventing the graphical user interface for computers (while at Xerox).  

The subjects covered in his reading list include:

• Technology and media
• Learning and creativity
• Anthropology and psychology
• Philosophy
• Art and perception
• Design
• Science
• Political
• Computers

What is interesting to me is that so many genius level people start in either mathematics (Kay, Minsky) or economics (Simon, Hayek), move into computer science or AI and end up in cognitive learning or psychology. Note that Kay reads in all those subjects except economics but I suspect that the reading in "political" involves some economics.

I believe the evolutionary path is mathematics--computer science--artificial intelligence--cognitive learning. If you have not progressed to reading and thinking about cognitive learning or psychology, perhaps you still have a ways to go in your study of economics or computer science. Both Herbert Simon and Marvin Minsky, generally credited as the founders of artificial intellligence, spent the end of their careers in psychology/cognitive learning. Simon, who won a Nobel Prize in economics ended his career at Carnegie Mellon as a professor in the psychology department.

Obviously there are other paths. For example, Hayek started in economics, probably founded behavioral economics and finished his career in psychology. 

My sample data is small but everyone mentioned is at least a Nobel Prize winner, a genius or both.

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Summer Project

With the semester finishing in a few weeks, I am thinking ahead to what course(s) need to be revamped for the fall semester. Definitely considering my newest course, Entrepreneurship, Design and Thinking (EDT), for some serious re-work.

Parts of the course really worked well:

1. Design thinking (More on Design Thinking)
2. The e-book "Art of Design". My students were blown away by this book as much as I was. 
3. The Shell "New Lens Scenarios" stimulated a lot of original thinking from the students about the future

Willian Duggan's book "Strategic Intuition" was a book I really liked, but the students seem to have missed the point.

Someone has suggested that I make EDT a pre-requisite for my course in social entrepreneurship. I like this idea because the work on thinking and design thinking is excellent preparation before one tackles worldwide social problems. I also like the idea of having two years to teach some fairly complex subjects. 

Thinking the course project might be to explain how plants identify familial offspring and "share" with them without a brain or processor. Definitely a complex question suitable for design thinking and it ties in nicely with two topics--neuroscience and AI--that I plan to expand in the seminar. May be too tough a question for under graduates. Might be a good example to learn about how to approach impossible problems :)

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