Business

On Common Sense on Mutual Funds

I recently finished reading Common Sense on Mutual Funds – New Imperatives for the Intelligent Investor – by John C. Bogle.

Below are key excerpts from this book that I found to be insightful:

Investing is an act of faith. We entrust our capital to corporate stewards in the faith—at least with the hope—that their efforts will generate high rates of return on our investments. When we purchase corporate America’s stocks and bonds, we are professing our faith that the long-term success of the U.S. economy and the nation’s financial markets will continue in the future.

To state the obvious, the long-term investor who pays least has the greatest opportunity to earn most of the real return provided by the stock market.

In my view, market timing and rapid turnover—both by and for mutual fund investors—betray both a lack of understanding of the economics of investing and an infatuation with the process of investing.

My guidelines also respect what I call the four dimensions of investing: (1) return, (2) risk, (3) cost, and (4) time. When you select your portfolio’s long-term allocation to stocks and bonds, you must make a decision about the real returns you can expect to earn and the risks to which your portfolio will be exposed. You must also consider the costs of investing that you will incur. Costs will tend to reduce your return and/or increase the risks you must take. Think of return, risk, and cost as the three spatial dimensions—the length, breadth, and width—of a cube. Then think of time as the temporal fourth dimension that interplays with each of the other three. For instance, if your time horizon is long, you can afford to take more risk than if your horizon is short, and vice versa.

Rule 1: Select Low-Cost Funds…Rule 2: Consider Carefully the Added Costs of Advice…Rule 3: Do Not Overrate Past Fund Performance…Rule 4: Use Past Performance to Determine Consistency and Risk…Rule 5: Beware of Stars…Rule 6: Beware of Asset Size…Rule 7: Don’t Own Too Many Funds…Rule 8: Buy Your Fund Portfolio—And Hold It.

No matter what fund style you seek, you should emphasize low-cost funds and eschew high-cost funds. And, for the best bet of all, you should consider indexing in whichever style category you want to include.

There are three major reasons why large size inhibits the achievement of superior returns: the universe of stocks available for a fund’s portfolio declines; transaction costs increase; and portfolio management becomes increasingly structured, group-oriented, and less reliant on savvy individuals.

Four principal problems are created by this overemphasis on marketing. First, it costs mutual fund shareholders a great deal of money— billions of dollars of extra fund expenses—which reduces the returns received by shareholders. Second, these large expenditures not only offer no countervailing benefit in terms of shareholder returns, but, to the extent they succeed in bringing additional assets into the funds, have a powerful tendency to further reduce fund returns. Third, mutual funds are too often hyped and hawked, and trusting investors may be imperiled by the risks assumed by, and deluded about the potential returns of, the funds. Lastly, and perhaps most significant of all, the distribution drive alters the relationship between investors and funds. Rather than being perceived as an owner oi the fund, the shareholder is perceived as a mere customer of the adviser.

On a closing note, on leadership:

To wrap up this litany, I put before you—both tentatively and humbly—a final attribute of leadership: courage. Sometimes, an enterprise has to dig down deep and have the courage of its convictions—to “press on,” regardless of adversity or scorn. Vanguard has been a truly contrarian firm in its mutual structure, in its drive for low costs and a fair shake for investors, in its conservative investment philosophy, in market index funds, and in shunning hot products, marketing gimmicks, and the carpet-bombing approach to advertising so abundantly evident elsewhere in this industry today. Sometimes, it takes a lot of courage to stay the course when fickle taste is in the saddle, but we have stood by our conviction: In the long run, when there is a gap between perception and reality, it is only a matter of time until reality carries the day.

A recommended read in the areas of investing and leadership.

On Confessions of an Advertising Man

I recently finished reading Confessions of an Advertising Man by David Ogilvy.

Below are key excerpts from the book that I found to be particularly insightful:

Today, the world of advertising faces four problems of crisis dimensions. The first problem is that manufacturers of package-goods products, which have always been the mainstay of advertising, are spending twice as much on price-off deals as on advertising…The second problem is that advertising agencies, notably in Britain, France, and the United States, are now infested with people who regard advertising as an avant-garde art form…The third problem is the emergence of megalomaniacs whose mind-set is more financial than creative. They are building empires by buying up other agencies, to the consternation of their clients.  The fourth problem is that advertising agencies still waste their clients’ money repeating the same mistakes.

(1) Creating successful advertising is a craft, part inspiration but mostly know-how and hard work. If you have a modicum of mostly know–how and hard work. If you have a modicum of talent, and know which techniques work at the cash register, you will go a long way. (2) The temptation to entertain instead of selling is contagious. (3) The difference between one advertisement and another. when measured in terms of sales, can be as much as nineteen to one. (4) It pays to study the product before writing your advertisements. (5) The key to success is to promise the consumer a benefit – like better flavor, whiter wash, more miles per gallon, a better complexion. (6) The function of most advertising is not to persuade people to try your product, but to persuade them to use it more often than other brands in their repertoire. (Thank you, Andrew Ehrenberg.) (7) What works in one country almost always works in other countries.

(1) I admire people who work hard, who bite the bullet. I dislike passengers who don’t pull their weight in the boat…(2) I admire people with first-class brains, because you cannot run a great advertising agency without brainy people. But brains are not enough unless they are combined with intellectual honesty…(4) I admire people who work with gusto. If you don’t enjoy what you are doing, I beg you to find another job…(6) I admire self-confident professionals, the craftsmen who do their jobs with superlative excellence. They always seem to respect the expertise of their colleagues. They don’t poach. (7) I admire people who hire subordinates who are good enough to succeed them. I pity people who are so insecure that they feel compelled to hire inferiors as their subordinates.

(1) I try to be fair and to be firm, to make unpopular decisions without cowardice, to create an atmosphere of stability, and to listen more than I talk. (2) I try to sustain the momentum of the agency – its ferment, its vitality, its forward thrust. (7) I try to recruit people of the highest quality at all levels, to build the hottest staff in the agency business. (8) I try to get the best out of every man and woman in the agency.

The agencies which are most successful in new business are those whose spokesmen show the most sensitive insight into the psychological make-up of the prospective client. Rigidity and salesmanship do not combine.

Some agencies pander to the craze for doing everything in committee. They boast about “teamwork” and decry the role of the individual. But no team can write an advertisement, and I doubt whether there is a single agency of any consequence which is not the lengthened shadow of one man.

(1) What You Say Is More Important Than How You Say It. (2) Unless Your Campaign Is Built Around a Great Idea, it Will Flop. (3) Give the Facts. (4) You Cannot Bore People into Buying. (5) Be Well-Mannered, But Don’t Clown. (6) Make Your Advertising Contemporary. (7) Committees Can Criticize Advertisements, But They Cannot Write Them. (8) If You Are Lucky Enough To Write a Good Advertisement, Repeat It Until It Stops Pulling. (9) Never Write an Advertisement Which You Wouldn’t Want Your Own Family To Read. (10) The Image and the Brand. (11) Don’t Be a Copy-Cat.

On a concluding note, “a collection of Ogilvy-isms”:

We prefer the discipline of knowledge to the anarchy of ignorance. Tell the truth, but make the truth fascinating. In the best establishments, promises are always kept. whatever it may cost in agony and overtime. Change is our lifeblood. It is important to admit your mistakes and to do so before you are charged with them.

A recommended concise and perceptive read in the areas of advertising, and influence.

 

On Den Of Thieves

I recently finished reading Den Of Thieves – by Pulitzer Price Winner, James B. Stewart.

Below are key excerpts from the book that I found to be particularly insightful:

Even now it is hard to grasp the magnitude and the scope of the crime that unfolded, beginning in the mid-1970s, in the nation’s markets and financial institutions. It dwarfs any comparable financial crime, from the Great Train Robbery to the stock-manipulation schemes that gave rise to the nation’s securities laws in the first place. The magnitude of the illegal gains was so large as to be incomprehensible to most laymen.

Nor were these isolated incidents. Only in its scale and potential impact did the Milken-led conspiracy dwarf others. Financial crime was commonplace on Wall Street in the eighties. A common refrain among nearly every defendant charged in the scandal was that it was unfair to single out one individual for prosecution when so many others were guilty of the same offenses, yet weren’t charged. The code of silence that allowed crime to take root and flourish on Wall Street, even within some of the richest and most respected institutions, continues to protect many of the guilty. To dwell on the ill-gotten gains of individuals, however, is to risk missing the big picture. During this crime wave, the ownership of entire corporations changed hands, often forcibly, at a clip never before witnessed. Household names—Carnation, Beatrice, General Foods, Diamond Shamrock—vanished in takeovers that spawned criminal activity and violations of the securities laws.

Nor should the financial implications of these crimes, massive though they are, obscure the challenge they posed to the nation’s law-enforcement capabilities, its judicial system, and ultimately, to the sense of justice and fair play that is a foundation of civilized society. If ever there were people who believed themselves to be so rich and powerful as to be above the law. They were to be found in and around Wall Street in the mid-eighties. If money could buy justice in America, Milken and Drexel were prepared to spend it, and spend it they did. They hired the most expensive, sophisticated, and powerful lawyers and public-relations advisors, and they succeeded to a frightening degree at turning the public debate into a trial of government lawyers and prosecutors rather than of those accused of crimes. But they failed, thanks to the sometimes heroic efforts of underpaid, overworked government lawyers who devoted much of their careers to uncovering the scandal, especially Charles Carberry and Bruce Baird, in the Manhattan U.S. attorney’s office, and Gary Lynch, the head of enforcement at the Securities and Exchange Lynch, the head of enforcement at the securities and exchange ness of crime on Wall Street after a decade of lax enforcement sometimes overwhelmed their resources. Not everyone who should have been prosecuted has been, and mistakes were made. Yet their overriding success in prosecuting the major culprits and reinvigorating the securities laws is a tribute to the American system of justice.

For Levine, the experience only reinforced his view that without extraordinary measures, he was never going to realize his grand ambitions. Not that he was particular surprised. As he told Wilkis constantly, he was convinced that everyone was using inside information to get ahead: the game was rigged.

The causes of the boom were probably as much psychological as financial, though many economic explanations have been offered to explain the sudden, almost frenzied effort to buy existing companies rather than create new ones. Throughout the 1970s, investors had focused on company earnings, and the corresponding price/ earnings ratios, as a measure of value. With an economy ravaged by post-Vietnam War and OPEC-induced inflation, high tax rates, and soaring interest rates, profits had been meager. So stock prices Stayed low even as inflation pushed the value of income-producing assets ever higher. Coupled with low-priced assets was the tax code’s very generous treatment of interest payments on debt. Corporate dividends paid on stock aren’t deductible; interest payments on debt are fully deductible. Buying assets with borrowed funds meant shifting much of the cost to the federal government. The election of Ronald Reagan in 1980 sent a powerful “anything goes” message to the financial markets. One of the first official acts of the Reagan Justice Department was to drop the government’s massive ten-year antitrust case against IBM. Bigness apparently wasn’t going to be a problem in the new era of unbridled capitalism. Suddenly, economies of scale could be realized in already oligopolistic industries such as oil, where mergers wouldn’t even have been considered in the Carter years.

Yet history offers little comfort. The famed English jurist Sir Edward Coke wrote as early as 1602 that “fraud and deceit abound in these days more than in former times.” Wall Street has shown itself peculiarly susceptible to the notion, refined by Milken and Boesky and their allies, that reward need not be accompanied by risk. Perhaps no one will ever again dominate the financial world like Milken with his junk bonds. But surely a pied piper will emerge in some other sector. Over time, the financial markets have shown remarkable e resilience and an ability to curb their own excesses. Yet they are surprisingly vulnerable to corruption from within. If nothing else, the scandals of the 1980s underscore the importance and wisdom of the securities laws and their vigorous enforcement. The Wall Street criminals were consummate evaluators of risk—and the equation as they saw it suggested little likelihood of getting caught.

A highly recommended read in the area of finance.

On The Lean Startup

I recently finished reading The Lean Startup – How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses – by Eric Ries. This book has been in my to-read list for quite some time, and has been recommended to me by several friends over the past few years. I am very glad that I was finally able to read this gem in entrepreneurship and management.

Below are key excerpts from the book that I found to be particularly insightful:

After more than ten years as an entrepreneur, I came to reject that line of thinking. I have learned from both my own successes and failures and those of many others that it’s the boring stuff hat matters the most. Startup success is not a consequence of good genes or being in the right place at the right time. Startup success can be engineered by following the right process, which means it can be learned, which means it can be taught. Entrepreneurship is a kind of management. No, you didn’t read that wrong. We have wildly divergent associations with these two words, entrepreneurship and management.

This is a book for entrepreneurs and the people who hold them accountable. The five principles of the Lean Startup, which inform all three parts of this book, are as follows: 1. Entrepreneurs are everywhere. 2. Entrepreneurship is management. 3. Validated learning. 4. Build-Measure-Learn. 5. Innovation accounting.

The Lean Startup method, in contrast, is designed to teach you how to drive a startup. Instead of making complex plans that are based on a lot of assumptions, you can make constant adjustments with a steering wheel called the Build-Measure-Learn feedback loop. Through this process of steering, we can learn when and if it’s time to make a sharp turn called a pivot or whether we should persevere along our current path. Once we have an engine that’s revved up, the Lean Startup offers methods to scale and grow the business with maximum acceleration.

Mark explained, “Traditionally, the product manager says, ‘I just want this.’ In response, the engineer says, ‘I’m going to build it.’ Instead, I try to push my team to first answer four questions: 1. Do consumers recognize that they have the problem you are trying to solve? 2. If there was a solution, would they buy it? 3. Would they buy it from us? 4. Can we build a solution for that problem?”

What differentiates the success stories from the failures is that the successful entrepreneurs had the foresight, the ability, and the tools to discover which parts of their plans were working brilliantly and which were misguided, and adapt their strategies accordingly.

Thus, for startups, I believe in the following quality principle: If we do not know who the customer is, we do not know what quality is.

These examples from Grockit demonstrate each of the three A’s of metrics: actionable, accessible, and auditable.

My goal in advocating a scientific approach to the creation of startups is to channel human creativity into its most productive form, and there is no bigger destroyer of creative potential than the misguided decision to persevere. Companies that cannot bring themselves to pivot to a new direction on the basis of feedback from the marketplace can get stuck in the land of the living dead, neither growing enough nor dying, consuming resources and commitment from employees and other stakeholders but not moving ahead.

For the Five Whys to work properly, there are rules that must be followed. For example, the Five Whys requires an environment of mutual trust and empowerment. In situations in which this is lacking, the complexity of Five Whys can be overwhelming. In such situations, I’ve often used a simplified version that still allows teams to focus on analyzing root causes while developing the muscles they’ll need later to tackle the full-blown method. I ask teams to adopt these simple rules: L Be tolerant of all mistakes the first time. 2. Never allow the same mistake to be made twice.

I highly recommend this book!

On Meditations

I have finished reading Meditations by Marcus Aurelius – translated by Gregory Hays. This book was highly recommended by Shane Parrish (author of my favorite blog – FarnamStreet) as a read on stoicism.

This book lived up to the recommendation, and tops my list for most page-for-page wisdom.

In his introduction, Professor Gregory Hays lays out the context of this book, including its relation to stoicism:

Of the doctrines central to the Stoic worldview, perhaps the most important is the unwavering conviction that the world is organized in a rational and coherent way. More specifically, it is controlled and directed by an all-pervading force that the Stoics designated by the term logos. The term (from which English “logic” and the suffix “-logy” derive) has a semantic range so broad as to be almost untranslatable. At a basic level it designates rational, connected thought-whether envisioned as a characteristic (rationality, the ability to reason) or as the product of that characteristic (an intelligible utterance or a connected discourse Logos operates both in individuals and in the universe as a whole. In individuals it is the faculty of reason. On a cosmic level it is the rational principle that governs the organization of the universe.’ In this sense it is synonymous with “nature,” “Providence,” or “God.” (When the author of John’s Gospel tells us that “the Word”—logos—was with God and is to be identified with God, he is borrowing Stoic terminology.)

All events are determined by the logos, and follow in an unbreakable chain of cause and effect. Stoicism is thus from the outset a deterministic system that appears to leave no room for human free will or moral responsibility. In reality the Stoics were reluctant to accept such an arrangement, and attempted to get around the difficulty by defining free will as a voluntary accommodation to what is in any case inevitable. According to this theory, man is like a dog tied to a moving wagon. If the dog refuses to run along with the wagon he will be dragged by it, yet the choice remains his: to run or be dragged. In the same way, humans are responsible for their choices and actions, even though these have been anticipated by the logos and form part of its plan. Even actions which appear to be—and indeed are—immoral or unjust advance the overall design, which taken as a whole is harmonious and good. They, too, are governed by the logos.

On the questions that the book addresses:

The questions that the Meditations tries to answer are primarily metaphysical and ethical ones: Why are we here? How should we live our lives? How can we ensure that we do what is right? How can we protect ourselves against the stresses and pressures of daily life? How should we deal with pain and misfortune? How can we live with the knowledge that someday we will no longer exist? It would be both pointless and impertinent to try to summarize Marcus’s responses; the influence of the Meditations on later readers springs in part from the clarity and insistence with which he addresses these questions. It may be worthwhile, however, to draw attention to one pattern of thought that is central to the philosophy of the Meditations (as well as to Epictetus), and that has been identified and documented in detail by Pierre Hadot. This is the doctrine of the three “disciplines”: the disciplines of perception, of action and of the will…Together, the three disciplines constitute a comprehensive approach to life, and in various combinations and reformulation they underlie a large number of the entries in the Meditations.

On the use of military parallels:

The Stoicism of the Meditations is fundamentally a defensive philosophy; it is noteworthy how many military images recur, from references to the soul as being “posted” or “stationed” to the famous image of the mind as an invulnerable fortress…For Marcus, life was a battle, and often it must have seemed—what in some sense it must always be—a losing battle.

Below are selected quotes from the book that very strongly resonated with me:

Then what can guide us? Only philosophy. Which means making sure that the power within stays safe and free from assault, superior to pleasure and pain, doing nothing randomly or dishonestly and with imposture, not dependent on anyone else’s doing something or not doing it. And making sure that it accepts what happens and what it is dealt as coming from the same place it came from. And above all, that it accepts death in a cheerful spirit, as nothing but the dissolution of the elements from which each living thing is composed. If it doesn’t hurt the individual elements to change continually into one another, why are people afraid of all of them changing and separating? It’s a natural thing. And nothing natural is evil.

If all the rest is common coin, then what is unique to the good man? To welcome with affection what is sent by fate. Not to stain or disturb the spirit within him with a mess of false beliefs. Instead, to preserve it faithfully, by calmly obeying God—saying nothing untrue, doing nothing unjust. And if the others don’t acknowledge it—this life lived with simplicity, humility, cheerfulness—he doesn’t resent them for it, and isn’t deterred from following the road where it leads: to the end of life. An end to be approached in purity, in serenity, in acceptance, in peaceful unity with what must be.

Then what should we work for? Only this: proper understanding; unselfish action; truthful speech. A resolve to accept whatever happens as necessary and familiar, flowing like water from that same source and spring.

Constant awareness that everything is born from change. The knowledge that there is nothing nature loves more than to alter what exists and make new things like it. All that exists is the seed of what will emerge from it. You think the only seeds are the ones that make plants or children? Go deeper.

It’s unfortunate that this has happened. No. It’s fortunate that this has happened and I’ve remained unharmed by it—not shattered by the present or frightened of the future. It could have happened to anyone. But not everyone could have remained unharmed by it. Why treat the one as a misfortune rather than the other as fortunate.? Can you really call something a misfortune that doesn’t violate human nature? Or do you think something that’s not against nature’s will can violate it? But you know what its will is. Does what’s happened keep you from acting with justice, generosity, self-control, sanity, prudence, honesty, humility, straightforwardness, and all the other qualities that allow a person’s nature to fulfill itself? So remember this principle when something threatens to cause you pain: the thing itself was no misfortune at all; to endure it and prevail is great good fortune.

What’s left for us to prize? I think it’s this: to do (and not do) what we were designed for. That’s the goal of all trades, all arts, and what each of them aims at: that the thing they create should do what it was designed to do. The nurseryman who cares for the vines, the horse trainer, the dog breeder—this is what they aim at. And teaching and education— what else are they trying to accomplish? So that’s what we should prize. Hold on to that, and you won’t be tempted to aim at anything else. And if you can’t stop prizing a lot of other things? Then you’ll never be free-free, independent, imperturbable. Because you’ll always be envious and jealous, afraid that people might come and take it all away from you. Plotting against those who have them-those things you prize. People who need those things are bound to 5 a mess—and bound to take out their frustrations on the gods. Whereas to respect your own mind—to prize it—will leave you satisfied with your own self, well integrated into your community and in mine with the gods as well—embracing what they allot you, and what they ordain.

Earth’s offspring back to earth But all that’s born of heaven To heaven returns again.” Either that or the cluster of atoms pulls apart and one way or another the insensible elements disperse.

When faced with people’s bad behavior, turn around and ask when you have acted like that. When you saw money as a good, or pleasure, or social position. Your anger will subside as soon as you recognize that they acted under compulsion (what else could they do.?). Or remove the compulsion, if you can.

An absolute must read!

 

On Turn the Ship Around

I recently finished reading Turn the Ship Around by Captain, U.S. NAVY (Retired) L. David Marquet. Despite having very high expectations about this leadership and transformation journey, given the book’s high ratings, I can definitely say that the book exceeded them in every way. The leader-leader model advocated by David is one that resonates very strongly with me, and the practical and applied manner in which he presents the transformation journey he went through and how one can apply it within their own organization is to be commended.

Below I wanted to share a summary of insights from the book.

In the foreword by the late Stephen R. Covey, on why you want to read this book:

Our world’s bright future will be built by people who have discovered that leadership is the enabling art. It is the art of releasing human talent and potential. You may be able to “buy” a person’s back with a paycheck, position, power, or fear, but a human being’s genius, passion, loyalty, and tenacious creativity are volunteered only. The world’s greatest problems will be solved by passionate. unleashed “volunteers.” My definition of leadership is this: Leadership is communicating to people their worth and potential so clearly that they are inspired to see it in themselves. I don’t know of a finer model of this kind of empowering leadership than Captain Marquet’s. And in the pages Remember, leadership is a choice, not a position. I wish you well on your voyage!

David starts out by denouncing the shortcomings of the traditional leader-follower model:

We’re taught the solution is empowerment. The problem with empowerment programs is that they contain an inherent contradiction between the message and the method. While the message is “empowerment,” the method—it takes me to empower you—fundamentally disempowers employees. That drowns out the message. Additionally, in a leader-follower structure, the performance of the organization is closely linked to the ability of the leader. As a result, there is a natural tendency to develop personality-driven leadership. Followers gravitate toward the personality. Short-term performance is rewarded. When leaders who tend to do it all themselves and rely on personality depart, they are missed and performance can change significantly. Psychologically for the leader, this is tremendously rewarding. It is seductive. Psychologically for most followers, this is debilitating. The follower learns to rely on the leader to make all decisions rather than to fully engage with the work process to help make the organization run as efficiently as possible.

On the purpose of the book:

I imagine a world where we all find satisfaction in our work. It is a world where every human being is intellectually engaged. motivated, and self-inspired. Our cognitive capacity as a race is fully engaged in solving the monumental problems that we face. Ultimately, this book is a call to action, a manifesto, for all those frustrated workers and bosses for whom the current leadership structure just isn’t working. We need to reject leader-follower as a model and view the world as a place for leaders everywhere to achieve this vision. Whether you are a boss, an employee, a teacher, or a parent, you will find ways to work toward this goal.

On the importance of a questioning and curious attitude:

I am not advocating being ignorant about the equipment. For me, however, it was a necessary step to make me truly curious and reliant upon the crew in a way I wouldn’t have been without it. Later in my tour I became a technical expert on all aspects of Santa Fe, but the positive patterns had been set and I continued in the same relationship with the crew. If you walk about your organization talking to people, I’d suggest that you be as curious as possible. As with a good dinner table conversationalist, one question should naturally lead to another. The time to be questioning or even critical is after trust has been established.

Aim at achieving excellence, not just reducing errors:

Focusing on avoiding mistakes takes our focus away from becoming truly exceptional. Once a ship has achieved success merely in the form of preventing major errors and is operating in a competent way, mission accomplished, there is no need to strive further. I resolved to change this. Our goal would be excellence instead of error reduction. We would focus on exceptional operational effectiveness for the submarine. We would achieve great things.

Distributing control by itself is not enough:

We discovered that distributing control by itself wasn’t enough. As that happened, it put requirements on the new decision makers to have a higher level of technical knowledge and clearer sense of organizational purpose than ever before. That’s because decisions are made against a set of criteria that includes what’s technically appropriate and what aligns with the organization’s interests.

On his approach of changing culture:

When you’re trying to change employees’ behaviors, you have basically two approaches to choose from: change your own thinking and hope this leads to new behavior, or change your behavior and hope this leads to new thinking. On board Santa Fe, the officers and I did the latter, acting our way to new thinking. We didn’t have time to change thinking and let that percolate and ultimately change people’s actions; we just needed to change the behavior. Frankly, I didn’t care whether people thought differently at some point—and they eventually did—so long as they behaved in certain ways. I think there were likely some sailors who never understood what we were trying to do and resisted the change to leader-leader, but they behaved as if they believed.

On using regular conversations:

SHORT, EARLY CONVERSATIONS is a mechanism for CONTROL. It is a mechanism for control because the conversations did not consist of me telling them what to do. They were opportunities for the crew to get early feedback on how they were tackling problems. This allowed them to retain control of the solution. These early, quick discussions also provided clarity to the crew about what we wanted to accomplish. Many lasted only thirty seconds, but they saved hours of time…Here is a short list of “empowered phrases” that active doers use: I intend to…I plan on…I will…We will.

On resisting the urge to provide solutions and letting others react to situations:

RESIST THE URGE TO PROVIDE SOLUTIONS is a mechanism for CONTROL. When you follow the leader-leader model, you must take time to let others react to the situation as well. You have to create a space for open decision by the entire team, even if that space is only a few minutes, or a few seconds, long. This is harder than in the leader-follower approach because it requires you to anticipate decisions and alert your team to the need for an upcoming one. In a top-down hierarchy, subordinates don’t need to be thinking ahead because the boss will make a decision when needed.

On the importance of of improving the process as opposed to merely monitoring it:

In his book Out of the Crisis, W Edwards Deming lays out the leadership principles that became known as TQL, or Total Quality Leadership. This had a big effect on me. It showed me how efforts to improve the process made the organization more efficient, while efforts to monitor the process made the organization less efficient. What I hadn’t understood was the pernicious effect that “We are checking up on you” has on initiative, vitality, and passion until I saw it in action on Santa Fe.

On the need for constant communication among the team:

If you limit all discussion to crisp orders and eliminate all contextual discussion, you get a pretty quiet control room. That was viewed as good. We cultivated the opposite approach and encouraged a constant buzz of discussions among the watch officers and crew. By monitoring that level of buzz, more than the actual content, I got a good gauge of how well the ship was running and whether everyone was sharing information.

On deliberate action:

TAKE DELIBERATE ACTION is a mechanism for COMPETENCE. But selling the crew on this mechanism’s value was hard going. One problem in getting the crew to perform deliberately was the perception that deliberate action was for someone else’s (a supervisor’s, an inspector’s) benefit. Even though we continually talked about how deliberate action was to prevent the individual from making silly mistakes, I would overhear sailors discussing deliberate action among themselves in this misperceived way. The second problem was overcoming the perception that deliberate action was something you did as a training exercise. but in a “real situation,” you would just move your hands as fast as possible.

How to more effectively engage employees in training programs:

Want to have a training program that employees will want to go to? Here’s how it should work: 1) The purpose of training is to increase technical competence. 2) The result of increased technical competence is the ability to delegate increased decision making to the employees. 3) Increased decision making among your employees will naturally result in greater engagement, motivation, and initiative.

On active certification as opposed to passive briefings:

DON’T BRIEF, CERTIFY is a mechanism for COMPETENCE. Certification is also a decision point. It is possible to fail a certification. Individuals can reveal that they aren’t prepared to take part in an action because of their lack of knowledge or understanding. Otherwise, it’s just a brief. “Don’t brief, certify” became another example where we basically did the opposite of what we were supposed to.

On specifying goals, not the approach/method:

SPECIFYING GOALS, NOT METHODS is a mechanism for COMPETENCE. In our case, this was because the crew was motivated to devise the best approach to putting out the fire. Once they were freed from following a prescribed way of doing things they came up with many ingenious ways to shave seconds off our response time.

On the importance of clarity:

As more decision-making authority is pushed down the chain of command, it becomes increasingly important that everyone throughout the organization understands what the organization is about. This is called clarity, and it is the second supporting leg—along with competence—that is needed in order to distribute control…Build trust and take care of your people. Use your legacy for inspiration. Use guiding principles for decision criteria. Use immediate recognition to reinforce desired behaviors. Begin with the end in mind. Encourage a questioning attitude over blind obedience.

On the need for emancipation:

Empowerment is a necessary step because we’ve been accustomed to disempowerment. Empowerment is needed to undo all those top-down, do-what-you’re-told, be-a-team-player messages that result from our leader-follower model. But empowerment isn’t enough in a couple of ways…What we need is release, or emancipation. Emancipation is fundamentally different from empowerment. With emancipation we are recognizing the inherent genius, energy, and creativity in all people, and allowing those talents to emerge. We realize that we don’t have the power to give these talents to others, or “empower” them to use them, only the power to prevent them from coming out. Emancipation results when teams have been given decision-making control and have the additional characteristics of competence and clarity. You know you have an emancipated team when you no longer need to empower them. Indeed, you no longer have the ability to empower them because they are not relying on you as their source of power.

A highly recommended practical read in the areas of leadership and personal development.

On Barbarians At The Gate

I recently finished reading Barbarians at the Gate – The Fall of RJR Nabisco by Bryan Burrough and John Helyar. This book has been on my reading list for quite some time, and I finally (and very gladly) was able to read it.

First on the merger of Standard Brands and Nabisco:

Nevertheless, Johnson was intrigued. He got together with Schaeberle and liked the man. In a matter of weeks the two executives agreed to merge their companies. Nabisco Brands, as the new company would be called, was formed in a $1.9 billion stock swap in 1981, at the time one of the larger mergers of consumer-product companies. Technically, it was a marriage of equals. But that was considered so much chin music. Everyone knew Nabisco, with dominant brands such as Ritz and Oreo, was the more powerful company. Everyone knew who would be in charge.

And the ascent of Ross Johnson to the top position of the combined entity:

As the smoke cleared, Johnson emerged triumphant, both inside and outside Nabisco. As far as Schaeberle and the board were concerned, he could do no wrong. That year Schaeberle rewarded Johnson by ceding him the title of chief executive. Nabisco’s huge new research center was about to be unveiled, and Johnson, in a spasm of flattery, repaid the favor by naming it the Robert M. Schaeberle Technology Center. Schaeberle was moved. The Merry Men thought it was a brilliant way to put Schaeberle out to pasture. A man who lad his name on a building, they reasoned, might as well be dead.

Despite the increased scope of responsibilities and breadth of company activities Johnson was already thinking beyond Nabisco brands:

If Johnson grew indifferent toward Nabisco, it was because he could no longer see much of a future in it. The cookie wars has changed his thinking; he regarded the battle with Frito-Lay and P&G not as a final victory, but as the successful deflection of a shot fired across his bow. There would be another giant like Procter & Gamble—maybe even P&G itself—that would come after him again. Nabisco, after all, had fatal weaknesses. No amount of work was going to revitalize its aging bakeries anytime soon. Johnson, in fact, never bothered to formulate any kind of master plan for reshaping Nabisco. Years of scrambling had soured him on long-range planning. Instead he spent his time enjoying the high life, putting out corporate fires as they flared, and waiting. Someone had once codified the Standard Brands culture into twenty Johnsonisms. Number thirteen was “Recognize that ultimate success comes from opportunistic, bold moves which, by definition, cannot be planned.” On a spring day in 1985, less than a year after being tapped Nabisco’s chief, Johnson took a call from J. Tylee Wilson, chairman and chief executive officer of RJ Reynolds Industries, the North Carolina-based tobacco giant. Would Johnson be interested in getting together for lunch? Maybe, Wilson said, they could do some business.

On a parallel, Reynolds was thriving and generating more cash than it knew what to do with:

Life was good then. Reynolds’s Winston, Salem, and Camel were three of the top four bestselling cigarette brands. Prince Albert remained the top-selling pipe tobacco, and a brand called Days Work was the top chewing tobacco. Americans were smoking like chimneys. In 1960, 58 percent of all men and 36 percent of all women smoked. It was often said that Reynolds’s only problem was how to turn out cigarettes fast enough and how to ship all that money back to Wachovia Bank. In one respect, it was true. From a corporate executive’s point of view, Reynolds had too much cash on its hands. In 1956 the company amended its charter to allow it for the first time to buy nontobacco businesses.

Thus came the idea of merging the two businesses:

The talks, in fact, rekindled within weeks. A small army of Wall Street lawyers and investment bankers were brought in, and, the directors having been convinced, Reynolds agreed in principle to acquire Nabisco for cash. The lone sticking point was the price. Then, during the negotiations, Nabisco stock began rising, a sure sign that word of the talks had leaked. Johnson took it as an opportunity to wheedle more money out of Wilson. At $80 a share, Wilson said he could go no further. “Well,” Johnson said, “you’re not gonna get a deal at eighty bucks.” The logjam broke when Wilson agreed to throw in preferred stock, which brought the price to $85 a share, or $4.9 billion, at the time the largest merger ever to take place outside the oil industry.

Despite the fact that the anti-tobacco lawsuits were being settled for lower than expected amounts, RJR Nabisco’s stock was not moving up as expected, thus further persuading Johnson of the idea that a leveraged LBO is the way to unlock the true value that exists within the company:

The case mounted by Anthony Cipollone was considered among the strongest ever brought against the tobacco industry; the plaintiff’s lawyers had unearthed a raft of damaging documents. A tobacco victory, Johnson reasoned, would give his stock a real pop. When the jury finally delivered a verdict, it broke tobacco’s unbeaten streak—but just barely, clearing the industry of conspiracy and awarding only $400,000 in damages. “A tip for Tony Cipollone,” Johnson chortled, and waited for RJR Nabisco’s stock to spike up. It didn’t. Johnson’s office became a wailing wall where everybody came to cry about the injustice of it all. Horrigan was particularly bitter; he had predicted the stock would climb at least six points. “The market never going to give us its due,” Henderson complained. “The equity markets just aren’t a suitable capital structure for some companies.” Arguing to take stock from public hands was in fact the intellectual basis for an LBO, although no one openly advocated it at the time. Horrigan thought Johnson would never go private. “The problem with the company going private,” he said to himself, “is that nobody would pay any attention to him.”

The time was ripe for LBO’s, and the reasons:

In the five years before Ross Johnson decided to pursue his buyout, LBO activity totaled $181.9 billion, compared to $11 billion in the six years before that. A number of factors combined to fan the frenzy. The Internal Revenue Code, by making interest but not dividends deductible from taxable income, in effect subsidized the trend. That got LBOs off the ground. What made them soar was junk bonds. Of the money raised for any LBO, about 60 percent, the secured debt, comes in the form of loans from commercial banks. Only about 10 percent comes from the buyer itself For years the remaining 30 percent—the meat in the sandwich—came from a handful of major insurance companies whose commitments sometimes took months to obtain. Then, in the mid-eighties, Drexel Burnham began using high-risk “junk” bonds to replace the insurance company funds. The firm’s bond czar, Michael Milken, had proven his ability to raise enormous amounts of these securities on a moment’s notice for hostile takeovers. Pumped into buyouts, Milken’s junk bonds became a high-octane fuel that transformed the LBO industry from a Volkswagen Beetle into a monstrous drag racer belching smoke and fire.

As the bankers got involved in the process, Johnson could feel that he was losing control of the company, and that everyone was in it to grab a share of profits for themselves:

Johnson remained in his office, shocked at the turn in events. He couldn’t talk to Gutfreund or Cohen; they seemed too pleased at laving shown Kravis the price of messing with them. He couldn’t talk to Kravis, who, in Johnson’s words, was “pissing fire.” Just seventeen hours earlier, he had managed to get a peace treaty. He hadn’t wanted to invite Strauss or Cohen or any of the Wall Streeters. The whole thing had fallen apart over greed—pure and simple greed. And now, the piece de resistance, his own partners were launching a $20 billion bid without even bothering to tell him. He felt like the man who entered the casino in a tuxedo one night and emerged the next morning in rags. Far worse, Johnson realized, he had lost all control of his fate…Everyone, he reflected, was out to get something for themselves. The directors, with their petty concerns about pensions and auto insurance. Kravis and his investment bankers and their fees. Salomon and its bonds. And now Frank Benevento wanted $24 million. There was no bloody way Benevento was getting anywhere near $24 million, Johnson thought. He told him to bill the company for whatever he wished. The matter would be dealt with when things returned to normal.

The media quickly paid attention to this, and this also affected the employees productivity during that time:

In an editorial headlined, “Why the RJR circus is so dangerous,” Business Week reflected the business establishment’s distress. “This spectacle is not just unseemly—it is dangerous,” it held. “It is precisely this sort of behavior that plays into the hands of those who want to shackle the free market with unnecessary regulation. LBOs, including a potential RJR deal, should stand or fall on their financial and economic merits, not on the childish behavior of the principals.” For all the high-level handwringing, few felt the effects of the escalating fight as keenly as RJR Nabisco’s employees. In Atlanta, office workers sat during lunch periods glumly reading the daily news summaries the company issued. Isolated, irritated, and uncertain of their futures, the staff spent its days consumed with following the events on Wall Street, its spare time channeled into producing anti-Johnson propaganda.

A three pronged bidding war for RJR Nabisco was on:

The public the bidding for RJR Nabisco seemed frenzied, the emergence of a third bidding group transforming it into a wide-open race. But in the subdued hallways and offices of Lazard Freres and Dillon Read, there was no such enthusiasm. To the board’s advisers, the First Boston bid was hardly good news. Few among them had any confidence that Maher’s troops would come back in eight days with a concrete proposal.

KKR was the winner at the end:

Five minutes later discussion inside the boardroom ebbed. “Time is running out,” Hugel said. “Call for a motion.” Marty Davis spoke first. “I move we award to KKR.” “Second,” said John Macomber. “All in favor,” Hugel said. Hands filled the air. “All opposed?” So hands. “The vote,” Hugel said, “is unanimous.

Johnson semi-retired a rich man:

Johnson officially resigned that day, pulling the chord on his $53 million golden parachute.* His fanciest Gulfstream jet yet, ordered before the LBO battle, flew him to Jupiter on its maiden voyage. Johnson released a final statement before leaving: “The process we commenced last October has benefited the company’s shareholders and has proven the financial strength of our varied businesses.”

The shareholders’ were also enriched through the process, although not all of them happy about the proceeding:

Yet in the world’s greatest concentration of RJR shareholders— Winston-Salem, North Carolina—they weren’t thanking Johnson even as the money gushed into town. No sooner had Kravis won than signs began popping up: “Good-bye Ross, Hello KKR.” Nearly $2 billion of checks arrived there in the late-February mail. Now, more than ever, Winston-Salem was “the city of reluctant millionaires.” The river of money had washed away the last of RJR’s stock. Local brokers and bankers who managed people’s money got calls from distraught clients. “I won’t sell my stock,” more than one sobbed. “Daddy said don’t ever sell the RJR stock.” They were patiently told they had to. They were told the world had changed. No sooner had the checks arrived than out-of-town “financial consultants” descended on Winston-Salem to advise its residents on how best to spend their new riches. In leaflets tucked under windshields in the Reynolds parking lot, in pesky phone calls, in seminars at the Holiday Inn, stockbrokers offered to help people reinvest their windfall in the market. The frequent, incredulous response: “You want me to buy stock?”

KKR may have won the battle for RJR Nabisco, but it had lost the war in its investment going sour:

To its credit, Kohlberg Kravis wriggled out of its fix. In July 1990, it announced a $6.9 billion refinancing package, enabling it to buy back the junk bonds and substitute less onerous forms of debt. The costly maneuver probably assured that, as a buyout, RJR would neither be a free-fall disaster nor a windfall profit for Kohlberg Kravis. Whatever the case, it assured big paydays for the bankers and lawyers who reconfigured the original deal: another $250 million in fees. For Kravis ultimate success, it was clear, was years away. To make matters worse, Philip Morris, sensing RJR’s vulnerability, moved in for the kill, pummeling the company in a number of key markets. It expanded its sales force, undercut Reynolds on pricing, and attacked its strong discount brand, Doral, with two new off-price brands of its own. Analysts predicted RJR’s cigarette volume could fall 7 percent to 8 percent in 1989, while Philip Morris gained volume. “Philip Morris is eating our lunch,” Cliff Robbins of Kohlberg Kravis acknowledged in October 1989. “Marlboro is an unstoppable machine. We have a lot to do.”

There are many lessons within this story that extend beyond RJR Nabisco, namely:

  1. In a sense it had. Johnson was a product of his times, as surely as R. J. Reynolds was of his. The Roaring Eighties were a new gilded age, where winning was celebrated at all costs. “The casino society” Felix Rohatyn once dubbed it. The investment bankers were part croupiers, part alchemists. They conjured up wild schemes, pounded out new and more outlandish computer runs to justify them, then twirled their temptations before executives in a “devil dance.” That, at any rate, is what Johnson took to calling it. Depending on one’s viewpoint, the “dance” Johnson initiated at RJR will go down as either the high point or the low point of an era. It wasn’t an accident that RJR Nabisco should provide that moment. In its final decade Reynolds had become less a great company than a great dream machine. Its torrent of tobacco money allowed egos to run wild and fantasies to become true. Paul Sticht could walk with kings. Ed Horrigan could live like kings. Directors could be treated like kings…The founders of both RJR and Nabisco would have utterly failed to understand what was going on here. It is not so hard, in the mind’s eye, to see R. J. Reynolds and Adolphus Green wandering through the carnage of the LBO war. They would turn to one another, occasionally so much about what came out of their computers and so little about what came out of their factories? Why were they so intent on breaking up instead of building up? And last: What did this all have to do with doing business?

  2. To some, this saga wasn’t just about the fall of RJR Nabisco but the rise of an “I’ve got mine” ethos that would permeate every corner of corporate America. Even partners at once-staid accounting firms came to see themselves more as croupiers than auditors. Paul Volcker, who was chairman of Arthur Andersen in its dying days, believes its accountants became accomplices to Enron because they were so envious of such clients’ riches. As Volcker explained it, “The accountants felt like, ‘We’re as good as they are and we’re doing all the work.’ The general atmosphere was, ‘Money is out there for the taking.'” Reverbrations from the RJR buyout would also long be felt all up and down Wall Street. The deal went so badly for KKR and was attacked so vehemently by politicians that LBO firms pulled in their horns and eschewed mega-deals for years thereafter.

  3. The ensuing period is eerily reminiscent of the early 1990s-post RJR hangover, which raises a question: does anyone on Wall Street ever really learn anything? Colin Blaydon isn’t so sure. “When there’s a situation like this and everyone comes piling into a market they don’t fully understand, the financial markets always overshoot,” he says. “There are a lot of parallels to the world of the bubble that gave us RJR Nabisco.” Be assured, however, that the Barbarians are out there just beyond the gate, licking their wounds, biding their time, waiting for their next chance to storm the gates.

One of the best business books I have read to date, both in terms of content and delivery. A must read.

The Advantage

A few years ago, I read The Five Dysfunctions of a Team and it remains to be, for me, one of the most practical and applicable management books. Patrick Lencioni, the author of that book, has published a number of other books which have received high reviews as well, and I decided to read one of his more recent ones The Advantage – Why Organizational Health Trumps Everything Else in Business.

The main premise of this book is that:

The single greatest advantage any company can achieve is organizational health. Yet it is ignored by most leaders even though it is simply free, and available to anyone who wants it.

Sounds simple, so why is it that difficult?

But before leaders can tap into the power of organizational health, they must humble themselves enough to overcome the three biases that prevent them from embracing it. The Sophistication Bias: Organizational health is so simple and accessible that many leaders have a hard time seeing it as a real opportunity for meaningful advantage…The Adrenaline Bias: Becoming a healthy organization takes a little time. Unfortunately, many of the leaders I’ve worked with suffer from a chronic case of adrenaline addiction, seemingly hooked on the daily rush of activity and firefighting within their organizations…The Quantification Bias: The benefits of becoming a healthy organization, as powerful as they are, are difficult to accurately quantify.

What exactly is organizational health and how do I recognize it?

A good way to recognize health is to look for the signs that indicate an organization has it. These include minimal politics and confusion, high degrees of morale and productivity, and very low turnover among good employees…And so a good way to look at organizational health -and one that executives seem to respond to readily— is to see it as the multiplier of intelligence. The healthier an organization is, the more of its intelligence it is able to tap into and use. Most organizations exploit only a fraction of the knowledge. experience, and intellectual capital that is available to them. But the healthy ones tap into almost all of it. That, as much as anything else, is why they have such an advantage over their unhealthy competitors.

How do we create it, or get there?

An organization doesn’t become healthy in a linear, tidy fashion. Like building a strong marriage or family, it’s a messy process that involves doing a few things at once, and it must be maintained on an ongoing basis in order to be preserved. Still, that messy process can be broken down into four simple disciplines: Discipline 1: Build a cohesive leadership team…Discipline 2: Create Clarity…Discipline 3…Overcommunicate Clarity…Discipline 4: Reinforce Clarity.

On the first discipline – building a leadership team, let us start with the fundamentals, with the definition:

A leadership team is a small group of people who are collectively responsible for achieving a common objective for their organization…This is perhaps the most important distinction between a working group and a real leadership team. Collective responsibility implies, more than anything else, selflessness and shared sacrifices from team members.

What are the key behaviors of a leadership team:

On building trust:

Members of a truly cohesive team must trust one another. I realize that sounds like the most patently obvious statement ever made, something that every organization understands and values. As a result, you’d think that most leadership teams would be pretty good at building trust. As it turns out, they aren’t, and I think a big part of it is that they have the wrong idea about what trust is…The kind of trust that is necessary to build a great team is what I call vulnerability-based trust. This is what happens when members get to a point where they are completely comfortable being transparent. honest, and naked with one another, where they say and genuinely mean things like “I screwed up,” “I need help,” “Your idea is better than mine,” ‘T wish I could learn to do that as well as you do,” and even, “I’m sorry”…Trust is just one of five behaviors that cohesive teams must establish to build a healthy organization. However, it is by far the most important of the five because it is the foundation for the others. Simply stated, it makes teamwork possible. Only when teams build vulnerability-based trust do they put themselves in a position to embrace the other four behaviors, the next of which is the mastery of conflict.

On mastering conflict:

Contrary to popular wisdom and behavior, conflict is not a bad thing for a team. In fact, the fear of conflict is almost always a sign of problems. Of course, the kind of conflict I’m referring to here is not the nasty kind that centers around people or personalities. Rather, it is what I call productive ideological conflict, the willingness to disagree, even passionately when necessary, around important issues and decisions that must be made. But this can only happen when there is trust…When leadership team members fail to disagree around issues, not only are they increasing the likelihood of losing respect for one another and encountering destructive conflict later when people start griping in the hallways, they’re also making bad decisions and letting down the people they’re supposed to be serving. And they do this all in the name of being “nice.”

On achieving commitment:

The reason that conflict is so important is that a team cannot achieve commitment without it. People will not actively commit to a decision if they have not had the opportunity to provide input, ask questions, and understand the rationale behind it. Another way to say this is, “If people don’t weigh in, they can’t buy in.”

On embracing accountability:

Even well-intentioned members of a team need to be held accountable if a team is going to stick to its decisions and accomplish its goals. In some cases, people will deviate from a plan or a decision knowingly, tempted to do something that is in their individual best interest but not that of the team. In other cases, people will stray without realizing it, getting distracted or caught up in the pushes and pulls of daily work. In either case, it’s the job of the team to call those people out and keep them in line…At its core, accountability is about having the courage to confront someone about their deficiencies and then to stand in the moment and deal with their reaction, which may not be pleasant. It is a selfless act, one rooted in a word that I don’t use lightly in a business book: love. To hold someone accountable is to care about them enough to risk having them blame you for pointing out their deficiencies.

On focusing on results:

The ultimate point of building greater trust, conflict, commitment, and accountability is one thing: the achievement of results. That certainly seems obvious, but as it turns out, one of the greatest challenges to team success is the inattention to results. What would members of an executive team be focused on if not the results of their organization? Well, for one, the results of their department. Too many leaders seem to have a greater affinity for and loyalty to the department they lead rather than the team they’re a member of and the organization they are supposed to be collectively serving. Other distractions include a concern for individual career development, budget allocations, status, and ego, all of them common distractions that prevent teams from being obsessed with achieving results…The only way for a team to really be a team and to maximize its output is to ensure that everyone is focused on the same priorities— rowing in the same direction, if you will.

The second discipline is about Creating Clarity:

The second requirement for building a healthy organization—creating clarity—is all about achieving alignment. This is a word that is used incessantly by leaders, consultants, and organizational theorists, and yet for all the attention it gets, real alignment remains frustratingly rare. Most executives who run organizations—and certainly the employees who work for them—will readily this.

This is done by answering six fundamental questions:

1. Why do we exist? 2. How do we behave? 3. What do we do? 4. How will we succeed? 5. What is most important, right now? 6. Who must do what?

On what do we do:

If an organization’s reason for existence answers the Question, Why?, then its business definition answers the question. What? It’s critical that it be clear and straightforward. It should not be crafted so that it also be used in marketing material. The point is just to make sure that the leadership team is crystal clear about, and can accurately describe, the nature of the organization’s business so that they don’t create confusion within the rest of the company or, for that matter, in the market. It’s as simple as that.

On how we will succeed:

We came to realize that the best way for an organization to make strategy practical is to boil it down to three strategic anchors that will be used to inform every decision the organization makes and provide the filter or lens through which decisions must be evaluated to ensure consistency. Strategic anchors provide the context for all decision making and help companies avoid the temptation to make purely pragmatic and opportunistic decisions that so often end up diminishing a company’s plan for success.

On who must do that:

There is not a great deal to be said about this particular question, aside from warning leadership teams not to take it for granted. Although there is often clarity among executives in most organizations about who does what on the team, making assumptions about that clarity can lead to surprising and unnecessary problems.

The third discipline is Overcommunicating Clarity:

What those leaders fail to realize is that employees understand the need for repetition. They know that messaging is not so much an Intellectual process as an emotional one. Employees are not analyzing what leaders are saying based solely on whether it is intellectually novel or compelling, but more than anything else on whether they believe the leaders are serious, authentic, and committed to what they are saying. Again, that means repetition is a must.

The fourth and last discipline is Reinforcing Clarity:

As important as overcommunication is, leaders of a healthy organization cannot always be around to remind employees about the company’s reason for existing, its values, and so on. In order to ensure that the answers to the six critical questions become embedded in the fabric of the organization, leaders must do everything they can to reinforce them structurally as well. The way to do that is to make sure that every human system every process that involves people—from hiring and people management to training and compensation, is designed to reinforce the answers to those questions. The challenge is to do this without adding too much structure.

A concluding reminder that success in creating healthy organization rests on the leaders of the organization:

There is just no escaping the fact that the single biggest factor determining whether an organization is going to get healthier—or not—is the genuine commitment and active involvement of the person in charge. For a company, that’s the CEO. For a small business, it’s the owner. For a school, it’s the principal. For a church, it’s the pastor. For a department within a company, it’s the department head. At every step in the process, the leader must be out front, not as a cheerleader or a figurehead, but as an active, tenacious driver.

While there is a considerable effort involved, there is also a substantial reward:

At the end of the day, at the end of our careers, when we look back at the many initiatives that we poured ourselves into, few other activities will seem more worthy of our effort and more impactful on the lives of others, than making our organizations healthy.

A recommended read in the area of organizational leadership and management. If you have not read The Five Dysfunctions of a Team, I highly recommend you read that one first.

 

American Icon

American Icon: Alan Mulally and the Fight to Save Ford Motor Company by Bryce G. Hoffman has been on my reading list for quite some time, particularly for the high rating this book had received and my interest in cars. I finally had a chance to read it and despite the high expectations I had of this book, it exceeded them both in terms of content and delivery.

Below are the highlights from this book.

The backdrop of the american car industry in late 20th century:

Ford may have been the company that put the world on wheels, invented the moving assembly line, and created the industrial middle class, but its glory days were long past. Together with General Motors Corporation and Chrysler Corporation, it had been a powerful engine of prosperity in postwar America…That era of easy profit created a culture of entitlement in Detroit that afflicted management and labor alike – inflating salaries, wages, and benefits until they became the envy of the world. Success was viewed as a birthright, not something that had to be fought for and won. As the Big Three’s share of the market had shrunk, they had not. At least not fast enough. They all had too many factories, too many workers, and too many dealers. Generous union contracts negotiated in better times had created enormous legacy costs that their foreign rivals did not have to bear. And none of the American companies had the stomach for the radical reforms that were now necessary just to stay in business. Wall Street had begun a deathwatch, waiting to see which of the Big Three would fail first. Most of the money was on Ford, which had become infamous for lackluster designs, poor quality, and managerial infighting.

Ford itself had some additional challenges of its own:

While many of Ford Motor Company’s problems were shared by the rest of Detroit, the Dearborn automaker also faced some challenges all its own. Ford’s woes had not begun with of the Japanese in the 1960s or the oil crises of the 1970s. The company had been struggling with itself since Henry Ford started it on June 16,1903. It invested massively in game-changing products, and then did nothing to keep them competitive. It allowed cults of personality to form around larger-than-life leaders, but drove away the talent needed to support them. And it allowed a caustic corporate culture to eat away at the company from the inside. These were birth defects that could be traced back to the automaker’s earliest days. Henry Ford liked to boast that he had created the modern world. In many ways, he had. But he also created a company that was its own worst enemy.

Bill Ford who was CEO knew it was time for a big change in leadership of the company was to be saved:

Hockaday commended Ford for having the self-awareness and the lack of ego to admit that, but he gently suggested that Ford needed something more than a new COO. Bill agreed: The time had come to find a CEO who could save Ford from itself…Though he knew it was coming, Hockaday thought Bill Ford’s speech to the directors was one of the most moving he had ever heard in a boardroom. No one ascends to the top of a major corporation without a healthy ego, but those in the automobile industry we’re oversized even by Fortune 500 standards. It took a big man to admit that he could not save his company, particularly when his name was on the side of the building. In other rooms in Detroit, other CEOs were adamantly refusing? to admit defeat. They would stubbornly cling to power and take their companies down with them. Bill Ford cared too much about Ford to let that happen in Dearborn.

Alan Mulally was the man that was chosen for the task:

The Seattle Times called him “Mr. Nice Guy.” Mulally’s lack of pre-tension was evident in his dealings with other people. At formal events, he showed little interest in the rich and powerful, preferring to mingle with those less interested in comparing resumes or other measurables. He asked more questions than he answered and seemed genuinely interested in what people had to say, be they world leader or waitresses. Mulally made a point of remembering something about everyone he met and would often astonish underlings by recalling some scrap of information about their lives they had shared with him months or years before. He was also big on hugs, and had even been known to plant pecks on the cheeks of both men and women when he was in a particularly exuberant mood. All of this made Mulally adored by subordinates. It also kept his rivals off balance. They could never quite figure out how much of it was an act. And Mulally liked to keep it that way.

Despite being and unconventional choice:

The conventional wisdom in Detroit held that outsiders were incapable of understanding the complexities of the automobile business. Bill Ford’s decision to hire an aeronautical engineer to save his car company spawned plenty of jokes during those early weeks. There was a lot of snickering about flying cars and the return of tail fins. “He has no idea how we do things in Detroit” was the common refrain at Ford’s crosstown rivals, as well as within Ford itself And Mulally knew it. They’re right. I don’t know how they do things in Detroit, he thought. But I do know it doesn’t work.

Mulally had a unique management style that he shared and communicated with his team from the beginning:

Mulally called their attention to a list of rules posted on the wall. There were ten of them: • People first • Everyone is included • Compelling vision • Clear performance goals • One plan • Facts and data • Propose a plan, “find-a-way” attitude • Respect, listen, help, and appreciate each other • Emotional resilience … trust the process • Have fun … enjoy the journey and each other

Listening was a key part of his philosophy, even from his competitors:

As he was leaving, Mulally told Wagoner he would like to be able to call him in the future if he had more questions. He was just trying to be polite, but Wagoner took it as another sign of weakness. He would later claim publicly that Mulally had sought his help as he e struggled to understand the industry in those early days. The truth was, Wagoner had been played so well he did not even notice.

He had a clear vision, even for what Ford would look like after he leaves – his legacy:

The Plan…Mulally also looked to Ford’s past for inspiration…Alan Legacy: • Clear, compelling vision going forward •Survive the perfect Storm—commodities, oil, credit, CO2, safety, UAW • Develop a profitable growth plan, global products and product Strategy • A skilled and motivated team • Reliable ongoing BPR process • A leader and leadership team with “One Ford” vision implementation tenacity

An example of, luck favors the prepared mind:

Did Ford see the credit crisis coming? Certainly not the full magnitude of it. But it is clear that Ford knew the game was changing and had the foresight to get as much cash as it could before it was too late. Other automakers would not prove so prescient. In the end, they would have to borrow their money not from the big Wall Street banks, but from the American people. Ford’s financing deal would allow it to survive without a government bailout. If Bill Ford had not convinced his family to stake everything, the Fords likely would have lost control of the company entirely. A few months later, such a deal would have been impossible for any American automaker. A year later, even the most profitable companies in the world would have been unable to borrow half that amount.

Alan never lost touch with what the business was really about – engaging with customers and making a difference in their lives through vehicles:

It would not be the last time Mulally played at being a car sales man. This was a way for him to see firsthand how Ford’s customers approached its cars and trucks. But it also generated a huge amount of goodwill for the company. Everybody who met Mulally walked away an ambassador for Ford. He had that effect on people.

He knew that a successful relationship with the Union of Automotive Workers was paramount to success and worked hard on nurturing it:

Even in the face of this increasing animosity between the UAW and Detroit’s Big Three, Ford managed to maintain a better relationship with the union. Ford family members often dealt directly with UAW officials, even during the period when there was no Ford in the chairman’s seat. None of the company’s factories had been struck since 1976. But even Ford could not get the concessions it needed to be competitive with the growing number of foreign transplants setting up factories of their own in the southern United States…Mulally took a step toward Gettelfinger and looked him in the eye. “We want to prove that we can do this in America,” he said solemnly. “Ron, will you hold hands with me.? We’ll do this together, and we’ll go out there and say we did this together. We’re going to be able to make products in America and make them profitably and successfully. Or, we’ll just go out there and tell everybody it was too hard. We just couldn’t do it. It’s up to you.” Gettelfinger did not hesitate.

Alan kept refining his vision and rallying the company around it:

Beneath the first, Mulally spelled out his vision for the company: People working together as a lean, global enterprise for automotive leadership, as measured by: Customer, Employee, Dealer, Investor, Supplier, Union/Council, and Community Satisfaction

During the crisis, it was not just about being defensive, it was about the offense – accelerating the transformation with the new product lines:

Accelerating Kuzak’s product time line would require a heroic effort on the part of Ford’s designers and engineers. It would also require other departments to cut deeper. It was a testament to how much Mulally had changed the culture inside the Glass House that they were willing to do so. Fields expressed this new spirit in a speech to his troops that summer “I know this is really a kick in the teeth, but this is not Ford Motor Company not delivering—this is the external environment. This is an egalitarian knock to the industry, and what’s going to separate the winners from the losers is how those companies approach this setback,” he said. “It’s easy to be a victim. It’s harder to say we’re going to take this and we’re going to make lemonade out of lemons.”

While Ford was in a better position than some of its competitors during the financial crisis their were some inter-dependencies within the industry that it had to actively manage with them and with the government:

Both Toyota and Honda were just as concerned as Ford about the impact that the failure of CM or Chrysler could have on their suppliers, as well as about the growing number of parts producers who were already in trouble. When they heard about Ford’s effort to support its suppliers, they wanted in. So Brown forged a tripartite alliance with Ford’s archrivals to prevent a cascading collapse of the entire automobile industry.

Ford was now engaged in a delicate balancing act, trying to convince consumers and investors that it was in better shape than its crosstown competitors while at the same time trying to persuade Washington that it was just as deserving of help. When Mulally was asked why Ford needed taxpayer assistance if it was not in dire financial straits, he said Ford would need help if either GM or Chrysler failed. “It’s just prudent to be prepared together. There’s a lot of issues that we’re all dealing with,” he said. “We are very interdependent, and we’re all dependent on the U.S. economy. If any one of us gets in trouble in a big way, then that’s going to have major ramifications for the entire value stream for the suppliers, for the (automakers), for the dealers.”

The strategy of forgoing the bailout paid off for Ford:

Sales remained depressed, but Ford continued to outperform the market and gain share…The board was pleased. The directors had hoped that Ford would get credit for forgoing a bailout, but none of them expected the decision to generate as much goodwill for the company as it did…The decision to pass on a bailout was a big part of that, but it would have mattered little if the company’s showrooms were still filled with the same old boring products. Fortunately for Ford, transports stacked with new vehicles like the redesigned Fusion and Fusion Hybrid were pulling into dealer lots just as customers decided that the company was worth another look. Once again. Ford’s timing was perfect.

Alan throughout this entire period ensured the team maintained focus on improving Ford’s financials:

Mulally’s focus was now on improving Ford’s balance sheet and beginning the long, slow march out of junk bond territory. The terms of Ford’s massive 2006 financing deal stipulated that all the assets it had pledged to secure those loans would be released once its revolving line of credit was paid off and two of the three major agencies restored the company’s credit rating to investment grade.

For those who down-play Ford’s come back:

There are some who will point to the loans Ford received from the U.S. Department of Energy and the money it borrowed from the U.S. Federal Reserve and say the company did take taxpayer dollars. This is true, but in this sense, so did the rest of the major automakers —and not just the American companies. Japanese and German manufacturers benefited from these programs as well, in addition to receiving support from their own governments. But these were loan programs set up to address systemic problems beyond these companies’ control.

And Alan’s key role in that:

While many of the pieces of Ford’s turnaround were already in place, the company’s own culture was preventing them from being implemented with the speed and scope necessary to effect real change…But Ford would have run out of time and money before it got to where it needed to be if Mulally had not been there to put the pedal to the metal…Mulally ripped off the bandage, cauterized the wound, and cured the disease. Only an outsider could do that. But not just any outsider: It had to be someone who understood the complexities of global manufacturing, labor relations, and heavily engineered products…His disciplined approach cut through the company’s caustic culture and forced everyone to march in the same direction…He taught the other executives how to make decisions based on data instead of boardroom politics. And once he had, most of the decisions that saved Ford were made by the team as a whole.

The keys to Alan’s success in his words:

“What I have learned is the power of a compelling vision, a comprehensive strategy, a relentless implementation process, and talented people working together based on those commitments,” he told me during our last interview for this book, in May 2011. “We laid out a plan, and for four and a half years, we have been relentlessly implementing that plan.”…”You’ve got to trust the process. You need to trust and nurture your emotional resilience,”

Another key, was Bill’s – the chairman – unwavering support:

It was not just Bill Ford’s willingness to step aside and make way for Mulally that helped save the company. It was also his unceasing effort to give him the time, the space, and the resources he needed for his revolution to succeed. Without that, Mulally may well have become just another victim of a company and a culture that seemed impervious to change.

A reminder though that a true test of great leadership is the ability of an organization to sustain itself after the leader leaves:

The ultimate test of Mulally’s revolution will be its ability to endure his absence. Boeing has suffered major setbacks since Mulally left Seattle in 2006. Insiders say that is because his successors have failed to maintain the processes Mulally put in place to guarantee success. When asked if the same thing could happen at Ford, Mulally says simply that he has given Ford the tools it needs to prosper. What the company does with them after he retires is beyond his control. Ford’s history is a long list of stunning successes followed by epic failures, of against-all-odds comebacks that turn into retreats back into mediocrity and mismanagement. But there are important differences this time that augur well for Ford’s future.

On a concluding note:

Henry Ford once said, “A business that makes nothing but money is a poor kind of business.” Ford Motor Company has certainly made a great deal of money since Alan Mulally started there in 2006. But it has also made people believe that the highest principles of American enterprise —ingenuity, innovation, and integrity—have not deserted us entirely. In an economic era marked by avarice and greed, Mulally’s Ford has demonstrated that a company can still succeed by building a good product and selling it at a fair price. As the big Wall Street banks tried to hide their mounting failures, Mulally was exposing Ford’s shortcomings and challenging his company to overcome them. Wall Street’s obfuscation and trickery would ultimately drag the entire world into the Great Recession. With Mulally’s relentless determination to succeed. Ford would defy that downturn and once again become an engine of prosperity. From the day he arrived in Dearborn, Mulally said he was fighting for the soul of American manufacturing. If Ford had failed, a little bit of America would have died, too. But Ford did not fail. Under Mulally’s leadership, it showed the entire world that at least one American automaker could pick itself up, shake off the rust, compete with the best in the business, and win.

A highly compelling, highly valuable and recommended read on leadership, management and corporate transformation as well as on the automotive industry.

Strategies of a Negotiation Genius

People are rarely born “negotiation geniuses.” Rather, what appears to be genius actually reflects careful preparation, an understanding of the conceptual framework of negotiation, insight into how one can avoid the errors and biases that plague even experienced negotiators, and the ability to structure and execute negotiations strategically and systematically. This book will provide you with this framework—and with an entire toolkit of negotiation strategies and tactics that you can put to work immediately. As you you begin to apply the famework and strategies in the many negotiations you encounter—in business, in politics, or in everyday life—you will begin to build your own reputation as a negotiation genius.

This is the main premise of Negotiation Genius by Deepak Malhotra and Max H. Bazerman. At the heart of their work is a five-step pre-negotiation framework that I wanted to share with you:

Step 1: Assess your BATNA. The first step in any negotiation is to ask yourself, “What will I do if the current negotiation ends in no deal?” In other words, you need to assess your BATNA, or best alternative to negotiated agreement—the course of action you will pursue if and when the ; current negotiation ends in an impasse. Your BATNA assessment requires the following three steps:

1. Identify all of the plausible alternative options you might pursue if you are unable to reach an agreement            with the other party.

2. Estimate the value associated with each alternative.

3. Select the best alternative; this is your BATNA.

Step 2: Calculate your reservation value. An analysis of your BATNA is critical because it allows you to calculate your reservation value (RV), or your walk-away point in the current negotiation…What determines your exact reservation value within this range? If you are risk averse, you might be inclined to lean toward the lower end of the range. But if you are optimistic about your ability to negotiate…you might lean toward the upper end.

Step 3: Assess the other party’s BATNA. Now that you have assessed your BATNA and calculated your reservation value, you know the lowest offer you would be willing to accept…Of course, you do not want to settle for a low sale price, so you will need to figure out how high a price you might be able to negotiate. In other words, you have to figure out the other party’s reservation value.

Step 4: Calculate the other party’s reservation value.

Step 5: Evaluate the ZOPA. Once you have an idea of each party’s reservation value, you can evaluate the zone of possible agreement, or ZOPA. The ZOPA is the set of all possible deals that would be acceptable to both parties. Put another way, the ZOPA is the space between the seller’s reservation value and the buyer’s reservation value…Your task in this negotiation is not simply to get a deal, but to claim as much value as possible.

The next question, that people then often ask is whether or not they should make the first offer. The authors respond:

Whether you should make the first offer or not depends upon how much information you have. If you believe you have sufficient information about the other side’s reservation value, it pays to make a reasonable (i.e., sufficiently aggressive) opening offer that anchors the discussion in your favor. If you suspect that you may not have enough information about the ZOPA, you’d be wise to defer an opening offer until you have collected more information. In this case, it may even be a good idea to let the other party make the first offer. You might forgo the opportunity to anchor the negotiation, but you also avoid the downside of not anchoring aggressively enough. Notice that a lack of information can also lead you to anchor too aggressively, demanding an amount that might offend the other side and drive them away. In other words, asking for too little diminishes the amount of value you can capture; asking for too much diminishes your chances of consummating the deal.

In the case where the other party makes their initial offer, one can become influenced by the “anchoring” effects of that offer. Here are five strategies to counter that subtle influence:

1) IGNORE THE ANCHOR: The best thing to do in the event that the other party makes an aggressive first offer—whether high or low—is to ignore it…In this manner, you can shift the conversation to an entirely different topic, one that allows you to reassert control of the discussion.

2) SEPARATE INFORMATION FROM INFLUENCE: Every offer is a combination of information and influence. The other party’s offer tells you something about what she believes and what she wants (information), but it also has the power to derail your strategy (influence). Your task is to separate the information contained in the particulars of the offer (and the way in which it was made) from the other side’s attempt to influence your perceptions.

3) AVOID DWELLING ON THEIR ANCHOR: If you are surprised by their offer, probe a little to find out if there is in fact any substantive new information that you can obtain. If no such information is forthcoming, quickly shift attention away from the anchor by sharing your own perspective and defining the negotiation in your terms.

4) MAKE AN ANCHORED COUNTEROFFER, THEN PROPOSE MODERATION: Finally, if it is not possible to ignore or dismiss the other party’s anchor, you should offset its influence by making an aggressive counteroffer…However, countering aggression with aggression comes at a risk: the possibility that both parties will become entrenched and reach an impasse. To mitigate this risk, you should offset their anchor with an aggressive counteroffer, and then suggest that you need to work together to bridge the gap.

5) GIVE THEM TIME TO MODERATE THEIR OFFER WITHOUT LOSING FACE: When reacting to very extreme offers, your foremost goal should be to re-anchor successfully, not to convey your outrage. And re-anchoring successfully often means helping the other side find a way to retract earlier demands and arguments.

On the other hand, if you were making the first offer, what would constitute an appropriate one? The authors offer four recommendations:

1) Keep the entire ZOPA in play. If your first offer is already inside the ZOPA, you have given up the ability to claim value that lies between your offer and the other party’s RV from the very start.

2) Provide a justification for your offer. The degree of aggressiveness should be appropriate to the situation…To determine your exact offer, ask yourself the following question: “What is the most aggressive offer that I can justify”

3) Set high but realistic aspirations. Why? First, those who set high aspirations tend to make more aggressive first offers in order to reach their target…Second, those with aggressive targets work harder at haggling once both parties’ Opening offers are on the table.

4) Consider the context and the relationship. Your goal should not simply be to get the best possible deal while preserving the relationship, but to get the best deal while strengthening the relationship and your reputation. You may have to forgo some short-term gains to meet this goal, but this sacrifice will almost always be worth the price.

The authors then go on to offer strategies on how one can obtain information that can aid in determining the Reservation Value of the other party we are negotiating with:

1) Exhaust all pre-negotiation sources of information: There are often dozens of ways to collect information that do not entail guessing or asking the other party directly.

2) Identify your assumptions prior to the negotiation: Of course, in any negotiation, each party makes an infinite number of assumptions. You cannot keep track of each one—and you don’t have to. But you do need to identify and be aware of all of the assumptions that underlie your planned course of action.

3) Ask questions that challenge your assumptions: The wrong way to approach a negotiation is to start bargaining as if your assumptions are correct. Instead, ask questions to clarify matters.

4) Ask indirect questions: Naturally, the other party will sometimes refuse to answer questions that could help you determine their reservation value. In that case, you need to ask questions that are less direct—and less threatening.

5) Protect yourself from lies and uncertainty with contingency contracts: Consider the use of a contingency contract. Contingency contracts are agreements that leave certain elements of the deal unresolved until uncertainty is resolved in the future.

Every negotiation will entail haggling, and below are strategies that provide guidance on effective haggling:

STRATEGY 1: FOCUS ON THE OTHER PARTY’S BATNA AND RESERVATION VALUE – These folks tend to set higher aspirations and capture more value in the deals they negotiate.

STRATEGY 2: AVOID MAKING UNILATERAL CONCESSIONS –  Luckily, a norm of reciprocity pervades most negotiation contexts: parties widely expect and understand that they will take turns making concessions. If the other party violates this norm, you should rectify this problem iimnTiediately. The next five points show how to so.

STRATEGY 3: BE COMFORTABLE WITH SILENCE – Effective negotiators understand not only the power of silence, but also the need to be comfortable with it. Just remind yourself that if you speak when it is their turn, you will be paying by the word.

STRATEGY 4: LABEL YOUR CONCESSIONS – Instead of simply giving something away or moderating your demands, make it clear that your action is costly to you. Because labeled concessions are hard to ignore, it becomes difficult for recipients to justify nonreciprocity.

STRATEGY 5: DEFINE WHAT IT MEANS TO RECIPROCATE – Reciprocity is even more likely if you not only label your concession, but specify what you expect in return. This strategy eliminates another piece of ambiguity.

STRATEGY 6: MAKE CONTINGENT CONCESSIONS – Contingent concessions explicitly tie your concessions to specific actions by the other party.

STRATEGY 7: BE AWARE OF THE EFFECTS OF DIMINISHING RATES OF CONCESSIONS – In most negotiations, concession rates follow a pattern: early concessions are larger in size than later concessions. In other words, negotiators tend to offer diminishing rates of concessions over the course of the negotiation.

On a closing note, and as with any skill, a reminder that we all have the ability to improve our negotiation talent:

Negotiation genius is about human interaction, and the only raw material you need to achieve it is the ability to change your beliefs, assumptions, and perspective. You have this ability. If you now put forth the effort to implement what you have learned, then you will become a negotiation genius—someone who finds it easy to achieve brilliant results in all types of negotiations. We hope you will put forth this effort. We hope this book motivates you to do so and guides you along the path.

I highly recommend this book, as a follow-up to the classic Getting to Yes by Fisher, Ury and Patton as well as Influence by Cialdini. I would like to thank my friend John Walker for this perceptive book recommendation.