Corporate

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 The Everything Store

I recently finished reading The Everything Store – Jeff Bezos and the Age of Amazon – by Brad Stone.

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

There is so much stuff that has yet to he invented. There’s so much new that’s going to happen. People don’t have any idea yet how impactful the Internet is going to be and that this is still Day 1 in such a big way.

“If you want to get to the truth about what makes us different, it’s this,” Bezos says, veering into a familiar Jeffism: “We are genuinely customer-centric, we are genuinely long-term oriented and we genuinely like to invent. Most companies are not those things. They are focused on the competitor, rather than the customer. They want to work on things that will pay dividends in two or three years, and if they don’t work in two or three years they will move on to something else. And they prefer to be close-followers rather than inventors, because it’s safer. So if you want to capture the truth about Amazon, that is why we are different. Very few companies have all of those three elements.

So looking back on life’s important junctures was on Bezos’s mind when he came up with what he calls “the regret-minimization framework” to decide the next step to take at this juncture in his career.

We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate direct! to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital. Our decisions have consistently reflected this focus. We first measure ourselves in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.

Jeff Bezos embodied the qualities Sam Walton wrote about. He was constitutionally unwilling to watch Amazon succumb to any kind of institutional torpor, and he generated a nonstop flood of ideas on how to improve the experience of the website, make it more compelling for customers, and keep it one step ahead of rivals.

Bezos was obsessed with the customer experience, and anyone who didn’t have the same single-minded focus or who he felt wasn’t demonstrating a capacity for thinking big bore the brunt of his considerable temper.

“My approach has always been that value trumps everything,” Sinegal continued. “The reason people are prepared to come to our strange places to shop is that we have value. We deliver on that value constantly. There are no annuities in this business.” A decade later and finally preparing to retire, Sinegal remembers that conversation well. “I think Jeff looked at it and thought that was something that would apply to his business as well,” he says.

“I understand what you’re saying, but you are completely wrong,’ he said. “Communication is a sign of dysfunction. It means people aren’t working together in a close, organic way. We should be trying to figure out a way for teams to communicate less with each other. not more.”

That was a typical interaction with Jeff. He had this unbelievable ability to be incredibly intelligent about things he had nothing to do with, and he was totally ruthless about communicating it.

If Amazon wanted to stimulate creativity among its developers, it shouldn’t try to guess what kind of services they might want; such guesses would be based on patterns of the past. Instead, it should be creating primitives—the building blocks of computing—and then getting out of the way. In other words, it needed to break its infrastructure down into the smallest, simplest atomic components and allow developers to freely access them with as much flexibility as possible.

‘Jeff does a couple of things better than anyone I’ve ever worked for,” Dalzell says. “He embraces the truth. A lot of people talk about the truth, but they don’t engage their decision-making around the best truth at the time. “The second thing is that he is not tethered by conventional thinking. What is amazing to me is that he is bound only by the laws of physics. He can’t change those. Everything else he views as open to discussion.”

On a closing note:

Amazon may be the most beguiling company that ever existed. and it is just getting started. It is both missionary and mercenary. and throughout the history of business and other human affairs, that has always been a potent combination. “We don’t have a single big advantage,” he once told an old adversary, publisher Tim O’Reilly, back when they were arguing over Amazon protecting its patented 1-Click ordering method from rivals like Barnes & Noble. “So we have to weave a rope of many small advantages.” Amazon is still weaving that rope. That is its future, to keep weaving and growing, manifesting the constitutional relentlessness of its founder and his vision. And it will continue to expand until either Jeff Bezos exits the scene or no one is left to stand in his way.

A recommended read in the areas of technology and corporate history.

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 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.

On The Bright IDEA BOX

This week, I have the pleasure and privilege to review Jag Randhawa’s book: The Bright Idea Box – A Proven System to Drive Employee Engagement and Innovation. Jag had approached me about his new book, having previously read Blue Ocean Strategy. Given that this book is about employee engagement and innovation, two topics I am very passionate and intimately involved with I was very much looking forward to reading and reviewing this book.

As the title indicates this is a book about innovation. Jag begins by making it clear that it is the employees within the organization that drive innovation:

It is never an idea, technology, market forces, or access to capital that makes a company innovative. What differentiates an innovative company from an average company is the people working inside the company.

Subsequently, their engagement level correlates to the level of innovation:

Researchers have long argued that a strong correlation exists between employee engagement and innovation. A highly engaged workforce can transform an average company to an innovative company, while a disengaged workforce can kill a great company.

The main premise of the book is to provide a framework for a bottom up employee driven innovation program:

This book offers a framework to create such a program, in which employees submit ideas to create operational efficiencies, improve business processes, increase customer satisfaction, and grow the business. This book mirrors the program I created at my work after years of reading, researching, and trial-and-error learning…This book is not meant to persuade anyone why he or she needs innovation, but rather to show how to get started on this journey.

Tying this back to employee engagement:

Creating such a program has an amazing effect on employee engagement. Let’s assume for a moment that you get absolutely no good ideas out of this program; then, you will still benefit from increased employee engagement. Establishing this program creates a new sense of worth among the employees, which, by itself, will increase their engagement. They will feel that you value their input— that they are intellectual human beings and their work makes a difference to their company’s bottom line. They will feel they are an integral part of the organization and not a dumb or easily replaceable component . Employee engagement increases trust between management and employees. Every job is important in an organization, and every job can be done better. You need to communicate that to employees. Ask them to look for ways to improve functions, processes, and products. If you feel there is any particular role that is not important or could not be improved, you are not thinking hard enough. Sometimes the problem lies in the definition of the role, and at other times, it is the person in that role. Take appropriate actions to make sure you address the actual problem.

The word innovation has been overused as of late, so Jag ensures he defines it and characterizes it for us:

The essence of innovation is to add value for customers. Inventions that wow people, but don’t add value, rarely survive for long, and they often end up costing more money than they add to the bottom line. For an invention to become innovation , it must add value for customers. The value can come through lowered cost, new features, aesthetics, convenience, ease of use, enhanced experience, or meeting emotional needs. Sometimes the value comes in the form of helping customers make more money , attain goals, or safeguard valuables.

Innovation = Invention + Execution + Adoption

Why is innovation so hard? And why do numerous companies don’t do well/fail in it?

Most companies fail to innovate because they are not receptive to the idea that enhancing existing products is innovative. The grass always looks greener on the other side . They cling to the notion of developing new products, which often end up costing companies more money than the new revenues they generate. This belief is further engrained in their minds by the notion that innovative ideas emerge in full form with “success” written all over them. In reality, this notion could not be farther from the truth.

What are the main areas of innovation that a company can focus on:

These areas of focus for innovation can be broadly classified into four business domains: • Revenue Generation • Cost Reduction • Business Process  • Business Model

REVENUE GENERATION The revenue-generating domain of innovation pertains to ideas that contribute to top-line growth. This focus is the most obvious for many organizations, and under this focus, creating new products is the most prevalent strategy.

COST REDUCTION As the name suggests, this domain encompasses ideas that help lower the operational costs of a business. Wal-Mart and Southwest relentlessly focus on providing value to customers through lowered cost. Therefore, ideas that help lower operational costs are given precedence over all other types of ideas.

BUSINESS PROCESS Process innovation is perhaps the most overlooked and underappreciated domain of innovation. In my view, business processes are perhaps the most important domain to innovate— especially customer facing processes.

BUSINESS MODEL Business model innovations address the “how” part of the value proposition of a business. A business model is the overarching process of an organization and explains how it transforms the input of labor, knowledge, material, means of distribution, and other resources into a product or service that customers feel is worth the money they pay for it. Business models also address how an organization acquires and serves its customers, and, at times, how it charges its customers in exchange for the value it delivers. Business model innovations entail changing one or more input resources in ways that deliver value to customers. Most business model innovations tend to be large, strategic initiatives, and you may not see many ideas in the business model innovations category from your employees.

What are the essential ingredients within a company for innovation?

As we discussed in Chapter Two, innovation has three critical components: invention, execution, and adoption. All three pieces must come together for any idea to see the light of day. All ideas face capital, intellectual, technical, and political challenges. These challenges can be overcome only if management creates the focus and employees align their efforts toward that focus and find creative solutions to make the products successful. This alignment and focus can be driven by strong management directives and processes, or it can come from employees as a passion to do great things, be part of something bigger, and make contributions toward a greater cause . The successful companies leverage both to drive continuous innovation.

Is it enough to have top-down innovation or bottom-up innovation?

A good organization is a mix of both top-down and bottom-up innovation. Top-down innovations are very important for dreaming big. Without top-down innovation, we would have never set foot on the moon, built the personal computer , or promoted personalized healthcare. It is the job of visionary leaders to push boundaries and constantly disrupt the market with new and innovative ways to add value for customers. However, leaders cannot be involved in every activity that goes on inside an organization . As the company grows, the only way to succeed is through delegation. The question then becomes: Are the delegates engaged at the same level as the leaders? Is their intent, energy, and focus aligned toward the same vision? Do they feel like part of that vision? Do they see themselves as an important piece of the puzzle in bringing that vision to reality? Creating a bottom-up innovation program can also be instrumental in bridging the gap between strategic intent and execution. When employees are more engaged, they provide superior service to customers and come up with ideas from a very diverse perspective that often gets missed in a top-down view.

Jag makes a very valid observation – and a key differentiator for this book – in that although attention has traditionally focused on product innovation it can and should also apply to services:

As I started my journey of innovation, I found that Service Industries have been largely neglected by most innovation experts and authors. A lot of books have been written on product innovation that teach how to develop new products, how to create prototypes, how to test markets, and how to build demand for novel products, but very limited literature exists on how to innovate in the Service Industry.

Subsequently, the framework for rolling out an employee-driven innovation program is introduced:

In the following chapters, I’ll introduce the Six-Step M.A.S.T.E.R. Innovation Program. Here are the steps: STEP 1: Mobilize STEP 2: Amass STEP 3: Support STEP 4: Triage STEP 5: Execute STEP 6: Recognize

On Mobilizing:

The first step in creating the Bright Idea Box program is to define and document the program’s vision and purpose. A clearly defined purpose statement will help ensure the entire workforce is marching in the same direction. The purpose statement should be a working document that captures the program’s essence, how it works, and the types of ideas you are seeking. It should be a three-part document outlining the purpose, objectives, and guidelines…This purpose statement is the overarching and simplified vision of the program that serves as a guiding beacon for employees who are thinking of new ideas, as well as those responsible for supporting and ensuring that valid ideas get implemented in a timely manner…The second part of the document should outline the area of focus and the program’s business objectives. The program’s objectives should be closely aligned with business goals and values…The last section of the purpose document should outline the guidelines for participating in the program. In this section, you can include what and who is outside the scope of this program.

On Amassing:

For this reason, at the heart of this program is an easy to use and easy to access Idea-Capturing System, which is available to all employees to capture ideas when they are fresh in their minds.

Idea Questions: 1. Name: What is the name for the idea? 2. Description: What is a brief description of the idea, including what problem it addresses and how it solves it? 3. Benefits: What value or benefits will the idea deliver to the customer or company? 4. Cost-Benefit Rationale: How much will it cost to try or implement the idea? Does the cost justify the benefits?This information is like a mini-business case for the idea. For an idea to be accepted and implemented, the employee must provide answers to all of these questions .

On Supporting:

The most important thing employees need is support and encouragement from management, and a little bit of freedom to contemplate and develop ideas. Creating an environment where management encourages employees to submit and develop ideas is the most important investment you need to make. You need to create an environment where employees feel comfortable bringing out the issues inside the company , flaws in the business processes , and weaknesses in your products.

On Triaging:

The next step in building the bottom-up employee innovation program is to create effective means for screening and prioritizing ideas…The best way to accomplish this is to form an Idea Screening Committee that meets on a regular basis to review newly submitted ideas and discuss changes to existing ideas.

On Executing:

Once an idea has been approved and financed, it must be implemented in a timely manner. Without a clearly visible process and a push from the top, an idea can easily vanish into the vast depths of corporate bureaucracy. As part of designing the program, you need to decide how you are going to test and implement ideas. You need to flush out who is responsible for implementing the ideas and what type of commitment you need from the impacted parties…There is no faster way to kill the innovation program than by not implementing good ideas.

On Recognizing:

The final step in developing the program is deciding how to recognize employees for their ideas and efforts. Recognition is the lifeline of the Bright Idea Box. Setting the right kinds of rewards is critical to the program’s longevity and ensuring that employees stay motivated to submit new ideas . Recognition is an opportunity to encourage desired behaviors and reward employees for thinking and acting in ways that add value for customers and the company.

What are some key leadership principles to help develop employees into innovators?

Below are the four leadership principles that play a vital role in developing and transforming employees into innovators. DRIVERS OF HIGHER ENGAGEMENT 1. Ownership: Give people responsibility and ownership. 2. Personal Growth: Grow people on a personal level so they can grow professionally. 3. Solution Mindset: Foster a Solution Mindset that promotes progress. 4. Partnership: Treat employees like partners so they will act like partners.

Ownership—Ownership instills a feeling of pride. Nothing motivates people to do more than pride. People work a lot harder for pride and often go to extremes to prove themselves. How can you take advantage of this human condition? Make employees the boss. Give them responsibility.

Personal Growth—Growth is the fuel of the soul. Without growth, even the masters can lose interest.

Solution Mindset—A solution mindset is a problem-solving approach that recommends that, no matter what the problem is, your first response should always be how to solve or get around the problem…A solution mindset, on the other hand, encourages progress. The goal is to keep moving forward. No matter what the problem is, focus on how to get around it and make progress…A solution mindset, on the other hand, encourages progress. The goal is to keep moving forward. No matter what the problem is, focus on how to get around it and make progress…To foster a solution mindset, tell employees that you are not interested in who or what caused the problem. You are only interested in hearing how we plan to go beyond the problem.

When launching the innovation program it’s important to sell it to all stakeholders:

To launch the Bright Idea Box program, you need to appeal to the rational and emotional brains of three distinct stakeholders. First, the top management, the executive leadership team in the company. Second, the middle management layers, and third, the front-line employees. I recommend that you create distinct sales pitches for each group to address their functional needs.

What are skills that we can all work on to further enable our innovative thinking abilities?

I have compiled a short list of skills that you can share with employees when you roll out the program . This is by no mean a comprehensive list of skills or techniques, but rather a starting point and enough to jump-start employees’ innovative thinking abilities. It is a short list that employees can easily understand and put to use immediately.

CURIOSITY Curiosity is perhaps the most imperative trait of all innovators. Being curious about what is on the other side and why things are the way they are is a great tool for making breakthrough discoveries.

LISTENING Customers are always telling us what they want, but employees on the other end are often not listening. There is no incentive for them to put up with customer complaints all day.

MINING Every frustration presents an opportunity. Instead of getting frustrated and blaming others for incompetence, mine your frustrations to look for ways to solve the problem…1. Not stopping at the first obstacle 2. Keeping a positive attitude 3. Always learning 4. Collaborate— share and ask for help 5. Solution finding rather than complaining.

BORROWING We like to believe that our problems are unique, but more often they are not. Often the problems we are wrestling with have been solved by others in different industries and in different products. Steve

NETWORKING The most innovative ideas often lie at the intersection of two different paths. We get some of the best ideas when we network with people from different disciplines .

WRITING Ideas often come when we are not looking. This is because of how our brain works. Our cognitive brain, which is responsible for decision making, has a limited capacity to process information, but our intuitive brain, which works in the background, can process a lot more information and make new associations that trigger aha moments…ideas. The second limitation of our cognitive brain is its ability to convert short-term memory into long-term memory. Often we get ideas, but they get lost in the rush of a million other things to do and remember. For this reason, recording problems and thoughts is essential to generating ideas.

PROBLEM SOLVING…ASKING “WHY” FIVE TIMES…REVERSING THE CHALLENGE…PROTOTYPING…

Getting a flywheel started takes a lot of energy— you push, and you push, and you push. Then with every turn, it becomes easier and easier to turn the wheel . And finally, it starts to generate its own momentum and what once took an enormous amount of energy becomes almost self-sustaining. It is the same for starting a bottom-up innovation program . It is a cultural shift and you will need to make a really strong push in the beginning and keep pushing until it gains momentum. With time, the recognition and the buzz created by this program will create a desire among employees to submit ideas. Pretty soon, you will have ideas pouring in at a speed faster than you can handle. The key is not to stop pushing.

What sets this book apart is its high degree of practicality – Jag has thought through and included the material not only to introduce the framework itself but how to operationalize it successfully – which is typically the harder part.

A recommended read in the area of innovation and employee engagement.

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.

Titan – The Life of John D. Rockefeller, Sr.

The name Rockefeller is ingrained within both American History and Business, but why so? This is the question that set me on the quest to read the National Bestseller, Titan – The Life Of John D. Rockefeller, Sr. by Ron Chernow.

Below are key highlights from this masterpiece that I wanted to share.

John D. Rockefeller’s began displaying and developing his business acumen at a young age:

Though only dimly aware of such distant developments, John D. Rockefeller already seemed a perfect specimen of homo economicus. Even as a boy, he bought candy by the pound, divided it into small portions, then sold it at a tidy profit to his siblings. By age seven, encouraged by his mother, he was dropping gold, silver, and copper coins that he earned into a blue china bowl on the mantel. John’s first business coup came at age seven when he shadowed a turkey hen as it waddled off into the woods, raided its nest, and raised the chicks for sale. To spur his enterprise, Eliza gave him milk curds to feed the turkeys, and the next year he raised an even larger brood. As an old man. Rockefeller said, “To this day, I enjoy the sight of a flock of turkeys, and never miss an opportunity of studying them.”

The same was also true for his attachment to his religious beliefs:

John D. Rockefeller was drawn to the church, not as some nagging duty or obligation but as something deeply refreshing to the soul. The Baptist church of his boyhood provides many clues to the secrets of his character. As a young man. he was raised on a steady diet of maxims, grounded in evangelical Protestantism, that guided his conduct. Many of his puritanical attitudes, which may seem antiquated to a later generation, were merely the religious commonplaces of his boyhood. Indeed, the saga of his monumental business feats is inseparable from the fire-and-brimstone atmosphere that engulfed upstate New York in his childhood.

These two elements formed the two pillars of his life:

He possessed a sense of calling in both religion and business, with Christianity and capitalism forming the twin pillars of his life…When challenges to orthodoxy arose in later decades, he stuck by the spiritual certainties of his boyhood…The church gave Rockefeller the community of friends he craved and the respect and affection he needed.

The role he had to play within his family, tough him responsibility:

Of course, this boyhood responsibility took its toll on John D., who experienced little of the spontaneous joy or levity of youth. Growing up as a miniature adult, burdened with duties. He developed an exaggerated sense of responsibility that would be evident throughout his life. He learned to see himself as a reluctant savior, taking charge of troubled situations that needed to be remedied.

On his entry to the Oil sector:

Tramping the banks. Rockefeller beheld the satanic new world bequeathed by the oil boom, an idyllic valley blackened with derricks and tanks, engine houses and ramshackle huts, thickly crowded together in a crazy-quilt pattern…Rockefeller represented the second, more rational stage of capitalist development, when the colorful daredevils and pioneering speculators give way, as Max Weber wrote, to the “men who had grown up in the hard school of life. calculating and daring at the same time, above all temperate and reliable, shrewd and completely devoted to their business, with strictly bourgeois opinions and principles.”

One of the keys to his business success was that he kept cash on hand, and allies in the banking sectors – which were essential particularly during the times of crisis:

It is impossible to comprehend Rockefeller’s breathtaking ascent without realizing that he always moved into battle backed by abundant cash. Whether riding out downturns or coasting on booms, he kept plentiful reserves and won many bidding contests simply because his war chest was deeper…To have orchestrated such a rapid campaign required a long relationship of trust with the banks.

Rockefeller believed in the importance of balanced work ethic:

Rockefeller bridled at the notion that he was a business-obsessed drudge, a slave to the office. “I know of nothing more despicable and pathetic than a man who devotes all the waking hours of the day to making money for money’s sake,” he recorded in his memoirs. He worked at a more leisurely pace than many other executives, napping daily after lunch and often dozing in a lounge chair after dinner. To explain his extraordinary longevity he later said, doubtless overstating the matter, “I’m here because I shirked: did less work, lived more in the open air, enjoyed the open air, sunshine and exercise.”

On his skillful negotiation skills:

One of Rockefeller’s strengths in bargaining situations was that he figured out what he wanted and what the other party wanted and then crafted mutually advantageous terms. Instead of ruining the railroads, Rockefeller tried to help them prosper, albeit in a way that fortified his own position.

One of his shortcomings was that he remained silent in the face of criticism, which haunted him particularly during the public relation battles he fought:

Only in the twilight of life did Rockefeller realize how poorly his taciturnity had served him in business battles. This was especially true during the SIC furor, which evolved into a political and public-relations battle. By remaining silent in the face of criticism, he thought he would seem confident and secure in his integrity—in fact, he seemed guilty and arrogantly evasive. Throughout his career. Rockefeller endured abuse with so much equanimity that Flagler once shook his head and said, “John, you have a hide like a rhinoceros! “

On his view of capitalism, and how he linked it to his religious beliefs:

In a critical distinction, he viewed competitive capitalism—and not capitalism per se—as producing a vulgar materialism and rapacious business practices that dissolved the bonds of human brotherhood. In a state of ungoverned competition, selfish individuals tried to maximize their profits and thereby impoverished the entire industry What the American economy needed instead were new cooperative forms (trusts, pools, monopolies) that would restrain grasping individuals for the general good. Rockefeller thus tried to reconcile trusts with Christianity, claiming that cooperation would end the egotism and materialism abhorrent to Christian values. It was an ingenious rationalization. While religion did not lead him to the concept of trusts, it did enable him to invest his vision of cooperation with a powerful moral imperative.

On his leadership skills and beliefs:

Even as a young man, Rockefeller was extremely composed in a crisis. In this respect, he was a natural leader: The more agitated others became, the calmer he grew.

Far more than a technocrat, Rockefeller was an inspirational leader who exerted a magnetic power over workers and especially prized executives with social skills.

Few outsiders knew that one of Rockefeller’s greatest talents was to manage and motivate his diverse associates. As he said, “It is chiefly to my confidence in men and my ability to inspire their confidence in me that I owe my success in life.” He liked to note that Napoleon could not have succeeded without his marshals. Free of an autocratic temperament. Rockefeller was quick to delegate authority and presided lightly, genially, over his empire, exerting his will in unseen ways. At meetings. Rockefeller had a negative capability: The quieter he was, the more forceful his presence seemed, and he played on his mystique the resident genius immune to petty concerns.

Rockefeller placed a premium on internal harmony and tried to reconcile his contending chieftains. A laconic man, he liked to canvass everyone’s opinion before expressing his own and then often crafted a compromise to maintain cohesion. He was always careful to couch his decisions as suggestions or questions.

On philanthropy:

Yet by the 1880s, Rockefeller had already formulated certain core principles for his bequests many of them stemming from beliefs he had long entertained as a businessman. For instance, like other industrialists he worried that charity fostered dependence and pauperized recipients…The most important concept Rockefeller bequeathed to philanthropy was that of wholesale giving, as opposed to small, scattershot contributions…Another cardinal principle of Rockefeller philanthropy was to rely upon expert opinion.

On Standard Oils’, the set of companies he started:

In a sense, John D. Rockefeller simplified life for the authors of antitrust legislation. His career began in the infancy of the industrial boom, when the economy was still raw and unregulated. Since the rules of the game had not yet been encoded into law, Rockefeller and his fellow industrialists had forged them in the heat of combat. With his customary thoroughness, Rockefeller had devised an encyclopedic stock of anti-competitive weapons. Since he had figured out every conceivable way to restrain trade, rig markets, and suppress competition, all reform-minded legislators had to do was study his career to draw up a comprehensive antitrust agenda.

Standard Oil had taught the American public an important but paradoxical lesson: Free markets, if left completely to their own devices, can wind up terribly unfree. Competitive capitalism did not exist in a state of nature but had to be defined or restrained by law. Unfettered markets tended frequently toward monopoly or, at least, toward unhealthy levels of concentration, and government sometimes needed to intervene to ensure the full benefits of competition. This was particularly true in the early stages of industrial development. This notion is now so deeply embedded in our laws that it has become all but invisible to us. replaced by secondary debates over the precise nature or extent of antitrust enforcement.

If Tarbell gave an oversimplified account of Standard Oil’s rise, her indictment was perhaps the more forceful for it. In the trust’s collusion with the railroads, the intricate system of rebates and drawbacks, she found her smoking gun, the irrefutable proof that Rockefeller’s empire was built by devious means. She was at pains to refute Rockefeller’s defense that everybody did it. “Everybody did not do it,” she protested indignantly “In the nature of the offense everybody could not do it. The strong wrested from the railroads the privilege of preying upon the weak, and the railroads never dared give the privilege save under the promise of secrecy.”

The following two excerpts summarize Rockefeller’s life and contributions:

The loftiest encomium to Rockefeller’s impact in this field came from Winston Churchill, who wrote shortly before Rockefeller’s death: When history passes its final verdict on John D. Rockefeller, it may well be that his endowment of research will be recognized as a milestone in the progress of the race. For the first time, science was given its head: longer term experiment on a large scale has been made practicable, and those who undertake it are freed from the shadow of financial disaster. Science today owes as much to the rich men of generosity and discernment as the art of the Renaissance owes to the patronage of Popes and Princes. Of these rich men, John D. Rockefeller is the supreme type.

The fiercest robber baron had turned out to be the foremost philanthropist Rockefeller accelerated the shift from the personal, ad-hoc charity that had traditionally been the province of the rich to something both more powerful and more impersonal. He established the promotion of knowledge, especially scientific knowledge, as a task no less important than giving alms to the poor or building schools, hospitals, and museums. He showed the value of expert opinion, thorough planning, and competent administration in nonprofit work, setting a benchmark for professionalism in the emerging foundation field. By the time Rockefeller died, in fact, so much good had unexpectedly flowered from so much evil that God might even have greeted him on the other side, as the titan had so confidently expected all along.

On a concluding note:

Although Junior moved into Kykuit after Rockefeller’s death, he knew that his father was inimitable, and so he decided to retain the Jr. after his name. As he was often heard to say in later years, “There was only one John D. Rockefeller.”

Attorney Samuel Untermver issued this paean to the elusive witness he had interrogated: “Next to our beloved President, he was our country’s biggest citizen. It was he who visualized as did no other man the use to which great wealth could wisely be put. Because of him the world is a better place in which to live. Blessed be the memory of World Citizen No. 1.”

After reading this book, I can definitely say that the question I had has been answered. A highly recommended read from a historical, humanitarian and business perspectives. If you are looking to learn more about the Oil/Energy side of the story, I strongly recommend reading The Prize: The Epic Quest for Oil, Money and Power by Daniel Yergin.

On Left Brain Right Stuff

I recently finished reading Left Brain Right Stuff – How Leaders Make Winning Decisions by Phil Rosenzweig. The author had graciously provided me with a copy of his new book, as I had previously read and reviewed an earlier work of his (The Halo Effect).

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

1- “They make predictable errors, or biases, which often undermine their decisions. By now we’re familiar with many of these errors, including the following: -People are said to be overconfident, too sure of themselves and unrealistically optimistic about the future. -People look for information that will confirm what they want to believe, rather than seeking information that might challenge their hopes. -People labor under the illusion of control, imagining they have more influence over events than they really do. -People are fooled by random events, seeing patterns where none exist. People are not good intuitive statisticians, preferring a coherent picture to what makes sense according to the laws of probability. -People suffer from a hindsight bias, believing that they were right all along.”

2- “Yet for all we know about these sorts of decisions, we know less about others. First, many decisions involve much more than choosing from options we cannot influence or evaluations of things we cannot affect…Second, many decisions have a competitive dimension…Third, many decisions take a long time before we know the results…Fourth, many decisions are made by leaders of organizations…In sum, experiments have been very effective to isolate the processes of judgment and choice, but we should be careful when applying their findings to very different circumstances.”

3- “Great decisions call for clear analysis and dispassionate reasoning. Using the left brain means: -knowing the difference between what we can control and what we cannot, between action and prediction -knowing the difference between absolute and relative performance, between times when we need to do well and when we must do better than others -sensing whether it’s better to err on the side a’ taking action and failing, or better not to act; that is, between what we call Type I and Type II errors -determining whether we are acting as lone individuals or as leaders in an organizational setting and inspiring others to achieve high performance -recognizing when models can help us make better decisions, but also being aware of their limits.”

4- “Having the right stuff means: -summoning high levels of confidence, even levels that might seem excessive, but that are useful to achieve high performance -going beyond past performance and pushing the envelope to seek levels that are unprecedented -instilling in others the willingness to take appropriate risks.”

5- “Moore and his colleagues ran several other versions of this study, all of which pointed to the same conclusion: people do not consistently overestimate their level of control. A simpler explanation is that people have an imperfect understanding of how much control they can exert. When control is low they tend to overestimate. but when it’s high they tend to underestimate.”

6- “Of course managers don’t have complete control over outcomes. any more than a doctor has total control over patient health. They are buffeted by events outside their control: macroeconomic factors, changes in technology, actions of rivals, and so forth. Yet it’s a mistake to conclude that managers suffer from a pervasive illusion of control. The greater danger is the opposite: that they will underestimate the extent of control they truly have.”

7- “If you believe there’s an intense pressure to outperform rivals when that’s not the case, you might prefer a Type 1 error. You might take action sooner than necessary or act more aggressively when the better approach would be to wait and observe. The risks can be considerable, but perhaps not fatal On the other hand, if performance is not only relative but payoffs are highly skewed, and you don’t make every effort to outperform rivals, you’ll make a Type II error. Here the consequences can be much more severe. Fail now, and you may never get another chance to succeed. By this logic, the greater error is to underestimate the intensity of competition. It’s to be too passive in the face of what could be a mortal threat. When in doubt, the smart move is to err on the side of taking strong action.”

8- “The lesson is clear: in a competitive setting, even a modest improvement in absolute performance can have a huge impact on relative performance. And conversely, failing to use all possible advantages to improve absolute performance has a crippling effect on the likelihood of winning. Under these circumstances, finding a way to do better isn’t just nice to have. For all intents and purposes, it’s essential.”

9- “First, not even thing that turns out badly is due to an error. We live in a world of uncertainty, in which there’s an imperfect link between actions and outcomes. Even good decisions sometimes turn out badly, but that doesn’t necessarily mean anyone made an error. Second, not every error is the result of overconfidence. There are many kinds off error: errors of calculation, errors of memory, simple motor errors, tactical errors, and so forth. They’re not all due to overconfidence.”

10- “The Trouble with Overconfidence,” the single word—overconfidence—has been used to mean three very different things, which they call overprecision, overestimation, and overplacement…Overprecision is the tendency to be too certain that our judgment is correct…He’s referring to overprecision: the tendency to believe a prediction is more accurate than it turns out to be…Overestimation, the second kind of overconfidence, is a belief that we can perform at a level beyond what is objectively warranted…Overestimation is an absolute evaluation; it depends on an assessment of ourselves and no one else…Overplacement, the third kind of overconfidence, is a belief that we can perform better than others…She calls it the superiority bias and says it’s a pervasive error.”

11- “My suggestion is that anyone who uses the term should have to specify the point of comparison. If overconfidence means excessively confident, then excessive compared to what? In much of our lives, where we can exert control and influence outcomes, what seems to be an exaggerated level of confidence may be useful; and when we add the need to outperform rivals, such a level of confidence may even be essential.”

12- “When we have ability to shape events we confront a different challenge: making accurate estimates of future performance. The danger here is not one of overlooking the base rate of the broader population at a point in time, but neglecting lessons of the past and making a poor prediction of the future. Very often people place great importance on their (exaggerated) level of skills and motivation. The result is to make forecasts on what Kahneman and Tversky call the inside view. Unfortunately these projections, which ignore the experiences of others who have attempted similar tasks, often turn out to be wildly optimistic.”

13-“The question we often hear—how much optimism or confidence is good, and how much is too much—turns out to be incomplete. There’s no reason to imagine that optimism or confidence must remain steady over time. It’s better to ramp it up and down, emphasizing a high level of confidence during moments of implementation, but setting it aside to learn from feedback and find ways to do better.”

14- “Duration is short, feedback is immediate and clear, the order is sequential, and performance is absolute. When these conditions hold, deliberate practice can be hugely powerful. As we relax each of them, the picture changes. Other tasks are long in duration, have feedback that is slow or incomplete, must be undertaken concurrently, and involve performance that is relative. None of this is meant to suggest their deliberate practice isn’t a valuable technique. But we have to know when it’s useful and when it’s not.”

15- “When we use models without a clear understanding of when they are appropriate, we’re not going to make great decisions—no matter how big the data set or how sophisticated the model appears to be.”

16- “To get at the root of the problem, Capen looked at the auction process itself. He discovered an insidious dynamic: when a large number of bidders place secret bids, it’s almost inevitable that the winning bid will be too high. Capen called this the winner’s curse.”

17- “But do some kinds of acquisitions have a greater chance of success than others? A significant number—the other 36 percent were profitable, and they turned out to have a few things in common. The buyer could identify clear and immediate gains. rather than pursuing vague or distant benefits. Also, the gains they expected came from cost savings rather than revenue growth. That’s a crucial distinction, because costs are largely within our control, whereas revenues depend on customer behavior, which is typically beyond our direct control.”

18- “The real curse is to apply lessons blindly, without understanding how decisions differ. When we can exert control, when we must outperform rivals, when there are vital strategic considerations, the greater real danger is to fail to make a bold move. Acquisitions ah ways involve uncertainty, and risks are often considerable. There’s no formula to avoid the chance of losses. Wisdom calls for combining clear and detached thinking—properties of the left brain—with the willingness to take bold action—the hallmark of the right stuff.”

19- “Starting a new business involves many of the same elements we have seen in other winning decisions: an ability to distinguish between what we can control and what we cannot; a sense of relative performance and the need to do better than rivals; the temporal dimension, in which decisions do not always produce immediate feedback; and an awareness that decisions are made in a social context, in which leaders sometimes need to inspire others to go beyond what may seem possible. Together, these elements help new ventures get off to a winning start.”  

20- “To make great decisions, we need above all to develop the capacity to question, to go beyond first-order observations and pose incisive second-order questions. An awareness of common errors and cognitive biases is only a start. Beyond that, we should ask: Are we making a decision about something we cannot control, or are we able to influence outcomes?…Are we seeking an absolute level of performance, or is performance relative?…Are we making, a decision that lends itself to rapid feedback, so we can make adjustments and improve a next effort?…Are we making a decision as an individual or as a leader in a social setting?…Are we clear what we mean by overconfidence?…Have we given careful thought to base rates, whether of the larger population at a point in time or historical rates of past events?…As for decision models, are we aware of their limits as well as strengths?…When the best course of action remains uncertain, do we have a sense of on which side we should err?”

21- “In his profile of longtime St. Louis Cardinals manager Tony LaRussa, Buzz Bissinger wrote that a baseball manager requires “the combination of skills essential to the trade: part tactician, part psychologist, part river-boat gambler.” That’s a good description for many kinds of strategic decision makers. The tactician plays a competitive game, anticipating the way a given move may lead to a counter-move and planning the best response. The psychologist knows how to shape outcomes by inspiring others, perhaps by setting goals or by offering encouragement or maybe with direct criticism. The riverboat gambler knows that outcomes aren’t just a matter of cold numbers and probabilities, but that it’s important matter of cold numbers and probabilities, but that it’s important to read an opponent so as to know when to raise the stakes, when to bluff, and when to fold. Winning decisions call for a combination of skills as well as the ability to shift among them. We may need to act first as a psychologist, then as a tactician, next as a riverboat gambler, and perhaps once again as a psychologist. In the real world, where we have to respond to challenges as they arise, one skill or another is insufficient; versatility is crucial Even then success is never assured, not in the competitive arenas of business or sports or politics. Performance is often relative and consequences of failure are harsh. A better understanding of decision-making, however, and an appreciation for the role of analysis as well as action, can improve the odds of success. It can help us win.”

Regards,

Omar Halabieh

Left Brain Right Stuff

On Steve Jobs

I recently finished reading Steve Jobs by Walter Isaacson.

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

1- “I always thought of myself as a humanities person as a kid, but I liked electronics,” he said. “Then I read something that one of my heroes, Edwin Land of Polaroid, said about the importance of people who could stand at the intersection of humanities and sciences, and I decided that’s what I wanted to do.” It was as if he were suggesting themes for his biography (and in this instance, at least, the theme turned out to be valid). The creativity that can occur where both the humanities and the sciences combine in one strong personality was the topic that most interested me in my biographies of Franklin and Einstein, and I believe that it will be a key to creating innovative economies in the twenty-first century.”

2- “His wife also did not request restrictions or control, nor did she ask to see in advance what I would publish. In fact she strongly encouraged me to be honest about his failings as well as his strengths. She is one of the smartest and most grounded people I have ever met. “There are parts of his life and personality that are extremely messy. and that’s the truth,” she told me early on. “You shouldn’t whitewash it. He’s good at spin, but he also has a remarkable story, and I’d like to see that it’s all told truthfully” I leave it to the reader to assess whether I have succeeded in this mission. I’m sure there are players in this drama who will remember some of the events differently or think that I sometimes got trapped in Jobs’s distortion field.”

3- “Jobs said that his appreciation for Eichler homes instilled in him a passion for making nicely designed products for the mass market. I Jove it when you can bring really great design and simple capability to something that doesn’t cost much,” he said as he pointed out the clean elegance of the houses. “It was the original vision for Apple. That’s what we tried to do with the first Mac. That’s what we did with the iPod.””

4- “The Blue Box adventure established a template for a partnership that would soon be born. Wozniak would be the gentle wizard coming up with a neat invention that he would have been happy just to give away. and Jobs would figure out how to make it user-friendly, put it together in a package, market it, and make a few bucks.”

5- “Coming back to America was, for me, much more of a cultural shock than going to India. The people in the Indian countryside don’t use their intellect like we do, they use their intuition instead, and their intuition is far more developed than in the rest of the world. Intuition is a very powerful thing, more powerful than intellect, in my opinion. That’s had a big impact on my work.”

6- “Jobs is a complex person, he said, and being manipulative is just the darker facet of the traits that make him successful. Wozniak would never have been that way, but as he points out, he also could never have built Apple. “I would rather let it pass,” he said when I pressed the point. “It’s not something I want to judge Steve by.””

7- “Apple. It was a smart choice. The word instantly signaled friendliness and simplicity. It managed to be both slightly off-beat and as normal as a slice of pie. There was a whiff of counterculture, back-to-nature earthiness to it, yet nothing could be more American. And the two words together—Apple Computer—provided an amusing disjuncture. ”

8- “Jobs’s father had once taught him that a drive for perfection meant caring about the craftsmanship even of the parts unseen. Jobs applied that to the layout of the circuit board inside the Apple II. He rejected the initial design because the lines were not straight enough. This passion for perfection led him to indulge his instinct to control. Most hackers and hobbyists liked to customize, modify, and jack various things into their computers. To Jobs, this was a threat to a seamless end-to-end user experience.”

9- “Markkula would become a father figure to Jobs. Like Jobs’s adoptive father, he would indulge Jobs’s strong will, and like his biological father, he would end up abandoning him. “Markkula was as much a father-son relationship as Steve ever had,” said the venture capitalist Arthur Rock. He began to teach Jobs about marketing and sales. “Mike really took me under his wing,” Jobs recalled. “His values were much aligned with mine. He emphasized that you should never start a company with the goal of getting rich. Your goal should be making something you believe in and making a company that will last.””

10- “Was Jobs’s unfiltered behavior caused by a lack of emotional sensitivity? No. Almost the opposite. He was very emotionally attuned. able to read people and know their psychological strengths and vulnerabilities. He could stun an unsuspecting: victim with an emotional towel-snap, perfectly aimed. He intuitively knew when someone was faking it or truly knew something. This made him masterful at cajoling, stroking, persuading, flattering, and intimidating people.”

11- “But even though Jobs’s style could be demoralizing, it could also be oddly inspiring. It infused Apple employees with an abiding passion to create groundbreaking products and a belief that they could accomplish what seemed impossible.”

12- “The best products, he believed, were “whole widgets” that were designed end-to-end, with the software closely tailored to the hardware and vice versa. This is what would distinguish the Macintosh, which had an operating system that worked only on its own hardware, from the environment that Microsoft was creating, in which its operating system could be used on hardware made by many different companies.”

13- “Their differences in personality and character would lead them to opposite sides of what would become the fundamental divide in the digital age. Jobs was a perfectionist who craved control and indulged in the uncompromising temperament of an artist; he and Apple became the exemplars of a digital strategy that tightly integrated hardware. software, and content into a seamless package. Gates was a smart, calculating, and pragmatic analyst of business and technology; he was )pen to licensing Microsoft’s operating system and software to a variety of manufacturers.”

14- “I’ll always stay connected with Apple. I hope that throughout my life I’ll sort of have the thread of my life and the thread of Apple weave in and out of each other, like a tapestry. There may be a few years when I’m not there, but I’U always come back. If you want to live your life in a creative way, as an artist, you have to not look back too much. You have to be willing to take whatever you’ve done and whoever you were and throw them away. The more the outside world tries to reinforce an image of you, the harder it is to continue to be an artist, which is why a lot of times. artists have to say. “Bye. I have to go now. I’m going crazy and I’m getting out of here.” And they go and hibernate somewhere. Maybe later they re-emerge a little differently.”

15- “Jobs sometimes avoided the truth. Helmut Sonnenfeldt once said of Henry Kissinger, “He lies not because it’s in his interest. he lies because it’s in his nature.” It was in Jobs’s nature to mislead or be secretive when he felt it was warranted. But he also indulged in being brutally honest at times, telling the truths that most of us sugarcoat or suppress. Both the dissembling and the truth-telling were simply different aspects of his Nietzschean attitude that ordinary rules didn’t apply to him.”

16- “For all of his willfulness and insatiable desire to control things. Jobs was indecisive and reticent when he felt unsure about something. He craved perfection, and he was not always good at figuring out how to settle for something less. He did not like to wrestle with complexity or make accommodations. This was true in products, design, and furnishings for the house. It was also true when it came to personal for the house. It was also true when it came to personal commitments. If he knew for sure a course of action was right. he was unstoppable. But if he had doubts, he sometimes withdrew, preferring not to think about things that did not perfectly suit him.”

17- “Ever since he left the apple commune, Jobs had defined himself and by extension Apple, as a child of the counterculture. In ads such as “Think Different” and “1984,” he positioned the Apple brand so that it reaffirmed his own rebel streak, even after he became a billionaire, and it allowed other baby boomers and their kids to do the same. “From when I first met him as a young guy, he’s had the greatest of the impact he wants his brand to have on people,” said Clow. Very few other companies or corporate leaders—perhaps none— could have gotten away with the brilliant audacity of associating their brand with Gandhi, Einstein, Picasso, and the Dalai Lama. Jobs was able to encourage people to define themselves as anti-corporate, creative. innovative rebels simply by the computer they used. “Steve created the only lifestyle brand in the tech industry,” Larry Ellison said. “There are cars people are proud to have—Porsche, Ferrari, Prius—because what I drive says something about me. People feel the same way about an Apple product.”

18- “One of his motivating passions was to build a lasting company. At age twelve, when he got a summer job at Hewlett-Packard, he learned that a properly run company could spawn innovation far more than any single creative individual. “I discovered that the best innovation is sometimes the company, the way you organize a company,” he recalled. “The whole notion of how you build a company is fascinating. When I got the chance to come back to Apple, I realized that I would be useless without the company, and that’s why I decided to stay and rebuild it.”

19- “Why do we assume that simple is good? Because with physical products. we have to feel we can dominate them. As you bring order to complexity, you find a way to make the product defer to you. Simplicity isn’t just a -visual style. It’s not just minimalism or the absence of clutter. X involves digging through the depth of the complexity. To be truly simple, you have to go really deep. For example, to have no screws on something, you can end up having a product that is so convoluted and so complex. The better way is to go deeper with the simplicity, to understand everything about it and how it’s manufactured. You have to deeply understand the essence of a product in order to be able to get rid of the parts that are not essential.”

20- “Despite his autocratic nature—he never worshiped at the altar of consensus—Jobs worked hard to foster a culture of collaboration at Apple. Many companies pride themselves on having few meetings. Jobs had many.”

21- “”From the earliest days at Apple, I realized that we thrived when we created intellectual property. If people copied or stole our software, we’d be out of business. If it weren’t protected, there’d be no incentive for us to make new software or product designs. If protection of intellectual property begins to disappear, creative companies will disappear or never get Started. But there’s a simpler reason: It’s wrong to steal. It hurts other people. And it hurts your own character.” He knew, however, that the best way to stop piracy—in fact the only way—was to offer an alternative that was more attractive than the brain-dead services that music companies were concocting.”

22- “But Sony couldn’t. It had pioneered portable music with the Walkman, it had a great record company, and it had a long history of making beautiful consumer devices. It had all of the assets to compete with Jobs’s Strategy of integration of hardware, software, devices, and content sales. Why did it fail? Partly because it was a company, like AOL Time Warner that was organized into divisions (that word itself was ominous) with their own bottom lines; the goal of achieving synergy in such companies by prodding the divisions to work together was usually elusive. Jobs did not organize Apple into semi-autonomous divisions; he closely controlled all of his teams and pushed them to work as one cohesive and flexible company, with one profit-and-loss bottom fine. “We don’t have ‘divisions’ with their own P&L,” said Tim Cook. “We run one P&L for the company.””

23- “Despite being- a denizen of the digital world, or maybe because he knew all too well its isolating potential, Jobs was a strong believer in face-to-face meetings. “There’s a temptation in our networked age to think that ideas can be developed by email and iChat,” he said. “That’s crazy. Creativity comes from spontaneous meetings, from random discussions. You run into someone, you ask what they’re doing, you say ‘Wow,’ and soon you’re cooking up all sorts of ideas.” So he had the Pixar building- designed to promote encounters and unplanned collaborations. “If a building doesn’t encourage that, you’ll lose a lot of innovation and the magic that’s sparked by serendipity,” he said. “So we designed the building to make people get out of their offices and mingle in the central atrium with people they might not otherwise see.””

24- “Jobs insisted that Apple focus on just two or three priorities at a time. “There is no one better at turning off the noise that is going on around him,” Cook said. “That allows him to focus on a few things and say no to many things. Few people are really good at that.” In order to institutionalize the lessons that he and his team were learning. Jobs started an in-house center called Apple University. He hired Joel Podolny, who was dean of the Yale School of Management, to compile a series of case studies analyzing important decisions the company had made, including the switch to the Intel microprocessor and the decision to open the Apple Stores. Top executives spent time teaching the cases to new employees, so that the Apple style of decision making would be embedded in the culture.”

25- “”Steve has a particular way that he wants to run Apple, and it’s the same as it was twenty years ago, which is that Apple is a brilliant innovator of closed systems.” Schmidt later told me. “They don’t want people to be on their platform without permission. The benefits of a closed platform is control. But Google has a specific belief that open is the better approach, because it leads to more options and competition and consumer choice.””

26- “The nasty edge to his personality was not necessary. It hindered him more than it helped him. But it did, at times, serve a purpose. Polite and velvety leaders, who take care to avoid bruising others, are generally not as effective at forcing change. Dozens of the colleagues whom Jobs most abused ended their litany of horror stories by saying that he got them to do things they never dreamed possible. And he created a corporation crammed with A players.”

27- “The saga of Steve Jobs is the Silicon Valley creation myth writ large: launching a start-up in his parents’ garage and building it into the world’s most valuable company. He didn’t invent many things outright. but he was a master at putting together ideas, art, and technology in ways that invented the feature. He designed the Mac after appreciating the power of graphical interfaces in a way that Xerox was unable to do. and he created the iPod after grasping the joy of having a thousand in your pocket in a way that Sony, which had all the assets and heritage, never could accomplish. Some leaders push innovations by being good at the big picture. Others do so by mastering details. Jobs did both, relentlessly. As a result he launched a series of products over three decades that transformed whole industries…”

28- “Was he smart? No, not exceptionally. Instead, he was a genius. His imaginative leaps were instinctive, unexpected, and at times magical. He was, indeed, an example of what the mathematician Mark Kac called a magician genius, someone whose insights come out of the blue and require intuition more than mere mental processing power. Like a pathfinder, he could absorb information, sniff the winds, and sense what lay ahead. Steve Jobs thus became the greatest business executive of our era, the one most certain to be remembered a century from now. History will place him in the pantheon right next to Edison and Ford. More than anyone else of his time, he made products that were completely innovative, combining the power of poetry and processors. With a ferocity that could make working with him as unsettling as it was inspiring, he also built the world’s most creative company. And he was able to infuse into its DNA the design sensibilities, perfectionism, and imagination that make it likely to be, even decades from now. the company that thrives best at the intersection of artistry and technology.”

Regards,

Omar Halabieh

Steve Jobs