Green is the Colour of Money $$$$$$$$

There is definite mood shift about the Green Revolution advocated by Friedman in Hot, Flat and Crowded (see my review). Just a year or so ago the predominant attitude in mainstream business to the whole ‘sustainable, green, environment, manage your waste’ thing was a begrudging acceptance and fear that it would inevitably spoil the party. We now detect the green shoots (pun intended) of investor excitement. Revolutions are an opportunity to make money, that is how we now see the agrarian revolution, the industrial revolution, the information revolution, and it is how more and more people are seeing the Green Revolution. “Hang on a moment, if we get first mover advantage on renewable energies, efficient waste disposal technology, new recyclable materials we can make a killing”. The smart money (which in these equity markets has nowhere else to go) is shifting towards anything green. Suddenly people with crazy little green ideas don’t seem so crazy and private investors are stepping forward to back them (I know of at least two such private investment groups, serious players, who are chasing such opportunities the way they would have chased internet start-ups).

Friedman’s argument is that the USA is uniquely placed and particularly motivated to lead the Green Revolution and thereby retain its place as world economic leaders. Perhaps, but the evidence of past revolutions is that they result in new world orders and new players. It was, after all, the industrial revolution that propelled the USA to where it is now and built the fortunes of new upstarts like J.D. Rockefeller (oil) and Andrew Carnegie (steel).

Who will be the new winners in the Green Revolution – answers on a postcard (or better still a comment to me which I will post).

The Art of Negotiation

Amazon lists no fewer than 225,000 books on negotiation. Remember my view on this – the more books there are, the more important the subject and the less likely that any one book can ever give you the answer. Negotiation lies at the heart of business. As Chester L. Karrass said (the title of his book), “In business as in Life, You Don’t get What You Deserve, You Get What You Negotiate”. And if you don’t understand the art of negotiation you will get what you deserve but not what you want. Negotiation is a business art everyone should understand and want to try to improve on. My experience is that very few do.

If you want to spot someone who does not understand even the basics of negotiation – and is therefore likely to be easy prey assuming you do- try this simple test. Go through the concessions or terms you want them to accept one at a time and see if they are dumb enough to comment on the first one. If they do you know you have a rank amateur in front of you. You never comment on a list of concessions until you have them all out on the table. Until you are sure you do you just say nothing or perhaps ask a question, ideally “Anything else you want?”. If you have any skill you then run the negotiation so as to get as much information about a) why the person is asking for something and b) how important it is relative to the other things they are asking for.

A seminal piece on negotiation is ‘Getting to Yes’ by Messrs Fisher, Ury and Patton. It was first published, and I first read it, in 1981. I re-read it as a summary from GetAbstract (a very good summary, well done guys) and was reminded just how wise it is. This is where you should start – the summary or the full book. It merits consideration as one of my top 10 business books of all time.

Just like you can always spot someone who has had media training if you have had some yourself (Good morning, can I start by saying that our deepest sympathies go to the relatives of the family who died as a result of the fire at our factory) anyone who has read ‘Getting to Yes’ will spot that you have also read it. They will see how you are trying to focus on interest areas rather than pre-determined negotiating positions, they will notice that you introduce the idea of objective criteria to judge the eventual outcome, how you ask a lot of questions and use silence as a weapon. “You do your most effective negotiating when you say nothing”. But it doesn’t matter – you will both get to a better outcome if you understand and apply the principles of ‘Getting to Yes’. Actually, the most dangerous thing in negotiation is someone who understands nothing about it.

Settle Down – We are all Traders at Heart

If you are feeling seasick they tell you it helps to look at the horizon. If these astonishingly bad economic times are making you feel sick the equivalent of looking at the horizon is to take a long range historic view of the world. That is what William J. Bernstein does in his book, ‘A Splendid Exchange – How Trade Shaped the World’. Bernstein goes back 15,000 years to the origins of trade and tracks it all the way through to the present day. This fabulous book thoroughly entertains the reader with fascinating insights and perspectives on how trade developed. It explains what drove trade throughout the ages, who the key players were, both nations and individuals, the set-backs and the unintended consequences, the evolution of trading routes and value add exports. As the author says “Globalization, it turns out, was not one event or even a sequence of events; it is a process that has slowly been evolving for a very, very long time”.

But how does it help with economic sea-sickness? What comes though very clearly is that we are all born traders. Our natural instinct is to exchange goods, services and of course ideas. Nothing ever has, nor will ever, change that. However bad it feels right now, the global trading community has weathered much worse storms. One unintended consequence of trade was the spread of disease. The Conquistadors brought small pox to South America and wiped out the Aztecs. Trade with Asia brought the Black Plague to Europe and wiped out an estimated 100 million people. Toxic debt has spread financial instability and wiped out a few banks but it feels pretty insignificant in a historic context. It will prove to be a temporary blip in the progress of global trade.

Columbus and Vasco de Gama opened up mind blowing trading possibilities as a consequence of their explorations respectively West and East  – all achieved at a time when most of the world, aside from the educated few, thought the world was flat. The internet is doing the same thing right now, at a time when most of the world thinks it is analogue.

You can’t trade without banks and a monetary system so we can stop worrying about their collapse. They will never collapse they will just evolve – albeit with painful consequences for some in the process. And without wishing to stray into dangerous waters we can stop worrying about the growing schism between the West and Islam. The prophet Muhammad was born into a tribe of traders and Islam was the engine behind global trade up to the 17th century – it may well become so again. The Infidels and Islam will find an accommodation eventually because they want to trade with each other. We should, of course, learn the lessons of history. Bernstein quotes Frederic Bastiat, “When goods are not allowed to cross borders, soldiers will”.

Protectionism is never the answer. The Great Depression of the 1920’s resulted in congress passing the short-sighted Smoot-Hawley Tariffs only to replace them 4 years later with The Reciprocal Trade Agreements under the free trader, Roosevelt.

The evolution of trade when looked in retrospect has been incredible – literally incredible since at any point in history no-one would have believed what was going to happen had they been told. From exchanging animal skins to exchanging perfumes and oils to exchanging silk then cotton to exchanging human labour and slaves to oil and now to buying books over the internet from amazon. From the Greeks to the Persians to the Spanish, Dutch, English, Americans – with the Chinese there throughout. From mules to ships to trains to planes to the ether. The evolution of trade has been both remarkable and relentless.

We are all traders at heart and we will continue to find new things to trade in new ways. Columbus faced worse storms than this – just focus on the horizon.

Why it Pays to be Negative

I was interested to read Sherrington’s piece on Game Theory, in fact it was hard to tear my self away from it and go back to reading the telephone directory. This is exactly the kind of management bollocks I keep warning you about. No surprise it was written up in the HBR along with all the other guru-babble management techniques all those Brookes Brother clones read before they go back to deciding things the way they always do – what would my boss like, what will make me look good, what is least risky to my career? Here’s my version of Game theory.

Imagine you are asked to give your view on an investment decision, any investment decision. Imagine for one glorious moment anyone gives a shit what you think. If you say yes and it turns out to be a great success how many marks out of 10 will you personally get? You cannot be dumb enough to think it will be 10 out of 10, success has many fathers (or mothers, jeez I hate this PC stuff). Maybe you will get 7 if you are lucky. Now imagine you said no, and it nevertheless went ahead to be a winner. Will you get zero? No, because you can always claim circumstances had changed, you can even argue you were merely trying to play Devil’s advocate. Maybe you score 3 out of 10. What if you voted ‘no’ and it turned out you were on the money, the thing flops and you get to play a very major ‘I told you so card’? Organizations respect that kind of mature judgment, you would probably score a 9. And if you said yes and it flopped – well, organizations do not like people who back losers. You can try to spread the blame – “I wasn’t the only one who voted ‘yes’, even my boss thought it was a great idea, the guy you fired last week” – but it doesn’t play well. You will get close to zero.

So using this game theory, add up the scores for saying no – it totals 12. Now add up the scores for saying yes – 7 maybe 8 if you are lucky (are you following this – just write it up in a little matrix, if you can’t do that then it’s unlikely you would be asked to vote on anything more important than where to have the Christmas Party). If you play the odds it is always better to say NO! And that is exactly how it works in big organizations, who tell you “It’s OK to make mistakes” but always forget to add “in theory”.

Rely on good old Stame to tell you it like it is.

Up yours

Game Theory and the Retailers’s dilemma

As Christmas approaches a number of retailers, whether they realize it or not, will participate in a game of “Prisoner’s Dilemma”. They will have to decide whether to hold their nerve and their prices until after the main holiday season, when traditionally the ‘sales’ period starts, or whether to introduce discounts before Christmas in an effort to hit top-line targets and steal a march on competition. The decision they take has to take account of what they think their competitors will do. If every retailer holds their nerve everyone will enjoy a higher bottom line, if everyone launches their ‘sales’ early everyone loses (except the consumer) because it is a zero sum game. But if one retailer moves ahead of the others they win relative to their competitors.

This kind of strategic decision is inter-dependant – the outcome depends on the actions or inaction of others -  and is the basis of Game Theory developed in the 1940’s by Neumann and Morgenstern for economics. In 1950 Flood and Dresher developed the example of the prisoner’s dilemma to illustrate the use of Game Theory. You can read the full version of this in Wiki but the basic idea is that 2 prisoners are held in separate cells accused of a crime. If both confess they get a 5 years sentence. If neither confess they get 6 months. If one betrays the other he goes free and the other guy gets 10 years. On the assumption that less prison time is better and there is no honour among thieves it is better for both to choose to confess. If the game is repeated eventually people can figure out that it is better to ‘co-operate’ and stay silent.

In 1995 Harvard Business Review carried an article by Brandenburger and Nalebuff (crazy names, crazy guys) which tried to re-launch the use of Game Theory in business strategy since so many business decisions have outcomes that depend on the decisions of others – like the prisoners dilemma. There don’t seem to be many takers for this very mathematical branch of business science. Decisions are discussed taking into account opinions on what competitors may or may not do, but it is rare for this to involve the kind of complex matrices and algorithms advanced by the purest disciples of Game Theory.

So you can expect the ‘sales’ to start early this year as every retailer takes the pre-emptive retaliation route. The retailers and their shareholders will lose out, consumers will win and no-one will learn. When the Prisoner’s Dilemma scenario was tried out among a sample of ‘ordinary people’ 40% took the ‘say nothing’ option. In other words they assumed that everyone realizes it is better to co-operate. Suckers.

Malcolm Gladwell’s Secret of Success?

Buggered if I know but I wish I had it. This little twerp is making millions spinning the simplest of observations into global best selling books and highly lucrative lecture tours.

Tipping Point – Things catch on and some people spread the news.

Blink – smart people are quick on the uptake

Outliers – you get good at something by doing it a lot and it helps if you were born in to the right family at the right time.

Thank you Sherlock. How does he get away with it? His TED.com video explains in 15 tedious minutes about how some American twat figured out that we like a bit of a choice. It’s not money for old rope, its money for very thin string.

I can’t wait to see his next best sellers:-

A Stitch in time saves Nine – how getting on with things helps you get on.
Look before you leap – some problems can be averted.
Too many cooks spoil the broth – there is only so much Gordon Ramsey anyone can stomach.

He can spin this out for years. Seth Bloody Godin is just as pisspoor. Purple cows stand out – so do chickens with a skunk stuck on their head but you wouldn’t want to eat one. If you want some real guru wisdom check out my titles here. I am also available to give lectures and key note speeches and will cost you quite a lot less than Mr. Glad – wellwhywouldn’thebe.

Up yours.

The Secret of Success – Contender for Top 10 Business Books?

Malcolm Gladwell is a great writer and a true thought-leader. I chose to include him and his first book, Tipping Point, and stuck with that choice even after the publication of his second book, Blink. His third book, Outliers, may in fact be his best book yet. No-one can argue the influence of Tipping Point. It propelled Gladwell to being one of the world’s most highly sought after and highest paid speakers and writers. The notion of there being a Tipping Point in how ideas, including new business ideas, catch on has itself caught on like wild fire. Mark Earls, featured on my site, takes issue with some of the social science behind Gladwell’s theories but even Mark would acknowledge the power of Gladwell’s work in reshaping thinking in the business world.

I actually prefer Outliers although I hate the title – it is positively misleading. This book is about the secret of success and, in a similar vein to Freakonomics, another of my Top 10 Best Business Books, it takes a closer look at the data and facts that lie behind freakish success. As Gladwell puts it “Success is not a random act. It arises in a predictable and powerful set of circumstances and opportunities”. He then sets out what these are based on a series of true stories stretching from Bill Gates and The Beatles to Korean Air (whose story was originally about spectacular safety failures).

You could criticize Gladwell for stringing out these stories and it is true that no detail or flowery description is spared in first saying what appeared to happen, then showing what really happened and the lessons to be learned. I forgive him for this for two reasons. Firstly, he is a writer and so like all writers he wants to paint a picture in words, which he does very well. You get drawn into the stories, you get to know the people and their lives. Secondly and most importantly, he has to spin the story because if he did not the conclusions would seem trite and they are anything but. They are powerful and very important – to blow the denouement of the book, Gladwell’s point is that if only we could see past the myths and apparent blind luck we could see that with the right opportunities and circumstances we could help create a million Bill Gates.

I always like to give people the summary, the 2 minute version, because that is my thing – I like to give the maximum return on the time you spend to learn about business. You then make up your mind whether to invest more time to learn in more detail. So here they are, the 6 key points, but they will sound trite, even platitudinous.

Here is the secret of success:-

1. Be born at a certain time – e.g. people born in the first quarter of the year do better simply because they are older than their school peer group.
2. Spend at least 10,000 hours getting really, really good at something – as Bill Gates did because he luckily had access to a computer, which was rare at the time, and he was a geek.
3. There is an IQ threshold of 130 – above that other things come into play like being a divergent thinker – in the same way that above a certain minimum height other things determine how good a basket ball player you are.
4. Your family circumstances are key – middle class kids grow up empowered, with a sense of entitlement and in a home full of books.
5. Your cultural legacy is key – Asians have a much harder work ethic because they come from a rice growing culture (much, much more demanding work than growing other crops as they did in Europe i.e. 3000 hours work a year versus 1200). On the other hand they tend to respect authority too much and that accounted for Korean Air’s appalling safety record until they brought a westerner in to get Pilots and First Officers to work as partners.
6. In one sentence success comes down to chance and opportunity plus hard work, persistence and experimentation.

They may not sound earth shattering but Gladwell’s point is that if we see success in this way, we can stack the odds to create much more success in the world. Simple but very well argued and very powerful. The title could have been “Outliers i.e rare success stories need not be rare” – ok, not that catchy. The sub title of the book, “The Story of Success” is catchier but again misleading – these are the facts not just the story of success.

I like Outliers a lot and if you enjoy reading a well written book so will you. I won’t change the book against Malcolm’s name in our Top 10 Best Business books list just yet – I will wait until you and other business people regard it as more seminal that Tipping Point. I think you might. Success is everything in business – and this book is all about the secret of success.

Budget Setting

This topic always seems to attract interest, I guess since so much of business is spent doing it and then living with the consequences.  The most common problems with budgets is that either people just look at the past and add on a bit for inflation (or the expectation that they will get cut back so better to start high) or else they double guess whoever will have to sign off the budget. “We better not go in asking for more than X or they’ll think we’re mad”. Another common mistake is to work the percentages based on benchmarks – it is just a version of setting budgets based on historical precedents. “Other businesses like us typically spend 2% of revenue on R&D so we will so the same”. Interesting to know but not the way you set a budget.

A budget, any budget, is an investment in the future that is intended to have a positive outcome. That is where you start – if successful what is this worth to us? The next thing is to look at the tasks that need to be accomplished and the realistic costs. “Task related budget setting” has to be the baseline.

Then you see how this can be funded, over what timescales and the effect on cash as well as P&L and balance sheet. Not so hard.
Adjust accordingly – if the budget outweighs the benefit (or is uncomfortably close) then re-evaluate the benefits not the budget. If the benefits by far outweigh the budget but there is an issue with funding then look at alternative ways of funding or alternative timescales over which the budget is invested – but don’t re-evaluate the budget.

Finally, when you are happy with all of that, then you look again at the budget. As I suggested before, do the plus 10% or minus 10% test. If you spend an additional 10% where would you spend it? If you had to cut 10% where would you cut it? This tells you a lot – where are you scimping, where might you have some slack (in which case put it in a contingency budget).

This leads on to the final two stages – risk management and procurement. Look at each individual task within the budget and evaluate the risks on two axis – how likely are they to happen and how big a financial impact? Decide what you need to do about the high likelihood/high impact. Then apply sensible procurement disciplines – have you compared alternative suppliers or ways of doing it? Do you understand how your suppliers costs are made up and examined ways of reducing them.
It is not that complicated and it is not that hard. But is a whole lot better than “last year’s budget plus 5%/what we spent last time/what our competitors do”.

The next time you are in a budget setting or review meeting go through this simple process:-
•    Benefits
•    Task related budget
•    Funding
•    Plus or minus 10%
•    Risk management
•    Procurement

I guarantee a better discussion and budget outcome!