Ever wondered why newspapers always had this ridiculously large, uncontrollable size? Perhaps when you were trying to read one in your garden on a sunny yet windy afternoon, forcing you to peel the pages of your face every annoying three seconds? Or while reading one on the train, smashing your elbow in a nodding neighbour’s face when turning the page? I did. Not smashing my elbow in anyone’s face, but wondering why these pages had to be so bloody large.
I simply assumed that it was much cheaper to print on large pages than small ones. Turns out I was wrong.
To my surprise, I found out that printing on large pages is actually more expensive than on smaller ones…?! Why did they do it then; are these Times, Guardian and Daily Telegraph people closet sadists, finding secret joy in giving us a daily struggle with inky pages? Here’s what happened:
In 1712 British newspapers came to be taxed on the number of pages published. Editors then decided to print the news on enormous pages, and fewer of them, creating the broadsheet format. The original tax disappeared in 1855 but, despite being considerably more expensive, the format persisted.
As you may remember (if you’re from London), a couple of years ago, after the free newspaper “Metro” entered the industry, the Independent was the first to abandon the broadsheet and “go tabloid”. Their sales figures surged. Soon The Times followed, and later also the Guardian, all to their benefit. But why did it take so long – centuries!? Had no-one ever conceived the idea of printing newspapers on smaller (and cheaper!) pages?
Sure they had. Many times over the years someone would bring it up; “shouldn’t we print on smaller pages?” But they would always dismiss the idea: “no-one is doing it” and, mostly, “the customer would not want it”… Yes we did!
I call this “collective inertia”. Every existing player in the industry was afraid to break the mould and take the plunge. I have also learned, studying many firms in many different lines of business, that most industries have such a slightly strange, idiosyncratic convention that everybody adheres to but nobody really remembers why we’re doing it that way.
But hardly anyone dares to challenge it. And that is where the business opportunity lies. If you’re the first one to spot the silly convention (just to name a few candidates: buy-back guarantees in book publishing, detailing in the pharmaceutical industry, insane working hours in investment banking) and do it differently, it might just make you a heck of a lot of money.
And it would save many of us customers from a daily elbow in the face.
Wednesday, January 30, 2008
Sunday, January 27, 2008
It is ok to get lucky – even for a top manager
Let me tell you a story. A story of a company called Hornby. If you’re British, you’ll know them. You might even be feeling slightly nostalgic merely thinking about them. Hornby makes little model trains, and has been doing so for a very, very long time.
Ten years ago the company was nearly bankrupt. In an attempt to save costs they decided to outsource production to China. However, much to their surprise, they discovered the Chinese not only produced much cheaper, they also delivered superb quality. Therefore, middle managers could not resist spending all the money that they were saving through the outsourcing on adding additional quality in their product designs and, most of all, a lot of extra detail: a working light on every table in the restaurant carriage, windscreen wipers on the locomotive, a bit of dirt (painted) on the bottom of the carriages, etc. Their products became perfect scale models.
Then, as much to their surprise as to their joy, they noticed sales increasing substantially. When it persisted, they started talking to their vendors to figure out what on earth was happening?! They discovered that it was no longer fathers buying model trains for their children, but buying them for themselves (and in the process spending quite a bit more money on themselves than on their children…). Inadvertently Hornby had moved out of the toy market into the hobby market, producing for collectors rather than children.
Not long thereafter, Hornby was outperforming the FTSE dramatically, seeing its share price rise from 35 to 250 in just a few years.
But what can we learn from a story like Hornby's? Isn’t their smart change in strategy simply due to sheer, unintended luck!? Well, partly, but that’s perhaps the first lesson. I find that many successful companies with great innovative strategies (e.g. Southwest Airlines, Zara, CNN) experienced some significant element of serendipity at their inception. But we (and often they) post-rationalise things as if it was all planned as such from the get-go.
But why? There is no shame in getting lucky. A great manager (such as Hornby’s Frank Martin) does not necessarily come up with the strategy, but is superb at recognising the opportunity when it comes knocking on the company's door, while subsequently carefully adding all the other necessary strategic elements (marketing, investor relations, distribution, etc.) to take advantage of the opportunity. Just recognise the importance of luck - rather than deny it - and make sure you gratefully take advantage of it.
Ten years ago the company was nearly bankrupt. In an attempt to save costs they decided to outsource production to China. However, much to their surprise, they discovered the Chinese not only produced much cheaper, they also delivered superb quality. Therefore, middle managers could not resist spending all the money that they were saving through the outsourcing on adding additional quality in their product designs and, most of all, a lot of extra detail: a working light on every table in the restaurant carriage, windscreen wipers on the locomotive, a bit of dirt (painted) on the bottom of the carriages, etc. Their products became perfect scale models.
Then, as much to their surprise as to their joy, they noticed sales increasing substantially. When it persisted, they started talking to their vendors to figure out what on earth was happening?! They discovered that it was no longer fathers buying model trains for their children, but buying them for themselves (and in the process spending quite a bit more money on themselves than on their children…). Inadvertently Hornby had moved out of the toy market into the hobby market, producing for collectors rather than children.
Not long thereafter, Hornby was outperforming the FTSE dramatically, seeing its share price rise from 35 to 250 in just a few years.
But what can we learn from a story like Hornby's? Isn’t their smart change in strategy simply due to sheer, unintended luck!? Well, partly, but that’s perhaps the first lesson. I find that many successful companies with great innovative strategies (e.g. Southwest Airlines, Zara, CNN) experienced some significant element of serendipity at their inception. But we (and often they) post-rationalise things as if it was all planned as such from the get-go.
But why? There is no shame in getting lucky. A great manager (such as Hornby’s Frank Martin) does not necessarily come up with the strategy, but is superb at recognising the opportunity when it comes knocking on the company's door, while subsequently carefully adding all the other necessary strategic elements (marketing, investor relations, distribution, etc.) to take advantage of the opportunity. Just recognise the importance of luck - rather than deny it - and make sure you gratefully take advantage of it.
Wednesday, January 23, 2008
Management consultants – pin-striped pigeons
Now, having said all that, they [management consultants] are a bit like rats. Or, to put it more kindly, pigeons (also referred to by London mayor Ken Livingstone as “rats with wings”). They spread diseases – allow me to explain.
I have been working on a large research project which analyses the spread of harmful management practices (a dodgy type of control system, faulty financial instrument, counterproductive management technique, etc.). One could conjecture that harmful management practices never see the light of day (wrong) or that if they accidentally do, they will always quickly die out and disappear (wrong again). Perhaps I will bore you with the findings of this project some other time but for now let me dwell on how these harmful practices actually spread across firms.
Yep, that’s where the pin-striped pigeons come in – ok, some of them rats. Harmful management practices spread much like a virus. Actually, the patterns of how they spread among firms can be modelled successfully using techniques from social anthropology on the diffusion of harmful cultural practices (such as footbinding in China, female circumcision, etc.), which not coincidentally have been adopted from epidemiology.
A virus survives – like the flu – by spreading to a new host, preferably before the old one dies. Often, there are some creatures (e.g. rats) that facilitate the spread amongst the creatures of another species (e.g. humans). That’s much of what management consultants do, even knowingly: picking up practices in one industry or country and recommending and applying them in others. Just like viruses or bacteria, some of these practices are not very helpful to say the least (although harmful effects may only manifest themselves in the long run), others may have been useful in the original setting (e.g. industry) but completely inappropriate in the new one.
Unintentionally – again, just like the poor pigeons in Trafalgar Square – management consultants promote the spread and persistence of the harmful practice. According to Mayor Livingstone, they’re best banned and starved to death.
I have been working on a large research project which analyses the spread of harmful management practices (a dodgy type of control system, faulty financial instrument, counterproductive management technique, etc.). One could conjecture that harmful management practices never see the light of day (wrong) or that if they accidentally do, they will always quickly die out and disappear (wrong again). Perhaps I will bore you with the findings of this project some other time but for now let me dwell on how these harmful practices actually spread across firms.
Yep, that’s where the pin-striped pigeons come in – ok, some of them rats. Harmful management practices spread much like a virus. Actually, the patterns of how they spread among firms can be modelled successfully using techniques from social anthropology on the diffusion of harmful cultural practices (such as footbinding in China, female circumcision, etc.), which not coincidentally have been adopted from epidemiology.
A virus survives – like the flu – by spreading to a new host, preferably before the old one dies. Often, there are some creatures (e.g. rats) that facilitate the spread amongst the creatures of another species (e.g. humans). That’s much of what management consultants do, even knowingly: picking up practices in one industry or country and recommending and applying them in others. Just like viruses or bacteria, some of these practices are not very helpful to say the least (although harmful effects may only manifest themselves in the long run), others may have been useful in the original setting (e.g. industry) but completely inappropriate in the new one.
Unintentionally – again, just like the poor pigeons in Trafalgar Square – management consultants promote the spread and persistence of the harmful practice. According to Mayor Livingstone, they’re best banned and starved to death.
Tuesday, January 22, 2008
RECORD COMPANIES SURRENDER TO CONSUMERS ON DOWNLOAD DRM
A quiet victory of music consumers has occurred now that Sony BMG Music Entertainment has become the final major recording company to drop digital rights management protection on its digital downloads.
Major recording companies starting placing protection software on downloadable files in 2005 and 2006 to protect the music files from being passed on to other listeners. The digital rights management software, however, often blocked consumers who had purchased downloads from moving files to portable music players or even to new computers and from making compilations discs of their favorite music.
The software incensed many consumers because it forced consumers to purchase multiple copies or forced them to illicitly bypass the software if they wished to use music they had purchased on more than on platform. Many felt it was unfair that one did not “own” the download in the same way as a CD, a book, or a DVD and voiced their frustration in blogs, music forums, and to the record companies.
Opposition grew so strong among consumers that consumer rights and competition authorities in both the U.S. and Europe soon began to investigate and question the practice.
In 2007 EMI and Universal Music Group dropped the DRM measures and Warner Music Group and Sony BMG Music Entertainment have now followed suit in 2008.
Although the recording companies would still have preferred that consumers only be able to "rent" music and never own it--giving them the possibility to limit the number of times a download could be played before an additonal payment would be required, they ultimately gave in to consumer oppostition and are recognizing that consumers view music purchased in whatever form as substitutable.
Major recording companies starting placing protection software on downloadable files in 2005 and 2006 to protect the music files from being passed on to other listeners. The digital rights management software, however, often blocked consumers who had purchased downloads from moving files to portable music players or even to new computers and from making compilations discs of their favorite music.
The software incensed many consumers because it forced consumers to purchase multiple copies or forced them to illicitly bypass the software if they wished to use music they had purchased on more than on platform. Many felt it was unfair that one did not “own” the download in the same way as a CD, a book, or a DVD and voiced their frustration in blogs, music forums, and to the record companies.
Opposition grew so strong among consumers that consumer rights and competition authorities in both the U.S. and Europe soon began to investigate and question the practice.
In 2007 EMI and Universal Music Group dropped the DRM measures and Warner Music Group and Sony BMG Music Entertainment have now followed suit in 2008.
Although the recording companies would still have preferred that consumers only be able to "rent" music and never own it--giving them the possibility to limit the number of times a download could be played before an additonal payment would be required, they ultimately gave in to consumer oppostition and are recognizing that consumers view music purchased in whatever form as substitutable.
Sunday, January 20, 2008
Management consultants – happy slapping
Is it just me or is it getting increasingly fashionable to dislike management consultants (but hire them anyway)? Now, I wouldn’t say it is an entirely new fashion but the loathing of the pin-striped mercenaries seems to be reaching new and unprecedented heights of late.
A short while ago, I was talking to three members in the top team of a British company (which will remain blissfully anonymous but which you will know) who showed me the three main conclusions of their team’s recent ‘strategy retreat’ and, believe it or not, one of the three was “no more consultants!”
Now, what have these poor people done to deserve such a bad reputation anyway, ‘eh?! Well…
It is an unprotected profession and every idiot can call and list himself as a management consultant (and many do – I guess the remainder become professors). Yet, the reputable firms also seem to provoke a fair share of grunting, ground-spitting, and a wide array of hand gestures. Is it pure envy? Surely there must be some of that; being seen walking hand-in-hand with the CEO on way to an expensive restaurant for a powerpoint presentation between the fifth and sixth course while overtly charging a couple thousand quid might do that to you.
Yet, there must be something more. Perhaps it is the fact the accountability of the consultant is knowingly nil; it is not that we withhold payment till the effects of the recommended strategy have become apparent in ten years time (even if that were measurable).
Perhaps it is because everything they recommend has such a high value of deja-vu – “didn’t I say that at our last away-day?”
Or perhaps it is because management consultants en masse recommended corporate diversification in the 1970s, a refocus on core activities in the 1990s, told “old economy” firms to keep their “new economy” activities as strictly separate entities during the dotcom bubble but lately advise them to carefully integrate clicks and bricks, urged IT firms to get into consulting while currently stealthily de-merging them, etc.?
Who knows, but let’s not pretend we knew better. Surely you have both bad and good consultants. Just as you have bad and good clients. Some (if not many…) executives seem to use consultants expecting them to say what they wanted to hear anyway.
Consultants are undoubtedly more useful if you are genuinely open to hear what they have to say about your strategy. For example, ample academic research has suggested that bringing in an outsider’s view can seriously improve the quality of decision-making (be it often at the price of slowing it down). Yet, hiring a consultant is of course no reason to stop thinking for yourself. As Richard Dawkins said, “it is good to be open-minded, but not so open that your brain falls out”.
A short while ago, I was talking to three members in the top team of a British company (which will remain blissfully anonymous but which you will know) who showed me the three main conclusions of their team’s recent ‘strategy retreat’ and, believe it or not, one of the three was “no more consultants!”
Now, what have these poor people done to deserve such a bad reputation anyway, ‘eh?! Well…
It is an unprotected profession and every idiot can call and list himself as a management consultant (and many do – I guess the remainder become professors). Yet, the reputable firms also seem to provoke a fair share of grunting, ground-spitting, and a wide array of hand gestures. Is it pure envy? Surely there must be some of that; being seen walking hand-in-hand with the CEO on way to an expensive restaurant for a powerpoint presentation between the fifth and sixth course while overtly charging a couple thousand quid might do that to you.
Yet, there must be something more. Perhaps it is the fact the accountability of the consultant is knowingly nil; it is not that we withhold payment till the effects of the recommended strategy have become apparent in ten years time (even if that were measurable).
Perhaps it is because everything they recommend has such a high value of deja-vu – “didn’t I say that at our last away-day?”
Or perhaps it is because management consultants en masse recommended corporate diversification in the 1970s, a refocus on core activities in the 1990s, told “old economy” firms to keep their “new economy” activities as strictly separate entities during the dotcom bubble but lately advise them to carefully integrate clicks and bricks, urged IT firms to get into consulting while currently stealthily de-merging them, etc.?
Who knows, but let’s not pretend we knew better. Surely you have both bad and good consultants. Just as you have bad and good clients. Some (if not many…) executives seem to use consultants expecting them to say what they wanted to hear anyway.
Consultants are undoubtedly more useful if you are genuinely open to hear what they have to say about your strategy. For example, ample academic research has suggested that bringing in an outsider’s view can seriously improve the quality of decision-making (be it often at the price of slowing it down). Yet, hiring a consultant is of course no reason to stop thinking for yourself. As Richard Dawkins said, “it is good to be open-minded, but not so open that your brain falls out”.
Wednesday, January 16, 2008
“Over the hill and far away, top managers are here to stay”
Well, at least Dutch top managers are.
When do top managers generally decide that it is time to move on and “seek other challenges”? Well, one prominent reason is of course that they are about to get the boot (because their firm’s performance is in dire straits). Yet, that appears to not be the only case. Academic research on American executives – among others by Professor Wagner from Michigan State University – has shown that top managers are not only leaving when the performance of their companies is rock bottom (undoubtedly with a good poke by their board if not a kick in the backside) but also when firm performance is relatively high. Wagner speculated that this happens because then they’re hot stuff on the job market and able to find themselves a nice new green pasture.
Now, although this will hardly be anyone (else)’s idea of “fun”, it so happened I had a database available on a couple of hundred Dutch top managers and was curious whether the same might be true for these guys (yes, all of them guys…). And you know what, after a good chunk of statistical analysis it appeared that Dutch top managers also leave when their firm’s performance is at a high. Yet, they’re not walking at all when it’s low…?! Apparently, Dutch top managers don’t get the sack even if their firms are underperforming.
When do top managers generally decide that it is time to move on and “seek other challenges”? Well, one prominent reason is of course that they are about to get the boot (because their firm’s performance is in dire straits). Yet, that appears to not be the only case. Academic research on American executives – among others by Professor Wagner from Michigan State University – has shown that top managers are not only leaving when the performance of their companies is rock bottom (undoubtedly with a good poke by their board if not a kick in the backside) but also when firm performance is relatively high. Wagner speculated that this happens because then they’re hot stuff on the job market and able to find themselves a nice new green pasture.
Now, although this will hardly be anyone (else)’s idea of “fun”, it so happened I had a database available on a couple of hundred Dutch top managers and was curious whether the same might be true for these guys (yes, all of them guys…). And you know what, after a good chunk of statistical analysis it appeared that Dutch top managers also leave when their firm’s performance is at a high. Yet, they’re not walking at all when it’s low…?! Apparently, Dutch top managers don’t get the sack even if their firms are underperforming.
Interestingly though, these top managers not only left when their firm’s performance was relatively high, but when it was also just starting to (rapidly) decrease. I guess it is all about picking your moment; what better time to get out than when you’re just “over the hill”, and your house of cards is about to come tumbling down!
Sunday, January 13, 2008
“Today’s fast-changing business environment”? – same as it ever was
“Today’s business environment is characterised by increasingly high levels of uncertainty and change” – ever read a business article that starts with a sentence like that? My guess is you have. It seems like every other management article I read starts with such a sentence. And it annoys me. Deeply.
“In today’s fast changing business world…”, “many industries are increasingly characterised by rapid change…”, “high velocity environments”, “increasing hypercompetition”, and so forth and so forth, bla bla, bla bla.
I know, it is slightly pathetic that something like this annoys me but it does. I guess it annoys me because people simply accept it as a given; as the truth. But is the current business environment really so much more turbulent than 15 years ago when the world computerised, or when the Berlin Wall came down, or when electricity was invented? Somehow, I doubt it. But still, people always say that “the world of business is becoming increasingly volatile” (without showing me any evidence).
Fortunately, my fellow strategy professor Gerry McNamara, from Michigan State University, and two of his colleagues were equally annoyed but (in contrast to myself) did something about it. They analysed the financial performance of about 5700 companies over a period of more then two decades, looking at measures such as performance stability, market stability, abnormal business returns, industry dynamism, munificence, etc. And they found the following: Nothing. Absolutely zilch.
Analysing 114,191 observations, starting from the late 1970s, they found that some industries may be turbulent, but no more turbulent than before. Or, as they say, “our results suggest that managers today face markets no more dynamic and opportunities to gain and sustain competitive advantage no more challenging than in the past”.
So please stop telling me that “the world of business is increasingly changing fast”. It is not. It is the same as it ever was.
“In today’s fast changing business world…”, “many industries are increasingly characterised by rapid change…”, “high velocity environments”, “increasing hypercompetition”, and so forth and so forth, bla bla, bla bla.
I know, it is slightly pathetic that something like this annoys me but it does. I guess it annoys me because people simply accept it as a given; as the truth. But is the current business environment really so much more turbulent than 15 years ago when the world computerised, or when the Berlin Wall came down, or when electricity was invented? Somehow, I doubt it. But still, people always say that “the world of business is becoming increasingly volatile” (without showing me any evidence).
Fortunately, my fellow strategy professor Gerry McNamara, from Michigan State University, and two of his colleagues were equally annoyed but (in contrast to myself) did something about it. They analysed the financial performance of about 5700 companies over a period of more then two decades, looking at measures such as performance stability, market stability, abnormal business returns, industry dynamism, munificence, etc. And they found the following: Nothing. Absolutely zilch.
Analysing 114,191 observations, starting from the late 1970s, they found that some industries may be turbulent, but no more turbulent than before. Or, as they say, “our results suggest that managers today face markets no more dynamic and opportunities to gain and sustain competitive advantage no more challenging than in the past”.
So please stop telling me that “the world of business is increasingly changing fast”. It is not. It is the same as it ever was.
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