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Global Crisis/Innovation Blog

Quarterbacks Can’t Bet on Games: Why Should CEO’s? Roger Martin Knows How to “Fix the Game”

By Shlomo Maital

 Warning: This blog is long.  If you are in a hurry, read the underlined parts for the essence.    

Roger Martin is the most creative business school Dean today, as head of University of Toronto’s Rotman School of Management.  He reshaped Rotman’s curriculum, to teach managers how to come up with new ideas rather than analyze old ones.  Now, in his new book “Fixing the Game” *, he offers a simple persuasive solution for fixing the broken global financial system.  Problem is,  his solution is so radical it will never be adopted – ban stock options for senior managers, just as athletes are banned from betting on their sport (on their own teams, or ANY teams).   Here is a brief, fascinating interview with Martin by BBC Global Business’ Peter Day.

On Integrative Thinking:     “Integrative thinking is the capacity to (when faced with choice) NOT select either or , but rather CREATE a better answer than either or ‘or’, and believe that is your job.  This becomes your perspective: My job is to create new answers, rather than choose among old ones with analysis.  Is A or B good enough? If not, my sole job is to create C, totally new.      .. CEO’s should ask, what should I be thinking about?  Be in a different industry?  Make a different product? Abandon current products?

On Apple:   “Steve Jobs is willing, on an ongoing basis, to step back and ask, are we thinking about the business in the only way you can think about it?  No, we’re not. We were a computer company. No longer. We’re now Apple. We think differently.   Every organization should think this way.  It goes back to the tension between mastery and originality. If Apple couldn’t master supply chains and bring together components from all over the world, its originality would be of no value.  I think business tries to escape from the tension, seeks ‘masterful’, it is not enough. You need creation and originality as well as mastery.”

On the Insights from Industrial Design:   “My interest in design was to bring the best of design education into management education. Design throws at students one design challenge after another. Students get good at creating what does not now exist. In Business Schools students analyze what DOES exist, in case studies.  Case studies constrain, create an artificial situation, exhibits contain all the day, come up with the answer somebody already though of.  The method has some utility.  It’s practice – but it’s not the real game.”

 On his new book:  My new book,  Fixing the Game,  means ‘repair the game’,  and also ‘the game is being fixed, or rigged’,  by managers and shareholders, at the expense of other stakeholders.  The   game is being run by those in the expectations game, not in the real game.  It’s like football. There’s a real game, and there’s also an imaginary game, where people bet on the likely outcome of the game.  The betting game, the expectations game, is the tail wagging the dog.  What sports understands is that if you let the imaginary, the expectations game, run everything, you ruin the sport.  In sport, players are not ALLOWED to bet on the game.  In business, you MUST bet on the game and play the expectations game.  In the past 35 years,  we believed we should align the interests of management and shareholders by giving managers stock-based compensation. 

      You can date ‘fixing the game’ to 1976.  It started with the most-quoted article in history, Michael Jensen, and William Meckling , **  ‘you have to align the interests of management and shareholders by giving managers stock options’,   it made sense on the surface, written in 1976,  but it has not worked out.  [A short quote from the Jensen-Meckling article:   

   “The directors of … [joint-stock] companies, however, being the managers rather of other people’s    money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it.  Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.”]

   [Maital: The ‘negligence and profusion’ blew up in 2007-8; they were a RESULT of letting CEO’s bet on the game, encouraging reckless short-term risk, not IN SPITE OF IT. The ‘real game’ is long run. The ‘expectations game’ is short run and is easy to manipulate.  Let’s get management out of manipulation! And if you don’t believe ideas are powerful forces for good AND for evil – try to plough through the dense Jensen-Meckling article, in a mathematical academic journal, which changed the world!]

   Roger Martin continues: “The ‘fixed game’ didn’t explode immediately. But what happened, the players in the game learned to “game” the game to their own benefits, to pay more attention to the ‘expectations’ game, they figured out, I’ll only make money if expectations about future performance rise, so the top managers talked to the analysts, then they said,  I have to try to work on jerking up expectations quickly and then get out fast…before it crashes.   It is not a stable system, it is getting more intense. “  

    “ Stop bonuses, and stock options?  Yes! That is the answer!  That would make a world of difference. It would be not unlike every organized sport, where you’re not allowed to both play and bet on the result.  It would make a profound difference!   The 1976 Jensen article had a real appeal,  ‘they make more money, we make more money’ – the logic was far from wonderful in the end.  ..At our school, Rotman, we want people to think how they think. They will be encouraged to think about this, and if they do that, they will go out into the standard world and do better!  My ‘football’ metaphor helps me simplify and think about how to shatter the existing models that are not helping us at all.”

   Here is how Adrianna Huffington, cofounder of The Huffington Post, summaries “Fixing the Game”:   “Through his brilliant analysis of the National Football League (which will entrance even those who don’t follow the market), he shows us how we can get back to the real game of building for the present and the future. Fixing the Game is a must-read for all who care about business being a positive agent for change in the world. And that should be all of us.”

* Roger Martin.    Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL  Harvard Business Press: Boston MA 2011.

 ** Michael C. Jensen and William H. Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,’ Journal of Financial Economics, Vol. 3, No. 4 (1976).

Global Crisis/Innovation Blog

Pigment Panic! A Lack of Tuxedo Black! Or, Any Color BUT Black!

By Shlomo Maital

 Tuxedo Black Ford..

In his famous 17th C. sermon, John Donne warned,  “never ask for whom the bell tolls; it tolls for thee.”  On Friday March 11, a powerful 9.0 magnitude earthquake and ensuing tsunami struck northern Japan, wreaking destruction and death and threatening a catastrophic meltdown of five nuclear plants in Fukushima.  The bell tolls out a message: A crisis in even the remotest parts of the world affects us all, and not just emotionally.

    Henry Ford once said famously that Model T buyers could have any color they wanted, provided it was black.  Today, Ford Motor Co. announces buyers can have any color they wish, provided it is NOT “Tuxedo Black”.  Why?   Pigment and paint factories in the northern prefectures of Japan have shut down, causing a global pigment panic and shortage of some key pigments. 

    Many car factories have told their buyers their orders will be delayed, or shipment of parts will be delayed, because of the northern Japan disaster.  

    A major culprit is the “just in time” philosophy of Japanese manufacturing.  In normal times, the idea is great – instead of warehousing huge stockpiles of parts, at high cost, organize the supply chain so the parts are delivered  ‘just in time’ – just as the hand of the assembler reaches out to grab them, and install them on the vehicle.  But when the delicate  ‘just in time’ system is disrupted, anywhere, the whole mechanism breaks down.

    Supply chain managers all know that ‘second sourcing’ is vital (having more than one source for key parts).  But not all of them practice it. 

     We are just now learning from Japan how loudly the bell tolls for all of us, everywhere, anywhere, when the bell tolls in any remote place in the world.  And the message is not just one of how humanity must care for everyone, but that globalization has created a highly delicate, sensitive system that easily breaks down.

     We can survive without Tuxedo Black Fords.  But China’s imposed scarcity of rare earth products is another more serious example.  In future, a breakdown of the complex delicate global ecosystem will wreak far greater damage.   

Global Crisis/Innovation Blog

America: Face the Brutal Facts:  Linking Libya, Shenzhen and the Congress

By Shlomo Maital

 Costly nuclear powered

 aircraft carrier  Nimitz

   There is a clear causal link between an on-line Harvard Business School Working Knowledge  publication issued today, a New York Times column by James Carroll, a former Catholic priest, and the US-led ‘no fly’ operation in Libya. 

   HBS Profs. Gary Pisano and Willy Shih, in Working Knowledge,   make the following arguments, that readers of my blog know well:   “There’s still a manufacturing base in the United States, and it’s quite large even though it’s a small percentage of the economy. But if things continue the way they’re going, I’m more doubtful. Manufacturing capability takes a while to erode. But the damage is almost irreversible; that’s the concern. So now is the time to be doing something about it before we get to the point where the answer is no. …. exporting manufacturing ultimately drains away American innovation.  That’s the heart of our argument. …For any individual company, it is often better, in the short or intermediate term, to outsource production to an overseas supplier. The company can buy manufacturing services at a much lower rate if it goes to China or elsewhere, depending on the industry.  But if everybody is doing that, you get a general erosion of the economy, which could lead to a decline in the standard of living.  One of the issues in developing a national economic strategy has been confusion with the term “industrial policy,” which has been anathema in Washington. “Industrial policy” involves some degree of central planning.  What we’re talking about is a discussion about strategic capabilities that need to reside within the country.  Unlike other nations, we don’t have a national economic strategy.  There’s this big debate about whether we should have one. My answer is absolutely yes.    If you look at the United States in the postwar period, there was a very strong national economic strategy around using science to drive economic growth. We created the National Science Foundation and the National Institutes of Health, among others, and the government invested dramatically in building a scientific and technical infrastructure needed to fuel growth. That was the national strategy, but it was not industrial policy. There’s an important need today for having a coordinated national strategy at the policy level.

    James Carroll argues: America can slash its defense spending to ‘only’ twice that of its nearest competitor – and still be a military superpower.  The savings in resources will be immense – the State Dept. budget is only $50 b., compared with a Pentagon defense budget  of $1 trillion ! And the Tea Party Republicans want to slash…the State Dept. budget.

    When France’s Sarkozy and Britain’s Campbell pressed for a ‘no fly’ zone operation over Libya,  the actual military operation was dominated by American aircraft and cruise missiles and still is, because, for example, America has eleven aircraft carrier battle groups, while no other country has more than one (Britain has none, because it has decommissioned its carriers, a few days before the Libya operation).   So, while foreign countries shape policy and use America’s military might to implement it, America pays the bills, which it can ill afford. Because today America desperately needs those ‘aircraft carrier’ investments to re-industrialize and bring home its manufacturing from Shenzhen to Schenectady.

  Those are the hard facts. Thanks to Profs. Pisano and Shih for again reiterating them.

   But, hello Congress? Hello, Obama?  Is anybody listening?

Global Crisis/Innovation Blog

Coffee, Facebook and Revolution

By Shlomo Maital

    Asmaa Mahfouz, Coffee..and Facebook

There is a surprisingly tight historical link between coffee, Facebook and revolution.  And it is not because people drink coffee while fomenting revolutions on their laptops.

    Coffee is over a thousand years old. It was allegedly discovered by an Ethiopian goatherd, who noticed his goats were especially lively after eating leaves and beans from a low shrub. He too tried it, the story goes – and the rest is history.

    On Jan. 18, Asmaa Mahfouz, a 26-year-old Egyptian woman, made a video urging citizens to demand their “human rights”.   The time and place of such demonstrations were coordinated on Facebook.  Earlier the same was done in Tunisia, a brutal dictatorship defeated by the boundary-free nature of Internet.  Facebook played equally important roles elsewhere, in Bahrain for instance, and continues to play this role in Syria and elsewhere. 

     But it is not widely known that the role of coordination and communication that Facebook filled in today’s Mideast evolutions was played 222 years ago, by …coffee.   Though discovered in Ethiopia, coffee was actually brought to Europe from South America.  Brazilian coffee, now a fourth of the world’s supply, originated with a few fertile stolen beans from Colombia.   Coffee became hugely popular in the 18^th C. in Europe  as coffee houses spread. Europe sobered up – instead of drinking wine and beer in pubs, Europeans (including the British) began drinking coffee.   

    The French Revolution, culminating in the storming of the Bastille in July 1789, was planned and coordinated in meetings held in French coffee houses.  At the time, coffee tasted awful!  The beans were poorly roasted and boiled into a black sludge.  But – caffeine is caffeine…. And the French Revolution was driven by caffeine and the conversations held as it was being drunk.  Coffee houses and cafes were the Facebook of the French Revolution.

    The same is true of the American Revolution, in 1776.  The French middle class was inspired by the rebellious Americans, who had made tea the Tahrir Square issue.  When the British tried to tax tea bought by Americans, they dumped it into Boston Harbor. The Tea Party was led by a brewer named Samuel Adams – you can still drink his beer.   It then became patriotic to drink coffee.  In fact, Americans identified their political leanings (British loyalist vs. American rebel) by the beverage they drank in coffee houses.   

    The final part to this Facebook coffee story, the missing link, is a man named James Folger, who left Boston and went to California in the 1849 gold rush.  But he found gold not in ‘them thar hills’ but in coffee.  He roasted coffee beans, then ground and packaged them, and brought them up to the miners and sold them for gold dust.  Folger made more money than they did.  And Folger’s remains a major coffee brand to this day.

    The link?  Facebook’s headquarters, like many such startups, are on Pagemill Road, in Palo Alto, California, where 26-year-old Mark Zuckerberg has struck gold, after drinking endless cups of coffee late into the night while writing code.   So — coffee, Facebook, Revolution…the circle has closed.

 Global Crisis/Innovation Blog

All-American, but – Made In China:  America is #2, First Time in 110 Years!

By Shlomo Maital

 American Barbie, “Made in China”

Writing in The Financial Times (March 18),  Gillian Tett notes that despite the lower dollar, slightly appreciating yuan, and deep understanding that America must repatriate its manufacturing from offshore sites, to create well-paying jobs – many things that are labeled “American” are in fact still Chinese-made. 

• At the American Girl store in Manhattan, the ‘all-American” dolls and clothes are Made in China.  Including Barbies.
• Apple is American; however, according to Tett,  “components for the iPhone are variously assembled in China, Korea, Taipei, Germany and the US, involving almost a dozen companies which are hard to pigeonhole with any ethnic label”.  

According to Tett, “the economics consultancy IHS Global Insight calculated that in 2010 China displaced America as the largest manufacturer in the world – the first time that the US has lost this top slot for 110 years”.

  The head of the World Trade Organization, Pascal Lamy,  has recently (according to Tett) said that economists should stop paying attention to “imports” and “exports”, because so many goods have imported components that “made in China” or “made in America” has no meaning any more.   There is a simple solution.  Measure “net export value added” (the value added to imported components for export goods).   Trade statistics are not arbitrary; it DOES make a huge difference where things are made, whether in China or America, to workers who make a living in factories.    And for buyers, it should also make a difference whether American Barbie dolls are made in Shanghai or in Peoria.