TIMnovate

Today’s BBC Business Daily reports on new and fascinating research by Professor Priya Raghubir Stern School of Business, NYU. Prof. Raghubir has found, in her research, that contrary to the economists’ assumption of rationality, how much money people spend depends on what jingles, or rustles, in their pockets. $50 in small notes and coins? We spend it freely. One big note, like $50? We hesitate to break it to spend it. 

Professor Raghubir notes:

We spend more in small denominations than with single large bill. Why? People fear, if they break large bill, they will have no control over it, it will go away. If they hold on to large denominations, they are more likely to maintain self-control.

This is only one of many mechanisms that we develop to control our own selves, and protect ourselves against ourselves.

Is this finding robust across different cultures?

We found it in 3 different countries: First, in the U.S., where we replicated it with children. Pre-schoolers were not prone to this effect, they think that lots of little coins is more money than paper…something called “numerosity.” But for older children, as with adults, five $1 bills, or coins were far more likely to be spent than one $5 bill. Second, we showed this in India, with a 500 rupee note vs. smaller notes. Third, I’ve shown it in China, with a group of housewives in Shiangtan, the effects were spectacular. There, people were far less likely to spend 100 yuan given in one banknote than when given 100 yuan in small denominations. 

All of us who travel know there is what Prof. Raghubir calls a foreign currency effect:

If I’m used to spending 1 dollar for cup of coffee, I will tend to spend 1 dollar for it in Canada, (worth only 67 U.S. cents), one pound in the UK, worth about $1.50, or one euro in Europe (also worth about $1.50). People inadequately adjust for exchange rates.  

So, does this mean we are dopes, and dupes? Not at all. Quite the opposite. It means that people are clever in devising ways to guard themselves against short-termitis, the tendency to spend and enjoy now rather than in the future.   

Do you also behave in this way? asked the BBC interviewer of Prof. Rughabir.

Of course, she said. 

Conclusion: In your business model, do sweat the small stuff. Because people do sweat (spend) it. Nickel and dime your business model, and you can boost your revenues.

Malaria is an infectious parasitic disease carried mainly by mosquitoes, in tropical and subtropical regions, including parts of the Americas, Asia, and Africa. According to Wikipedia, each year there are approximately 350–500 million cases of malaria worldwide, killing between one and three million people, most of them young children in Sub-Saharan Africa.

Had 3 million persons, mainly children, died in the West from anything, there would be massive investment to combat it. But for Merck, Pfizer, Novartis and other Big Pharma firms, there is no margin in innovative cures for malaria. Meanwhile, the mosquitoes are gaining — the parasites they carry are developing resistance to the current leading anti-malaria drugs.   

Now, a $3 b. program to combat malaria has been announced, led by 59-year-old Tanzanian President Jakaya Kikwete. The program is beautifully ultra-simple. Provide 250 m. mosquito nets (treated with insecticide) for Africans. Organize logistics to bring them (and related educational efforts) to the remotest of African villages.

Kikwete is one of Africa’s lesser known but more effective leaders, mainly because he is not involved in scandals or notoriety. In general Tanzania has had enlightened leaders, dating from its first President, Julius Nyerere. 

Let us wish Kikwete and his program success. Let us also ask: In our innovation efforts, why do we value some lives far less than others? Is not a life, a life?

The Jewish world celebrated its New Year on Saturday and Sunday, Sept. 19 and 20. By the Jewish calendar, the year 5770 began. In our tradition, Rosh HaShanah marks the day on which the world was created and the time when human beings were created. 

Ask 100 people about the Biblical account of how and when people were created, and 99 will tell you about Adam and about how Eve was created from Adam’s rib. This of course is accurate. But few know that there are two rather different accounts of Man’s creation, one in Genesis chapter one and the second in Genesis chapter two. The key differences between the two are explained clearly by the late Rabbi Joseph B. Soloveichik, the American prophet of modern Orthodox Judaism, in his 1956 article, “The Lonely Man of Faith”, published in Tradition, vol. 7, 1965. The two accounts are relevant for innovators and entrepreneurs.

The first account of mankind, Soloveichik notes, in Genesis 1, states that human beings were created in God’s image. “And God created man in his image; in his image God created man, male and female He created, and God blessed them…”. What does this mean, “in his image”? It means, the learned Rabbi says, that just as God is the Supreme Creator, so are human beings creative, just like their Creator. This first version of humanity speaks of how human beings — men and women, created together, jointly — seek to master their environment, by constantly asking the question “how?”, and come up with ideas that answer it in ways that make life better. This is the ‘feet on the ground’ aspect of innovation and entrepreneurship, whose roots are in Genesis 1. What are our needs? How can we meet them? Here, mankind is commanded “to fill the Earth and conquer it” creatively.   

But the second version of human beings’ creation is “significantly different”, Soloveichik writes. In Genesis 2, man is created by God out of the earth. Women are then created out of Man’s rib. And mankind is commanded by God not to conquer the Garden of Eden, but rather to preserve and enhance it. (In no time, we manage to mess up that mission badly). No mention is made here of God’s image. So, says Soloveichik, in this version, mankind asks metaphysical questions: Why? For what purpose? This version of mankind is “head in the clouds”, the thinkers, the questioners, the dreamers. Mankind questions everything.

Innovators and entrepreneurs fulfill both versions of mankind’s Creation. They are feet-on-the-ground innovators, creators. And they are head-in-the-clouds dreamers, questioners, who challenge every assumption and who break the rules.

Both qualities of mankind are vital if we are to endure and prevail on this earth. And both qualities are vital, if innovators and entrepreneurs are to succeed in changing the world by meeting real pressing human needs.

*This blog was inspired by a brilliant lesson led by our Rabbi, Dov Hayun, Rabbi of Moriah Synagogue, Haifa.

An interesting article in Business Week by Peter Coy, asks “can we protect consumers (from financial innovation) and still be creative?” [Incidentally — Business Week was put up for sale by McGraw Hill last week. There were few buyers.  Business Week’s famed investigative reporting has reportedly been hamstrung…].

His answer?   

In spite of the public’s mistrust, entrepreneurs and academics are plunging ahead. They’re working on ideas they hope will help the consumer borrow more safely and build wealth more reliably. Some are ambitious, like reducing homeowners’ exposure to declines in local housing prices. Others are fanciful, like an electronically rigged wallet that becomes harder to open when your bank account is low, an idea from the Massachusetts Institute of Technology.

Let us remember Joseph Schumpeter’s memorable phrase: Creative destruction. All creation involves destruction.  Old things have to die in order for new ones to be born. That is one interpretation. Another is: All creative things can be used destructively. It is not inherent in the innovations, but in the people who use them.  

Sub-prime mortgages in principle made housing affordable even for low-income people. A great idea, if used properly. But it was used to enrich unscrupulous thieves. It is not the fault of the innovation, but of those who misused it.

Financial innovation will continue. As it does, hopefully those who pioneer in it will remember that the foundation of capitalism is in creating long-run sustainable value for people,  in creating customer margin as well as company profit margin. The “I’ll be gone, you’ll be gone [before the earthquake we created happens]” principle that drove much financial innovation in the past is hopefully dead and buried.

TIM managers have just completed a remarkable benchmarking week in Britain, visiting 13 organizations, including LandRover, BT, BP, Virgin, Rolls Royce, RBS and Manchester United.

Our visit included a trip to the Prince of Wales Theatre in London’s West End, where we met with Richard Pulford, CEO of the Society of London Theatre, a trade association of theatrical producers.

We learned many things about the business of producing plays and musicals. The main lesson: It is not enough to create value. (London plays and musicals create enormous value, and memorable customer experiences, for 14 m. theatre visits annually!) Some shows have run for decades — Agatha Christie’s The Mouse Trap ran for 57 years,  Phantom of the Opera for 27 years, Cats for 21 years!.  

But you have to capture that value in order to sustain the business. London theatres are sustained only by the fact that producers tend to be wealthy and can afford to lose money. Only one play or musical in 10 makes money, two break even and 7 lose! Why? Market failure — inability to capture value. Here is how Richard Pulford explains it:

West End theatres are crucial for London. They bring in many tourists, who spend on restaurants, cabs and hotels.  For instance, total hotel revenue is £ 415 m. yearly. Much of this comes from theatre-goers. Perhaps £ 1 b. in tourist revenues is directly related to the theatres. Yet, the theatres cannot capture this revenue, it is an ‘externality’. [Perhaps they could, if they practiced market segmentation, like Manchester United…but they do not, and have not apparently benchmarked Man Utd.]. A rare strike in the theatres drastically cuts tourism.

We were convinced that with market segmentation, with the techniques used by Manchester United, BT and other businesses we visited, London theatres could be profitable. They could capture more of the value they create. Yet they appear to avoid benchmarking other businesses, because theatre is, well, theatre is artistic, not business. But why? In social entrepreneurship, powerful business principles are used to do good in the world and to help people. Why not do the same in theatres?

Every business begins and ends with creating value for its clients. But every business must also know how to capture a large portion of that value. Businesses that do not are doomed to lose money. They will disappear, unless, like the theatre, they have wealthy backers willing to lose money forever.

Norman Borlaug passed away on Sept. 12, at the age of 95. Borlaug was the innovator, an agronomist, who created the Green Revolution. He developed strains of wheat that had short stalks and were disease resistant. When the wheat puts its energy into its kernel, not into the straw, yield improvements of 100% (double) resulted. 

As a boy I grew up in Milestone, Saskatchewan, amidst fields of waving wheat higher than my head. Today that same wheat no longer waves. It is only a foot or so high. A simple yet powerful idea, that according to the Nobel Institute has saved hundreds of millions from hunger in India and Pakistan, primarily. Mexico became a wheat exporter in 1963 as a direct result. Borlaug was awarded the Nobel Peace Prize for his efforts in 1970. 

Borlaug was the great grandchild of Norwegian immigrants to America. He worked as a boy and teenager on the family farm in Iowa, and came to know farming at the ground level. Borlaug’s grandfather encouraged him to leave the farm and study at college. “If you want to fill your belly,” he told Norman, “go fill your head!” A Depression-era program that enabled low-income students to afford college made it possible for Borlaug to enroll at University of Minnesota. He failed the entrance exams, but persisted, and eventually ended up in the College of Agriculture.

Here is how Wikipedia describes just one of his innovations: “dwarfing”.

Dwarfing is an important agronomic quality for wheat; dwarf plants produce thick stems and do not lodge. The cultivars Borlaug worked with had tall, thin stalks. Taller wheat grasses better compete for sunlight, but tend to collapse under the weight of the extra grain—a trait called lodging—and from the rapid growth spurts induced by nitrogen fertilizer Borlaug used in the poor soil. To prevent this, he bred wheat to favor shorter, stronger stalks that could better support larger seed heads. 

The graph below shows the dramatic rise in grain yields Borlaug achieved. He developed the Green Revolution wheat varieties in remote Mexico, finding suitable strains of wild wheat, in difficult conditions, with low budgets and oppositions from those who directed his work. Few innovators can claim, as Borlaug could, that they saved hundreds of millions from starvation.

Really, this is going too far. I mean, innovation is all well and good, but — innovating opera? And at London’s  Royal Opera House? After all, is nothing sacred? Good heavens. Who in the world thought of this ghastly idea?

Someone had the idea of asking the public to submit “tweets” (to the Royal Opera website). One month ago, the Royal Opera website presented the public a sentence on which to build a story: “One morning, very early, a man and a woman were standing, arm-in-arm, in London’s Covent Garden.” Some 900 140-character messages were received.  Composers Helen Porter and Marc Teitler set the tweets to music. If they all were used, they would be a full seven-act opera — even beyond Wagnerian Valkerie proportions. So instead, excerpts will be used, making a twenty-five minute opera. It will be performed as part of the Deloitte Ignite arts festival.

The BBC Music Magazine’s deputy editor called the exercise “an accident waiting to happen”. He said: “Whenever there is a new fad you know somebody in the art world is going to grab hold of it by the horns. They should be careful that it doesn’t overtake the serious stuff they do.”

In response, Sara Parsons, the publicity officer for Ignite, says, “It’s about getting people involved and interested in opera — and it’s certainly done that.” 

Talk about breaking the rules. Opera is opera. It ends when the fat lady sings, not when the last thin Tweet ends. Give us a break!

However, here is my own Tweet contribution, following on to the lead sentence. 

“Let’s tweek the twats,” the man said, “and Twitter Aida! Pyramids, shmyramids!”.