Marginalism and the Higher Ed Paradox

By now, you may be getting sick of reading articles and blog posts about the crisis in higher education. This post is different. It proposes an explanation of why students have been willing to pay more and more for undergraduate and professional degrees at the same time that these degrees are becoming both less scarce and more dumbed down. And that explanation rests on a simple and plausible economic hypothesis.

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Individual Bias and Collective Truth?

Freek’s latest post on confirmation bias notes that intellectual commitments can bias which research findings one believes. The tone of the post is that we would all be better off if such biases didn’t exist, but there is definitely a tradeoff here. Greater objectivity tends to go with lower intensity of interest in a subject. (Disinterested and uninterested are correlated, for those old-timers who remember when those words had different definitions.) That’s why you often find that those with strong views on controversial topics–including those with minority or even widely ridiculed opinions–often know more about the topic, the evidence, and the arguments pro and con than “objective” people who can’t be bothered to dig into the matter. Other than partisanship, the only thing that will get people interested enough to seriously assess competing claims is a personal stake in the truth of the matter. (And in all cases, Feynman’s admonition that the easiest person to fool is yourself should be borne in mind.)

Historians of science of all stripes, from romanticists like Paul de Kruif (author of the classic The Microbe Hunters) to sophisticated evolutionists like David Hull in Science as a Process, have reported that intellectual partisanship motivates a great deal of path-breaking research. “I’ll show him!” has spawned a lot of clever experiments. Burning curiosity and bland objectivity are hard to combine.

But how can such partisanship ever lead to intellectual progress? Partisans have committed to high-profile public bets on one or another side of a controversy; their long-term career and immediate emotional payoffs depend not directly on the truth, but on whether or not they “win” in the court of relevant opinion. The key to having science advance is for qualified non-partisan spectators of these disputes be able to act as independent judges to sort out which ideas are better.

Ideally, these adjacent skilled observers would have some skin in the game by virtue of having to bet their own research programs on what they think the truth is. If they choose to believe the wrong side of a dispute, their future research will fail, to their own detriment. That’s the critical form of incentive compatibility for making scientific judgments objective, well-described in Michael Polanyi’s “Republic of Science” article. If, for most observers, decisions about what to believe are closely connected to their own future productivity and scientific reputation, then the partisanship of theory advocates is mostly a positive, motivating exhaustive search for the strengths and weaknesses of the various competing theories. Self-interested observers will sort out the disputes as best they can, properly internalizing the social gains from propounding the truth.

The problem for this system comes when 1) the only scientific interest in a dispute lies among the partisans themselves, or 2) observers’ control over money, public policy, or status flows directly from choosing to believe one side or another regardless of the truth of their findings. Then, if a false consensus forms the only way for it come unstuck is for new researchers to benefit purely from the novelty of their revisionist findings–i.e., enough boredom and disquiet with the consensus sets in that some people are willing to entertain new ideas.

Fungibility v. Fetishes

For an economist studying business strategy, an interesting puzzle is why businesspeople, analysts, and regulators often don’t seem to perceive the fungibility of payments. Especially in dealing with bargaining issues, a persistent “optical illusion” causes them to fetishize particular transaction components without recognizing that the share of total gain accruing to a party is the sum of these components, regardless of the mix. Proponents of the “value-based” approach to strategy, which stresses unrestricted bargaining and the core solution concept, ought to be particularly exercised about this behavior, but even the less hard-edged V-P-C framework finds it difficult to accommodate.

Some examples:

  • There’s been some noise lately about U.S. telecom providers cutting back on the subsidies they offer users who buy smartphones. None of the articles address the question of whether the telecom firms can thereby force some combination of a) Apple and Samsung cutting their wholesale prices and b) end users coughing up more dough for (smartphone + service). The possibility that competition among wireless providers fixes the share of surplus that they can collect, so that cutting the phone subsidy will also require them to cut their monthly service rates, is never raised explicitly. There is a pervasive confusion between the form of payments and the total size of payments.

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Excessive government paperwork–meta edition

An earlier post described the sclerotic impact of excessive regulatory documentation requirements on real-estate development projects. it turns out that the private sector isn’t the only victim of this tendency:

I think we all know what the logical response to the GAO meta-meta-study is…

H/t Instapundit.

The History Tax

Try to guess the context for this piece of writing. Is it part of a scholarly study on the history of convention centers? A tourist guidebook? Is it the catalogue to a museum display on convention-center architecture?

In order to attract growing numbers of conventions in the
second half of the twentieth century, cities incorporated
convention center construction within urban renewal and
redevelopment schemes, usually at the edge of core urban
areas where space would be available for construction of
large buildings with contiguous, flat-floor space.

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Sleeping With the Enemy Part II

In an earlier post, I noted Target’s costly decision to end its on-line outsourcing arrangement with Amazon’s cloud service and take all its work in-house. The short-term costs were considerable, both in direct outlays and in performance degradation, and the long-term benefits were hard to pin down. Vague paranoia rather than careful analysis seemed to have driven the decision. I pointed out that firms often seemed unwilling to “sleep with the enemy,” i.e. purchase critical inputs from a direct rival, but the case for such reluctance was weak.

A few months ago, an apparent counterexample popped up. Swatch, the Swiss wristwatch giant, decided unilaterally to cease supplying mechanical watch assemblies to a host of competing domestic brands that are completely dependent on Swatch for these key components. These competitors (including Constant, LVMH, and Chanel) sued, fruitlessly, to force Swatch to continue to sell to them. The Swiss Federal Administrative Court  backed up a deal Swatch cut with the  Swiss competition authorities that allows Swatch to begin reducing its shipments to rivals. The competition authority will report later this year on how much grace time Swatch’s customers must be given to find new sources of supply, and these customers may appeal to the highest Swiss court. For now, Swatch’s customers are scrambling for alternative sources of supply in order to stay in business. The stakes are especially high because overall business is booming, with lots of demand in Asia.

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Error propagation and extinction

One of my minor neuroses is an aversion to propagating errors of fact or logic. Indeed, I have to apply teeth to tongue at times when witnessing others propagating error. Managing this quirk productively is an important part of pedagogy, as experienced MBA instructors will immediately recognize. (Note that you will have many more opportunities to correct errors than to answer questions, because part of not understanding something is often not realizing it.)

Knowing when to pull the trigger on a correction to an error is the most subtle aspect. The first-best solution is another student immediately chiming in with an on-point critique, but that happens rarely. A lightly guided discussion that eventually corrects the error is next best, but there are practical challenges here as well, since a) limited class time may be available to deal with the topic, b) it can become aggravating for the students to play “guess what the professor is thinking,”, and c) the longer the uncorrected statement lies there the more likely that students will internalize the error and repeatedly spout it back in future classes, on exams, etc.

Assuming one has let the error go uncorrected as long as seems prudent and decided to directly intervene, it’s still often a challenge to a) precisely recognize the nature of an error and b) quickly come up with a concise, memorable, and understandable correction that will persistently displace the erroneous idea from the audience’s minds. Of course, experience helps, because errors tend to fall into repetitive patterns, allowing you to build up an internal database of diagnoses and appropriate responses. Here are some classic sallies with proposed responses below the fold. Suggested improvements to these responses (as well as additional examples of “favorite errors”) are welcomed in the comments.

1. “The company has a cost advantage because it makes more products and there are economies of scope in this industry.”

2. “The company has a cost advantage because it’s more vertically integrated (and Porter says that reduces costs).”

3. “The company has a cost advantage because it outsources more activities.”

4. “There are strong entry barriers because small companies can’t afford to pay the capital costs to operate in the industry.”

5. “The company needs to give better deals to its loyal customers.”

6. “The big growth in this industry comes from this new segment X, so the company should focus its resources on penetrating X.”

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Does This School Make Me Look Fat?

It appears that selling “competitive” foods–often called junk foods–in schools has little market-expanding effect, at least if we use childhood obesity as a measure. The authors of this study look to have used pretty robust methods and found no link between attending a middle school where such marketed foods are sold and obesity. So firms’ efforts to penetrate these schools probably represent zero-sum market-share battles among brands, not a means of stimulating overall long-term consumption of these products.

Bonus question: If food firms make competitive bids to schools in order to get exclusive access (and I have no idea whether that is true–I’m analogizing from the many college campus exclusive soft-drink deals), then how would they feel about regulations banning them from school premises? Hint: Think about the impact of taking cigarette advertising off of TV on cigarette firm profits.

Urban Strategy Fads

Mario Polese provides a nice short history (up to the present) of oversold urban revitalization strategies in City Journal. Interestingly, these theories succeed with municipal decision makers for the same kinds of reasons that pop-strategy notions flourish with company managers: They fit the zeitgeist, they flatter the preconceptions and prejudices of the decision-making class, they claim to magically bypass the obstacles to success, and they enable the rent seeking of powerful coalitions. Their obvious theoretical and empirical drawbacks as all-purpose nostrums have little effect on their propagation, and their promoters often flourish despite a complete lack of proven efficacy.

One useful thought exercise for assessing urban development strategies is to imagine yourself the monopoly landowner in a city and think about what policies would maximize the value of your holdings (or rent stream). It quickly becomes apparent that for cities of any size or complexity, your chances of picking sectoral, much less firm-level, “winners” are very low, unlike the owner of, say, a shopping mall. The peculiar difficulty is that cities have both the “internal” complexity of closed systems and the “external” complexity of open systems in a turbulent environment.

Centrally planning complementarities and synergies within the city overwhelms the monopoly landowner’s knowledge and modeling prowess, because 1) the interactions are manifold and hard to decompose and 2) the city itself is what Hayek called an order (or cosmos) with different people pursuing different objectives, not an organization (or taxis) where a single hierarchy of objectives can be imposed; the denizens of the city don’t work for the landowner and are not deployable resources. The best you can do is provide the most effective sector-neutral institutions and infrastructure you can think of given your geographic and historic legacy. Any “natural” advantages a city has in specific sectors can be accommodated by policy (e.g., tourism-friendly policing in a natural tourist area), but trying to create such advantages from scratch seems foolhardy.

Deliberately positioning the city as a competitor against other cities then becomes something of a fool’s errand. The very sort of maneuverable, focused tradeoff-making needed to pursue competitive “good strategy” as an open system with shared objectives (a taxis) in a turbulent environment conflicts with the efficient policy neutrality needed to manage the city’s internal complexity as a cosmos.

Interesting question: How big does a piece of land have to be before planned synergy-mongering and focused strategy should give way to neutral governance? There are large master-planned communities put up by real-estate companies that include residential, commercial, and office components. I conjecture that that size is about the limit of effectiveness for guided, synergy-conscious development strategy.

Our Top Posts for 2012

10. Strategies in the new European barter economy.

9. Tom Friedman: Why bubbles are  far-sighted industrial policy when undertaken by bureaucrats.

8. Radical-disruptive-agile-entrepreneurial strategy implications of thought-controlled smartphones.

7. The Rose Bowl as case-discussion classroom: UCLA’s innovative response to online MBA competition.

6. Sorry we got WordPress shut down with that link to one of Russ’s videos—#!%& SOPA.

5. Harvard Business School replaces Ohio as the Cradle of Presidents.

4. Cuneiform Case Studies–archaeologists discover Babylonian analysis of the five forces. (“Gilgamesh had a decision to make…”)

3. “Sustainability” voted official cant word of the decade by the Academy of BS.

2. Facebook’s decision to display users’ Social Security numbers–bid for ad revenue or is Zuckerberg now just screwing with us for fun?

1. New SEC and FASB regulations on precise use of strategy and business buzzwords create “analyst apocalypse” and “consulting catastrophe.”

Sleeping with the enemy

Target used to outsource its e-commerce service provision to Amazon. Recently they decided to bring these operations in-house and have had some teething problems. After two embarrassing crashes, they’ve patched the site up for the holiday season and the former head of the operation has abruptly left the company. (One problem Target faced in quickly trying to build their site is a scarcity of programming talent–even hot Silicon Valley companies are having trouble recruiting skilled Web architects and coders.)

A simple question: Why is Target doing this? The question is not simply a classic make-or-buy decision but a decision about whether to “sleep with the enemy” by purchasing essential upstream inputs or services from a downstream rival. This issue comes up quite frequently in company scope discussions. One Harvard Business School case where it explicitly arises is PepsiCo’s Restaurants. Burger King, which had long poured Pepsi from its fountains (in contrast to the “all-American” combination of McDonalds and Coke), switched to Coke when Pepsi bought Taco Bell and KFC. The case claims that Coke salesfolk successfully argued that BK shouldn’t buy soda from its competitor in fast food.

There’s an instinctive tribal emotion that might motivate such behavior, but is there any rational reason to avoid “sleeping with the enemy” in this fashion? An oligopoly analysis actually favors such promiscuity, since being an upstream customer of one’s downstream rival actually reduces the rival’s incentive to steal customers from you (since they now have to net out the lost upstream sales). This effect reduces the rival’s willingness to make sunk promotional expenditures, for example, to capture market share from you–a point of market share grabbed from you now makes a smaller impact on the rival’s bottom line.

The obvious fear is of sabotage by one’s “enemy supplier.” (The rival would be raising your cost or reducing your value to gain a stronger competitive position.) This is the most common response given by outside analysts of Target: As e-commerce becomes more important, a company cannot allow its destiny to be controlled by a rival like Amazon. Given some past problems between Amazon and Toys R Us, this isn’t completely crazy, but as one analyst pointed out, Amazon has every incentive now to maintain a reputation as a reliable provider of cloud services given its giant investment in this fast-growing area.

 Here you have to look at the reputational impact on your rival’s upstream business if it’s caught doing this, as well as potential legal remedies you might have available (and might be able to negotiate contractually). Unless the supplier has subtle ways of screwing you that wouldn’t be easy for you to detect or to prove to others, this risk seems reasonably easy to control. (If the rival supplier is not a profit maximizer, e.g. a state-owned enterprise, the risks go up.)

Most of the other fears that firms could rationally entertain are the traditional ones for outsourcing, even from suppliers who are not also downstream rivals. For example, maybe Target anticipates the need for asset-specific investments between its e-commerce activities and its brick-and-mortar businesses and believes it faces either ex ante investment incentive problems a la Grossman and Hart or ex post haggling problems a la Williamson. I’m not sure just what these would entail that couldn’t be handled effectively with long-term relational contracts, but in any case Amazon’s status as a downstream rival has no bearing on them.

So it’s hard to come up with a plausible argument against sleeping with the enemy. But managers and analysts frequently express discomfort with it. Am I missing something?

Strategic analysis of strategist certification

At the recent Strategic Management Society meetings in Miami, I attended a session devoted to creating an SMS strategy certificate. (Apparently this is an ongoing initiative that started a year ago or so, although I hadn’t been paying attention.) The idea is to offer a written exam that consultants can take (for a fee) in order to become SMS-certified strategists. (I would put in links to the SMS website for all this–they even have a forum where members can view the tentative list of exam topics and leave comments–but the hamsters that power the site appear either to be on strike or allergic to Chrome.)

My first reaction to this proposed exam was to be reminded of the old story about the grocer who observes a shopper sniffing the meat for freshness and responds, “Lady, could you pass that test?” They had a laundry list of topics forming a kind of core and then planned “electives” in different specialized areas of strategy. Many of the topics are things I’ve heard of but don’t know much about. Others are things that I know about but believe to be vacuous or fatally flawed. It looked like a flat-file version of one of those giant multicolored management textbooks used by undergraduate business majors, which have always depressed me with their pretension and lack of coherence. I’m not sure if I espied Miles and Snow’s categories among the topics flashing by on the Powerpoint, but they did have SWOT analysis, generic strategies, the BCG matrix, vision/mission statements, and a variety of other forms of management Laetrile. Can you imagine being certified in SWOT? In vision statements? It’s almost as embarrassing as Louisiana’s tests for licensing flower arrangers that were mostly repealed under pressure from the Institute for Justice.

Perhaps to maintain buy-in from the heavily academic constituency of SMS, the program is being sold as having no effect on academic curricula or research. The influence is supposed to go entirely from academia to consulting and practice, with no one’s course being pressured to meet the certification content.

It was a peculiar meeting in the Neptune room of the Loews. A working group had been beavering away on a proposed curriculum for a year and was ostensibly soliciting our feedback, but 1) didn’t want to engage in the specifics of what they had come up with and 2) didn’t really want to address the basic question of whether the whole enterprise makes sense. Those in charge took notes on what the people in the room said but it felt like one of those government “request for public comment” setups, where the fix is in and no meaningful reconsideration of the project is possible. One person told me afterward that he had never been in a meeting with such an undercurrent of fear and suppressed tension. There was indeed a whiff of preference falsification in the air.

I was as diplomatic as possible, but expressed some of my concerns. Afterwards, a few people commented to me that they thought that this was a terrible idea but had expected/hoped that its intrinsic hideousness would have killed it off by now. I see no signs of such a spontaneous abortion. Rather, the meetings keep going on and the “process” keeps rolling forward, despite the instantaneously queasy feeling it causes in everyone with whom I discuss it.

Why would the SMS want to do this?

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A private Euro bailout–now with Italian flavor

No matter how annoying the European debt-crisis soap opera has become–reminding me of the old Saturday Night Live Weekend Update routine about Generalissimo Francisco Franco still being dead–there’s no way to pretend that it isn’t going to cost us here in the land of the free and the home of the brave. Even before the Euro leaders huddled and brought forth their bailout mouse (getting their banks to “voluntarily” take a 50% haircut on Greek debt so as to avoid triggering the credit-default swaps that a formal default would entail, then promising to make the banks whole with taxpayer money), skeptics were predicting its failure. Now the PASOK government in Greece has scheduled a referendum on its austerity end of the bargain, and the likelihood of a rejection by Greek voters has spooked the markets more. New Eurozone manufacturing numbers are dire, suggesting another slowdown, lower tax revenues, increased deficits, rivers turning to blood, cats and dogs living together, and so on.

“So what?” you ask, with a Gallic shrug or perhaps some Teutonic schadenfreude. Well, the IMF, heavily backed with U.S. tax dollars, is in on the deal and will probably be hit up for more money later. What’s more, some of our banks have exposure to European sovereign debt and I’m not confident that equity or loss reserves will turn out to be adequate in all cases, given our past experience here with regulatory diligence (and given the regulators’ professional courtesy toward fellow governments, treating sovereign debt as “safer” than, say, bonds from cash-laden private companies). And finally, a big recession-and-default contagion in Europe is guaranteed to chop into the profits of U.S. and Asian firms, crippling confidence, investment, and hiring.

The central bankers and technocrats and politicians are not going to be able to stop this; they’ll ride out the crisis and take credit if everything works out and duck the blame if it doesn’t.

But fear not. Because I Have a Plan.

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Corporate strategist agonistes

Russ makes an interesting point about SBU portfolios and headquarters’ impact on their performance, but from Rumelt on, variance decompositions cover multiple years (that’s how the business unit effect is identified). Business unit effects are therefore persistent phenomena. I don’t see how a transient improvement caused by HQ could be confounded with SBU effects as suggested. It could move some of the variance from the error term to the corporate account, I think.

Possibly one could directly look at corporate acquisitions and divestitures to see if particular parents differ in their impact on the time pattern of SBU ROIs. What would worry me about interpreting such a study would be distinguishing between an HQ that actually improved its acquisitions and an HQ that was just good at buying low and selling high.

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Are you ready for some football?

As another big weekend of (American) football awaits, I am again drawn to the broader intuitions and insights we might draw from the game. The best blog I know for analyzing football strategy and tactics (not sabremetrics-like analysis) is the erudite but down-to-earth Smart Football site run by Chris Brown, who now also writes regular columns for ESPN’s Grantland site. Highly recommended for astute and balanced analysis of football trends and history. He also does a great job of calling BS on over-caffeinated TV commentators who love to spout buzzwords they barely understand. (Hmm, sound like anything in the popular business press?)

Even though sports teams only engage in zero-sum competition on the field, there are obvious similarities between this on-the-field competition and business. Both require fitting people with diverse specific skills into coherent patterns of action, patterns intended to give the team some kind of advantage over rivals. There must be fit between the routines developed and the resources (skills) available. There are complicated relationships among the prevalence of particular routines, the scarcity of resources useful for those routines, and the results of competition between different teams’ resource/routine combinations. Why do all the service academies throw relatively few passes and run triple option offenses, when that style has fallen out of favor in college football as a whole? The answer is not that hard to see, and it may shed light on similar but trickier questions in business strategy.

Strategy and execution–substitutes or complements?

The management field has long been obsessed with the oddly loose idea of fit, whether it be between strategy and the environment, strategy and structure, or the functional-area components of an overall strategy. Pieces have to fit together into some sort of design in order for the whole thing to work; firms that get all the pieces to fit better (whether by skill or luck) win the competitive struggle. This orientation generates a kind of rhetorical, emotional glow around the idea of complementarity–who wouldn’t want to be coherent and consistent and have all everything work together?

My concern with this attitude is that it overlooks the importance of substitution. Opportunities to outcompete rivals often involve being the first or the only player to recognize that one action, factor, resource, or level of coordination can profitably replace another. I’ll probably return to this theme in future posts; here I want to discuss one particular area of substitution–between strategic acumen and skill at execution.

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Strategy, science, and debates

Mike makes some interesting points in his post. I’m not sure if I should debate him on it, because that seems like it would cause an infinite recursion of meta-posts, so I’ll just lay out some areas for clarification:

1. On the live-debate format with audience votes, I don’t think anybody sees those votes as having even straw-poll relevance. “Losing” or “winning” one of these debates in voting terms is inconsequential. It’s just an audience=participation device (not that successful, as far as I can tell) and really doesn’t say anything about the field.

2. As for the “debate” format itself, where people explain their conflicting points of view and try to say why their view seems more reasonable/plausible/believable/useful, it represents a rare opportunity to actually confront ideas with which one disagrees, articulate why, and hear responses from the proponents of opposing views. Perhaps journals should allow or encourage more back-and-forth arguing in print, which would put less of a premium on speed and agility of thought. But strategy already has too much public deference to dubious ideas.

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Accentuate the negative

A fair amount of my research and teaching focuses on how things go wrong and why. This orientation is countercultural in the world of management, where  everyone strives for (or talks about or studies) excellence and advantage and competence and capability and innovation and sustainability and ambidexterity and X where X = [any pleasant word that can be related somehow to success].

One result of this prevailing positive bias is that we have a great deal of scholarly writing that makes fine distinctions among competences, resources, capabilities (operational and dynamic), and routines. Attempts to classify mechanisms of, say, integration failure, however, receive eye-glazed dismissals for “just describing bad management.” No Tolstoyan wisdom for us–here, every unhappy firm is the same while every happy one is different.

Just why management and strategy people are so prone to positive framing of issues is overdetermined: A desire for inspiration, the search for hidden success factors, fears of spreading demoralization or cynicism, a focus on winners as models to emulate, concern about naming and blaming specific people and organizations, and probably other things I haven’t thought of all contribute to this tendency. But neglect of the negative perspective is a big mistake for the field of strategy. Here’s why:

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John Sculley, path dependence, and the Great Man theory

The explosion of commemorations after Steve Jobs’s retirement and untimely death has focused on his intense and demanding management style, his infusion of aesthetic sensibility into the world of computing, the remarkable success-exile-triumph arc of his career, and most of all on the transformative impact of the innovations he shepherded to market. From NPR to the BBC, from China to Europe, and from one end of the business and tech Internet to the others, it was all Jobs all the time for a couple of weeks. This treatment left no doubt that Jobs was a Great Man.

The man who fired Jobs from Apple and sent him to Medina–whoops, make that NeXt and Pixar–was John Sculley. Sculley is now treated as a definitively Not Great Man, and his own comments on his times with Jobs have, for the last several years, been appropriately humble. I myself have pointed in class to specific decisions he made (and rationales he offered) that were offenses to economic theory and business strategy.

And yet Sculley’s decisions have shaped today’s computing environment as profoundly as Jobs’s.  Read the rest of this entry »