The Fallacy of Equivocation at the Economist

In a remarkably shoddy example of anti-market propaganda emanating from the Nottingham Business School, the Economist runs a screed that starts out with the debatable but reasonable premise that business leaders exaggerate their omniscience. It somehow ends up with the unsupported conclusion that business schools should abandon economics, finance, and the pursuit of profit for the cant trio of “sustainability,” “social responsibility,” and “leadership for all not for the few.”

The crude equivocating shifts from intellectual humility to moral humility to altruism would qualify for an F in any class on composition, much less philosophy. The vague assertions about “business excess” (entirely unsupported or even defined), the implicit attribution of these excesses to the teachings of business schools (ditto), and the wild leap at the end (replacing business school education with an agora-like setting in which sophists mingle with scientists and philosophers with philistines to figure out what are “social needs”), all conduce to a massive loss of reader brain cells per sentence. This article might be useful as a sort of mine detector–anyone who finds it congenial is best separated from responsibility for educating or commenting on business or economic issues.


When Industry Analysis Goes Flat

Barry Lynn, apparently some sort of John Kenneth Galbraith wannabe, has an amusingly cockeyed post over at the Harvard Business Review blog. He seems to think that state regulations protecting local beer distributors from vertically integrated competitors are the font of virtue, preserving needed diversity in the beer market by allowing craft and micro-brewers to get their product delivered. But if the big brewers were legally able (and motivated) to foreclose distribution of the small brands, they would be legally able to do it without vertically integrating into distribution (by requiring exclusivity).

A simpler analysis: When there were many  competing major brewers, independent multi-brewer distributors made economic sense, since they eliminated needless duplication of sales and delivery of all those brands to retail establishments. With the consolidation of the beer industry into two giant companies that own all the big brands (and a shift from on-premises to at-home consumption), a single-brewer distribution firm can now internalize almost all those economies. Then the beer industry starts to look a bit more like the soft-drink industry, where two major firms own and develop all the major brands and we don’t blink an eye at their bottler/distributors having exclusive relationships with the upstream brand owners or even being vertically integrated with them. If your local Costco or supermarket won’t carry a micro-brew or an off-brand soda, it’s unlikely to be due to market power on the part of the distributors.

UPDATE: It seems that AB InBev, owner of Budweiser and many other beer brands, is indeed shifting to more of a product innovation strategy and running into distribution problems with these new products:

“That’s not to say that AB InBev has perfected the process. Profit this year was hurt by higher distribution and administration costs in the U.S. as the brewer struggled to keep up with demand for Platinum and Lime-A-Rita, which required extensive — and expensive — countrywide distribution.”

So maybe there are strategic reasons why AB InBev would want more control over its distribution pipeline.

HP/Autonomy and Public Company Governance Perplexities

I’ve been listening to my good friend Todd Zenger for the last few years explaining that the strategic management field is predicated on the idea that corporate managers know more than the uninformed stock market and its lazy analysts. Dick Rumelt’s Good Strategy/Bad Strategy makes a similar point. The idea is that finding unique resource synergies is a good way to get competitive advantage but a bad way to please narrow-minded investors who hate unique strategies that are hard for them to evaluate. Raghurum Rajan’s recent presidential address to the American Finance Association makes a similar point, although with a much more positive spin on the role of equity markets in supporting the creation of entrepreneurial enterprises. With such an eminent set of eloquent and insightful advocates, it’s hard not to tentatively consider the perplexing idea that stock markets systematically undervalue powerful synergistic corporate strategies.

Then I wake up.

You probably followed the news about HP’s massive writeoff on its perplexing Autonomy acquisition of a year ago. The headline to that story was HP CEO Meg Whitman’s claim that Autonomy had cooked its books and fooled its auditors prior to HP’s purchase of the firm under previous, perplexingly hired, CEO Leo Apotheker. It isn’t clear that the extent of the alleged fraud can explain the gigantic size of the writedown by HP, but in any case outsiders like short-seller Jim Chanos, much of the British tech analyst community, and the very useful John Hempton, proprietor of the Bronte Capital blog, had long smelled a rat. They thought, even prior to the acquisition, and using only the company’s official accounting statements, that there was something fishy about Autonomy’s books. How could HP’s finance team and the outside auditors have failed to notice this at the due diligence stage? It’s perplexing.

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David Stern and the Aging Emperor-CEO Syndrome

NBA Commissioner David Stern recently fined the San Antonio Spurs $250,000 and severely chastised them for the decision by Gregg Popovich, their near-legendary coach, to rest his aging stars at home rather than fly them to Miami for a meaningless (but nationally televised) tilt with the defending-champion Miami Heat. Is Stern losing his grip? Does he need an intervention and/or a forced retirement as he reaches his managerial dotage? While I haven’t heard of Commissioner Queeg–whoops, Stern–clicking steel balls in his hand or searching for the keys to the strawberries, a Caine Mutiny scenario may be approaching if he continues to deteriorate. Other firms with long-term, successful “emperor” CEOs have found their later years to be problematic. See Eisner, Michael (Disney) or Olson, Kenneth (Digital Equipment Corporation) or maybe Cizik, Robert (Cooper Industries).

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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.

Jeremy Lin and Moneyball: The Problem of Identifying Talent

After watching Jeremy Lin (Knicks) score 38 points against the Lakers tonight, I’m now on the Lin bandwagon.  I don’t really even follow basketball that closely, but this seems like an intriguing story.

How on earth did someone like this go unnoticed?   Seriously.  He happened to get an opportunity to show his stuff as Carmelo Anthony and Amare Stoudemire are injured – and boy has he delivered.

Here’s a kid who didn’t get recruited for college ball, despite a tremendous record in high school.  He was a superstar at Harvard but went undrafted by the NBA after graduating from Harvard (in economics) in 2010.  He played a few games for Golden State and Houston, but was cut by both.  He has played D-league basketball this year, until a few weeks ago.  As of last week, he did not have a contract.

But come on: is basketball truly this inefficient at identifying and sorting talent?  The comparisons and transfer of ability across “levels” (high school-college-professional) of course is tricky, though you would think that with time there would be increased sophistication.

Now, four games of course doesn’t make anyone a star.  But even if Lin proves to “just” be a solid bencher, it seems that talent scouts clearly undervalued Lin (who lived in his brother’s apartment until recently).  How much latent talent is out there?  (I think that at the quarterback position in professional football – there are significant problems in identifying talent, but that’s another story.)

There are of course also some very interesting player-context/team-fit, interaction-type issues here, and I’m not sure that this really gets carefully factored beyond just individual contribution (thus not recognizing emergent positive, or negative, player*player effects).  It’ll be interesting to see what happens, for example, when Carmelo Anthony is added back into the mix.

Well, it’ll be interesting to see how all this plays out.  There is in fact a sabermetrics-type, stats-heavy, Moneyball-like thing in basketball as well – called ABPRmetrics.  I would be curious to know whether there are ways to statistically identify Lin-type undervaluation and potential, and whether phenoms like this lead to better metrics for identifying talent.

UPDATE: Here’s ONE analyst/statistician who saw Lin’s potential in 2010.

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.”

Duly Noted: Solving the Principal-Agent Problem in Firms:The dumbest idea in the world?

This article in Forbes argues that a new book by the Dean of Rotman School provides an antidote to the rampant excesses of modern day capitalism.  The principle swipe is against the landmark paper (over 29000 Google Scholar citations)  by Jensen and Meckling on both the prevalence of the principal agent problem in the governance of firms and the various solutions to overcome it – including creating incentives that maximize shareholder value.  Quoting Jack Welch, former CEO of GE, the article says that maximizing shareholder value is the dumbest idea in the world.  I my self am not sure if this is THE dumbest idea in the world – in fact there are many more that would easily surpass P-A problem resolution – but I am sure this will ignite a debate about why firm’s exist – what is the best governance mechanism for them and the role of economic theory and action in our lives.  I for one need to go back and read the article and then read the book.

Ronald Coase: 101 years (and still publishing)

Via Karim’s twitter feed: Ronald Coase turned 101 years old today.  Congratulations!

(My new goal is to be publishing at 101.  That’s got to be a record of some sort.)

How doing economics is like riding a Harley

When I was a grad student at UCLA, I had the great good fortune to marry a management consultant. As a result, my grad school experience was, well, richer in some ways than those of many of my fellow students.

At one point, my wife became manager on a project her firm was doing for Harley Davidson. She hopped on a plane and disappeared for several weeks, organizing work teams on the Harley assembly line.

One day, some time after her return, we were driving north on the 405 when a couple riding a Harley Road King (the big, two-seater highway bike) zoomed by. My wife said, “Maybe we should consider riding.” Needless to say, I couldn’t believe my ears. This was a sudden, unexpected, miraculous piece of good luck!

I offered a quiet prayer of thanks and replied, “Great idea! We could get a Road King and tool all over the state!”

A Road King?”

“Yeah. We could get one and ride up the Pacific Coast Highway. Wow. It would really be a blast. Romantic!” I helpfully suggested.

“Are you planning on riding bitch [recently acquired slang from the Harley shop floor referring to a motorcycle passenger]?

“… uhm … what …?”

“If we ride, I’ll be on my own bike!”

And, thus, began a canonical SoCal adventure. We took riding classes and purchased two brand-spanking new Super Glides, mine black and hers red. It really was a wonderful experience. We still have a number of long-standing friendships that originated within the Harley community.

During our SoCal motorcycling romps, I frequently had the following experience. Upon pulling into the parking lot of a motorcycle bar, Macdonald’s, gas station, etc., and minding my own business, some complete stranger would walk over, point to his Honda (BMW, Kawasaki, etc.), and launch into a rant about why Harleys sucked and why his Honda (BMW, Kawasaki, etc.) was totally superior. Often, these diatribes were delivered red-faced, veins popping, and spittle flying.

So much emotion. Which was puzzling. I mean, I never felt compelled to walk up to some stranger riding one of those other brands and lecture him on the inherent faults of his preferred machine. I was happy that he was happy and spent exactly 0 milliseconds agitated about his choice.  I never saw anyone in our Harley group — or even anyone who happened to be riding a Harley — engage in this puzzling behavior.

Don’t get me wrong, I was always interested in chatting with folks who sincerely explained why they liked their choice of bike (and did not try to use the explanation as a pretext to launch a vicious attack on my character). Much can be learned from such friendly exchanges and, indeed, there were several occasions on which much was.

I was reminded of these experiences when I read Teppo’s Freakonomics post the other day. The link is to a rant by a couple of statisticians cataloging the technical faults of an economist writing popular tracts for a nontechnical audience (and you don’t have to be Sherlock Holmes to detect the vitriol directed at economists as a whole). I often get this as well. Non-economists berating me on the post-modern philosophical failings of my methods, non-modelers excoriating me about the pointlessness of using math in the social sciences, and so on.

So much emotion. Guys, go write Freakostatics or something. Seriously. We’re fine with that. You get on with your ride and we’ll get on with ours.


Best governance structure for b-schools?

Here is the headline from Financial Times editor Della Bradshaw: From the editor: Trouble at the top. “A spate of deans’ departures raises questions about the way they were appointed,” writes Bradshaw. The examples given in the article are the short tenures of Robin Buchanan at LBS, John Wells at IMD, and Frank Brown at Insead. The basic gist of the article is that these examples illustrate bad governance practices at non-university-based schools. What’s bad? Well, according to Ms. Bradshaw, too much faculty involvement in the Dean selection process.

Of course, most US and UK university-based business schools follow a straight­forward system in which the president (US) or vice-chancellor (UK) appoints the dean of the business school based on recommendations from a search committee or firm. Presidents hire and only presidents can fire.

But, at non-university schools, faculty meddling is allowed to a shocking degree …

It is hard to imagine any other organisation – commercial or academic – allowing the workers to effectively decide who will be their new boss. When the FT is next looking for an editor, will jobbing journalists be asked to vote?

Can you imagine?!

I’m not quite sure where to begin with this. But, let me try. First, Bradshaw cites no evidence  that these short tenures were bad outcomes. Rather, they may be the kind of flexible, timely, and appropriate decisions that schools should make upon learning that the new Dean is a dud. Managing a research-based business school is a tricky endeavor. On the one hand, a Dean needs to have the management chops to run an organization constrained (yes, constrained) by insanely dense complementarities between policy variables. On the other hand, he or she also needs to understand the research world, both in order to construct a sensible educational vision as well as to manage faculty resources. The problem is that each of these skill sets typically takes a career to develop and, hence, are rarely co-occurrent  in a single individual. Perhaps we should be surprised that the rate of Dean turnover isn’t higher.

Second, it appears that Ms. Bradshaw has never heard of a governance form called the “partnership.” Traditionally, faculty have been run along the lines of a partnership, much the same as in law firms and consulting practices … and for most of the same reasons (aligning decision rights with inherently decentralized information and creating effective incentives). True, the partnership model for b-school governance has been greatly degraded in recent years.  In its place, we now have the corporate-style administration. This modern administrative form — untethered from from faculty oversight — is, in the parlance of our times, a bug and not feature. Treating faculty as mere “workers” (or, worse, as a frustrating “problem” to be sidestepped whenever possible) results in misaligned decision rights and incentives, which then contribute to undesirable behaviors like: the mindless chasing of rankings put out by popular business periodicals; expanding capacity to what may be an unsustainable level; the dumbing down of graduate business education; and, a shocking rate of tuition inflation. This is why, whenever I hear university administrators refer to themselves as “The Senior Management Team” (typically, embedded within some self-congratulatory announcement), it really makes my skin crawl.

By the way, in terms of her own experience, Ms. Bradshaw was an English teacher before joining the FT, where she has served as a journalist for the past 20 years. As far as I can ascertain, her experience includes neither scholarly research nor business unit management. She has been involved in the FT rankings since their inception in the 1990s. Think on that.

DOE makes $150m loan conditional on matching private funds – firm folds

Here is the WIRED link: EV Startup Aptera Motors Pulls the Plug: “The company that brought us a three-wheeled sperm-shaped two-wheeler shuts its doors after four years.” More here: The 190 MPG Aptera electric care that never was.

No kidding. My faith in government bureaucrats to make successful commercialization picks is, as we used to say in Nevada, lower than a snakes belly in a wagon rut. How many Department of Something-or-Other types do you think have the slightest idea of what Porter’s Five Forces are? And that’s a 30-year-old framework in strategy. Don’t even get me started on the open invitation to political corruption that these policies tend to create.

Those who worry about our dependence on foreign oil – a worry I share, by the way – often cite historic examples of government projects that successfully developed new technologies that would never have seen the light of day (or, at best, would have seen it decades later) had the country relied on the private sector to do it.  The Manhattan Project to develop the nuclear bomb during WWII is a favorite citation.

The problem we are seeing today is that the government is presently throwing money at firms claiming they can commercialize green technologies that, in reality, have not yet passed the basic development stage. You can’t get private investors to ante up when taxpayers are shouldering half the risk? That’s a very strong signal that those who spend their lives evaluating such things believe your technology is not ready for prime time. There is a big difference between government involvement in basic technology and government involvement in its commercialization.

Now, if folks are really serious about a Manhattan Project-style effort to, say, develop an efficient electric car, then let’s do it right! Get the smartest scientists from the top schools, fence them in at a top-secret facility in the middle of some desert, and don’t let them out until they succeed. I think that might work. And, I’m pretty sure the scientists’ home institutions would go for it.

Then, turn the technology over to the VCs to compete in the commercialization stage.


A patent for a strategy framework?!

I love that there are patents like this – an IBM patent for “an integrated framework for analyzing a firm in terms of its resources, capabilities and strategic positions, providing a Strategic Capability Network composed of nodes signifying these resources, capabilities and strategic positions, together with relationships between these nodes.”

Here are the full details on US patent # 6,249,768 at google patents.  Read through the patent document – it is inclusive of citations to work in SMJ and other journals.  And, this particular ‘strategy’ patent has also been referenced by many other patents.

And, here are other patents that cite SMJ. Here’s one for an “organizational innovation enhancement technique.”