Episode #68 - Proper Project Management

Defining the Word “Project”

Sometimes, we need to go back to the very basics. While facilitating a class on project management, I always take the opportunity to spend a few minutes defining some basic concepts, since as Plato said, “All knowledge begins with the definition of terms.” Of course, for a project management course, the first term would be project.

What is a project?

According to the Project Management Institute (PMI) a project is “a temporary endeavor undertaken to create a unique product, service, or result.”

In my experience, further refining two words in this definition provides tremendous insight into the topic of project management. They are: temporary and unique.

To understand a project as temporary is to understand that it must have a clearly defined end. Too many projects are allowed to continue on seemingly ad infinitum. More often, professionals struggle to obtain sign off from a customer to clearly end the project. These two situations are caused by a lack of, or poorly defined, project objectives. One metaphor that has helped me over the years is to think of a project as a temporary company—one that comes into existence for the sole purpose of obtaining the objectives of the project and then goes out of business.

To comprehend a project as unique is to know that while you have participated in many similar projects, each one in truly different. There is no such thing as the “plain vanilla” or standard project, especially in professional knowledge firms. Each project has a different set of goals, objectives, constraints, and of course, personalities. Customers who ask you for the “plain vanilla” project are ignorant of these facts. (Note that the same customer who asks for the “plain vanilla” project will likely state, often times only five minutes later, that their company does this “very differently” from others you many have encountered).

The Difference Between Goals and Objectives

There is clearly a difference, in good project management, between goals and objectives. Goals are what we hope to attain by undertaking the project; however, they are not always attained by project end because there may be other external influences that factor into their achievement or lack thereof. Objectives are, well, objective, in that they can clearly be checked off as having been attained by project end.

For example, “increase sales by 10 percent” would be a goal of the project not an objective. An objective would be the “installation of the new accounting system.” The acid test question to distinguish one versus the other is, “Can this (goal or objective) be clearly accomplished when we consider the project to be completed?”

I am not saying that we should not continue to track project goals, post completion; I am just noting that they need not be accomplished in order for us (and the customer) to consider the project done.

Lastly, if a customer wants you to guarantee the attainment of goals than I would have you consider contingency pricing. For example, if they do increase sales by 10 percent, you should be paid at least 30 percent of that number. In a sense, a customer asking you to guarantee goals, is like that customer asking a lawyer to guarantee winning a case and therefore subject to a contingency arrangement. I would, however, guarantee meeting all objectives.

Now that we have defined some basics of project management, let us put it all together into the Triangle of Truth.

The Triangle of Truth

One of the basic principles of project management is what is known as the triple constraint. Some call this the scope, resource, time triangle. I call it the Triangle of Truth.

The concept is simple. A project consists of three interrelated variables: scope, resource (some say cost), and time. These variables are like the angles of a triangle. If you recall from geometry class in high school, in order for a polygon (shape) to be considered a triangle the three angles must add to 180 degrees—i.e., Angle A (Scope) + Angle B (Resource/cost) + Angle C (Time) = 180. If these do not add to 180 you do not have a triangle. So, if you make a change to the value of one of the angles, one of the other two or both must also change to compensate or else the figure is broken.

The big problem with most professionals is that they are lousy and lazy about scope development. They prefer to concentrate on the second two elements, cost and time. In some cases, the professional feels pressure from the customer or prospect to give answers to the cost and time questions first. To me, this would be the equivalent of purchasing the lumber for a new house before going to an architect for plans; or a doctor writing a prescription before performing a diagnosis. Remember: prescription before diagnosis equals malpractice!

Why do we need a balanced triangle? If we go back to the analogy and take it one step farther, let us draw a circle inside this triangle, the size of the circle represents the quality of the work performed. The largest perfect circle can be drawn inside a triangle that is equilateral—that is, all sides the same—and, therefore all angles equal to 60 degrees.

This is an important point, because for a professional knowledge firm (PKF), quality is defined exclusively by the customer, not the professional. The professional cannot say that they do quality work. Rather, their customers say that about them.

Great Moments in Value Pricing History - Ed Kless

What happens in most firms is that scope is often poorly or not-at-all defined. I am sent an email a week from someone asking me to assist them with scope creep on a project. My first response is to ask them to send me a copy of their scope document. In almost all cases, I am sent back a proposal with a range of hours. In replying to this I tell the poor sap that I have some good news and some bad news. “The good news is you do not have scope creep; the bad news is you are over budget.” What I mean is that since they never defined scope to begin with they are not outside of scope. This leads us to the scope document.

Elements of a Scope Document

I submit the following as the required elements (consultants call them inclusions) of a scope document.

• Scope statement

• Objectives

• Constraints

• Project structure

• Roles definition

• Project team definition

• Assumptions

• Deliverables

• Scope details or functional requirements

• Project change control

• Future projects list

• Approval

Elements of a Change Request

In almost all of the small and medium business information technology projects that I have been associated with there have been usually dozens of change requests. In fact, I cannot think of a single project, however small, that there were none. I believe it would be Twilight Zone weird that any project would have no change requests. Any project worth scoping will be, by definition, one that lends itself to changes. If a customer expects that a project will not have any change requests, he is probably not a good customer to have. No one can predict the future.

Please note that the language that I use for these is change request, not Cchange Oorder. They are, by definition, requests and may be accepted or rejected by the project sponsor (steering committee, on a larger project). A change request is simply an acknowledgment that something that affects the Triangle of Truth needs to be adjusted. In some cases there may not be any budgetary or price change. For example, during an implementation of software the controller may leave the company. The resolution for this may be to push the “go-live” date of the project out, rather than adjust the financial resources. Even if there is no change to the budget, this is still a change request and needs to be approved by the project sponsor. Let us look at the elements of a change request with some commentary.

• Project name

• Change number

• Project manager name

• Requestor name—In my view on small projects anyone on the project (customer or consultant) can request a change. In many cases the project manager would assist in the creation of the change request document and would most certainly review it before presenting it to the executive sponsor.

• Requested date

• Resolution requested by date—“ASAP” is not an allowed date. ASAP means different things to the sender and receiver. To the sender it means now, emphasis on the word soon. To the receiver it means whenever, emphasis on the word possible.

• Description of change

• Business reason for change—This section must describe the economic benefit that the change will create. In short, if the economic benefit does not exceed the cost section below, it is unlikely the change will be accepted.

• Impact on scope—In a sense a change request is a mini scope document. Please remember that when scope changes there must be a change to cost and/or time in the Triangle of Truth.

• Impact on price—This would detail the pricing change needed to perform the change.

• Impact on time

• Impact on quality—Remember if quality is affected, all three of the other elements (scope, cost and time) must also be affected.

• Change accepted or rejected

• Reason for rejection, if rejected

• Signatures and dates

• Lastly, change requests should be listed in a separate change request log if the changes are great in number.

Customers do not care about the amount of time spent on their work—or effort. They do, however, care about the duration of that work. Duration is the number of days or weeks that a project will take to complete. It is the window of time in which the result must be achieved. 

Effort is the actual amount of work, usually expressed in resource hours. A task can have a duration of 8 hours; however the effort could only be 15 minutes. Alternatively, a task with duration of 8 hours could also have 24 hours of effort. Project management is more concerned about duration than effort.

Turnaround time would emphasize when a project or case will be done, not how many hours will go into its completion. It is similar to FedEx guaranteeing the package will arrive on your doorstep by 8:30 a.m. It is the result that counts. Hence, turnaround time is an example of a Key Predictive Indicator that measures what customers care about.

Episode #67 - Free-Rider Friday - October 2015

Ed's Topics

New Apple TV New Features, but still no Amazon Prime App. 

Visitors to Karl Marx's gravesite resent having to pay. Wall Street Journal article.

Would you allow auto insurance companies monitor your driving habits? For example, Allstate.

Adidas now offers 3-D printed shoes.

Inventor creates a beer cup that fills from the bottom potentially ending the beer line as we know it. 

Ron's Topics

VW's Market Share Myth

Volkswagen's emission testing scandal was reported in The Economist, September 26, 2015, "A mucky business." One of the reasons cited was VW's desire to overtake Toyota as the world's largest auto manufacture.

The market share myth on parade. See our shows, The Top 10 Business Myths, Parts I and II, from September 26, 2014 and October 3, 2014 for more on this.

Interesting to note that cars carrying the VW badge make up 60% of sales but the profit margin on them is just 2%. VW obviously makes its profits from its other brands, including Audi, Bentley, Porsche, Lamborghini, etc.

Right to Try Laws Sweep the Country

Right to Try laws allow doctors to prescribe medication being safely used in clinical trials for patients diagnosed as terminally ill. These laws goes beyond the FDA's current "Compassionate Use" policy, allowing patients access to drugs that have passed Phase I clinical trials, since that exemption requires 100 physician hours of paperwork, hence only about 1,000 applications are approved annually.

Right to Try laws have passed in AZ, AK, CO, IN, LA, MI, MS, MO, MT, ND, SD, UT, VA, WY, and CA has a bill on the Governor Brown's desk. The FDA, so far, has not challenged these laws, and it's believed if it did, they'd lose in court--and in the court of public opinion.

Prediction Markets on the US Presidential Race

Check out the Iowa Electronic Market and PredictIt websites for, usually, more accurate predictions with respect to political races than pollsters.

eBay No Long an Auction Site

The Economist reported in its August 29, 2015 issue that eBay reports only 20% of its sales are made in an auction. Sixty percent are now a flat price and the rest are best offer.

Sage Small Business Awards US Prize Winner Interviewed

Michelle James, founder of Forever Cakes, is an entrepreneur with an inspiring story. Here is a picture of the cake she mentioned as here favorite. We have to admit, it is pretty amazing! 

Michelle James' incredible cake. 

Episode #66 - The Death of Standard Cost Accounting

Andrew Carnegie’s favorite saying might have been, “Watch the costs and the profits will take care of themselves,” but in an intellectual capital company, it should be,  “Watch your value and price, and the profits will take care of themselves. Management accounting is a thoroughly inward-looking discipline, from cost accounting to the DuPont return on investment (ROI) formula. One of the century’s most influential accounting academics was William Paton, who in a 1922 treatise described what he believed to be the cost accountant’s chief activity:

“The essential basis for the work of the cost accountant—without it, there could be no costing—is the postulate that the value of any commodity, service, or condition, utilized in production, passes over into the object or product for which the original item was expended and attaches to the result, giving it its value.”

Fortunately, Paton later repudiated this notion that costs attached to a product as it moves through the factory in a speech he gave at a conference in 1970:

“The basic difficulty with the idea that cost dollars, as incurred, attach like barnacles to the physical flow of materials and stream of operating activity is that it is at odds with the actual process of valuation in a free competitive market. The customer does not buy a handful of classified and traced cost dollars; he buys a product, at prevailing market price. And the market price may be either above or below any calculated cost figure.”

In their outstanding book, The Strategy and Tactics of Pricing (third edition), Thomas T. Nagle and Reed K. Holden offer the following indictment of cost-plus pricing:

“The problem with cost-driven pricing is fundamental: In most industries it is impossible to determine a product’s unit cost before determining its price. Why? Because unit costs change with volume. This cost change occurs because a significant portion of costs are “fixed” and must somehow be “allocated” to determine the full unit cost. Unfortunately, since these allocations depend on volume, which changes with changes in price, unit cost is a moving target.”

Price is how the firm captures the results of its value proposition, and since a company is what it charges for, focusing on maximizing value is a better metric than maximizing profit, which is nothing but a lagging indicator, derived from value creation.

This debate between cost accounting and profitability is not over. Much work is being done in this area. In 1987, as mentioned before, H. Thomas Johnson and Robert S. Kaplan published Relevance Lost: The Rise and Fall of Management Accounting, which was named in 1997 one of the 14 most influential management books to appear in the first 75 years of Harvard Business Review’s history. The book is credited with launching the activity- based costing (ABC) revolution.

ABC always asks, “Does this process have to be done?” If so, what is the most effective way of doing it? This costing method has provided manufacturers with the information they need to cut costs substantially, but the real promise of ABC may rest with service industries. Peter Drucker makes this observation in his book Managing in a Time of Great Change:

Activity-based costing shows us why traditional cost accounting has not worked for service companies. It is not because the techniques are wrong.

It is because traditional cost accounting makes the wrong assumptions. Service companies cannot start with the cost of individual operations, as manufacturing companies have done with traditional cost accounting. They must start with the assumption that there is only one cost: that of the total system. And it is a fixed cost over any given time period. The famous distinction between fixed and variable costs, on which traditional cost accounting is based, does not make much sense in services.

But that all costs are fixed over a given time period and that resources cannot be substituted for one another, so that the total operation has to be costed—those are precisely the assumptions with which activity-based costing starts. By applying them to services, we are beginning for the first time to get cost information and yield control.

Toyota—No Cost Accounting?

Johnson’s later book, Profit Beyond Measure, is a seminal work, although not yet fully developed. Johnson profiles Toyota and Scania as two manufacturers that do not have a standard cost accounting system.

As Glenn Uminger, a financial controller at Toyota Motor Manufacturing-Kentucky (TMM-K) since 1988, says, “TMM-K has never had a standard cost system to track operating costs, and we probably never will.”

 So how do they do it? How can a manufacturing company run without a standard cost accounting system? Toyota understands price justifies costs, not the other way around. Here is how Johnson explains it in his book, Profit Beyond Measure:

“None of these comments is meant to imply that Toyota does not have accounting and production planning information systems. Of course it does. Toyota has a comprehensive array of information systems, accounting and otherwise, with which to plan, in advance of operations, and to report results of operations after the fact. But information from such systems is not allowed to influence operational decisions.

Toyota management discharges its responsibility for costs not by taking arbitrary steps to manipulate operations, but largely in the vehicle planning stage. During the design stage, long before the first penny has been committed to making a vehicle, Toyota has always placed enormous importance on setting and achieving cost targets.

To do so, over the years Toyota has developed a famous technique for target costing. Simply stated, target cost is the maximum cost the company can afford to incur to produce and sell a vehicle and still earn a required profit at the price customers are expected to pay.”

He notes Dr. Edward Deming’s observation that over 97 percent of the events that affect a company’s results are not measurable, while less than 3 percent of what influences final results can be measured:

“Managers who adopt the new thinking offered here will accept as second nature the idea that what decides an organization’s long-term profitability is the way it organizes its work, not how well its members achieve financial targets.

Management accounting simply takes accounting revenue, cost, and profitability information, which is appropriate for measuring the overall financial results of a business, and inappropriately attempts to trace it to the particular activities and products of the business that gave rise to those results. Assigning such quantitative measures to parts of a mechanistic system makes sense. However, the parts of a natural living system cannot be so treated. Accounting measures are unable to penetrate the organic, multifaceted union between customer and company that ultimately is the source of a company’s financial results.

Because cost and profit are not objects, but are properties that emerge from relationships, quantitative measures can only describe them, they cannot explain them.”

Wisdom Is Timeless

Henry Ford’s understanding of this topic is truly prescient, as demonstrated in his autobiography, My Life and Work, published in 1922. It is worth quoting at length for the historical lessons it teaches. The notion that price justifies costs was not foreign to Ford:

“If the prices of goods are above the incomes of the people, then get the prices down to the incomes. Ordinarily, business is conceived as starting with a manufacturing process and ending with a consumer. If that consumer does not want to buy what the manufacturer has to sell him and has not the money to buy it, then the manufacturer blames the consumer and says that business is bad, and thus, hitching the cart before the horse, he goes on his way lamenting. Isn’t that nonsense? But what business ever started with the manufacturer and ended with the consumer? Where does the money to make the wheels go round come from? From the consumer, of course. And success in manufacturer is based solely upon an ability to serve that consumer to his liking.”

Keep in mind that Ford’s primary objective was the mass consumption of the automobile, so he focused more on driving the price down in order to increase volume. In a growing industry this is a viable strategy. In mature markets, it is probably better to increase value, thus allowing higher prices. Nevertheless, with Ford’s objective in mind, consider his views on the importance of cost accounting and prices, which are profound:

Our policy is to reduce the price, extend the operations, and improve the article. You will notice that the reduction of price comes first. We have never considered any costs as fixed. Therefore we first reduce the price to the point where we believe more sales will result. Then we go ahead and try to make the prices. We do not bother about the costs. The new price forces the costs down. The more usual way is to take the costs and then determine the price; and although that method may be scientific in the narrow sense, it is not scientific in the broad sense, because what earthly use is it to know the cost if it tells you that you cannot manufacture at a price at which the article can be sold?

Notice Ford “never considered any costs as fixed.” He understood, in the long run, that all costs are avoidable, and by subjecting every cost to the test, does it add value to the customer?, he was able to increase the efficiencies in the factory:

But more to the point is the fact that, although one may calculate what a cost is, and of course all of our costs are carefully calculated, no one knows what a cost ought to be. One of the ways of discovering what a cost ought to be is to name a price so low as to force everybody in the place to the highest point of efficiency. The low price makes everybody dig for profits. We make more discoveries concerning manufacturing and selling under this forced method than by any method of leisurely investigation.

Disney’s Brilliant Price Hike

Our VeraSage colleague Kirk Bowman, The Visionary of Value, does his own podcast, The Art of Value. He interviewed Joni Newkirk, who used to lead pricing for Walt Disney World.

We highly recommend you listen to this show, then read her whitepaper on the price hike story.

It’s a perfect illustration how pricers have to optimize profits overall, not for each silo or department.

Yet cost accounting tends to atomize a business, under the false believe that maximizing each part results in a more optimal whole. This runs counter to systems thinking, where sometimes certain departments need to be less efficient (or profitable) in order for the whole to be more effective.

The Price-led Costing Revolution

By its very nature, cost accounting is a historical function, but what is important for pricing are planned costs, not past costs. Furthermore, cost accountants usually pay far too much attention to sunk costs, which should have no influence over pricing or value considerations.

As Henry Ford pointed out, no one knows what a cost should be. Yet, cost accounting has held hegemony for far too long over the pricing strategies of businesses everywhere, embedding the conventional wisdom that costs determine price. Merely because a practice is widely adopted and utilized does not make it optimal, not to mention true. Check out the debate on Ron’s LinkedIn post on this topic in the comments.

One of Peter’s Principles is bureaucracy defends the status quo long past the time when the quo has lost its status. Cost accounting, and its more modern cousin activity-based costing, does not deserve to be the apotheosis of pricing, let alone running a business.

No doubt, it has its role in any organization, but that role is very specific and historical, not one that should have a major influence in production and pricing decisions.

Innovation requires builders not bean-counters, and the last person who should be running something is the man who controls the costs. Sure, you need that man in there somewhere to keep a rein on things, but he shouldn’t be at the top.

—James Dyson, Against the Odds: An Autobiography

Episode #65 - How to be a Price Searcher, not a Price Taker

View fullsize

We simply must get over the false idea that there is one optimal price for a customer. There is a range of optimal prices, commensurate with the value being created. Dutch economist Peter van Westendorp developed the van Westendorp Price Sensitivity Meter (PSM) by posing five questions, to which I have added two more:

1. At what price would this service be so expensive the customer would not consider buying it?

2. At what price would the service be expensive, but the customer would still buy it?

3. At what price would the service be perceived as inexpensive?

4. At what price does the service become so inexpensive the customer would question its value?

5. What price would be the most acceptable price to pay?

6. What costs can we afford to invest in at the target price and still earn an acceptable profit?

7. At what price would the firm walk-away from this customer (Reservation price)? What is the firm’s Hope For price? Pump Fist price?

Commercial from IBM about achieving premium pricing at a hotel minibar. "Satisfying the right need at the right moment".

The Psychology of Price

There is strong empirical evidence—from both the rational and behavioral schools of economics—that offering customers different options can often times result in them purchasing more, at a higher price, than merely offering one take-it or leave-it option.

This simply recognizes that different customers have different value perceptions, and firms that engage in price searching are deploying a more optimal pricing model.

In his book, Predictably Irrational, MIT behavioral economist Dan Ariely illustrates the utility of offering options by illustrating The Economist magazine’s offerings. First, he presented the following two options to 100 students at MIT’s Sloan School of Management:

1. Economist.com subscription $59: One-year subscription to Economist.com, including access to all articles from The Economist since 1997—68 students chose this option.

2. Print & web subscriptions $125: One-year subscription to the print edition of The Economist and online access to all articles from The Economist since 1997—32 students.

Now compare those results to the actual ad that The Economist offered, which contained three options, not two:

1. Economist.com subscription $59: One-year subscription to Economist.com, including access to all articles from The Economist since 1997—16 students chose this option.

2. Print subscription $125: One-year subscription to the print edition of The Economist—0 students.

3. Print & web subscriptions $125: One-year subscription to the print edition of The Economist and online access to all articles from The Economist since 1997—84 students.

Ariely concludes that there is nothing rational about this change in choices. The mere presence of an option that was not desired affected behavior, leading to a potential 42.8% increase in incremental revenue for The Economist, or $3,432. You simply will not get that level of return by improving efficiency.

Offering pricing options creates the anchoring effect, whereby the customer is now comparing prices to your highest offering. This is why Prada stores always display one incredibly high-priced article that acts as an anchor for all the other products.

All of these high priced items act as an anchor, even if the customer never buys them—throwing a halo effect over the other offerings, allowing for prices to be higher.

The first lesson from the above is if you do not offer a high-end premium package, how could you customers ever select one? Second, list your most expensive option first. The third lesson is that by offering three options, you almost always sell more of the middle option, and less of the cheapest offering.

Once again this confirms what most pricing experts know: people are not just price sensitive; they are value conscious.

A snippet from Dan Ariel's TED talk. This is a great illustration on the psychological effects of options pricing.

Seven Generic Customer Segmentation Strategies

According to Tom Nagle and Reed Holden in their book The Strategy and Tactics of Pricing, there are seven effective segmentation strategies to specifically identify different types of customers in order to capture the consumer surplus:

1. Buyer identification. Senior discounts, children’s prices, college students, non-profits, and coupons are all examples of ways to identify different buyers with different price sensitivities.

2. Purchase location. Dentists, opticians, and other professionals sometimes maintain separate offices, in different parts of the same city, or in different cities, which charge different prices based upon the economic and demographic makeup of each. Coca-Cola and other soft drinks sell at radically different prices depending upon where they are purchased, from discount retailers being the cheapest price per ounce and bars and vending machines being the most expensive. With the increasing use of the Internet to make purchases, being able to segment by location is becoming more difficult, but still feasible.

3. Time of purchase. Theaters offering midday matinees, restaurants charging cheaper prices for lunch than dinner, and cellular and utility companies offering pricing based on peak and off-peak times are all examples of segmenting by time of purchase.

4. Purchase quantity. Quantity discounts are usually based on volume, order size, step discounts, or two-part prices. Customers who buy in large volumes tend to be more price sensitive but less costly to service, and they have more incentive to shop for a cheaper price. Thus, they are offered volume discounts. Two-part pricing involves two separate charges to consume a single product. Night clubs charge a cover at the door as well as for drinks and food.

5. Product design. Offering different versions of a product or service is a very effective way to segment customers, either by adding more features, or taking some away.  Premium gasoline, for instance, only costs the oil companies approximately 4 cents more per gallon to refine but sells at the pump for anywhere from 10 to 15 cents more. Pricers call low-end products a flanking product, a signal to competitors to not start a price war in the higher-value segment.

6. Product bundling. Restaurants bundle food on the dinner menu as opposed to à la carte, usually at cheaper prices. Symphonies, theaters, and sports teams bundle a package of events into season tickets. IBM and Hewlett-Packard bundle hardware, software, and consulting services to increase the value of their respective offerings.

7. Tie-ins and metering. Before the Clayton Antitrust Act of 1914, tie-in sales were common. American Can, for instance, leased its canning machines with the requirement they be used to close only American’s cans. Since the passage of the Clayton Act, the courts have refused to accept tying agreements, except for service contracts where it is essential to maintain the performance and/or the reputation of a new product. While using the tying method with a contract may be illegal, opportunities still exist to use this strategy without a contract. For example, Rrazor blade manufacturers design unique razors requiring customers to purchase its blades for refill, and a certain toner must be used on various leased copy machines.

In addition to the above seven generic strategies, other characteristics that can be used to offer different options to the customer include:

• Guaranteed response time; start time; and turnaround time

• Access to specific talent within the firm

• Bundling education and training

• Inclusion of the firm’s newsletter, special events, seminars, and so forth

• Automatic upgrades or updates (relevant if changes in the law or technology are significant to your customer)

• Offering older technology to achieve a lower price

• Historical data conversion included or excluded

• Prior tax or other government compliance requirements (e.g., bundling in five year’s worth of prior tax return filings)

• A systems review, risk audit, or other Needs & Diagnostics your firm offers

• Attendance at the customer’s board meetings

• Intellectual Property ownership belongs to firm rather than customer (mostly for advertising agencies)

• Different risk-sharing methods based upon the outcome the customer achieves

• Offering warranties, guarantees, and other forms of insurance

• Varying payment terms

• Various financing options—purchase, lease, rent, etc.

Once again, the above is not an exhaustive list of criteria that a firm could use to offer different levels of options to its customers. The process of creating these options is one of creativity and innovation; there are literally an infinite number of combinations, limited only by a firm’s imagination. 

Listener Questions

On Twitter, BJ Lee asks about payment terms, e.g., half paid upfront and half on completion.

Payment terms are pricing, and must be considered upfront. The general rule is: the lower the price, the fast you get paid, including 100% pre-paid (similar to a hotel’s best internet rate being pre-paid, no cancellations).

Another question we received, via email, was from Bryce, a practicing CPA:

Ron and Ed,

Love the show. I have a situation that I'd love to hear your opinions on.

We work with many HVAC and Plumbing companies. Most of them do not do hourly pricing/billing. Instead, if you need a repair, they charge a flat diagnostic fee and, once they've found the source of the problem, give a flat price for fixing it upfront that the customer has to sign off on.

This seems to be a way of pricing you would advocate for.

However, many of them run into questions about 'fairness' when the job is shorter than the customer expected. The customer often looks up the price of the parts online, subtracts that from the price they paid and divides the remainder by how long it took the company to fix the problem, arriving at what they perceive as the hourly rate. This number seems too large to them and they complain of being overcharged. (I've attached a screenshot of a recent complaint like this.)

What are your thoughts on this? How would you go about responding to these complaints? How would you educate the customers ahead of time to avoid these complaints? Would you change how these companies are pricing?

This is partly an educational opportunity: we must simply reeducate the customers away from thinking time spent = value. The airlines, cellular companies, etc., have been able to reeducate customers, so we know it’s possible.

Also, managing customer expectations upfront could also be deployed. A great example (example to our VeraSage colleague, Dan Morris) is Waters Plumbing Heating and Air. The explanation of its Flat Rate Pricing plan is brilliant.

Notice how they discuss how the customer has choices: repair the item, replace the item, or upgrade the item. They also waive the diagnostic price if they are hired to do the job.

We believe another strategy is to offer the customer options on when the work will be done. We’ll do it today for $x, tomorrow for $X - $Y, or next week for $X - $Y - $Z.

Obviously, this will change with the nature of the job (emergency, etc.), but it’s another arrow in the quiver that could be used in the right circumstances.

Episode #64 - Famous Last Words

Clarence Darrow once said, "I have never killed anybody, but I have read many obituaries with delight!"

With that schadenfreude in mind, join us for a look at some of the funniest, poignant, and insightful last words spoken by famous, and infamous, people throughout history.

Last words allow us to catch a glimpse of the entire life that preceded it.

Hard to authenticate last words: witnesses distraught, or they are revised for posterity. For example:

“Tell them to go out and win one for the Gipper.”

This was never said on the death bed of “George Gip.” In fact, he was never known to his teammates as “the Gipper.”

Last Words—Famous People

“I’ve never felt better.” Douglas Fairbanks

“I wish I had drunk more champagne.” John Maynard Keynes

“Am I dying or is this my birthday?” Lady Astor (Churchill’s sparring partner).

“Don’t cut the ham too thin.” Fred Harvey, restaurateur, Harvey Houses across the west.

“That was a great game of golf, fellers.” Bing Crosby, just finished a round, fatal heart attack, 20 yards from the clubhouse

Berg, Morris (“Moe”) (1902-1972) American athlete, spy. Professional baseball player. Catcher for Boston Red Sox. Spied for U.S. during World War II. Died at age 70 of injuries sustained in a fall at his home. Last Words: “How did the Mets do today?” Spoken to his nurse.

“Goodbye, I’ll see you in heaven.” John D. Rockefeller, Sr. to Henry Ford, who replied, “You will if you get in.”

“I love your company, gentlemen, but I believe I must leave you to go to another world.” Adam Smith’s last words to his friends (on his gravesite in Edinburgh)

Hope, Leslie Townes (“Bob”) (1903-2003) British-born American comedian. Stage, screen, radio and television actor. Grew up in Cleveland, Ohio. Starred in popular radio and television programs. Won many awards including Emmy, Golden Globe, People’s Choice. Entertained American troops in World War II and subsequent conflicts. Died at age 100 at Toluca Lake, California.

Last Words: “Surprise me.” His response to his wife who asked where he wanted to be buried.

Last Words—Infamous People

“Well, folks, you’ll soon see a baked Appel.” George Appel, put to death, electric chair in 1928 for killing a NY policeman

Anastasia, Albert (1902-1957) American gangster. Executioner for Murder, Inc. Killed at age 55 in a gangland-style execution while sitting in a chair at the Park Sheraton Hotel barbershop in New York City.

Last Words: “A quick haircut.”

Burris, Gary (1956-1997) American murderer. Shot and killed a cab driver in Indianapolis in 1980. Executed at age 40 by lethal injection in Indiana.

Last Words: “Beam me up!”

Chubbuck, Christine (1944-1974) American television news reporter. Committed suicide by shooting herself in the head during a live telecast. Died 14 hours later at age 29 in a Sarasota, Florida, hospital.

Last Words: “In keeping with Channel 40’s policy of bringing you the latest in blood and guts, and in living color, we bring you another first, an attempted suicide.” Statement she read to viewers just before shooting herself.

Glass, Jimmy L. (1962?-1987) American murderer. Convicted of killing a couple in their home on Christmas Day. His case is notable in that he petitioned the U.S. Supreme Court claiming execution by electrocution is cruel and unusual punishment and a violation of the Eighth and Fourteenth Amendments to the U.S. Constitution. The Court ruled 5 to 4 that electrocution was an acceptable form of execution. Glass was executed by electric chair in Louisiana at age 25.

Last Words: “I’d rather be fishing.” Spoken while he was sitting in the electric chair waiting to die.

Grasso, Thomas J. (1962?-1995) American murderer. Convicted of double murder. Executed at age 32 by lethal injection in Oklahoma.

Last Words: “I did not get my Spaghetti-O’s; I got spaghetti. I want the press to know this.”

Harris, Robert Alton (1953-1992) American murderer. Convicted of the murder of two teenage boys. When he died in San Quentin’s gas chamber in 1992, he was the first person to be executed in California since 1967.

Last Words: “You can be a king or a street sweeper, but everyone dances with the grim reaper.” Recorded by Warden Daniel Vasquez.

French, James D. (1936?-1966) American Murderer. Claimed his constitutional rights were violated because he was forced to wear prison clothes and was surrounded by prison guards during his trial. Murdered his cellmate. Executed by electrocution in Oklahoma.

Last Words: “How about this for a headline? French fries.”

Last Words from the Titanic

“We have been together for 40 years, and we will not separate now.” Ida Straus, refusing lifeboat on Titanic to stay with husband Isidor, NY Dept store magnate.

Astor, John Jacob, IV (1864-1912) American businessman. Great-grandson of John Jacob Astor I. Served in the Spanish-American War. Victim ofTitanic disaster. His pregnant wife Madeline survived. Eyewitness reported that Astor grabbed onto the sides of a raft. When his feet and hands froze he let go and drowned at age 47. Different

Last Words: “The ladies have to go first—Get into the lifeboat to please me—Good-bye, dearie. I’ll see you later.” Spoken to his wife Madeline.

Harris, Henry B. (1866-1912) American theatrical producer, theater owner and operator. Victim of Titanic disaster. Produced more than 60 shows on Broadway. On the Titanic, Harris went to the side of his wife before the lifeboat was lowered away. Upon hearing “Women first” shouted to him by one of the ship’s officers, Harris made his last known statement.

Last Words: “All right. Good-bye, my dear.” He hugged and kissed his wife goodbye then climbed back to the deck of the Titanic where he drowned.

Episode #63 - Entrepreneur Heaven - October 2015

On this show, Ed and I profiled four entrepreneurs:

1. George Eastman        

2. James Cash Penney

3. The Wright Brothers

4. Anita Roddick

George Eastman

Eastman (July 12, 1854 – March 14, 1932) was an American innovator and entrepreneur who founded the Eastman Kodak Company and popularized the use of roll film, helping to bring photography to the mainstream.

He was a major philanthropist, establishing the Eastman School of Music, and schools of dentistry and medicine at the University of Rochester and in London.  

1976 Kodak = 90% of all film sold in USA, 85% of all cameras. The irony is Kodak invented digital camera!

January 2012 Kodak filed bankruptcy.

Make the Camera as Convenient as the Pencil, 1920 Essay

“You press the button and we do the rest.”

“What we have made an advertised and sold has always been the embodiment of an idea rather than a piece of photographic apparatus.”

He was a pessimist at heart: “Tell me the worst you know,” his approach to getting at problems.

He liked the letter K, strong, incisive. Start and end with K: Kodak.

First Kodak on market July, 1888—10 years after start of business.

100 Exposures, 2.5” picture diameter, $25 = $700 today. New roll = $10, but you had to develop pictures with Kodak.

Eastman Kodak lost major antitrust suit: “he did not understand the antitrust laws and did not know anyone who did.”

He did believe business was war, but no trace of cruelty (unlike Charles Revson).

1925, final year of active engagement, told employees:

“What we do in our working hours determines what we have in the world. What we do in our play hours determines what we are.

In his final two years, Eastman was in intense pain caused by a disorder affecting his spine.

On March 14, 1932, Eastman shot himself in the heart, leaving a note which read, "To my friends: my work is done. Why wait?"

James Cash Penney

James Cash "J.C." Penney, Jr. (September 16, 1875 – February 12, 1971) 1902, founded the J. C. Penney stores.

First venture: butcher shop failed.

He refused to supply meat to hotels that sold liquor.

Penney’s father was a Primitive Baptist preacher, Missouri farmer with 12 children.

Insisted his employees never touch tobacco/alcohol.

Why a Buyer’s Market Hasn’t Changed Our Plans, 1921 essay

Store managers had to own 1/3 of the store.

In 1918, he personally interviewed 5,000, hired 100

Centralized bookkeeping, cash receipts @ Mother Store. Easier to teach a man merchandising than finance

After the 1929 stock crash, Penney lost virtually all his personal wealth, and borrowed against his life insurance policies to help the company meet its payroll.

The financial setbacks took a toll on his health. Penney checked himself into the Battle Creek Sanitarium, where he was treated.

In 1940, during a visit to a store in Des Moines, Iowa, he trained a young Sam Walton on how to wrap packages with a minimal amount of paper and ribbon.

He remained as chairman of the board until 1946, and after that as honorary chairman until his death in 1971.

The Wright Brothers

Born:

• Orville: August 19, 1871, Dayton, Ohio

• Wilbur: April 16, 1867, Millville, Indiana

Died:

• Orville: January 30, 1948 (aged 76), Dayton

• Wilbur: May 30, 1912 (aged 45), Dayton

Education: Orville 3 years high school; Wilbur 4 years

The Wright Brothers, David McCullough. This is a fantastic, short volume on their lives, extremely well-written.

Fascination started with toy helicopter brought home by father, Bishop Milton Wright.

Orville was more cheerful, optimistic, mechanical ingenuity.

Lifelong bachelors, Republicans. Two older brothers married, had families.

Spring 1893 opened Wright Cycle Exchange, earned $2-3K/year ($55K today).

Answer to inquiry from Wilbur to US Weather Bureau in Washington, DC, about prevailing winds around country: Outer banks of North Carolina, Kitty Hawk, 700 miles from Dayton.

December 17, 1903: flipped a coin to see who’d fly. Wilbur won. Four flights that day.

May 1912 Wilbur typhoid fever, died May 30 at 45.

Orville flew 1910 at 80MPH, had to give up flying in 1918.

July 20, 1969, Neil Armstrong carried small swatch of the muslin from a wing of the 1903 Flyer.

“The best dividends on the labor invested have invariably come from seeking more knowledge rather than more power.”

Anita Roddick

23 October 1942 – 10 September 2007

Founder of The Body Shop, a cosmetics company producing and retailing natural beauty products that shaped ethical consumerism.

Ron read Body and Soul, 1991, on Paul Dunn’s recommendation.

The company was one of the first to prohibit the use of ingredients tested on animals and one of the first to promote fair trade with third world countries.

In 2003, Queen Elizabeth II appointed Roddick a Dame Commander of the Order of the British Empire.

In 2004, Roddick was diagnosed with liver cirrhosis due to long-standing hepatitis C.

By 2004, the Body Shop had 1980 stores, serving over 77 million customers throughout the world. It was voted the second most trusted brand in the United Kingdom, and 28th top brand in the world.

On 17 March 2006, L'Oréal purchased Body Shop for £652 million. This caused controversy, because L'Oréal is involved in animal testing.

Four-Letter Words! (essay), 1998

Love, give, care, feel, hope, fair, soul, and true all found in my work (my all-time favorite word).

We can bring our heart to work.

For me, the workplace is an incubator for the human spirit.

Enthusiasm cannot be managed; it cannot be taught.

Sign above her office door: “Department of the Future”

Allowed ½ day per month for community service.

Merged politics and business—activism must be incorporated.

Quotes:

If you think you're too small to have an impact, try going to bed with a mosquito.

If you do things well, do them better. Be daring, be first, be different, be just.

I want to work for a company that contributes to and is part of the community. I want something not just to invest in. I want something to believe in.

Episode #62 - Free-Rider Friday - Septemeber 2015

Ed's Topics

The song "Happy Birthday" is now in the public domain, and you get to hear Ed sing happy birthday to Ron royalty free!

Price Gouging for Drugs

Turing Pharmaceuticals and its CEO Martin Shkreli clearly made a serious mistake in pricing, but chalking it up to gouging and greed missed a large part of the story. 

The Freedom Report, Fraser Institute

The index published in Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, free- dom to enter markets and compete, and security of the person and privately owned proper

Ron's Topics

Airplane Space is a Human Right?

The Washington Post, September 17, 2015: "Airplanes' space wars are shifting to the human rights front, by Christopher Elliott.

KPMG Australia: Disruptive Innovation?

Hat tip to our good friend Brent Uken at EY for passing this along.

"KPMG Australia disrupts itself with online marketplace for idle staff hours KPMG has launched a new online marketplace to offer the down-time of staff to clients for short term jobs at a discount. Like Airtasker.com or Freelancer.com – but for KPMG clients and staff only. 

Martin Sheppard, KPMG Australia's lead brand and innovation partner, likens KPMG Marketplace to an airline maximising "yield" by selling last-minute seats cheap. The idea grew from a response to an in-house ideas competition. "Relationship partners" don't get to sign off on KPMG Marketplace assignments bought by "their" clients. A start-up built the platform, not a big IT house. 

Some partners bristled at the idea of discounting charge-out rates. But the marketplace meets more business needs than optimising revenue from highly paid workers. Traditional professional services firms like KPMG don't turn a dollar of revenue online. That leaves them ill-equipped to exploit the boom in use of contingent labour by pared-to-the-bone clients struggling with peak workloads. 

KPMG Marketplace can also be used to sell other services. KPMG generated ideas from its staff via an internal competition, dubbed iTiger (i is for innovation). The idea that became KPMG Marketplace started as an idea for overworked KPMG staff to farm out batches of work internally. Others gave it a client focus, and KPMG Marketplace was born. Gestation was 18 months from "lightbulb moment" to launch. 

KPMG Marketplace works like this: Clients struggling with short-term peak seasons or workloads submit assignments online – for example, in foreign exchange reconciliation, financial modelling, data or business process analysis or project administration. They might get three CVs back – and choose one, who comes to work for them for up to 10 days. Longer secondments – say for a stand-in chief financial officer – will continue to be dealt with by the traditional process of speaking with a partner and signing an engagement letter setting out terms and conditions. Engagement online via KPMG Marketplace is more efficient, which explains part of the discount."

We discuss why we believe this is a flawed strategy for a so-called professional knowledge firm (and my Alma Mater).

Question & Shout Outs

Tim Rodman (@TimRodman) asks: If using timesheets means you are "a practicing Marxist", how bad would a Bernie Sanders win be for the @VeraSage mission?

To BJ Lee (@bj_lee_), a vocal coach, who asked us about pricing. We suggested he offer options, which he did, and the customer selected the highest priced option. Congratulations, BJ!

Thanks for Justin Royer (@justin_royer) for letting Ron know he will have to get his check book out to purchase the Apple car, scheduled to be released in 2019. Read about it here.

Episode #61 - Pricing on Purpose: Price Sensitivity Factors

The following is excerpted from Chapter 14 of Ron’s book, Pricing on Purpose: Creating and Capturing Value.

Price Elasticity vs. Price Sensitivity

Certainly mathematics has its place in pricing, allowing us to test, predict, and determine elasticity. Yet, since pricing is an art more than a science, judgments are also vitally important and cannot be substituted with mathematical precision.

Even if a company possesses a precise elasticity calculation it knows is accurate, it would only be part of the puzzle of pricing. Since elasticity normally lumps “consumers” together, it does not help us in segmenting customers into different value propositions, thereby offering individuals different bundles in order to maximize profit.

Ten Factors of Price Sensitivity

In order to assist those who are in charge of Pricing On Purpose in ascertaining and judging price sensitivity, the following ten factors should be examined to see which apply to your particular customer circumstances.

Thomas Nagle identifies ten factors affecting price sensitivity in his book, The Strategy and Tactics of Pricing.

1. Perceived Substitutes Effect

This effect states that buyers are more price sensitive the higher the product’s price relative to its perceived substitutes. New customers to a market may be unaware of substitutes, and thus pay higher prices than more experienced buyers. Restaurants in resort areas face less pressure to compete based on price (which locals may describe as “tourist traps”).

Branding can also overcome, to a certain extent, the substitute effect. Woolite, for example, has maintained a relatively expensive price because it positions itself as an alternative to dry cleaning, not a substitute to regular laundry detergent.

Customers have a reference price when there are many substitutes, and as long as the offering is within that range—sometimes referred to as a zone of indifference—it will be considered acceptable, the point being your marketing can influence which products customers will compare yours with, possibly pushing up the price they are willing to pay.

2. Unique Value Effect

Buyers are less price sensitive the more they value the unique attributes of the offering from competing products. This is precisely why marketers expend so much energy and creativity trying to differentiate their offering from that of their competitors.

Heinz ketchup, for example, developed a secret formula for making its product thicker and was able to increase its market share from 27 to 48 percent while maintaining a 15 percent wholesale price premium.

Auction houses rely on the unique value effect in order to command the prices they do among their bidders. Rare artifacts from the John F. Kennedy estate are known as “positional” or “expressive” goods, since the people who purchase them are trying to position themselves in society, or express who or what they are (art collectors, for example).

3. Switching Cost Effect

Buyers will be less price sensitive the higher the costs (monetary and nonmonetary) of switching vendors. Airlines that have a fleet of Boeing airplanes may be reluctant to switch to Airbus because of the enormous investment they have in their pilots, flight crews, parts inventory, and the mechanics of operating a certain plane.

Many people are unwilling to give up certain software products due to the learning and familiarity they have with their existing product. Personal relationships are most susceptible to this type of perceived cost, due to the emotional investment the customer has made in the relationship. Childcare providers, doctors, lawyers, veterinarians, and accountants all can benefit from this effect.

4. Difficult Comparison Effect

Customers are less price sensitive with a known or reputable supplier when they have difficulty in comparing alternatives. People eat at McDonald’s, continue to use AT&T, lodge at Marriott and shop at JC Penny because they are familiar with these offerings and perceive them to be less risky than unknown alternatives.

Stockbrokers price based on different criteria (shares of stock traded, or value of shares traded), making it difficult for the customer to compare one with the other. Cellular phone companies employ this strategy by offering different features among their myriad calling plans, making it very difficult to compare one company’s offering to another.

5. Price Quality Effect

Buyers are less sensitive to a product’s price to the extent a higher price signals better quality. These products can include image products, exclusive products, and products without any other cues as to their relative quality.

It is said that only 15% of Rolls Royce customers ask about price before purchasing. These types of prestige products are an important form of marketing. Witness designer clothing and accessories, along with American Express’ Gold, Platinum, and Black credit cards, which command enormous premiums over alternative cards.

Many customers still have a common visceral reaction that high price equates to high value (and quality). Marketers have discovered that utilizing a high price for new products is quite effective for signaling quality to the marketplace. Other marketing research has shown that while discounting familiar brands can increase sales, the same strategy for unknown brands can actually reduce sales.

6. Expenditure Effect

Buyers are more price sensitive when the expenditure is larger, either in dollar terms or as a percentage of household income. A one-office accounting firm may not pay much attention to the price of paper clips, but an international firm that buys in large quantities will.

Business purchasers look at the total amount of the purchase, while households will compare the expenditure to total income. Many people will not expend much energy shopping for the lowest price of soft drinks, but they will put more effort into searching for an automobile or a home. Higher-income customers often will pay higher prices because they do not have the time to shop as thoroughly as low-income individuals.

7. End-benefit Effect

This effect is especially important when selling to other businesses. What is the end-benefit they are seeking? Is it cost minimization, maximum output, quality improvement? The fulfillment of the end-benefit is often gauged by its share of the total cost.

For instance, steel suppliers selling to auto manufacturers know that the price of the steel comprises a large component of the cost of the car; on the other hand, when steel is sold to a luggage manufacturer, the steel cost is relatively minimal compared to the other material used.

The end-benefit effect is also psychological. Think of going out for a romantic anniversary dinner and paying with a two-for-one coupon. Most people view price shopping as tacky when the purchase involves something emotional. Wedding florists, caterers, and bands certainly understand this principle.

The larger the end-benefit, the less price sensitive the buyer. Think of the Michelin tire ads showing a picture of a baby in diapers next to its radial tire proclaiming, “Michelin. Because so much is riding on your tires.”

8. Shared-cost Effect

When you spend someone else’s money on yourself, you are not prone to be price conscious. This is one reason airlines, hotels, and rental car companies can all price discriminate against business travelers, because most of them are not paying their own way.

This also explains some of the success of the frequent flyer and other reward programs. Many business travelers value these rewards and will not accept alternative offerings, especially since they are reimbursed anyway. Also, publications, educational seminars, and other business expenses are tax deductible, and this also reduces the buyer’s price sensitivity relating to various business expenses.

9. Fairness Effect

Notions of fairness can certainly affect customers, even when they are not economically (or mathematically) rational. If a gas station sells gas for $2.30 per gallon and gives a $0.10 discount if the buyer pays with cash, and another gas station offers the same gallon at $2.20 but charges a $0.10 surcharge if the customer pays with a credit card, which station will sell more gas to credit card users?

The economic cost is exactly the same, but most people will psychologically prefer to deal with the first station and not the second because there appears to be something inherently unfair about being assessed a surcharge.

10. Inventory Effect

The ability of buyers to carry an inventory also affects their price sensitivity. Amateur cooks with large pantries will stock up on a good deal, but a single person living in a small apartment will not. The perishability of the item in question is another factor to consider.

Centralized vs. Decentralized Pricing

We discussed the debate between having pricing centralized versus giving pricing authority to the field. We are advocates of a centralized pricing function, since someone needs to own this function, study it, and turn it into a core compentency.

See our show from February 13, 2015, Who’s In Charge of Value?, for our discussion of the role of the Chief Value Officer.

Episode #60 - Interview with George Gilder

Includes our conversation during commercial breaks which are not heard in the audio above.

From George Gilder's appearance on Uncommon Knowledge (click for interview)

George Gilder is the author of 18 books: Bitcoin & Gold: Information Theory of Money (forthcoming); Knowledge & Power: The Information Theory of Capitalism; Men & Marriage; Wealth & Poverty (new edition 2012); The Spirit of Enterprise; Life After Television, Microcosm, Telecosm, The Silicon Eye, and The Israel Test.

Microcosm and Telecosm both listed among the era's top 10 technology books by VentureBeat in 2012 and Microcosm ranked among the era's top two technology books by Wired. Knowledge & Power was libertarian "book of the year" at FreedomFest 2013. George is a contributor to Forbes, National Review, and the Wall Street Journal.

He is also a venture capitalist (angel) specializing in U.S. technology companies. He wrote and edited the Gilder Technology Report, is number 27 Management Guru in Clayton Christensen's Top 50, and is founder and fellow of the Discovery Institute, and was the most quoted living author by President Ronald Reagan.

His specialties: Long distance running, chiefly trail and hill races, and Nordic skiing.

Why Gilder is Ron’s Mentor

Ron’s Dad read the Playboy interview with George Gilder in August 1981, and insisted he read Wealth & Poverty.

The rest is history. You can read more about this here.

I wrote Mind Over Matter: Why Intellectual Capital is the Chief Source of Wealth, inspired by Gilder, which he included in the bibliography to The Israel Test, and quoted from it in Knowledge & Power (page 145).

We discussed with George some of his books, and his profound speech before the Vatican in 1997, The Soul of Silicon.

Below are some excerpts from these works, most of which were not covered on the show.

Ed and Ron recommend you read anything by Gilder.

Wealth & Poverty, 1981 [updated 2012]

This book grew out of Gilder’s Visible Man book, which was ahead of its time on welfare reform.

Gilder makes the moral case for capitalism, as well as supply-side economics. Ronald Reagan was so impressed with Wealth & Poverty, he gave a copy to each of his Cabinet members.

Gilder went on to become Reagan’s most quoted living author.

Joshua Gilder, George’s cousin, was the main speechwriter on Ronald Reagan’s Moscow State University speech, which we use a clip from to open The Soul of Enterprise show, and discussed in our book, The Soul of Enterprise: Dialogues on Business in the Knowledge Economy. 

One of the key insights in Wealth & Poverty: Greed leads, as by an invisible hand, to an ever-expanding welfare state.

Ayn Rand attacked Gilder, in her last speech in 1982, “The Age of Mediocrity.”

George’s response: “Her atheism blinded her to the spiritual dimensions of capitalism.” Indeed.

The Spirit of Enterprise, 1984 [updated 1992]

Entrepreneurs accelerate creative destruction. Economists measure the destruction and doubt the creativity.

“It is the spirit of enterprise—the mysterious workings of creativity and faith—that can surmount all the material scarcities of human life.”

“Entrepreneurship can no more be reduced to a model of money and markets than poetry can be explained by the rules of grammar and vocabulary.”

“Capitalism offers nothing but frustrations and rebuffs to those who wish—because of IQ, birth, credentials—to get without giving, to take without risking, to profit without sacrifice, to be exalted without humbling themselves to understand others and meet their needs.”

The Israel Test, 2009

The Israel test is a moral challenge, and can be summarized by a few questions:

1. What is your attitude toward people who excel you in the creation of wealth or in other accomplishment?

2. Do you aspire to their excellence, or do you seethe at it?

3. Do you admire and celebrate exceptional achievement, or do you impugn it and seek to tear it down?

Israel’s per-capita innovation dwarfs all nations, so much so that American technology could display the emblem: Israel Inside.

Golden Rule of Capitalism: That the good fortune of others is also one’s own. No one can be rich alone.

Envy of excellence leads to perdition, the love of it leads to the light.

What matters in human accomplishment not average performance, but exceptional performance. Charles Murray’s book, Human Accomplishment, documents extraordinary accomplishments have been made by 4,002 people from 800 B.C. to 1950.

The Jewish world population is approximately .3%, yet they comprise 25% of notable accomplishments. Inequality is the answer, not the problem.

Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing Our World, 2013 

The key issue in economics is not aligning incentives with some public good but aligning knowledge with power.

The key force of economic advance is the entrepreneur, who creates new goods, services, business plans and projects.

Proposition: Capitalism is not chiefly an incentive system but an information system.

It lacks a science of disorder and randomness. Until now.

Gilder uses Claude Shannon’s information theory to explain innovation and creativity. Essentially all information is surprise, according to Shannon.

Creativity always takes us by surprise, otherwise we wouldn’t need it, and socialism would work

This is a new way to think about human creativity, not simply invisible hands responding to incentives, but visible hands creating entire new markets.

Information wants a low-entropy carrier to provide demand and predictability for high-entropy signals of supply and surprise.

Gilder’s examples of Low-entropy carriers: rule law, maintenance of order, property rights, reliable regulation, light taxation, transparency, monetary stability, and family life.

Excessive Government regulation creates noise in the channel, distorting the signals of markets, inhibiting learning, growth, discovery, surprise, and thus wealth.

Expansion of wealth happens through learning and discovery through falsifiable experiments.

Knowledge is about the past, entrepreneurship is about the future.

One of the books key insights:

•          Wealth = Knowledge

•          Growth = Learning  

Capitalism is more about ideas than incentives. It’s a “noosphere” (mind-based system) and can revive as quickly as minds and policies can change.

Adam Smith was to assume that the entrepreneur was the tool of the market rather than its creator. This is the original sin of demand-side economics.

“The grander vision of economics fails because it subordinates a higher and more complex level of activity—the creation of value—to a lower level, its measurement and exchange.” 

The Soul of Silicon, May 1, 1997

We believe this is the most profound moral defense of capitalism ever written.

The 21st Century Case for Gold: A New Information Theory of Money, 2015

Click for access to the book

Economist Richard Thaler: “Why tie to gold? Why not 1982 Bordeaux?”

In this monograph, Gilder argues Milton Friedman was wrong on monetary policy. Floating currencies have been an utter. Failure.

Steve Forbes says that floating the currency is as senseless as floating the clock. A measuring stick cannot be part of what it measures, which is what makes time a perfect external measurement unit.

Gilder’s main argument is that while time is not money, money is time. The source of the value of money is time:

• As economy grows, only time remains scarce

• Money succeeds not because it measures value but because it obviates the need to perform impossible calculations Value > Price (consumer surplus)

• Money facilitates exchange, making it an information system

• Austrian subjective theory of value functions within objective time

• Money isn’t the content, it’s the carrier of transactions

Gilder replaces the quantitiy theory of money with an information theory of money.

The old monetary equation: Money supply x Velocity = GDP, always held Velocity constant (this made it a theory, otherwise it would be just an identity equation, like accounting).

But velocity is not a constant 1.7, as Friedman assumed—it has varied from 3.1 to 12. Gilder defines velocity as freedom.

He further argues that if Government guarantees investments, mortgages, banks and auto companies to big to fail, then no learning will take place and you’ll destroy wealth.

Bitcoin not a competitor to gold, but a gold inspired standard for the Internet

Outsider trading scandal—the government doesn’t want you to buy anything you know—buy the lottery where no one knows more than you!

When a company goes public, its information goes private:

• Berkshire/GE, private equity, and venture capitalists are all really inside traders

• Venture capitalists have the most valuable money—less than .2%, yet they have seeded companies that comprise some 21% of GDP, 65% of market          capitalization, and 17% of jobs created

Speaking of George Gilder, by Frank Gregorsky, 1988

This is an excellent compendium of Gilder’s thinking on a wide-range of topics. Well worth reading.

Thank you, George, for appearing on The Soul of Enterprise, it was an honor and privilege!

Episode #59 - Best Business Books

Ron's Books

The Future of Management, Gary Hamel (2007) 

Your company is being managed by a small coterie of long-departed theorists who invented the rules and conventions of ‘modern’ management back in the early days of the 20th century. Management is out of date. Like the combustion engine, it’s a technology that has largely stopped evolving, and that’s not good.

Your company has 21st-century, Internet-enabled business processes, mid-20th century management processes, all built atop 19th-century management principles.

Types of innovation:

• Management Innovation

• Strategic Innovation

• Product/Service Innovation

• Operational Innovation 

Management Ideas 1900—2000 (most born after Civil War!)

• Scientific management

• Cost accounting and variance analysis

• The commercial research laboratory

• ROI analysis and capital budgeting

• Brand management

• Large-scale project management

• Divisionalization

• Leadership development

• Industry consortia

• Radical decentralization (self-organization)

• Formalized strategic analysis

• Employee-driven problem solving

Made organizations more efficient, not more ethical

Our organizations are less human than the people in them—people are amazingly adaptable and creative, our organizations are not.

Put efficiency ahead of every goal, since most management was invented to solve the problem of inefficiency.

1917 Henri Fayol, early management theorist, described the work of management as, "Planning, organizing, commanding, coordinating, and controlling." Sounds familiar, no?

From Hamel again, “Today the most valuable human capabilities are precisely those that are the least manageable. While the tools of management can compel people to be obedient and diligent, they can’t make them creative and committed.”

Management Innovation is defined as anything that substantially alters the way in which the work of management is carried out, or significantly modifies organizational forms, and, by so doing, advances organizational goals.

Management Innovation yields a competitive advantage if:

1. Is a novel management principal, challenges long-standing orthodoxy

2. Is systemic, encompassing a range of processes and methods

3. Is part of an ongoing program of rapid-fire invention where progress compounds over time

Most managers find it easier to acknowledge the merits of a disruptive business model than to abandon the core tenets of their bedrock management beliefs. "What management practice or behavior does most to drive really great people out of our company? Or, which of our management practices does the most to destroy employee initiative?"

Examples of Management Innovations

• Results Only Work Environment

• Prediction markets

• Internet, all periphery and no center

• Knowledge Worker

• Strategic Pricing (C-Suite)

• Our Firm of the Future (not just a business model change!!) It’s an End, not just a means. It’s a Management Innovation as well:

  • Intellectual Capital leverage, not time leverage

  • Effectiveness over efficiency, efficaciousness

  • Value Pricing, not hourly billing

  • No timesheets

  • After Action Reviews

Positive deviants (management mutants), examples of companies that innovate management itself

• Toyota (USA automakers thought it was  their paternalistic culture; then Toyota opened plants in USA and got same results)

• Whole Foods

• GoreTex

• Google

• Semco

• Morningstar

• Linux

The real reason it takes a crisis to provoke big change:  too much authority has been vested in too few people.

A Class with Drucker: The Lost Lessons of the World’s Greatest Management Teacher, William A. Cohen, PhD, 2008

William Cohen was Drucker’s first Graduate PhD Student (1975-1979), Claremont Graduate University.

Drucker called himself a social ecologist in that he believed the human condition could be advanced by more effective management and more ethical leadership.

Some of Drucker’s Lessons

What everybody knows is frequently wrong. For example, the demise of Tylenol (Johnson & Johnson) was predicted, but failed to occur.

If you keep doing what worked in the past you’re going to fail. Organizations  should make revolutionary change itself, even though it means obsolescing products of its current and past success

GE’s Jack Welch, CEO 1981 $12B value. 25x that when he left

            Drucker’s two questions:

1.    If you weren’t already in the business, would you enter it today?

2.    What are you going to do about it?

Approach problems with your ignorance—not your experience.

Ignorance is the most important component for helping others to solve any problem in any industry.

Henry Kaiser’s Liberty Ships, built 1500 in 2/3 the time and ¼ cost! He knew nothing about ship building.

Develop expertise outside your field to be an effective manager.

Outstanding performance is inconsistent with fear of failure.

The objective of marketing is to make selling unnecessary. Selling and marketing are neither synonymous nor complementary. One could consider them adversarial in some cases. There is no doubt that if marketing were done perfectly, selling, in the actual sense of the word, would be unnecessary. Marketing is not a business function, like manufacturing, because it permeated every aspect of the business. 

You can’t predict the future, but you can create it.

A Model organization that Drucker Greatly admired. The Army trains and develops more leaders, with a lower casualty rate. George Patton: “A pint of sweat in training is worth a gallon of blood in combat." Training is Army’s most important investments, not an expense.

How to motivate the knowledge worker

• Theory X/Y not the answer

• There is a responsible manager in authority

• Workers are led, not managed

• Workplace is participatory, but not “free-wheeling”

• Workers are not motivated by money alone

• Each worker is motivated differently, according to the   individual and the situation

• Workers can leave = volunteers, treated with respect

• Volunteers don’t need contracts, they need covenants

Drucker’s principles of self-development

Not up to others after we leave home/school—up to ourselves!

• Reading

• Writing

• Listening

• Teaching

Ed’s Books

A Failure of Nerve, Edward H. Friedman

Ed opened by quoting from the Preface of Friedman's book, here is blog post about the quote. TCMOOTITATIWWWPWAUTC

In short, Friedman's belief is that leaders do not need to be empathetic, but self differentiated and compassionate. They need to be step down transformers who seek to lower the level of anxiety around them, by simply self regulating their own anxiety. 

As an example of this, Ed cited the work of Captain Chesley Sullenberger of the ill fated, but not deadly, Flight 1549. When asked by Katie Couric if as any point he prayed, he replied, “I would imagine somebody in back was taking care of that for me while I was flying the airplane.”

Friedman also points out that data in business is like alcohol or other additive drug. It can be used in moderation, but many leaders are ensnared in its addictive properties and become dependent on it.

Wealth and Poverty, George Gilder (1981 Edition)

In addition to changing the lives of both Ron and Ed, this book influenced Ronald Reagan to implement supply-side economics during his first administration. 

Ed made two basic points about the book. First, that Keynesians, according to Gilder, have "hopelessly and irrevocably" confused cause and effect. Their mantra on demand causing supply is akin to saying demand or need and it will be given unto you.

Second, supply side economics is not about "trickle down." This notion was used to spurn the ideas of the book by its opponents, but in truth, Gilder makes a completely different point. He is saying that in order to receive one must first give, create or give and it will be given unto you. 

In other words if you want a meal/car/house, you don't go about demanding a house, you first give, in most cases to your employer who in turn trades money for your talent. You then can use that money to buy a meal/car/house. 

Note: there has been an update to this book, in 2012, but Ed was discussing the 1981 edition.

Episode #58 - Free-Rider Friday - August 2015

Ed's Topics

More misunderstanding of price theory.

Another example of how the belief that price is exclusively a function of costs: Why Starbucks' Prices Went Up, as Coffee Beans Got Cheaper (New York Times).

Big Brother Boss

Also from the Times: Data crunching coming your way so your boss can manage your time. Great, sign my up for this... NOT!

Froggy Went A-Courtin' But Lady Frogs Chose Second-best Guy Instead (NPR)

Thanks for our listener Mike Natolli for sending the link to this one. The framing effect (or decoy effect, if you prefer) is part of the reptilian brain, not only in retiles, but in we humans as well. 

Apple working on a car.

Ron needs to start saving his money as he is on record as saying that if Apple made a car, he would buy it.

More abuse of intellectual property law.

LMFAO, The Band, Sends Cease And Desist Over LMFAO, The Beer

Ron's Topics

"What If Stalin Had Computers?" (New Republic, August 18, 2015). 

Postcapitalism: A Guide to Our Future, by Paul Mason.

Postcapitalism argues that we are on the brink of a change so big and so profound that this time capitalism itself, the immensely complex system within which entire societies function, will mutate into something wholly new.

At the heart of this change is information technology, a revolution that is driven by capitalism but, with its tendency to push the value of much of what we make toward zero, has the potential to destroy an economy based on markets, wages, and private ownership.

The Black Book of Communism: Crimes, Terror, Repression, 1999:

French scholars tally up the deaths under communism:

• USSR = 20 million

• China = 65 million

• Vietnam = 1 million

• North Korea = 2 million

• Cambodia = 2 million

• Eastern Europe = 1 million

• Latin America = 150,000

• Africa = 1.7 million

• Afghanistan = 1.5 million

• Communists not in power = 10,000

• Total = Nearly 100 million.

There is no good way to implement a bad idea!

Dan Price, CEO, Gravity Payments

120 employees, paid each $70,000 (“Happiness Salary”). He sank last year’s profits $2.2M into higher wages and slashed his salary $1M to $70,000. His two best employees quit, as well as customers who feared less service from non-motivated employees.

His brother Lucas, co-founder in 2004, filed a lawsuit, accusing Dan of paying too high a salary to himself.

This illustrates the perils of "Bubble sheet research," which attempts to measure "happiness" and its link to income.

Distributive fairness:

1.   Equality (everyone gets the same).

2.   Proportionality (all receive rewards in proportion to their inputs).

“There is nothing more unequal than the equal treatment of unequal people.” ― Thomas Jefferson

At least he used his own resources. Imagine a $70,000 federal minimum wage?

Dodd-Frank Rule

SEC requires companies to reveal median pay and compare to CEO pay, starting in 2017, passed 3-2 on party lines on August 5th.

Multinationals can exclude 5% of foreign employees.

Lobbying trade unions believe this rule will shame bosses into paying themselves less and workers more. “It will allow investors to see," says Commissioner Kara Stein, "how a company manages human capital.”

But labor unions don’t have a history of caring about protecting investors!

An investment bank with high pay can look more egalitarian than a cleaning company with low paid workers and a moderately paid CEO.

This rule hijacks the SEC for political purposes, unrelated to SEC’s mission, which is:

To protect investors, maintain fair, orderly, and efficient          markets, and facilitate capital formation.

A company’s pay ratio is not material information! Moreover, the ratio has no bearing on whether or not the CEO's pay is appropriate. Executive pay is already disclosed under current regulations.

Companies will try to goose the ratio from the other direction, by shedding its lowest-paid employees (utilizing contractors and temps).

Cost of implementation: $1.3 Billion upfront, $526million afterwards.

One way of course to "fix" the appearance of a "bad" ratio would be outsourcing, but as Ed points out, another court ruling in California is trying to stop that from happening.

Uber in Las Vegas

Surge pricing = bad when Uber does it.

Congestion pricing when government does it, celebrated by urban planning policy wonks.

North Korea

On August 15th, it turned clocks back ½ hour to establish its own time zone and reverse the imposition of Tokyo time in 1912.

It established the "Juche calendar," from 1912, the birth of Kim Il Sung.

Hugo Chavez turned clock back ½ hour in 2007 (a fairer distribution of sunrise?).

What is it with dictators and time?

Episode #57 - The Experts Speak

On this episode, Ed and I discussed the book, The Experts Speak: The Definitive Compendium of Authoritative Misinformation, Christopher Cerf and Victor Navasky, expanded and revised edition, 1998.

The two authors are interesting—a National Lampoon Contributing Editor, and a  Sesame Street contributor (Cerf) and editorial director of The Nation, Navasky.

They created The Institute of Expertology, a group of scholars who record sayings from experts for posterity.

The book describes three kinds of experts: past, present and future. Also, three type of expertise: descriptive, prescriptive and predictive.

Richard Feynman reminds us, “Science is the belief in the ignorance of experts.”

Samples from the “Experts”

Politics

WSJ Editorial, “Bill Clinton will lose to any Republican who doesn’t drool on stage.”

“FDR will be a one-term president.” Mark Sullivan, New York Herald Tribune columnist and political commentator, 1935.

"The race will not be close at all. Landon will be overwhelmingly elected and I’ll state my reputation as a prophet on it." William Randolph Hearst, August 1936. [FDR in 1936 won 523 electoral votes to Alf Landon’s 8, 11M vote margin].

"And while I'm talking to mothers and fathers, I give you one more insurance. I have said this before but I will say it again and again and again: Your boys are not going to be sent into any foreign wars.” FDR October 30, 1940.

"It is highly unlikely that an airplane or a fleet of them could ever think of fleet of navy vessels under battle conditions.” FDR as Secretary of the Navy 1922.

"I have no political ambitions for myself or my children.” Joseph P Kennedy.

---

"I favor the civil rights act of 1964 and it must be enforced at gunpoint if necessary.”1965.

"I would have voted against the civil rights act of 1964.” 1968. 

Both Ronald Reagan.

---

"There are only two ways to reduce the budget deficit. We must do both.” April 1987.

"There are only three ways to reduce the budget deficit. We must do all three.” September 1987.

"There are only four ways to reduce the federal budget deficit. We must do all four.” August 1988.

All Michael Dukakis.

---

Economics

“Stocks have reached what looks like a permanently high plateau.” Irving Fisher, Yale Economist, October 17, 1929 [one week prior to the $6 billion stock market crash].

“1930 will be a splendid employment year.” US Dept of Labor, New Year’s Forecast, December 1929.

“In all likelihood world inflation is over.” Managing Director, IMF, 1959.

Hitler

“There is no doubt that he [Hitler] has become a much more quiet, more mature and thoughtful individual during his imprisonment than he was before and does not contemplate acting against existing authority.” Otto Leybold (Warden of Landsberg Prison), letter to the Bavarian Minister of Justice, Sept 1924.

“Hitler is a queer fellow who will never become Chancellor; the best he can hope for is to head the Postal Department.” Paul von Hindenburg, President of Germany, 1931.

War

“The Hawaiian Islands are over-protected; the entire Japanese fleet and air force could not seriously threaten Oahu.” Captain William T. Pulleston, former Chief of US Naval Intelligence, “What Are the Chances?” The Atlantic Monthly, August 1941.

“Among the really difficult problems of the world, the Arab-Israeli conflict is one of the simplest and most manageable.” Walter Lippmann, April 27, 1948.

Invention

“The phonograph is not of any commercial value.” Thomas Edison, 1880.

“For God’s sake go down to reception and get rid of a lunatic who’s down there. He says he’s got a machine for seeing by wireless! Watch him—he may have a razor on him.” Editor of the Daily Express, London, refusing to see John Logie Baird, the inventor of television, 1925.

“There is not the slightest indication that nuclear energy will ever be obtainable. It would mean that the atom would have to be shattered at will.” Dr. Albert Einstein, 1932.

“What, Sir? Would you make a ship sail against the wind and currents by lighting a bonfire under her deck? I pray you excuse me. I have no time to listen to such nonsense.” Napoleon Bonaparte, to Robert Fulton, inventor of the steamboat, c. 1805.

“God himself could not sink this ship. Titanic Deckhand, responding to a passenger’s question, “Is this ship really unsinkable?” Southampton, England, April 10, 1912. [Sunday, April 14, 1912 it struck an iceberg].

“This is the biggest fool thing we have ever done…The bomb will never go off, and I speak as an expert in explosives.” Admiral William Daniel Leahy, advising President Truman on the impracticality of the US atomic bomb project, 1945.

"X-rays are hoax.” Lord Kelvin

"Radio has no future.” Lord Kelvin

"My dynamite will sooner lead to peace." Alfred Bernhard Nobel, founder of the Nobel Prizes.

Ed’s Favorite

"I have often thought that if there had been a good rap group around in those days I might've chosen a career in music instead of politics.” Richard M Nixon.

Ron’s Favorite

“Nothing of importance happened today.” George III (King of England), diary entry, July 4, 1776.

Episode #56 - Interview with Jennifer Warawa

Ed and I had the pleasure of interviewing his Sage colleague, Jennifer Warawa, the Global Vice President, Product Marketing–Accountants.

Jennifer's passion is to partner with consultants, accountants and bookkeepers to provide solutions that make a difference in their business or firm, and support them in delivering an extraordinary experience to their clients.

Prior to working with Sage, Jennifer owned her own firm for 12 years providing accounting, bookkeeping, and consulting services, software training, as well as business/ financial planning and marketing.

In addition to being a regular speaker at accounting conferences, Jennifer was also listed as one of the “10 Tweeters Worth Following” by Accounting Today and is an avid blogger, which includes being a featured writer on the Virgin Entrepreneur website. Jennifer made the Accounting Today Top 100 Most Influential People in Accounting and CPA Practice Advisor’s Top 40 Under 40 lists consecutively for the last four years.

Some of the issues we discussed with Jennifer

• What is Sage’s Strategy to add value in the future?

• How is the Cloud adoption coming along among firms?

• The gap between what customers want and what firms think they want.

• What things should business owners look for in selecting a CPA firm?

• What’s the number one issue facing the accounting profession?

• Is this different in different countries?

Sage's New Products to help firms be more effective

• Sage Impact

• Sage View

• Sage Value - coming soon! 

Thanks for sharing your insights and knowledge on the state of the professions, as well as businesses, Jennifer!

Episode #55 - Entrepreneur Heaven - August 2015

They say you can’t turn back the clock and go back to the good old days. Yet this is precisely what is happening with the total quality service movement, the customer loyalty movement, CRM, and other philosophies that put the customer at the center of the business organization. Millions of dollars are being spent on consultants to relearn what was once common sense, practiced by the great entrepreneurs from the turn of the century to the mid-1950s.

On this third installment of our Entrepreneur Heaven Series, we will explore the wisdom of Sam Walton, P.T. Barnum, Andrew Carnegie, and Conrad Hilton, and.

Wisdom is timeless, and occasionally turning back the clock is the wisest course of action. Sometimes history is our best teacher. 

Sam Walton (March 29, 1918- April 5, 1992)

Three weeks before his death, President George H. W. Bush awarded him the Presidential Medal of Freedom.

Graduated with a B.A. in economics, 1940, University of Missouri.

1940, starts work at J.C. Penney, stays 18 months.

Sept 1, 1945—opens first variety store.

1950, starts over in Bentonville with Walton’s .05¢ and .10¢.

July 2, 1962, Opens Wal-Mart, in Rogers, Arkansas.

Oct 31, 1969 Wal-Mart incorporated.

Battle over “fair trade,” whereby manufacturers could determine the price at which their goods could be sold. Benefited inefficient retailers since it protected them from low-price retail competition.

State by state, these laws were repealed in the 1950s, 1960s, and in 1975 Congress passed legislation ending the practice.

On the corporation’s organization chart, Walton was listed as: Chief Spiritual Officer.

In his book, Made in America: My Story (1992), Walton writes that his  single biggest regret in his whole business career: that he didn’t include the associates in the initial, managers-only profit-sharing plan.

Walton’s great insight: replacing inventory with information!

“Job security lasts only as long as the customer is satisfied. Nobody owes anybody else a living.”

Six ways Wal-Mart thinks small:

1.    Think one store at a time

2.    Communicate, Communicate, Communicate

3.    Keep your ear to the ground—no computer can tell you how much you could have sold

4.    Push responsibility—and authority—down

5.    Force ideas to bubble up

6.    Stay lean, fight bureaucracy

Sam’s Rules for Building a Business:

1.    Commit to your business

2.    Share your profits with associates

3.    Motivate your partners. Encourage competition, set high goals, keep score, switch jobs

4.    Communicate

5.    Appreciate everything associates do.

6.    Celebrate your successes

7.    Listen to everyone in the Co.

8.    Exceed customer expectations

9.    Control your expenses better than competition

10.  Swim Upstream. Ignore conventional wisdom

“In this free country of ours, the shopkeeper’s success is entirely up to you: the customer.”

Phineas Taylor  Barnum (July 5, 1810 – April 7, 1891)

He never said: “There’s a sucker born every minute.”

Human oddities on display, but never gross—women and children could attend.

He just wanted to entertain an America he thought worked too hard and laughed too little

He wrote, “The American Museum” in 1869.

His circus was sold to Ringling Brothers on July 8, 1907 for $400,000 (about $8.5 million in 2008 dollars). The Ringling Brothers and Barnum & Bailey circuses ran separately until they merged in 1919 forming the Ringling Bros. and Barnum & Bailey Circus. 

Andrew Carnegie (November 2, 1835–August 11, 1919)

Born: Nov 2, 1835 in Dumferline, Scotland.

Immigrated at age 12 from Scotland.

In 1870, Britain produced more steel rest of world combined. By 1900, year Carnegie retired, US producing twice as much as UK, highest-quality, lowest-priced:

            $160/ton in 1875 to $17/ton by 1898

            Sold holdings to JP Morgan $480M (his share $300M)

Carnegie: optimist, thirst for public approbation, wrote nice things about unions, who lionized him.

Homestead Steel Works strike of 1892, Carnegie in Scotland, 300 Pinkerton guards hired crushed the workers, black mark on his legacy.

He was fanatical about controlling costs: “Cut the prices; scoop the market; run the mills full…watch the costs and the profits will take care of themselves.”

Railroads developed cost accounting, and Carnegie brought it to the steel industry

Committed himself to world peace from two decades from retirement to death, a complete failure. Actually worse, he was a fool (Richard S. Tedlow, Bus Historian, Giants of Enterprise). He was fond of Kaiser Wilhelm II of Germany (“I think he can be trusted and declares himself for peace.”)

He wrote “The Crucial Question,” (1896) advice to young people on how to become business owners.

“And here is the prime condition of success, the great secret: concentrate your energy, thought, and capital exclusively upon the business in which you are engaged.”

 “The only irreplaceable capital an organization possesses is the knowledge and ability of its people. The productivity of that capital depends on how effectively people share their competence with those who can use it.”

“Take away my people but leave my factories, and soon grass will grow on factory floors. Take away my factories but leave my people, and soon we will have a new and better factory.”

“The man who dies rich dies disgraced.”

“Man must have an idol—The amassing of wealth is one of the worst species of idolatry. No idol more debasing than the worship of money.”

Carnegie gave away $332M, including 7,000 church organs, while Rockefeller gave away $175M.

Conrad Hilton (Dec 25, 1887–Jan 3, 1979)

Grew up New Mexico, father ran a general store. He married and divorced Zsa Zsa Gabor, and had a son with her.

First bus venture managing the Hilton Trio, musically inclined ladies (including his sister), but it flopped.

Then worked in a bank, and then manager of father’s store, but father kept meddling. He served in the Army WW I.

While trying to find a hotel bed first night in Cisco, TX, he couldn’t. The owner gave him one week to come up with $40K buy the hotel. He scraped together the money from family and friends. By 1921, he added two more hotels.

He wrote “A Million-Dollar Mountain and a Red Hat” (1957) to explain how he raised the money to build his first million dollar hotel on the corner of Main and Harwood in the Dallas bus district and Be My Guest, which used to be found in the drawer of every Hilton hotel next to the Bible.

He leased the land for 99 years, at $31,000/year, from the owner, and negotiated a clause in the lease to allow him to pledge the land as collateral to lenders, enabling him to build the hotel.

Episode #54 - Free-Rider Friday - July 2015

We discussed the following topics on this episode of Free-Rider Friday.

Sage Summit 2015 Recap

Our thoughts on Sage Summit in New Orleans, where we also broadcasted The Soul of Enterprise live, over three days with an array of guests.

You can listen to each day’s shows here:

• Tuesday, July 28, 2015

• Wednesday, July 29, 2015

• Thursday, July 30, 2015

Ed’s Topics

Uber delivers a passport and launches a “De Blasio Feature” in New York City, which shows what your wait would be in the absence of Uber. How about Uber for flights?

Cato Institute: One idea for how states could effectively end the federal income tax: Texas could refund everyone’s federal income tax, and then increase the state sales tax. Effectively converting to a pure consumption tax.

The CEO of the private company that makes WD-40 said: “Profit is the applause of doing good work and having engaged employees and that’s what I’m most proud of.”

Jet.com plans to compete against Wal-Mart, Costco, Amazon, etc. by charging $50 per year, and sell everything at cost. Will this business model succeed?

Ron’s Topics

American Enterprise Economist Kevin Hasset, says if you confiscate 100% of all after-tax US corporate profits, and redistribute them to wage earners, you would add roughly $7.50 per hour to wages.

Compare this to the $15 minimum wage some cities have implemented, and you don’t have to be an economist to predict what will happen to employment.

Accenture will get rid of annual performance appraisals. Deloitte is doing the same thing, as reported in detail in the Harvard Business Review, which you can access here: Reinventing Performance Management.

Airline profits have soared to record heights, even as fuel prices have dropped recently, as explained in this article.

Episode #53 - VeraSage Laws

Ed and I discussed the upcoming Sage Summit in New Orleans, where we will be broadcasting three live shows on VoiceAmerica.com on Tuesday-Thursday, from 2pm-3pm (CT).

We announced the winners of the VoiceAmerica contest to attend Sage Summit:

• Virginia Colin

•          Ann Beal

•          Barbara Young

•          Lindsay Boyd

•          Prudence Gensman

•          Simran Singh

VeraSage Laws

Baker’s Law: Bad customers drive out good customers

All customers are not equal.

Whenever anyone said, “All men are created equal.” Federalist Fisher Ames, an ardent opponent of Thomas Jefferson would retort:

            And differ greatly in the sequel.

Usually, the price isn’t wrong—the customer is!

We discussed the VeraSage Adaptive Capacity Model, whereby, similar to an airline or hotel, you reserve capacity for your best customers.

Also, this caveat before firing customers: your customers won’t get better until you do.

It’s axiomatic: You’re as good—or as bad—as the character of your customer list. How does that make you feel.

Kless’ First Law: He who liveth by the discount, shall ye also perish by the discount.

Kless’ Second Law: All measurements are judgments in disguise.

VeraSage adoption of the Second Law of medicine: Prescription before diagnosis is malpractice.

The Military has a great saying: “Time spent on             reconnaissance is never wasted.” 

VeraSage Axiom: Ideas are always and everywhere more important than their execution.

This one is counterintuitive, but true. There’s no good way to execute a bad idea, and good ideas are not everywhere. Thomas Sowell discusses this concept in his books, Knowledge and Decisions and Basic Economics.

Peter Drucker’s Law: Marketing and selling are not complementary, but adversarial.

Another counterintuitive point from Peter Drucker. In a perfect world, you wouldn’t need salesman, because your marketing would be so effective customers would line up to purchase your wares. Apple?

Episode #52 - Interview with Greg Tirico

Ron and Ed interview Greg Tirico who is responsible for Advocacy Solutions and Services at Sprout Social. He has spent the majority of his career leading digital marketing initiatives in Fortune 500 organizations. Today we will speak to him about Mary Meeker's annual Internet Trends report. Greg's insight when added to Mary's will guide your social strategy for the next 12 months. Personal note on Greg: When not espousing the benefits of employee advocacy, he can be found searching for the perfect Pinot Noir.

2015 Internet Trends Report from Kleiner Perkins Caufield & Byers

Episode #51 - Best Business Books

Ron’s Book Selections

Business as a Calling: Work and the Examined Life, by Michael Novak.

The economic and ethical responsibility of a business is to serve others, and increase the wealth of its customers.  The business world instills, and requires, the practice of a number of virtues:  diligence, industriousness, prudence in risk taking, reliability, kindness to strangers (customers), and fidelity in personal relationships.  Are not these the same virtues parents try to teach their children?  As Michael Novak explains in Business as a Calling:

My general position on these three questions has two parts.  First, business is a morally serious enterprise, in which it is possible to act either immorally or morally.  Second, by its own internal logic and inherent moral drive, business requires moral conduct; and, not always, but with high probability, violations of this logic lead to personal and business disgrace.  Immoral acts do occur in business. But to behave immorally is neither necessary to nor conducive to business success (Novak, 1996: 8-9).

These men [industrial barons] did more than make money; calling them “money-makers” trivializes what they accomplished.  Nor does the word greed capture their state of soul.  “Greed” does not explain why Andrew Carnegie gave virtually all his money away.  Instead, he poured [profits] back into his firm as an investment in its future.  In other words, he put it at risk.  “Greed” is for the impoverished socialist imagination a term of art; its purpose is neither descriptive nor analytical.  Its purpose is moral denunciation, for ideological reasons (Ibid: 75).

The Seven Internal and External Responsibilities

The moral case for capitalism needs to be made, and fortunately it has been.  Nonetheless, most popular culture and institutions, from movies and television shows to research organizations and universities, villainize businesspeople and business firms, endlessly portraying them as power-hungry, stop-at-nothing-to-get-ahead, ruthless members of society.  This view is pernicious, not to mention entirely out of touch with how the world works.  A business, in its essence, is a moral institution because it requires moral conduct to succeed in the long run.  As Novak explains:

It may help to divide these responsibilities into two different sets.  The second set will easily be recognized as “ethics,” since the source of their authority comes from outside business––from religious conviction, moral traditions, humane principles, and human rights commitments.

The first set [Internal Responsibilities] consists of the moral requirements necessary for business success.  One way to see that they are ethical is to ask yourself what happens when they are violated (Novak, 1996: 135).

Seven Internal Responsibilities:

1) To satisfy customers with goods and services of real value.  Like other acts of freedom, launching a new business is in the beginning an act of faith; one has to trust one’s instincts and one’s vision and hope that these are well enough grounded to build success.  It is the customers who, in the end, decide.

2) Make a reasonable return on the funds entrusted to the business corporation by its investors.  Is it moral to lose other people’s money?

3) To create new wealth.  This is no small responsibility.  If the business corporation does not meet this, who else in society will? 

 4) To create new jobs.  You cannot create employees without creating employers.                 

 5) To defeat envy through generating upward mobility and putting empirical ground under the conviction that hard work and talent are fairly rewarded.  The founders of the American republic recognized that most other republics in history had failed and that the reason they failed was envy:  the envy of one faction for another, one family for another, one clan for another, or of the poor toward the rich.  ...The best way to conquer this is to generate economic growth through as many diverse industries and economic initiatives as possible, so that every family has the realistic possibility of seeing its economic condition improve within the next three or four years.  Poor families do not ask for paradise, but they do want to see tangible signs of improvement over time.  When such horizons are open, people do not compare their condition with that of their neighbors; rather, they compare their own position today with where they hope to be in three or four years.  They give no ground to envy.   ...Only then can people see that hard work, goodwill, ingenuity, and talent pay off.  When people lose their faith in this possibility, cynicism soon follows.

6) To promote invention, ingenuity, and in general, “progress in the arts and useful sciences” (Article I, Section 8, U.S. Constitution).  All wealth comes from intellectual capital and the human mind, or caput, Latin for head.  The great social matrix of such invention, discovery and ingenuity is the business corporation.

7) To diversify the interests of the republic.  Crucial to preventing the tyranny of the majority.  The interests of road builders are not those of canal builders, or of builders of railroads, or of airline companies.  The sheer dynamism of economic invention makes far less probable the coalescing of a simple majority, which could act as a tyrant to minorities.  The economic interests of some citizens are, in an important sense, at cross-purposes with the economic interests of others, and this is crucial to preventing the tyranny of a majority (Ibid: 138-45).

Seven Responsibilities from Outside Business:

1. To establish within the firm a sense of community and respect for the dignity of persons.

2. To protect the political soil of liberty.

3. To exemplify respect for law.

4. Social justice.  To be good citizens of the community.  Like other forms of justice and love, social justice begins at home.

5. To communicate often and fully with their investors, shareholders, pensioners, customers, and employees.

6. To contribute to making its own habitat, the surrounding society, a better place.

7. To protect the moral ecology of freedom (Ibid: 146-51).

Bad Medicine: Doctors Doing Harm Since Hippocrates, by David Wootton

Bad Medicine is one of the most important books I have read in a long time. David Wootton is a historian at the University of York. He’s no medical profession basher, thanking modern medicine for saving his life and also proudly announcing his daughter is a doctor.

Not only is the book incredibly well written—even if, like me, you have no particular interest in the history of medicine—it is a mesmerizing look at how a supposedly scientific and evidence-based profession rejected new innovations, knowledge, and theories while stubbornly clinging to their old—and completely ineffectual, if not down right lethal—therapies.

Bad Medicine Drives Out Good Medicine

The history of medicine begins with Hippocrates in the fifth century BC. Yet until the invention of antibiotics in the 1940s doctors, in general, did their patients more harm than good. In other words, for 2400 years patients believed doctors were doing good; for 2300 years they were wrong.

From the 1st century BC to the mid-nineteenth century, the major therapy was bloodletting, performed with a special knife called a lancet. Interestingly enough, that is the title of today’s prestigious English medical journal, The Lancet. Bad ideas die hard.

The Case Against Medicine

The author makes three devastating arguments. First, if medicine is defined as the ability to cure diseases, then there was very little medicine before 1865. Prior to that—a period the author calls Hippocratic medicine—doctors relied on bloodletting, purges, cautery, and emetics, all totally ineffectual, if not positively deleterious (no matter how efficiently they were administered).

Second, effective medicine could only begin when doctors began to count and compare, such as using clinical trials.

Third, the key development that made modern medicine possible is the germ theory of disease.

We all assume that good ideas and theories will drive out bad ones, but that is not necessarily true. Historically, bad medicine drove out good medicine, as Wootton explains:

We know how to write histories of discovery and progress, but not how to write histories of stasis, of delay, of digression. We know how to write about the delight of discovery, but not about attachment to the old and resistance to the new.

The cultural obstacles, Wootton believes, are based on a somewhat counterintuitive observation: institutions have a life of their own. All actions cannot be said to be performed by individuals; some are performed by institutions. For instance, a committee may reach a decision that was nobody’s first choice.

This is especially true for institutions that are shielded from competition and hermetically sealed in orthodoxy. In a competitive market, germ theory would have been tested in a competing company, diffusing into the population much faster than it did within the institutions of the medical community. Wootton also cites Thomas Kuhn’s book, The Structure of Scientific Revolutions, wherein he distinguished between periods of “normal science” and science that takes place during periods of crisis. Germ theory was adopted because the medical profession knew it was in crisis.

Why is this Relevant to Business?

The similarities between bad medicine, the billable hour, timesheets, Frederick Taylor’s efficiency metrics, and value pricing are illustrative.

In physics the key barriers to progress are most likely theoretical. In oceanography they might be practical. What are the key barriers to progress in the professional knowledge firm?

If a supposed scientific and evidence-based profession is this slow to change, what chance do lawyers, CPAs, and other professionals have to move away from the discredited labor theory of value—the modern-day equivalent of bloodletting?

Ed’s Book Selections

The Trusted Advisor, by David H. Maister, Charles H. Green and Robert M. Galford

 

 

 

 

 

Beautiful Evidence, by Edward R. Tufte

The best graphic ever! 

Episode #50 - Free-Rider Friday - June 2015

Welcome to “Free-Rider Friday.” Most of our shows are “topic” driven, where we dive deep into one subject. Free-Rider Fridays are designed to be “event” driven—whatever issues are in the news that we (or you) find worthy of commentary.

In economics, free riding means reaping the benefits from the actions of others and consequently refusing to bear the full costs of those actions. This means Ed and Ron will free ride off of the news, and each other, with no advanced knowledge of the events either will bring up.

The song lyrics for “Free Ride” by The Edgar Winter Group. 

Ed’s Topic

The driverless car conundrum: should the car be programmed to swerve and kill 5 people, or to kill the driver? It’s a version of “Trolleyology” that we discussed on our August 22, 2014 show, Everyday Ethics: Doing Well and Doing Good.

It’s a fascinating question, and we discussed the ethics and legal implications of the driverless car.

Ron’s Topic

One traditional definition of “management” in older English dialects was, according to the Oxford English Dictionary, “to spread manure.”

According to David Whyte, a self-described corporate poet, in his book, Crossing the Unknown Sea:

Manager is derived from the old Italian and French words          maneggio and manege, meaning the training, handling and          riding of a horse.

It is strange to think that the whole spirit of management is          derived from the image of getting on the back of a beast,          digging your knees in, and heading it in a certain direction.

The word manager conjures images of domination, command, and ultimate control, and the taming of a potentially wild energy. It also implies a basic unwillingness on the part of the people to be managed, a force to be corralled and reined in. All appropriate things if you wish to ride a horse, but most people don’t respond very passionately or very creatively to being ridden, and the words giddy up there only go so far in creating the kind of responsive participation we now look for.

Sometime over the next fifty years or so, the word manager will disappear from our understanding of leadership, and thankfully so. Another word will emerge, more alive with possibility, more helpful, hopefully not decided upon by a committee, which will describe the new role of leadership now emerging. An image of leadership which embraces the attentive, open-minded, conversationally based, people-minded person who has not given up on her intellect and can still act and act quickly when needed.

Also, on work-life balance, our VeraSage colleague Dan Morris wrote a post back in 2006, “Work-Life Balance is PC for Slacker.”

On this topic, David Whyte also provocatively points out in his book The Three Marriages: Reimagining Work, Self and Relationship:

Poets have never used the word balance, for good reason. First of all, it is too obvious and therefore untrustworthy; it is also a deadly boring concept and seems to speak as much to being stuck and immovable, as much as to harmony. There is also the sense of unbalancing that must take place in order to push a person into a new and larger set of circumstances.

My mentor, George Gilder, says this with respect to work/life balance:

One of the things that really makes me laugh is when I hear about the “workaholic.” Workaholics are what the make the world go. Show me a success in any field, and I’ll show you an obsessive. If your life is “balanced” by languid afternoons at the museum, you cannot develop a new business, break an important story, or make a contribution to the world. …Our task on earth—laboring in the service to others—can only be satisfied thru hard and unbalanced work.

Balance is for ballerinas and tires.

Ed also talked about his new favorite word: Floccinaucinihilipilification, meaning “the estimation of something as valuless.” 

Ed’s Topic

Donald Trump announced his candidacy for US President to Neil Young’s song “Rockin’ in the Free World,” which created a controversy since Young doesn’t support Trump.

Ron’s Topic

We discussed The Economist May 23, 2015 article, “Democratising medicine: The crowd will see you now,” which talks about CrowdMed to diagnose rare diseases.

Ed’s Topic

The California Labor Commission ruled that Uber’s “independent contractors” are actually employees. This is an insane ruling, and another regulatory burden that the disrupter Uber will have to deal with.

Ron’s Topic

We discussed The Psychology of Pessimism, by Steven Pinker, from Cato’s Letter, Winter 2015. You can check out more of Steven Pinker’s work at Humanprogress.org.

If you are listening to this show in the year 2115, you will be worried about declining population! We don’t have an economic model for what happens when worldwide population declines, since it’s never happened in history.

Ed’s Topic

Since we pre-recorded this show before the Supreme Court ruling on the ObamaCare case, we discussed how might the court rule. Ron thought the court would let it stand, but tell Congress to fix it. Ed thought they’d overturn it, but tell Congress to fix it.

We were both wrong. Ed was wronger!

Ron’s Topic

We discussed price-match guarantees, since they prevent rather than provoke price wars, from The Economist, Free Exchange, February 14, 2015.

It’s a pre-emptive defense as it persuades customers they don’t need to shop around, since they can invoke the guarantee instead of switching.

The result: tacit collusion, without any explicit communication between firms.

Episode #49 - Interview with former Disney Executive Lee Cockerell

Lee Cockerell is the former Executive Vice President of Operations for the Walt Disney World® Resort. "As the Senior Operating Executive for ten years Lee led a team of 40,000 Cast Members and was responsible for the operations of 20 resort hotels, four theme parks, two water parks, a shopping & entertainment village and the ESPN sports and recreation complex in addition to the ancillary operations which supported the number one vacation destination in the world."

One of Lee's major and lasting legacies was the creation of Disney Great Leader Strategies, which was used to train and develop the 7000 leaders at Walt Disney World. Lee has held various executive positions in the hospitality and entertainment business with Hilton Hotels for 8 years and the Marriott Corporation for 17 years before joining Disney in 1990 to open the Disneyland Paris project.

Lee has served as Chairman of the Board of Heart of Florida United Way, the Board of Trustees for The Culinary Institute of America (CIA), the board of the Production and Operations Management Society and the board of Reptilia a Canadian attractions and entertainment company. In 2005 Governor Bush appointed Lee to the Governor's Commission on Volunteerism and Public Service for the state of Florida where he served as Chairman of the Board.

He is now dedicating his time to public speaking, authoring a book on leadership, management and service excellence titled, Creating Magic…10 Common Sense Leadership Strategies from a Life at Disney, which is now available in 13 languages and his latest book, The Customer Rules…The 39 Essential Rules for Delivering Sensational Service. Lee also performs leadership and service excellence workshops and consulting for organizations around the world as well as for the Disney Institute. Lee has received the following awards: 

• Golden Chain Award for Outstanding leadership and business performance from the Multi-Unit Foodservice Operations Association (MUFSO).

• Silver Plate Award for Outstanding Operator in the foodservice industry from the International Foodservice Manufacturers Association (IFMA).

• Excellence In Production Operations Management and Leadership (POMS) from the Productions and Operations.

• Grandfather of the year from his three grandchildren, Jullian, Margot and Tristan.

Lee and his wife Priscilla live in Orlando Florida.

Topics discussed with Lee

1.    Ever meet J.W. Marriott? Yes.

2.    Joined Disney 1990, to open Disneyland Paris? (Euro Disney), which in the early days lost $1 million per day.

3.   Creating Magic: 10 Common Sense Leadership Strategies from a Life at Disney (2008) 

The Customer Rules: The 39 Essential Rules for Delivering Sensational Service (2013)

Time Management Magic (Jan 2015)

4.    Walt Disney World = size of San Francisco, or 2x Manhattan, 59,000 Cast Members

a.    Mickey = Teamster (13 or 14 unions in WDW)

b.    70% return rate

c.     Lowest turnover in hospitality industry

5.    Formula: Committed, responsible, inspiring leadership create a culture of care, which leads to quality service, which leads to Guest satisfaction, which leads to measurable business results and a strong competitive advantage.

6.    “Because all business problems boil down to leadership problems. The soft stuff is actually the hard stuff."

7.    Strategy #1: Remember, everyone is important: Cast was given freedom to set it’s own productivity targets. They set them very high!

8.    Feelings are never translated or passed on properly in a command chain

9.   No micromanagement = Trust!

10. Disney Institute Definition of Culture: “The system of values and beliefs an organization holds that drives actions and behaviors and influences relationships.” Established by design, not chance.

11.  You mentioned no price consistency at Disney’s food and beverage, because no one person in charge. How has pricing improved?

12.  What do you think of Disney’s new surge-pricing scheme?

13.  Your response to 9/11: evacuate 50,000 from theme parks; free hotel rooms; food vouchers; suspend charges for phone calls anywhere in world; costumed entertainers to occupy frightened children.

14.  Structured interviews by psychologists over the phone, create detailed profiles, powerful tool 1994?

15.    ¼ of the 25,000 Sommeliers work at WDW, sells more wine than any single site in the world (Vegas)

16.    Magical Moments and Take 5

17.    25 steps between trash containers!

18.  Sacrifice efficiency for safety and security (or Take 5, and MOMs). Snow White and Four Dwarfs

19.  Customers are human beings = Guestology

20.  Trading Pins! Two guys got idea at Olympics = millions dollar business!

21.   20% = active change agents; 30% = resist change; 50% on fence

Thanks to Lee for sharing how Disney spreads Pixie Dust, and how your organization can do it, too.