Visualizing the risk in public pension funds and the extent of under-funding
The public pension system in the US is a mess. State and local plans for government employees are underfunded to an extent that the typical taxpayer will need to ante-up about $3,000 per year over 15 years to meet past commitments. And that ignores unstoppable future commitments. This mess has arisen out of a combination of bad doctrine, corrupt politics, and bad governance. The bad doctrine treats “expected” returns as if they are guaranteed over a long enough time horizon. The bad politics has politicians buying votes and campaign support from government employees in return for giveaways of unfunded benefits. The bad governance has fund managers chasing yield to magnify their incomes. Full entry→
Good management is more than motivation
“Management,” says the speaker “is about people.” He pauses, slowly surveying the roomful of executives, and then continues. “It is about getting the most out of people, about motivating extraordinary performance.”
The speaker is a famous management guru. His provocative presentations command high fees and the rapt attention of his audience. Looking around me, I see heads nod slightly in agreement. Something about those nods sparks a quick mental image of a preacher reminding his congregation that God loves us all. The guru’s audience, like the preacher’s congregation, nods in agreement at the repetition of something they already believe. Full entry→
The forces at work deconstructing physical book retailing
On Sunday I went to the local Borders in Santa Fe (New Mexico), looking at its going-out-of-business bargains. I selected some books and audio books and stood in the long check-out line.
In New York or Los Angeles you don’t normally speak in public to people you don’t already know. If you do, they tend to ignore you or even turn and move away. Santa Fe is a small town and people will talk with strangers. In the line at Borders, the man behind me remarked that he would miss Borders. “I love to spend an afternoon browsing and having a coffee,” he said. We chatted about bookstores in general for a bit, but were then distracted by the young woman in front of me. She had been reading one of her book choices in line, but then used her iPhone to download an electronic version from Amazon. Putting the physical version down, she began to read the e-version on her iPhone’s Kindle App. “Cheaper and quicker” she said to us with a smile. (The book was The Convenient Marriage, by Georgette Heyer, Borders’ special-discount priced at $10 with the Kindle edition priced at $7.99 from Amazon.) Full entry→
Egypt's uprising is triggered by huge cadre of unemployed urban youth
As someone who writes about “strategy,” I am frequently asked to react to crises. Today, as the events in Egypt tumble along, the questions are about the administration’s “strategy” vis-à-vis Cairo. Should Obama help Mubarak hold on for a bit longer? Should he work closely with the Egyptian military or with elements of the uprising? Is the fact that the State Department and the White House cannot agree a problem?
The first step in generating a good strategy is having a reasonable diagnosis of the situation. The aim of strategy is to focus resources on a critical point of leverage, but that is an unlikely outcome if you do not understand the nature of the difficulty. Full entry→
Iranian students could not understand the US loss in Vietnam
Nixon Welcomes John McCain After 5-1/2 Years as a POW
When, in January of 1974, Henry Kissinger and Le Duc Tho signed the Paris “Peace” Accords, I was on leave from Harvard Business School, working in Tehran at the newly formed Iran Center for Management Studies. Most of my American colleagues and friends were relieved—the war in Vietnam had torn American society apart and it had been clear for some time that, although a majority of Americans “supported” the war, there was not a majority in favor of the violence required to defeat North Vietnam militarily.
What surprised me was the attitudes of many of my Iranian students. Full entry→
The big risk in capital budgeting is lying, not uncertain cash flows
Strategy work involves large stakes and strategic decisions mobilize large chunks of resources. If there is a lack of integrity in the system, it becomes difficult to design good strategies. Any choice necessarily shifts resources from some uses to other uses and, if advisers are not disinterested, their advice will be corrupt. When advice is corrupt, and leaders are bright enough to know that it probably is corrupt, it will be virtually impossible to enact subtle or longer-term strategies. Thus, corruption breeds myopia, the antithesis of strategy. Absent a true strategic genius at the helm, the more corrupt the system, the more myopic the strategy.
My client was Harold, the head of business development at one of the largest fifty companies in the United States. We did good strategy work on a potential new product. But that project was small potatoes compared to the big event, Project T. The company’s main business was mature and in decline and Project T promised a youthful replacement, one that would restore the company’s profits and prestige. Project T was too big to be handled by Harold; It was being managed directly by the Senior Vice President for New Products, Clarence. A fast-tracked 40-year old manager, Clarence was smart and ambitious. As far as I could tell, he had an almost unlimited budget to spend on Project T. Full entry→
Incremental improvements in a chain-linked system reduces overall performance
One consequence of chain-link logic is quality matching. Quality matching means that the most economical approach is to balance the qualities of the chain-linked factors. That is, the presence of low quality factors reduces the incentive to invest in improving other factors.
The logic of quality-matching is not obvious at first glance, but it is by such deductions that scholars earn their keep. In this case, the intellectual work has been done by economists Michael Kremer and Sherwin Rosen. The matching insight was hard-won because economics gained much of its analytical power by assuming vast pools of identical workers and capital equipment.
A century ago academic style required that a topic like quality matching be given an exhaustive treatment. The rise of Athens, feudal life, military organization, social structures in Indian life, manufacturing, and so on would each be investigated from the quality-matching perspective. Today, academic style asks that the problem be stripped to its bare essentials so that the central logic is exposed. We call this process model building because the purpose is not to describe the real world but, instead, to construct something so simple that its operation is transparent. The simplest situation in which quality matching occurs has a single product that is the joint outcome of two tasks. A model is just structure and logic, but it is a harmless pleasure to fix the structure within a special context. In this case, my context is Adam Smith’s pin factory. Full entry→
Boulder climbers trigger an insight about the gains to focus
Gill on Red Cross Rock
Thinking about the class on General Motors, I drive a few kilometers north and go for a walk. The Fontainebleau forest is old and deep, the hunting ground of French kings for 500 years. Perhaps a hundred square miles in extent, it is now crossed by paths frequented by hikers, runners, and bicyclers. Most of the INSEAD students walk or picnic in the forest, but few seem to know it contains rock outcroppings that attract boulder climbers from all over the world.
The worldwide sport of boulder climbing was born in Fontainebleau forest in the 1930s. At that time, French mountaineer Pierre Allain began training for alpine climbing on these boulders and began to do short ascents that required feats of strength and balance beyond any seen before in climbing. Allain invented the soft-soled shoe (“PA”) that revolutionized rock climbing and was the first to climb a number of classic Alpine routes of great difficulty. Full entry→
The puzzle of inertia at GM kicks off a series on chain-link systems
Why do organizations get “stuck?” The standard answer is “resistance to change,” a tautology, relabeling without explaining. A more interesting answer, one which has enough bite to only apply in some situations, is chain-link-systems. In my forthcoming book, Good Strategy/Bad Strategy, I explore the importance of chain-link systems in competitive strategy, for they both inhibit change and protect excellence.
Here, in this series (Chains of Excellence) I want to describe how I came to see this connection and something of its technical underpinnings. This first entry sets of up the problem, the second describes the sudden lizard I experienced while watching climbers. The third delves into some of the technical analysis of chain-link systems. Full entry→
Distributed knowledge resists imitation
Among strategy researchers, Jeffrey Dyer has done one of the cleanest jobs of putting isolating mechanisms under the microscope. Jeff started his investigations of Japanese automobile makers when he was a doctoral student at UCLA, working under the direction of Bill Ouchi. Since then he has crafted a wonderful comparison—he has looked at U.S. companies that make automobile components for both Toyota and American auto firms. For instance, a U.S. company making carburetors might have two different manufacturing “cells,” one making parts for General Motors and another making parts for Toyota. Dyer measured the quality and labor productivity in both cells and tracked their changes over time.
In the same company, in the same plant, making the same type of product, the cell supplying Toyota improved quality and labor productivity faster than the cell supplying the U.S. auto company. Dyer attributes the difference to Toyota’s greater attention to learning and improvement. “But,” he asks, “why doesn’t the supplier replicate what they have learned from Toyota in their operations devoted to other customers?” Full entry→