Wednesday, March 31, 2010

Creating Structure

I've watched a number of effective managers in my life . . . and I've even tried to imitate some of their successes.

One thing that they all had in common: their teams just worked.

It was amazing to compare highly skilled managers' team members with those of less skilled managers. Everybody from the strong manager's team seemed to be a star, and they were several steps ahead of others in the meeting - always ready to make a decision and push ahead.

Of course, the strangest part was that these managers never seemed to be devoting huge amounts of time to managing their people. Work just got done, and it was high quality.

How did the great managers craft these dream teams?

They created structures in which other people could succeed, then they got out of the way.

Instead of telling people how to write a proposal step by step, they described the information that the client needed to see and then left the proposal crafting process to a team member.

Instead of giving a strict list of duties, they created a set of objectives that should be met and allowed team members to create their own list of duties.

Instead of trying to fix areas of weakness, they crafted teams so that one person's weakness was another person's strength. No individual was perfectly strong, but the team was.

They created the structure: Great work was the byproduct.

Monday, March 29, 2010

It's Not Who You Know Or What You Know . . .

I was chatting with a nice college senior a couple of days ago. We were discussing his future in industrial engineering when he said, "It's not what you know, it's who you know, right?"

I hadn't heard that sentence or thought about it since college. So I was intrigued when I realized that I strongly disagreed with it.

Knowing people is certainly helpful. I found my first job in China through an old contact, and several of my interesting internships were sourced through friends of friends and family. So I must agree, who you know is important.

However, who you know is useless if you can't produce.

I worked with a company that hired several people based solely on their connections. Those people never worked out. In fact, it was so bad that we gave up hiring those types. Instead we hired semi-connected people who also had a strong track-record of achieving results in our industry. Those people generally worked out brilliantly.

"Who you know" vs. "what you know" forms a continuum. It's not a binary choice. If you're a salesperson selling a product that buyers understand, who you know is usually more important than what you know. If you're an ultra-specialized researcher developing new pharmaceuticals, what you know is more important than who you know.

It's not who you know or what you know. It's achieving the right mix of both for the job that you're doing.

Friday, March 26, 2010

The Future of Economics?

From David Brooks: a brief, interesting article about the history and future of economic thought.

Update(3/7/2010, evening): Greg Mankiw of Harvard offers a critique of Brooks's argument.

Thursday, March 25, 2010

Building Your World

I'm visiting my hometown for spring break. It has been an interesting experience.

I have lived in three places in my lifetime. In each of the places, my life is different from those in either of the other places.

What startles me is how starkly different they are, even though they are all mine. I spend time with friends in one city who would not get along with my friends in another city. My priorities change depending on location. It's completely automatic - it's like my whole life rearranges itself when I relocate.

What's interesting, though, is that each of these lives was built with a series of conscious choices. In other words, I had enough control over my surroundings to build my own world.

A lot of people complain about the world that they live in. They look at what is outside of their control to see what is wrong. Maybe they are correct in their assessment that the world is causing them trouble.

However, I think that the same people often underestimate their ability to build their own world.

Monday, March 22, 2010

Winning on the Merits

While I was watching Meet the Press yesterday, David Gregory made a comment that hurt my ears.

"I'm asking you a political question," he said, "and it's not always about merits in politics."

There are real costs and benefits associated with every decision. They could be the drivers of decisions. They could also be the factual basis for the ensuing political battles.

I'm not naive. I know that politics don't always work that way. I know that the world is full of disparate groups with conflicting interests, and finding the best solution to balance those interests is difficult if not impossible.

I know that selling the solution is even more difficult. People misrepresent and they pander. Reality becomes confused.

However, can't we at least try to preserve the link between real effects and outcomes?

Sunday, March 21, 2010

Stubborn Persistence

I've been reading a book recently. I started it around New Year's Day.

The book and I have a strange relationship. I pick it up and read it for 30 minutes. Then I realize that I'm not learning much. I don't really enjoy it either. I put it down.

A week or two later, I notice it laying on my table. I feel bad that I haven't finished it. I pick it up again and read for about 30 minutes. Then I realize (again) that I'm not learning much, and I don't enjoy reading it. I put it down.

I picked it up again last night. You can guess what happened 30 minutes later.

In business school professors hammer the concept of "sunk costs" into students' brains.

Here's the idea: when making a decision, you must forget everything that you have invested up to this point in time. Forget the money, forget the time. None of that matters since those costs cannot be recovered. They're "sunk." Then, considering only future costs and benefits, you make the decision that will yield the best results.

I'm not getting enough out of the book. Every time I read it I realize it. I may want to finish it. I invested time into it. I'm nearly half-way through. I could just keep trudging ahead.

However, my investment is sunk.

It's time to move on to something more productive.

Saturday, March 20, 2010

Change is Imminent. Your Response to it is Your Responsibility.

Lots of jobs have gone. Many won't come back. Many people will have to learn to do something new.

In the future more jobs will go. Many of those won't come back. Again, many people will have to learn to do something new.

The cycle will repeat itself - over and over again.

You can prepare for the next cycle. You can look ahead and anticipate what will still be needed in the future. You can prepare yourself to meet those needs.

Nevertheless, realize that your vision of the future is not 20/20. When you are wrong, you will need to do something new. It may be tough, but it will be necessary. Just do it. It will shorten the painful transition period.

Change will come, whether you like it or not. How you deal with it is your choice.

Thursday, March 18, 2010

The Gap is Closing

We've known for a while that unskilled manufacturing jobs have been moving to China. However, there are increasing signs that skilled and knowledge work is moving there.

Having worked in China for three years, I'm not surprised to see stories like this. China's best workers do not take their country's growth for granted. They prove that they want the jobs by studying like crazy and working insane hours. Work-life balance is a foreign concept there.

My first boss called my China experience a "vaccine." I didn't fully understand his meaning at the time, but I do now. He's a smart guy, and he saw this future coming. He knew what I needed to be able to compete, even if I didn't.

He vaccinated me to kill my American brand of complacency.

Monday, March 15, 2010

It's Uncontrovercial Because It's the Status Quo

It's final exams week here at Chicago Booth. What does that mean? Let me briefly share some thoughts.

  • The majority of students here left medium to high paying jobs where they had significant responsibility and solved important problems
  • There are more than 1100 full time students on campus
  • Collectively, they are spending thousands of hours preparing to solve final exam problems
  • The majority of these problems are either fictitious, have already been solved (often by thousands of students in prior years), or both.
Weird when you think about it like that right?

Now imagine that university programs didn't exist, but you have the bright idea to start one. I'd be willing to bet that you would meet a huge amount of resistance to your idea. How would you convince people that the program worthwhile, given the immense costs that I described? Is it worthwhile?

On a very related note, I will be spending many hours this week preparing to solve fictitious problems. Hence, I will be blogging infrequently (if at all) between now and Friday, March 19th.

Friday, March 12, 2010

Multilingual is the Future.

The census bureau cannot find enough people to fill jobs that require bilingual applicants. A recent Wall Street Journal article specifically notes a shortage of Spanish, Russian, Korean, Urdu, and Kirundi speakers.

Eric Schmidt, CEO of Google noted the the web of the future will be mostly Chinese.

English will be the language of academia . . . as long as the best universities in the world remain in the United States. Take note of the "if."

For business, English, Mandarin, Cantonese, Portuguese, Arabic, Spanish, and Russian battling it out for the top spot1. I'd put English and Mandarin ahead of the others, but neck-and-neck in the race to be the most important. However, that doesn't mean that the others will go away!

The monolingual person is losing power to the multilingual one.

I've worked in multilingual environments (specifically Chinese-English, Chinese-French-English and Japanese-Chinese-English). When a person was missing one of the languages, he or she was essentially a child among adults. The person with a 5-year-old's vocabulary was lost whenever the others began "grown-up talk."

My parents' generation will be alright if they're monolingual. My generation will have an advantage if they are multilingual. I'd bet money that most people in my kids' generation (and I don't have any kids yet) will be at a disadvantage if they are not multilingual.

1 Note that I did not mention any Indian languages. That's partially because the language situation there is very fragmented. It's also partially because I'm unfamiliar with the choices given that fragmentation. Perhaps a dialect or two should be included.

Thursday, March 11, 2010

When Friction is a Good Thing

I finally broke down and upgraded my iPod Touch so I could download apps. As a part of the process, I had to sign up for an iTunes account and enter a credit card number. I'm fine with purchasing things online, but this felt strange.

When I purchased the upgrade, I didn't feel like I had bought something. I didn't have to enter a credit card number - which usually gives me time to re-think my purchase - since Apple already had mine on file. I didn't even have to take out my wallet. I just clicked a button. Apple was paid. I received my app. There was no friction. It was way too easy. Actually, it was so easy that it frightened me. Now I don't want to go back. I'm afraid that I'll buy more stuff.

This fear of buying too much is the same fear that prevents me from signing up for Amazon's 1-click shopping. It's existence has also prevented me from buying a kindle (even though I read voraciously). I generally like to think that I have a good sense of self-control, but when buying is as frictionless as iTunes and Amazon 1-click make it, I feel like I could accidentally buy something. That's not a good feeling.

I like the friction, and I don't want it to go away.

The best thing about friction - we can introduce it before we're tempted. I refuse to sign up for 1-click shopping. Some people leave credit cards at home so they aren't tempted to buy when they don't have money. Fred Wilson leaves his cash at home to prevent him from making $2-$3 purchases.

Some people view these tricks as silly tactics for the weak minded. They're not. They are intelligent ways to increase purchase frictions, and often extra friction gives us the time to make a better decision.

Tuesday, March 9, 2010

The Simplest Way to Master a Subject

I am surrounded by brilliant people at Chicago Booth. Most graduated at the top of their university classes. Their average student scores above the 90th percentile on the GMAT (business school's version of the SAT). These people born learners. They master subjects really, really quickly.

However, even within this group there are huge differences in talent. A few people are always ahead of the class. They just "get" things. In my first quarter of classes, these ultra-learners were visible. You could recognize who they were. In the second quarter, their identities were unmistakably clear. They were even further ahead of average than they were the quarter before.

How do they do it?

Sure, they're naturally gifted, but everybody at Booth is. The common thread between the best of the best learners is not superior intelligence. It is how they learn . . . and how they learn is surprisingly simple.

The top students have one thing in common: a deep and integrated understanding of the foundations.

They have complete a complete command of the most elementary and basic business concepts.

That's the secret.

Many of the students who fall behind want to immediately jump to the advanced material. They are anxious to learn. They impatiently push ahead.

Not the students at the top of the class - they're different. They spend time becoming scary-good at dealing with simple ideas, ideas that others consider obvious. They spend hours understanding the implications of small assumptions that other students take for granted. The time pays off. They know their stuff inside-out.

Then later when somebody asks them about an obscure rule in corporate cash flow analysis, they don't get scared because they forgot the specific rule. They calmly think back through their knowledge of journal entries in accounting - boring knowledge that a 16 year old could handle. Nine times out of ten, they can come up with the right answer without looking it up. They understand the reasoning behind the rule.

Later when thinking through a complicated marketing issue that a company is facing, they don't concern themselves with all of the details of the problem. They think about the customer - what would she want? They think about the company - what can it reasonably do? And they think about the competition - can we beat them? They can answer those three questions easily, and it leads them to logically consistent answers.

They know the simple boring stuff: math, statistics, basic consumer psychology, accounting rules and vocabulary, simple economic reasoning, and the rules of competition. They know these things better than everybody else . . . and it shows.

Want to master a subject? Learn the basics. Then learn them again . . . and again . . .

Monday, March 8, 2010

The Three Types of Knowledge

I didn't originally post this article when I read it . . . probably because I secretly wished that I had written it. However Steve Schwartz wrote it first, so here it is.

Saturday, March 6, 2010

Understanding What Choice You've Made

I recently discovered two shocking facts while reading Nudge (a brilliant book by Richard Thaler and Cass Sunstein).

The first was that many people who are investing do not understand extremely basic investment theory:

When the Boston Research Group surveyed 401(k) participants in 2002, it found that despite a high level of awareness of the Enron experience [where employees lost their life savings when the stock crashed], half of the respondents thought that their own company stock carried the same or less risk than a money market fund.
This belief is clearly incorrect. Money market funds are known to be one of the safest investment tools around - they also don't earn much interest as a result. They invest in very short term, high quality debt. In simple terms, they'll fall in value when the financial world will implode, and not otherwise. Company stock, however, is like any other individual stock. It can go up or down 5%, 10%, or more in a single day.

The second strange fact is that mortgages are extraordinarily complicated contracts that almost nobody understands:
A study by Suzanne Shu (2007) finds that even MBA students at a top school had difficulty picking out the best loans, and this was in a task that was much simpler than the one that they would encounter in the real world.
So you need to have an MBA and a law degree to understand a mortgage contract completely. That's a bit unsettling.

So here's the thing that bothers me: why don't consumers push back a little harder? Why don't we say, "I don't understand this, and until you explain it in words that I understand, I'm not buying"?

Not knowing is okay. Not knowing that you don't know is not. It's dangerous.

Thursday, March 4, 2010

Two Things Car Dealerships Don't Want You to Know

I have written before about how most of us (including me) have little experience dealing with large purchases, like car and home purchases. My recommendation when facing one of these deals: talk to someone who knows more about the process than you do and learn what they know.

As fate would have it, I recently had a chance to talk with many people who know a lot about car purchases as part of a managerial accounting assignment. It was a fascinating discussion. There are two pieces of information that really amazed me. Here they are.

1) Most people believe that having your car serviced outside of an official dealership voids the warranty. That belief is completely false.

I did not even know that this belief existed. However, I was exposed to it and convinced of it for a brief time during my discussion. Then a very knowledgeable person (my professor) set the group straight. He explained that not only can you have your car serviced by the mechanic of your choice without voiding the car's warranty, it is illegal for companies to claim otherwise. So when you buy a new car, have it serviced by your favorite cheap certified mechanic. Your warranty will be fine.

2) Trade-in values and purchase prices are pulled out of thin air (but they are related to each other).

Have you ever heard one of those commercials that claims a "$5,000 minimum trade-in value for your car. It doesn't even have to run! You can push, pull or drag it in! We'll give you $5,000 for it toward the purchase of a new car!"?

Have you ever thought, "How can companies do that without losing money?"

The following (slightly long) example shows how.

Let's pretend that John has a crappy 1984 Toyota Camry that just died. He needs a new car to replace it. He takes the Camry to a dealer for trade-in and picks out a new Lexus that he might want to buy. Then he starts to negotiate.

Here is how John thinks about the purchase:

  • Maximize trade in value of crappy Camry - Expectation: $1,500
  • Reasonable sale price of new car - Expectation: $35,000 or so
So John is looking at two values: he wants "trade-in value" to be big, and "sale price" to be small.

Here is how the dealer looks at the sale:
  1. Cash + financing payment we will receive from John: Unknown
  2. Value of trade-in when dealership re-sells it: Assume that it is $1,600
  3. Cost of Lexus when dealership bought it: Assume that it is $25,000
The amount of money that the dealer receives is (1) + (2), and the amount the dealer spent on the sale is (3).

Total profit for dealer: (1) + (2) - (3) = Unknown + $1,600 - $25,000.

Notice what is missing from the car dealership's list of important considerations: sale price of Lexus, and quoted trade-in value . . . the two items that John cares about!

The rest of the deal is entirely psychological.

Let's say that John cares more about the price of the Lexus than he does about the value of the trade in. The dealer says that he'll give John . . .

Deal Number 1:

Price on the Lexus: $34,000
Quoted trade-in value for Camry: $600

John thinks to himself, "Woah! $1,000 cheaper than I expected on the Lexus price! I'd better take this!"

However, from the dealer's point of view, John's cash payment is $33,400 = ($34,000 - 600)

Dealer's profit = cash payment + sale price of Camry trade-in - Cost of Lexus

That equals $33,400 + $1,600 - $25,000 = $10,000. Pretty good profit.

Now pretend that John cares more about the trade-in value of the Camry than he does about the price of the Lexus. The dealer says that he'll give John . . .

Deal Number 2:

Price on the Lexus: $38,400
Quoted trade-in value for Camry: $5,000

John thinks to himself, "Woah, that's $3,500 more than I expected to get for the Camry! Sure, the price of the Lexus is a little high, but when I look at the extra money from trade-in, I'm still only paying ($38,400 - $3,500) = $34,900, which is lower than my $35,000 price point! I should do this!"

However, from the dealer's point of view, John's cash payment is $33,400 = ($38,400 - $5,000)

Dealer's profit = cash payment + sale price of Camry trade-in - Cost of Lexus

That equals $33,400 + $1,600 - $25,000 = $10,000.

That looks a lot like the profit on the last deal. It should, because from the dealer's point of view, the two deals are exactly the same!

The lesson: don't be fooled by trade-in price gimmicks. Trade in prices will always be related to the sale price.

A final thought.

Dealerships are motivated by profit. Don't forget it. They know a lot about cars, and a lot about psychology. Double and triple-checking your reasoning is worth the effort on purchases of this size.

Oh, and if a dealer ever asks if you want the "under-coating," "rust protection," or something silly like that after you've agreed to the sale price, it's okay to get angry.

Wednesday, March 3, 2010

Do You Really Want to Be the Boss?

A lot of people claim that they would love to be in charge. "If people just did what I said, this place would work much better." Be honest. You know that you've thought it at some point or another.

However, I wonder if people truly understand what that those words mean.

Today in a speech to my marketing class, Chris Krohn, Chief Marketing Officer of Whitney Automotive Group, made the meaning of that statement clear. He faced the following situation:

He was making a major decision about the future of the company's online business and had to present his plan to the company's board of directors. The board heard his proposal, and one member said plainly: "I don't think this will work. You realize that if this goes badly, the whole business could go down. You are risking this company's future."

Stop for a minute. Read the critique again. Really put yourself in Chris's shoes. The entire future of a company, and hundreds to thousands of jobs ride on your decision.

How would you respond?

Chris told us this: "You have to be ready to look at the board and say, 'I believe that we are facing something entirely new. I can't prove that this will work until we do it, but we should do it. We have to do it.'"

He continued: "I put my job, my reputation, [the person who hired me's] reputation, and the company's future on the line with that one decision . . . but I made the decision."

This is the third time that I have heard a version of this story from a CEO or CMO. It may be that high level executives just have a flair for drama, but I doubt it. These are the types of responsibilities that people take on at this level, and these are the decisions that they have to make. These people must make risky decisions with imperfect information. That's the job.

Would everybody still want to be the boss if they heard this part of the story?

Thanks to Chris Krohn for taking the time to share his knowledge with us students, and thanks again to Professor Dhar for arranging it!

Monday, March 1, 2010

But What Will Other People Think?

The other day I created something new. It was wild, and it was different. I knew it. And I knew that when I showed it to others, they would reject it. It was too different and too crazy for others to handle. I created it anyway . . . for me.

However, I was doing business, and business must be finished. So I also created another version. It got the job done. It was comfortable and mellow. People were ready for it.

I showed people the safe version first. They liked it. It was professional. It was what would be expected, and they were satisfied with it.

Then I showed the crazy version. Eyes went wide. Jaws dropped. I could feel the silence. I quietly waited for rejection.

It never came. People loved the wild one. All they could tell me was how much better it was than the safe version. "Wow . . . That's what we want!"

We are unpredictable creatures. The truth is that you can't know for certain how a new idea will be received until others hear it with their own ears, touch it with their own hands, or see it with their own eyes.

If you think that you can guess others' reactions, think again. Put your instincts and predictions to the test. You might be surprised.